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Local financing in rural areas

[ Summary ]


Chapter 2:
Current funding provision


2.3 Alternative financing sector


The aim of alternative financing is not to bridge the gap between the provision of commercial banks and demand for finance, but to provide an alternative offering suited to the specific needs of applicants, especially those that are most atypical. It includes all those organizations that seek to offer financial services to match the needs of people with no access to commercial banking services and at the same time to play an important role in terms of local, social, environmental and other types of development (e.g. small projects, welfare projects and environmental projects).

“Financial alternatives” are all guided - at different levels - by “ethical” or “mutual aid” principles aimed at introducing:

  • Mutual aid practices by supporting projects that are of social and environmental interest, generate jobs, or emanate from vulnerable groups in the community, etc.

  • Transparency regarding the use of savings and the gains from certain stock market investments.

The movement towards ethical and mutual aid financing, which began in the eighties, has today taken on significant proportions. In France, for example, more than EUR 500 million is invested each year in ethical or mutual aid projects and 4% of France’s businesses have been created using mutual saving funds. The various mutual aid financial operators grouped under the “FINANSOL” label have been responsible for creating 25,000 new jobs [9].

There are three types of initiative in the alternative-funding sector:

  • those initiated by civil society aimed at supporting welfare or public interest initiatives, such as projects created by groups in difficulty. These structures, which often take the form of associations or cooperatives, raise the funding required to plug the gap left by traditional banks;

  • ethical banks: although these are proper banking organizations, they are built around an ethical and non-commercial objective. They therefore have a specific objective of mutual aid that runs right through all of their operations. They have either developed from civil society initiatives that were already at an advanced stage of development, or were created at the initiative of political or trade union movements;

  • ethical products offered by conventional financial institutions - to cater for the growing demand from private individuals and businesses for alternative ethical finance products, investment trusts and certain traditional financial institutions, including commercial banks, have started to offer products of this type. This has led to a branch of the alternative sector emerging within the very heart of the traditional commercial sector.


2.3.1 Alternative finance structures and products initiated by civil society

Alternative initiatives initiated by civil society began to develop in the 1980s, when the first mutual saving funds began to be collected locally, especially in European countries like France and Italy [10].

In France in 1983, for example, the “Cigale Clubs” (investment clubs for the alternative local management of savings) emerged in the sector of local mutual aid venture capital. In Italy, the movement “monetary objection to the banking system”, which led to the creation of the “MAG” (self-managed mutual funds), also emerged in the 1980s to support sectors with insufficient capital, project promoters needing bank guarantees and projects of community interest.

In the majority of cases, such initiatives have been created locally, because it is at local level that the signs of the growing divide between the actual economy and the financial economy are most apparent. It is therefore at local level, which has the advantages of proximity including mutual knowledge between the parties and social relations, that a “social objective” can be developed for using local savings. Social relations in the community can serve as a basis for developing a strategy to facilitate access to finance for project promoters rejected by the banks.

However, over time, such initiatives develop beyond the local level into far wider-ranging structures.

In 1981, France’s Basque Country set up a venture capital company devoted to business creation: “Herrikoa” (meaning “home-grown “ in the Basque language). In 1999, the company had 3,500 shareholders. A total of 11 million francs was collected from the population, creating an estimated 1,561 net jobs. Herrikoa, a financial instrument, works in partnership with other local economic structures, including ADIE (Association pour le Droit à l’Initiative Economique), Accea Lann Berri (Atelier-conseil en création d’entreprises ou d’activités) and Hemen (meaning “here” in the Basque language), an association to support and assist economic initiatives). Hemen receives around 200 project proposals per year [11].

The objectives of alternative initiatives initiated by civil society are generally mutual aid, economic support for the emergence of projects and long-term financial management:

  • objective of mutual aid - to use local savings for supporting initiatives put forward by disadvantaged social groups (including the unemployed) who have no access to conventional credit, by innovation-promoters or by sectors of the social economy;

  • objective of support for the emergence of projects - to create mechanisms for coordinating and identifying projects that should receive support to foster the transparent self-management of savings and their utilisation;

  • objective of autonomy and management control - to develop project support services during the design, start-up and consolidation stages, in order to support access to credit.

Alternative initiatives launched by social groups involve the creation of private law organizations (cooperatives, associations or limited liability companies) that have a limited scope of intervention in the area and draw their financial resources from the local savings of private individuals and business firms, although they often receive support from public organizations. They are characterized by the fact that:

  • they are local instruments;
  • they play an educational role;
  • they often serve as relays for local development measures. Characteristics of alternative finance structures and products initiated by social groups

    a) Local instruments

      The scope of activity of these financial alternatives is localized (the local area and/or for the sole benefit of their members) and these alternatives are replicated from a single model. This is the case with France’s Cigale clubs and Local Initiative Platforms, as well as Italy’s MAGs. The legal frameworks adopted by such local instruments justify their existence by limiting the field of intervention. In Italy, for example, MAG-type financial cooperatives must limit their interventions to a very specific area.

    b) Educational instruments

      Above and beyond the “transparent” management of the funds entrusted to them for “mutual aid”, these structures have a strong educational impact because they all supplement the provision of credit with advisory or skill transfer services. They thereby reinforce the autonomy and project-management ability of sectors of the population cast aside by traditional banks [12].

      For such structures, ethical credit is instrumental in fostering solidarity, combating local unemployment and developing local management expertise.

      Created at the end of the 1970s at Inzago, a local district of 8,500 inhabitants in Lombardy, the ethical finance cooperative “MAG2” [13] was set up to invest local savings to assist projects put forward by economically vulnerable people or by non-profit-making associations that find it difficult to access traditional financial channels. In addition to this task, the cooperative has gradually evolved towards providing integrated forms of support for initiatives, becoming a real “one-stop shop” for local development.

      In educational terms, MAG2 defines itself as an all-inclusive service for supporting job-creating initiatives, primarily those organized on an associative or mutual-aid basis. Such support may cover all the phases in a project’s life:

      • for self-employment activities, moving from the idea to the project stage, by evaluating and launching new ideas;

      • moving from the project to the start-up stage, by providing technical support for producing feasibility studies, choosing the most appropriate legal form and completing the diverse administrative formalities involved in the start-up;

      • the consolidation phase, by providing support for management and for certain specialized fields, in order to enhance the development of a firm’s internal dynamics and its contacts with the outside world. The experience of MAG2 demonstrates that this latter type of support is crucial to preventing the failure of new initiatives. Paradoxically, however, no resources are available to defray the costs of this type of support.

    c) Local development relays

      The development of this type of activity frequently relies on public sector support and on forms of partnership with certain banks.

      The public authorities and certain banks (particularly savings banks and ethical banks) have understood the importance of these structures for providing direct support to innovative small businesses, businesses of a social nature, project promoters from vulnerable sectors of society, etc., and support their educational and credit function by turning them into proper “local development relays” [14].

      People’s awareness and involvement in the way their savings are invested are important factors in sustainable endogenous development.

      Alternative initiatives created by social groups are therefore increasingly of interest to rural areas, although in Europe such experiments are still more the province of urban players. Typology of alternative finance structures and products initiated by social groups [15]

    Local venture capital companies

    Private individuals and businesses invest in new business creations and support business development within the framework of venture capital companies. This system relies on people’s sense of belonging to a region whose economic potential they wish to safeguard. This is the case with Herrikoa mentioned earlier.

    Mutual-aid venture capital companies

    Venture capital companies and investment clubs combine local savings with mutual aid, by taking an equity participation in new or expanding businesses. The financial dividends from such investments remain modest. The objective of the exercise is to invest in job creation. France’s Cigale clubs provide an example of this type of financial alternative.

    The investment clubs for the alternative local management of savings (“Cigale”) were created in 1983 in order to help develop business firms that respect man’s role in the environment. Since then, 200 clubs have been set up. Each Cigale club is a jointly owned venture capital company. It is comprised of between five and twenty members. Each member invests between EUR 10 and 600 in the club. The club carries out its activities in the local area, mainly by taking an equity participation in business firms that are either being created or in the process of increasing their capital [16].

    Financial cooperatives and self-managed mutual funds

    This type of initiative has developed mainly in Northern Italy with self-managed mutual funds (MAG). Currently there are six MAGs, distributed in small towns throughout northern Italy.

    MAG2 was created as an alternative to the conventional financial system, which sets no ethical limits on the use of savings.

    MAG2 financial support is therefore conditional upon the social quality of projects, the relationship of trust between members (ethical evaluation) and the financial solvency of the funding applications submitted (technical and economic evaluation). Information about where the savings are invested plays a key role in the decision-making process, since no asset-backed guarantees are requested.

    By 1999, the cooperative had 940 members and had financed 200 projects (some a number of times). The amounts invested totalled EUR 2 million.

    Over the years a policy has developed of encouraging members to help define the sectors of intervention and to self-manage savings.

    For example, financing activities are organized by groups (“comprensori”) that include a variable number of members who organize themselves on a voluntary basis to develop activities for promoting ethical finance on the basis of “Information Points”.

    Shared investments

    Shared investments enable financial returns to be made on savings in the normal commercial market, with some of the earnings being donated to associations operating in developing countries, to local or social integration projects, etc. They are generally created by associations working to combat social exclusion, trade unions, etc. However, banking networks and management companies are also interested in them and are also creating this type of investment, as we see below.

    Ethical banks created for a mutual aid objective

    Ethical banks have either:

    • developed from alternative initiatives initiated by civil society, or
    • been created on a piecemeal basis by political or trade union organizations.


    Italy: “Banca Etica”,
    a spin-off from the MAGs

    In Italy, in order to overcome the territorial constraints imposed by legislation on financial cooperatives, the six existing MAGs supported the creation of the “Banca Etica” (Ethical Bank) in Padua, whose purpose is to put together a range of ethical finance products.

    Banca Etica was created following a massive collection of funds (around EUR 8 million) to constitute the corporate capital demanded by Italy’s banking legislation. This institution complements and extends the activities of the MAGs by providing conventional financial products: certificates of deposit, current accounts, credit cards for buying ethical and mutual aid products, etc.

    The launch of Banca Etica (January 1999) enabled the MAGs to direct their energies away from providing financial services and focus on promoting development projects for combating poverty (support for new business initiatives put forward by the weakest social groups; development of a local system of micro-credit, etc.). Note also that, unlike the MAGs, the Ethical Bank is in competition with conventional banks.

    Banca Etica is a credit instrument that helps to enhance the competitiveness and management skills of non-profit-making organizations and hence improve the quality of their products and services. By 2000, Banca Etica had around 13,000 members, of which 170 are local councils, 20 are provincial administrations and five are regions. In order to guarantee its members and customers clear and complete information on the projects financed [17] and on the criteria for evaluating funding applications, Banca Etica considers that savers and members should be responsible for choosing them. It has also appointed an “Ethics Committee”, comprised of important figures known for their social and civil commitment, which has the task of verifying the bank’s adherence to, and coherent application of, the ethical criteria described in its statutes.


    Experiments in other countries

    Apart from the example of Italy’s Banca Etica, there are banks or cooperative financial institutions in several European countries [18] which offer exclusively ethical products allocated to combat exclusion and support business creation.

  • Netherlands and Belgium: Triodos Bank [19]
    Triodos Bank, created in the Netherlands in 1980, was the first bank in Europe to define itself as “different”, by making one of its founding principles transparency in the use of financing. Today, the bank has more than 12,000 shareholders in the Netherlands (private individuals, associations and business firms). This ethical bank was set up in Belgium in 1995. Like its Dutch sister company, Triodos Belgium has chosen to finance projects which, whilst financially viable, have added value in environmental, social and/or cultural terms. With its 7,300 shareholders, Triodos Bank also considers itself to be a local development bank.

  • United Kingdom: Cooperative Bank
    The objective of the Cooperative Bank, the only major financial institution in the United Kingdom involved in the social economy sector, is to “make the banking system ethical”. Since 1992, it has operated a very rigorous ethical policy, defined in a charter based on a survey carried out among the bank’s customers keen to combine ethical considerations with finance. The principal ethical criteria contained in the charter including safeguarding civil rights, fair trade and opposing the arms trade [20]. With its 2,300 counters dotted throughout the country, the Cooperative Bank has around one-and-a- half million customers, which, as it name would indicate, include numerous cooperatives.

  • Germany: Ökobank [21]
    Created in 1988, Ökobank (Ecobank) was an offshoot of Germany’s ecologist and pacifist movement. Its first savings and loan products were aimed primarily at the renewable energy sector. Nowadays the bank has extended its fields of intervention, particularly in the social sector.



2.3.2 Alternative financial products created by investment trusts or by traditional banks

This generally includes two types of product: either equity participation in business firms evaluated according to ethical criteria (job creation, respect for the environment, etc.), or transferring some of the profits from stock market investments to welfare associations.

Ethical investments

Ethical investments are administered by finance companies that buy shares in business firms selected on the basis of ethical criteria, respect for the environment, job creation, etc. Fund subscribers are kept regularly informed about investment strategies.

Mutual aid and life insurance banking products

Mutual aid and life insurance bank products have been created by cooperative banks and friendly societies. Their chief aim is to combat exclusion by granting loans to new business creators. For instance, when they open a mutual aid account providing entitlement to all the traditional banking services, account holders authorize the bank or credit cooperative offering the service to invest 70% of the amount on deposit for use by associations supporting the unemployed, new business creators, organic farmers, etc.

Since 1996, investment trusts and savings management companies in Italy have created two types of ethical fund: funds that adopt ethical management policies and those that support non-profit- making activities. The former category includes funds belonging to the “ethical system” created by the San Paolo Bank and the latter category includes funds from the various management companies (“Azimut”, “Gestnord”, etc.). In the former case, investments are made in public sector projects or in companies that meet “positive criteria” (safeguarding human rights, the environment, etc.). In the latter case, profits from the funds are used to support non- profit-making organizations. There is also the “Roma Caput Mundi” fund, created jointly by the municipality of Rome and the association Roma Caput Mundi, whose profits are used to develop the artistic and cultural heritage of Italy’s capital city. This public/private collaborative venture has resulted in the restoration of some of Rome’s leading monuments [22].


[9] FINANSOL was founded by several associations
such as the Fondation pour le Progrès de l’Homme, the
“Cigale”, etc. They were joined by several banking
networks. Apart from administering the mutual aid savings
label, FINANSOL seeks to publicize the mutual aid
financing sector more widely and promotes its products
amongst local authorities.
FINANSOL, 4, rue Jean Lantier, 75001 Paris.
Tel: +33 1 448 28012.

[10] See: TRANSRURAL Initiatives,
no. 125, 26 February 1999,
Feature article: Financer autrement les
projets ruraux (pp. I to VIII).

[11] For information on these initiatives:
BIE Euskal Herri, Résidence L’Alliance,
Centre Jorlis, F-64600 Angelu.
Tel: +33 4 95311559.

[12] Granger op. cit. pp. 55-61

[13] For more information about this
initiative, contact:
Dott. Giovanni Acquati, President -
Cooperativa MAG2 Finanze
Via Pacini 11 - 20131 Milan
Tel.: +39 02 2665474
Fax: +39 02 70637335

[14] Alternatives Economiques et La Vie,
Les Placements Ethiques, l’épargne alternative
et solidaire en 65 fiches, Hors-Série
Pratique, no. 3, First quarter 1999. p. 13

[15] This typology was drawn from ‘Alternatives
Economiques et La Vie’, op. cit.

[16] For more information about this experiment, contact:
Fédération des Cigale,
61 rue Victor Hugo, F-93500 Pantin
Tel & Fax: +33 1 49 91 90 91.

[17] According to the daily newspaper “Il Sole 24 Ore”
of 6 March 2000, only 12 months after its creation,
Banca Etica had financed 222 projects (41% in health
and welfare services, 32% in development cooperation
and 19% in improving the quality of life) and had
collected EUR 43 million.

[18] Most of these structures are members of the INAISE
international network (International Association of
Investors in the Social Economy), created in 1989.
The role of INAISE is to use its power of promotion
to commit savers and banks to practising an innovative
loan policy, to ensuring greater transparency in the
way money is used and to lobby to change banking
legislation so that the way savings are collected
becomes more conducive to the development of the
social economy and small businesses.
The objectives and functions of these organizations
are described in the journal “Alternatives
Economiques”, op. cit. pp. 130-137.

[19] For more information:
Triodos Bank
PO Box 55 NL-3 700 AB Zeist.
Tel: +31 30 693 65 00;
Fax: +31 30 693 65 55;
Banque Triodos,
rue des Brasseurs 115, B-5000 Namur.
Tel: +32 81 22 22 09;
Fax: +32 81 22 22 67;

[20] For more information:
Cooperative Bank, PO Box 101
Balloon Street, Manchester (UK).
Tel: +44 1618 295 797;
Fax: +44 1618 394 220;

[21] For more information:
Ökobank EG. PO Box 166 06 51,
D-60069 Frankfurt.
Tel: +49 69 256 10 163;
Fax: +49 69 256 10 219

[22] Source: La Reppublica, Affari e Finanza,
6 March 2000.

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