The financial sector and the world of work
It was exciting to experience the International Labour Organization’s (ILO) centenary celebrations last year. One of the highlights was the work of the Global Commission on the Future of Work, which considered the displacement of workers into the gig economy, the effects of automation and artificial intelligence on jobs, and the prospects for a new social contract between workers, employers and the state. The work of the Commission formed the basis of the ILO Centenary Declaration on the Future of Work, which sets out the way forward for the ILO.
In this context, Social Finance has also reassessed and rearticulated how the financial system can foster social justice, promote Decent Work, and contribute to the Sustainable Development Goals (SDGs). This can be summarized through the following mnemonic: more jobs, better jobs, and the right(s) jobs.
More jobs
“More jobs” is the most obvious of the three. The current financial inclusion agenda began with microcredit, which involved the provision of loans to entrepreneurs to enable them to start and expand microenterprises, and those efforts continue today. However, academic research has not shown that this approach has indeed created jobs. Most financial service providers (FSPs) target existing businesses rather than start-ups, and most microenterprises are not creating jobs for others. The best outcome from microcredit is probably job stabilization rather than creation.
Since job creation remains a critical objective for national governments and development agencies alike, we have seen two main reactions. First, some financial institutions have broadened their offerings, recognizing that credit alone is not sufficient. To support business growth, they have introduced other financial services — especially payment and insurance services — as well as non-financial services, such as training and market linkage facilitation, in the hope that a more comprehensive package will have a greater impact. An alternative approach has been for FSPs to broaden their remit and target small and medium enterprises, as they are likely to be a better source for new jobs.
At the ILO, we are betting on both of these horses. On the one hand, we are working with banks and microfinance institutions to help them introduce a range of financial services, and offer training courses, to enhance the impact that they can have on small enterprises. On the other hand, we are also working with investors, to help them to ensure that they consider both the “more” and the “better” job agendas when they are making investment decisions.
Better jobs
That brings us to “better jobs”. Of course, a high volume of jobs is not sufficient. We need to consider quality as well as quantity. The promotion of better jobs is an area where financial institutions can be much more active and engaged. When visiting micro and small enterprises, one often finds, for example, women weaving carpets without any natural light; or machine shops where welders do not wear gloves or protective eyewear; or farmers with open containers of pesticides leaning against their sheds.
There is a school of thought that financial institutions should focus exclusively on their core business of providing financial services, and should not get distracted by ancillary activities like conducting training, providing advice or raising awareness. However, I would like to argue that there is not only a moral obligation to embrace a broader engagement with the target group but that it also makes business sense. Morally speaking, if field staff witness deplorable working conditions, then they should want to improve the situation in some way.
But this is also the business logic — if a bank’s clients are exposed to risks, then the bank is exposed to those risks as well. The bank would therefore be wise to undertake risk prevention measures through, for example, basic awareness raising about occupational safety and health. It would also be helpful if the entrepreneur (the borrower) and the bank (the lender) transferred some of the risk through insurance. Indeed, efforts by FSPs to enhance the productivity and resilience of their borrowers — as long as they are low-cost and targeted — will reap rewards for the lenders in the form of a healthier loan portfolio and enhanced customer loyalty.
Not only should financial institutions expect that they can help improve the working conditions in their clients’ businesses, but their shareholders should as well. Many investors in the financial institutions in emerging markets come from the development community, including local and international development banks, and socially responsible investors. They can, and should, use their influence to raise the bar and enhance their institutions’ expectations about the social and environmental dimensions of the triple bottom line.
Right(s) jobs
The third aspect of the mnemonic is the “right(s) jobs” — and here I am taking some poetic licence with the terminology. I am not talking about the right jobs, in terms of training the workforce for the jobs of the future — although that is also an important issue for the ILO — but rather, whether the rights of workers are being considered.
“The Fundamental Principles and Rights at Work” involves a range of issues, including freedom of association and collective bargaining. Especially for small enterprise clients, financial institutions can play a powerful role in promoting the fundamental principles with regards to child labour and forced labour.
First, a warning. If they are not careful, by lending to micro and small enterprises, financial institutions can actually stimulate the demand for child labour. The scenario can play out like this: I am running a small shop, perhaps with my spouse, and because I get a loan, I have more inventory and my business is more attractive to customers. Now the foot traffic increases, and I realize I need help tending to customers, but I do not want to hire someone that I do not trust and who will be an extra expense for the business. So on days when I think business will be busy, I keep my daughter home from school to help me out, and maybe she even brings a friend. It is a slippery slope to child labour, which is certainly not an attractive outcome for financial institutions.
So what should FSPs do about this insidious problem? Unfortunately, this can be more challenging than improving working conditions or enhancing resilience, because there are many different causes of child labour, but the starting point is to raise awareness of the issue with front-line staff members, and for them to do the same with their clients. Some FSPs have even asked for school attendance records as a condition for subsequent loans. Others offer specific financial services to target the root causes of child labour, such as an education savings account to make schooling more affordable; or insurance to help households to cope with the illness or death of a breadwinner. While financial institutions on their own cannot eliminate child labour, they can be a part of the solution. Similarly, the investment community can make a major contribution as well.
Conclusion
The financial sector has an important role to play in the world of work, and it could take on an even bigger one. To encourage financial institutions to live up to their potential to contribute to Decent Work, the ILO’s Social Finance Programme’s approach involves testing, learning, documenting and promoting (see the figure). In this way, we work with banks, insurers and investors to pilot new products and processes, and to learn with them which methods achieve the intended objectives. Having documented that knowledge, we actively promote the insights and recommendations, with policy-makers and practitioners alike. We hope that, with the right mix of carrots and sticks, we can make progress in nudging the financial sector towards having a more beneficial impact on the lives of the working poor and the communities in which they live.
Our 2019 Annual Report highlights the work of the ILO’s Social Finance Programme in 2019 and is structured around three segments of the financial sector: (a) banks, microfinance institutions and credit unions working on financial inclusion; (b) insurers that are contributing to development objectives, which we refer to as impact insurance; and c) investors that are subscribing to a sustainable investing agenda. The full report is available on our website.
