Microfinance in Scotland – Neil McHugh, Olga Biosca & Cam Donaldson – Reform Scotland

In a recent blog, we reviewed the role of social finance – specifically in the form of social impact bonds (SIBs) – as an alternative (or supplemental) mode of financing health services.¹ At least rhetorically, there is great enthusiasm for SIBs, although, as we showed, this is not necessarily backed up by experience and evidence. However, social finance has other potential roles beyond aiding politicians looking for innovative ways to fund our public services. The other main form of social finance that we have examined in our work is that of microfinance. As well as helping fulfil the right of access to credit for those worst off in society, recent research has shown it to have more-pervasive positive impacts on health and wellbeing. Thus, as opposed to SIBS trying to get more money into the health care system, here we are suggesting that microfinance for individuals may, through helping them out of poverty, poor housing etc., or at least live more stable lives in such situations, also contribute to poor health outcomes. Yet, rather contradictorily when compared with SIBs, we are seeing governments withdraw from supporting the key community development finance institutions (or CDFIs) who operate most microfinance provision in the UK. Scotland is no exception, with the closure of our only CDFI offering small, personal loans at fair interest rates – Scotcash – announced last year. This policy move requires some unpacking and, perhaps, rethinking.²

In the UK, estimates suggest that millions of people are still under-served and denied access to the financial services they need to buffer against shocks and build financial resilience. Poor or no credit histories, low and unstable incomes, digital exclusion, immigration status, or language barriers, among others, are all common challenges to accessing loans at affordable interest rates. At the same time, 18% of families in the UK had no savings in 2021-2022. Perhaps as a consequence of this there is evidence that 22% of adults have increased or started their borrowing during the cost of living crisis. However, access to affordable lending is certainly not expanding at a similar pace. Options to smooth consumptions are limited with the main alternatives being high-cost lenders (also in decline due to financial regulation introduced to protect consumers), illegal lenders, and Buy Now Pay Later (BNPL) products which help spread costs of large purchases but can also become extremely costly when payments are missed or late.³

What is microfinance? How can it impact on health?
It is important to acknowledge that microfinance is not new. There are several historical examples of communities aiding each other financially; some of which developed into long-standing institutions such as savings banks and financial cooperatives or credit unions.  More current examples have come in the form of microfinance institutions, such as Grameen Bank (founded by Nobel Peace Laureate, Muhammad Yunus, after whom our research centre is named). These examples are all documented in our recent book.¹ These days, microfinance is associated with lower-income countries through the provision of collateral-free small loans, mainly for enterprise, to the poorest of the poor.³ Once these banking communities are established, they have been able to build health initiatives on top, so enhancing access of their clients to advice and care that would otherwise not be possible.

In more-advanced economies, its role is different. Mostly, loans are issued to cover personal needs and for income-smoothing, as illustrated avbove. Our work has demonstrated the potential of this not only to enhance people’s financial wellbeing but also their health.^5-7 The mechanisms for this are multiple and complex. For example, microcredit enables borrower’s capacity to plan and feel secure when faced with (un)expected financial events, reducing the associated stress, sustaining social relationships and empowering borrowers to take greater control over their lives.⁶ Although, in lower-income countries, the priority might be that of enhancing access to health care, in higher-income countries, we are talking about microfinance acting on the social determinants of health by acting on ‘upstream’ aspects of people’s lives. This is due to the persistent inequalities that exist in such countries – again, Scotland being no exception, where we know that inequalities in income are strongly related to inequalities in health and where traditional approaches to public health, such as telling people to reduce more-risky behaviours (e.g. smoking, drinking, drug use) do not appear to be working. We need to think differently about acting on the wider, more structural, aspects of people’s lives, and microfinance is one possible vehicle for that.

To be clear, we are talking about financial institutions, CDFIs, adjudged to be providing loans at fair rates as well as sound advice on financial management, including savings. A large part of their missions is to avoid people being driven into the hands of ‘loan sharks’ and never being able to create any surplus or relief for themselves. Perhaps to the disadvantage of CDFIs based in Scotland, there is a strong network of credit unions here, and an accompanying myth that they are able to handle the savings and loans requirements of the clients we are talking about. Credit unions generally target more-affluent households and have quite restrictive rules on lending. This is not a criticism. It ensures their survival, but just means that finance policy continues to fail a substantial group of Scotland’s least-well-off.

Such a situation is unfortunate, to say the least, when our conceptualisation of ‘microfinance as a public health initiative’ provides a new lens through which to view different forms of social finance opening up the ‘evaluative space’ when assessing such initiatives. Although a nascent area of research, empirical evidence is suggestive of microcredit – through its general use, lending and repayment mechanisms – positively impacting on upstream determinants of health. Interestingly, this is the case in both lower- and higher-income countries. This provides a counterpoint to the traditional narrative of the Global South learning from the Global North. The innovative responses of some microfinance institutions to the COVID-19 pandemic, especially for those living with long-term conditions, provides a recent and pertinent example of how microfinance can enable their clients’ in managing their long-term health conditions.¹

Where now for policy?
For public health stakeholders, microfinance represents another way for thinking about how to impact on health. Microcredit, for example, will not dramatically reduce health inequalities. However, this is beside the point. Evidencing microcredit as a socioeconomic determinant of health demonstrates the importance of non-health interventions and initiatives for health outcomes. At a minimum, the provision of microcredit illustrates how to avoid inflicting further unnecessary harm on vulnerable individuals through, for example, stress, shame and guilt. More constructively, there is scope for debt being a positive experience that contributes to, for example, increases in confidence, control, feelings of self-worth and social participation. Taken together, this body of work illustrates the importance of not just what you do but how you do it.

For microfinance practitioners, evidencing how their institutions positively impact on (determinants of) health adds to the case for regulation, and public sector funding, designed to strengthen and develop these alternative economic spaces. This is particularly relevant for those institutions operating in contexts that cannot benefit from economies of scale. It costs about as much to administer a microloan as it does a larger loan; likely more given all the advice and alternative forms of affordability-checking that go on. This is why the big banks and other financial institutions are not interested; it is easier just to innovate in providing more trendy and accessible services to the middle class; but it does little to advance the lives of populace more widely. Estimates indicate that each year in the UK, microcredit providers originate just £250m of loans, while over the same period, high-cost short-term credit providers originate £3bn – more than ten times as much.⁸ Microlenders already respond to market failures, operating in areas vacated by private sector institutions who cannot generate a profit. The relatively high transaction costs require subsidisation, especially with research emerging as regards positive social impacts of microfinance. Short-sighted governments in advanced economies, including Scotland, are failing to see the potential for microcredit to be part of a progressive welfare state and, as we have seen above, the funding landscape fails to recognise such wider social benefits. But glimmers of hope can be seen, especially where dormant assets have recently been ring-fenced for initiatives focused on financial inclusion. Organisations such as Fair4All Finance, one of our partners in the ongoing Real Accounts research project led by Nest Insight, have been working, since 2019, on addressing the problem of access to affordable microcredit in England through funding providers using dormant assets. Financial Inclusion for Scotland has argued that dormant asset monies should be similarly deployed in Scotland. In fact, this is the main recommendation of Scotland’s first Financial Inclusion Strategy, published last month. 

Conclusion
The challenge of arresting the growth of health inequalities requires new solutions. Different forms of social finance could complement their more traditional publicly-financed and public health counterparts, leading to health creation in ways not often recognised. While microfinance acts imperfectly in these roles, the process of exploration has generated new tools for action to policymakers, practitioners and researchers working in, and across, public health and microfinance. However, it seems that the place of microfinance is not being recognised adequately in Scotland, leading us to fail those in vulnerable communities suffering the most from multiple inequalities.

Neil McHugh PhD and Professor Olga Biosca PhD are from the Yunus Centre for Social Business & Health at Glasgow Caledonian University. Cam Donaldson PhD FRSE is the Yunus Chair & Distinguished Professor of Health Economics at Glasgow Caledonian University and Professor of Health Economics at the National Centre for Epidemiology & Public Health at Australian National University.

References

1. McHugh N, Biosca O, Donaldson C. Social Finance and Health. Routledge, Abingdon, Oxon, 2024.
2. McArthur M. Glasgow affordable loan lender Scotcash to cease lending. Glasgow Times, 15^th May 2023.
3. Financial Inclusion Commission. Fixing Financial Exclusion across the Four Nations. June 2024. https://financialinclusioncommission.org.uk/wp-content/uploads/2024/06/FIC_Fixing_Financial_Exclusion_2024.pdf
4. Yunus M. Banker to the Poor. Aurum Press, 2003.
5. McHugh N, Biosca O and Donaldson C. From wealth to health: evaluating microfinance as a complex intervention. Evaluation 2017; 23(2):209-225 (DOI: 10.1177/1356389017697622).
6. Ibrahim F, McHugh N, Biosca O, Baker R, Laxton T, Donaldson C. Microcredit as a public health initiative? Exploring mechanisms and pathways to health and wellbeing. Social Science & Medicine. 2021 Feb 1;270:113633.
7. Biosca O, Bellazecca E, Donaldson C, Bala A, Mojarietta M, White G, McHugh N, Baker R, Morduch J. Living on low-incomes with multiple long-term health conditions: a new method for disentangling the vicious circle. PlosOne.
8. Fair4All Finance. £65 million in Dormant Assets funding released to Fair4All Finance. Fair4All news. 20^th May 2020. https://fair4allfinance.org.uk/about-fair4all/