Katy Love

ANNEX 1: “The promising practices” case studies series ILO Debt Bondage Prevention Through Micro-finance
Context: a. Socioeconomic overview Millions of poor, South Asian workers are bound to their employers as they attempt to repay loans. The reasons for the bondage include: social exclusion (religious, ethnic, caste, or otherwise), asymmetric information (illiteracy and a lack of understanding of contractual relationships), financial and labor market monopolies (as the only option for credit and employment), multiple roles of employers (in influential political or social roles), and in-kind linkages (enhancing employee dependency by deducting rent, etc). b. Purpose of intervention This project is not viewed as the resolution to debt bondage, but rather, as a way to encourage new policy and recognition of the problem. The ILO project does not exist to provide credit to bonded laborers, since bondage is illegal and would undermine the execution of the law. However, microfinance is an integral part in eradicating bonded labor for three reasons. Only the poorest are targeted for participation and they are targeted through the use of the Vulnerability to Debt Bondage Index (VDBI) and other poverty indicators. First, access to financial services will be provided. Second, social and economic empowerment will be delivered through a group savings program. Finally, the capacity of a household to generate income will be increased. c. Description of target group/clients/members Those targeted are among the bonded laborers whose employers retain part of their earnings to pay an outstanding debt. They are mostly in the agriculture sector, and some are in the industrial sector, and they are consistently the poorest and most undereducated, as well as from the lowest castes and in religious minorities. More on client group size? II. Description of methodology: a. Summary of design concepts: The ILO program attempts to eradicate bonded labor through the action of policymakers, the identification of bonded laborers, the uses of the legal system for their release, the rehabilitation of laborers, and finally, the creation of conditions to prevent them from reentering into bondage. Prevention was originally the focus of the project, but more attention has been given to increasing awareness and political action. b. Process/steps in implementations: The ILO partnered with various NGOs to create a package of services that include microfinance services for the extreme poor who are most vulnerable for bondage, or those who have been legally released from bondage. Other focus areas include social empowerment (through savings and credit programs), education, skill training, and health services. Microfinance is an important element of the program, but other and complementary non-financial services are required to keep participants from returning to bondage. Surveys are used to gather socio-economic and environmental data (literacy, poverty, health, etc). Families form savings and credit groups. In the mean time, social and economic empowerment initiatives begin, coupled with vocational and I.

entrepreneurial training. These are done with the intended effect of raising member confidence. The financial services component must address the needs of the group, as well as manage their risks and even occasionally pay for traditional obligations. In fact, four services are needed: income generating loans, emergency loans, contractual savings, and liquid savings. One important element of the ILO process is the involvement of employers. Employers must be integrated by using a combination of the threat of legal action and helping employers to determine alternatives. c. Methods of measuring results: Need more here. III. Results Because of the flexibility and involvement of the program, these services (financial and otherwise) will likely not cover the cost of delivering them. However, these services are necessary to reduce vulnerability among participants and to eventually graduate them into full recovery and participation in standard MFIs. Overall, the ILO feels that the program needs at least five years in order to effectively evaluate the costs and benefits. The policy impact is measured by individual country, as it varies in each. Nepal, India, Bangladesh, and Pakistan have all made progress from 2000 to 2002 in terms of recognizing bonded labor. May need more here. IV. Resources required/cost to institution It is difficult—and costly—to target the poorest of the poor, because of their perpetual social, political and economic marginalization. Additionally, field staff struggles to reach more than a few participants at a time because groups are so widely dispersed. Need more here. V. Challenges/pitfalls/lessons learned Although, as mentioned above, it can be quite costly to target exclusively the poorest, it is a necessary step. Perhaps the ILO will pilot a two-tiered approach to provide the services for the most vulnerable while also serving as a financial intermediary for the larger community. Another challenge is the coordination of the various services provided, for each service is integral to the program. To facilitate this, the ILO project uses a “group approach,” to make members responsible for designing and implementing many nonfinancial services. The group approach has its own limitations; many participants would be better served in the trainings and financial services on an individual basis. Finally, the ILO staff has technical and managerial limitations. Because the program requires such diverse talents, it creates a difficulty for creating an effective, yet small staff. For this reason, the ILO has sought advice from other departments, as well as the UN and short-term consultants. One lesson learned through this project is that a “tough-love” approach on repayments is more effective with those most vulnerable to debt bondage. Several options exist to facilitate this; timely repayment refunds, financial education, customized loan amounts, tailored repayment schedules, repayment holidays, and others. VI. Contact information/sources of information

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