Analysis of two French solidarity finance tools: the NEF and the CIGALES
Case studies on: « Microfinance and social ties »
Pauline Grosso, October 2001
Languages : français
Microfinance and social ties
Analysis of two French social finance tools Nef and Cigales
Pauline Grosso – 5th October 2001
[[I – The microfinance aspect}}
« A set of techniques and methods that aim to meet the needs for saving, credit and insurance services of sectors of society that are denied access to financial resources, with the long-term objective of becoming permanent institutions ». (Microfinance and Social Ties Group - 18/10/00)
A – Meeting the needs for saving services
Nef: because of its status as a financial company, Nef cannot take in short-term savings. It can only offer reserve accounts with a minimum term of two years. To mitigate this problem, it has joined up with a social economy banking network, Crédit Coopératif, which allows it to offer its clients a wider range of products (current accounts and savings books). Nef savings give low interest in comparison to equivalent non-social savings. As well as this, the saver has a choice of rates within a certain range as well as allocation to specific sectors of the population.
Nef brings in savings through parts of its capital, its three fixed time-deposit accounts, the Nef-Crédit Coopératif savings book and the Nef-Crédit Coopératif current account. In 2000, it had over 5000 members and 289 million francs of amount outstanding.
Cigales: these are investors clubs holding coparcenary status, made up of 5 to 20 people who put monthly savings into a shared kitty. Before being allocated, the liquid assets are put into a current account, with or without interest (often a Nef-Crédit Coopératif account). In 2000, there were 98 active clubs all over France (except for in four regions), with assets spread over every regions of France (except four) to the tune of 2.9 million francs.
A general comment on social saving in France: unlike what happens in microfinance in the South, in France it is a matter of meeting savings needs that are of a qualitative and not of a quantitative nature. All the savers have access to savings services that are satisfactory from a technical point of view, in terms of returns, liquidity and security. It is the ethical aspect of their saving systems that the clients find unsatisfactory and social finance methods provide an answer to this problem.
From a strictly financial point of view, these savings methods are less profitable for savers than other products on the market to which they have access:
These products have a weak distribution network
The range is limited
The financial returns, liquid assets and security are generally lower than those of equivalent products on the market
However, these setbacks are not insurmountable. A comment made by one Nef saver is telling: « we closed our accounts at our neighbourhood bank and became 100% Nef clients… Why not give this wonderful project a go? Just because of a few practical disadvantages, which are more imagined than real anyway? »
Because the intention is to meet ethical or intellectual needs, it can be considered that we are entering the arena of social capital, as it is not simply a matter of improving financial capital.
Extract from the Aldéa charter (the origin of the Cigales):
« …we want to imagine a world in which everyone can once again find the freedom to steer his own fate and take part in the economics of his environment.
In such places, accessible to all, money is not the master but the instrument and individual value is not confused with material wealth…
B – Meeting needs for credit services
Nef: Nef is a credit company, regulated by banking law. It gives medium and long-term loans to economic projects, mostly start-ups or expanding small businesses, but also to associations, district councils, etc. It targets “useful projects” which do of course include the insertion of people with difficulties but actually cover a much wider area: culture, art, renewable energy, health, organic farming, etc. Its loans range from 30,000 F up to several million francs. Interest rates are market rates or slightly higher. In 2000, there were 433 loans granted reaching a total of 81.6 million francs (average loan of 190,000 F).
Cigales: these investment clubs finance start-up companies and expanding small businesses by means of becoming shareholders for a five year term. Because of this specific type of activity, they can only invest in corporations, which very much limits their degree of intervention (the vast majority of small French businesses are individually owned). The sums that Cigales lend range from ten to fifteen thousand francs. The sum provided is agreed but the return on investment is only ascertained afterwards In 2000, thirty-three businesses were financed in fifty-seven different loan agreements (more than one club can finance a single business), for a total sum of 0.86 million francs, or 28.8% of the amount outstanding.
The funding models are very different: Nef agrees loans with interest for sums that can be quite considerable while Cigales make very small deposits into their own funds.
C – Meeting needs for insurance services
Nef: does not offer insurance services per se. If warranty can be considered a form of insurance, Nef employs a particular technique; that of groups of joint and several guarantee. This means that the lender identifies a number of people (family, friends, clients and suppliers) who each stand surety for a certain percentage of the loan. If there are repayment difficulties, each one is called upon to pay a sum up to the amount of their surety commitment.
Cigales: does not offer insurance services per se. If warranty can be considered a form of insurance, Cigales are protected from the risk of loss by recourse to a « France Active » guarantee fund. This guarantee is acquired by the club and not by the business that has been funded.
Insurance services (with the exception of the warranty) are non-existent in French social finance. At the very most, one finds one agent (e.g., Habitat et Humanisme) which offers a life insurance policy but it is in fact a type of social saving account offered to savers and not a form of protection for the beneficiaries.
D – Long-term objective: becoming permanent institutions
Nef: founded in 1978 as an association, it has chosen, under the limitations imposed by the direction the legislative and regulatory environment is taking, to adopt the status of a credit institution with limited license for operations. From now on it is a financial company subject to Bank of France approval, required to follow prudential regulations and the normal control systems of any credit institution. This is a heavy and costly constraint. The minimum amount of capital required is 15 million francs. After almost 15 years of operations, Nef managed to show a profit but this is only made possible by the interest generated from placing liquid assets that amply exceeds the sum of its payment obligations
Cigales: the club is not driven by profit-making aims or even one of balance of payments. Receipts are potentially made up of the interest gained on members’ current accounts, on the dividends paid and the capital gains made on the selling of shares. But these receipts are rare. More often than not, there is neither interest nor dividends. As far as asset transfers are concerned, they are often done at par value. Moreover, losses are relatively frequent (around 25%); they can be covered up to 50% by a France Active guarantee fund. The club generates a certain amount of expenses that are not covered (postage, photocopies, transport, federation membership fees, etc.)
Nef and Cigales have very different systems of institutionalisation and financial autonomy. However, they both subscribe to not seeking profit and aim to provide their members with moderate returns.
The microfinance aspect: conclusion
One considerable difference between microfinance in the South and in France (where it is more appropriate to speak of social finance) is that saving clients and borrowing clients are not from the same sectors of the population:
Savers are people who are integrated into the economic system and who move towards social finance out of conviction and a spirit of solidarity.
Borrowers of course have problems getting funding but some of them choose this type of funding structure for ideological reasons. The products are seen as the natural financiers of the social economy sector. It is also worth noting that social finance products are rarely the only sources of funding for a project.
However, although the social finance products studied do help to strengthen people’s social capital (as we shall see below), they do not deliberately reach the most needy sectors of society.
II – The social ties aspect
A – Social ties
Social ties are the relationships that exist between individuals and groups. They can be horizontal – innate – (family, ethnic, religious) or vertical – forged by people who share common interests or goals. (Workshop on a Socio-Economy of Solidarity, group 6 Finance of Solidarity)
Nef: The groups of joint and several guarantee discussed above have a direct impact on this type of bond because they strengthen the position of the borrower in his or her project. Above and beyond the financial aspect (protection against credit risk), it is clearly advantageous on a human level to strengthen the social fabric around the instigator of the project.
The borrower is given assistance before and after financing by employees of the system or sometimes by voluntary workers. However, this assistance is often outsourced to specialist consultancy networks such as the “Boutique de gestion”.
Nef makes transparency its particular overriding policy: the most obvious example of this is the publication of all loans granted, with a description of each borrower. Each Nef saver (over 5000 members) has access to this and can become a client or support the financial project. In the Nef newsletter (“Vif argent”), members are invited to meet leaders of projects supported by Nef and share their experience with readers.
Cigales: the borrower meets the 5 to 20 members of the club, who all represent new contacts. Each of them looks in their address book and amongst their acquaintances to provide the project leader with new, useful contacts. Depending on the field of activity, these may also be potential direct clients. In addition, two Cigale members also play the role of sponsors or patrons.
Both Nef’s and Cigales’ main contribution is that of bringing the borrower into a network of people and financial resources. They help to develop the fundamentally vertical social ties. Meanwhile, as they put their trust in the borrowers, they also help to improve the borrower’s relationship with peers (horizontal ties) by helping him to become stronger.
The financial network is basically made up of other providers of social finance, but can also involve relations with traditional bankers open to this kind of initiative. Independently of any relationships, by strengthening the financial structure of the project, the contribution of social finance is an effective lever for extra “traditional” financial aid.
The people network is created by “opening the address books”, both personal and professional, of the providers of social finance.
Both Nef and Cigales have newsletter describing the initiatives and the experiences of savers and the projects that have been funded.
B – Social capital
Social capital is defined as people’s ability to co-operate and work together to fulfil common aims. It is born of the interaction between the values of the people involved and the processes developed by institutions that value social ties and make co-operation possible. Social capitalisation is possible when values can be expressed: power, welfare, competence, respect, sense of belonging… (Workshop on a Socio-Economy of Solidarity, group 6 Finance of Solidarity)
Nef: Once funding has been agreed, the borrower is the focus for follow-up relations (see above).
Cigales: two of the savers adopt the role of privileged interlocutors, in charge of maintaining the relationship between the club and the borrower. They attend the general assemblies of the funded company and have regular contact (quarterly or monthly) with its founder. This follow-up goes beyond simple financial interests of risk prevention. It is motivated by the wish to accompany the founder along a stretch of the way, to assist him in the difficult stages of starting up the project.
Right from the start, the project leader is received by the group with goodwill and an open-minded attitude to his project, even by the social finance providers. Any atypical or weak points he may have from a traditional point of view are viewed as an asset here. The project-designer is asked to describe his project and develop it. He is listened to benevolently and questions are never posed to knock him off balance, but to guide him towards improvement. Even when funding is not given, the simple fact of exchanging ideas with the finance providers helps to build the person’s self-confidence.
One particularity of social finance that is highly visible in Nef and Cigales is that it helps to reinforce savers’ social capital and ties. This may not help to reintegrate excluded individuals, but it does present advantages for society as a whole in terms of teaching citizenship and democracy and as a form of intellectual and emotional training and enrichment, if not financial enrichment.
C – Mutual help and solidarity
Mutual help carries the notion of exchange and reciprocity. Solidarity is more unilateral.
Nef: Nef arises from a group of people who want to help each other and try out the social and economic ideas of the Austrian philosopher Rudolf Steiner (1861-1925). To begin with, it was restricted to financing projects born out of the anthroposophic movement.
It was later extended and has evolved towards a structure of solidarity, in which people with resources makes them available to others who needed them and did not belong to their mutual help network.
Cigales: Cigales emerged from a group of people from Aldéa (Agence de liaison pour le développement d’une économie alternative) who wanted to transform the economy, particularly by changing the way savings were managed. It was not only a matter of helping alternative businesses but of letting them manage their savings themselves. The initiative is clearly based on solidarity.
Nef and Cigales both employ the tools of social change. Mutual help exists, mostly among savers, sometimes among borrowers: solidarity is clearly expressed.
D – The idea of the group
Microfinance in the South makes constant references to the idea of a group, which often forms the basis of savings and credit systems.
Nef: Nef grants loans at interest to individuals or collective businesses. The idea of the group finds a specific application here through the groups of joint and several guarantee. Nef asks the borrower to assemble a certain number of sureties, each for a percentage of his loan. Contrary to microfinance in the South, this system does not require borrowers to stand surety amongst themselves (they do not know each other, as they come from all over France and from all different sectors) but does require the borrower to have recourse to the trust and the money of people who know him, in other words, to activate his social ties.
Cigales: Cigales intervene in the form of holding shares in the companies’ capital. In this sense, they do not finance isolated individuals, only people in groups, the partners of a single company (public or private limited company), be it co-operative or not. The social ties among the borrowers is pre-existing, because they make contact with the Cigales together. It is not the latter that require the borrowers to form an association.
The idea of the group as it is understood in the South is difficult to apply in France. An organisation such as Adie (which takes its inspiration from the Grameen Bank) has set up groups of business project designers but this is only to create social ties and exchange information and not to provide social loans.
Conclusion on the social ties aspect
What does consideration of social capital bring to social finance? Consideration of social capital ties into its very raison d’être because, as we have seen from a strictly financial point of view, these products perform less well than those of the market. Although its presence may seem rather discreet, social finance does exist, but in very different shapes and forms to those of the South.
Pauline Grosso analyzes and compares the microfinance institutions NEF and CIGALES on the following themes: saving and credit, insurance, institutionalization, social ties, social capital, help and solidarity, and group work.
The NEF has a statute of financial company and cannot collect short term savings. To compensate for this difficulty, it has formed an alliance with a bank of the social economy network.
The CIGALES are investor clubs, with a statute of joint ownership composed of between 5 and 20 people who save together monthly.