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Katy Love

ANNEX 1: The promising practices case studies series

ILO Debt Bondage Prevention Through Micro-finance

I. Context:

a. Socioeconomic overviewMillions 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 ofcontractual 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 bondedlabor 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 otherpoverty 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 someare 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 re-entering 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:

TheILO 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 healthservices. 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

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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 asmanage 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 costsand 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 difficultand costlyto 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 morehere.

V. Challenges/pitfalls/lessons learned

Although, as mentioned above, it can be quite costly to target exclusively thepoorest, 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 non-

financial services. The group approach has its own limitations; many participants wouldbe 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, yetsmall 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 onrepayments 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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Need contact info.