Impact banking: Erste – the social banking network

UN Sustainable Development Goals

For a relatively poor region, eastern Slovakia looks remarkably prosperous. On a late spring day, the rolling countryside is lush and green. The villages are tidy and well kept, with substantial houses freshly painted in bright colours. The main roads – thanks to EU money – are excellent. Apart from a few holes in the tree line caused by illegal logging, it could be Bavaria.

This bucolic idyll comes to an abrupt end, however, just beyond the small and serene village of Kojatice. Here, in a handful of shacks on a scrubby hillside, 117 members of the country’s Roma community live in conditions that would shock a 19th century peasant.

The settlement has no paved roads and no electricity. The only water supply is a stream in the forest just up the valley. Social workers say it is contaminated and as a result many of the children have been getting sick.

The one-storey homes are self-built and rudimentary. The first we go into is barely 10 square metres and houses a family of 10. In winter, when temperatures can dip below -20°C, they have to sleep in shifts as only a small area in the centre of the single room remains dry.

What we are here to see, however, is not the existing hovels but a small plot of land at the bottom of the settlement, where foundations have been laid for a new house. It is being built by Iveta, a Roma woman in her late 30s who, in addition to caring for a sick mother and a disabled husband, is leading efforts to improve conditions in the settlement.

There are a number of reasons for this, including widespread poverty and unemployment, but the main one is that no one will sell them property. This in turn means that the country’s Roma are unable to legally connect their homes to electricity or use them as collateral. They are also ineligible for any form of housing subsidy.

What will make Iveta’s new home different from those of her fellow villagers is that it will be legally built on land that she owns. The rest of the Kojatice settlement is illegal – as indeed is nearly all the housing in which Slovakia’s 380,000 Roma currently live.

The fact that Iveta has been able to buy land and start building her house is thanks to an initiative by Slovenska Sporitelna, the Slovak arm of Austria’s Erste Group. The way it works is that the bank secures land in or near an existing Roma settlement and then collaborates with a local NGO, Projekt DOM.ov, to identify and approach potential buyers in the community.

Those who sign up for the scheme, like Iveta, commit to saving €50 a month out of their state welfare payments – usually around €350 to €400 – for a year. This pays for the plot of land and the owner can then get a loan of €10,000 to €12,000 from Slovenska Sporitelna to buy construction materials.

The families build the houses themselves, with help and advice from instructors provided by the bank. Once they are completed, the owners will be eligible for state subsidies of up to €95 a month, which will help them repay the loan. 

In 2012 he abandoned banking to focus on social impact projects, including the creation of a community and education centre for young Roma mothers. Two years later, when he was recruited by Slovenska Sporitelna, one of his first projects was the development of legal Roma housing.The initiative is the brainchild of Rastislav Blazej, the head of Slovenska Sporitelna’s social banking team. A tech specialist, Blazej began his career at Accenture before moving to Intesa Sanpaolo subsidiary VUB, where he was responsible for developing its internet and mobile banking services.

It was inspired by the work of ETP, a local NGO backed by the Soros Foundation, in Rankovce, another Roma settlement in eastern Slovakia.

At first glance, Rankovce is very different from Kojatice. Built around an arterial road, it is the size of a small town. The locals, many of whom work in the car factories of nearby Kosice, are visibly healthier and more prosperous than the prematurely aged inhabitants of Kojatice.

The houses are large, well-built and brightly painted. Many boast two storeys and attractive carved verandas, and most have electricity. Cars are parked outside and children in good clothes play with new toys in the street.

Nevertheless, as in Kojatice, nearly all of these properties – and their utility connections – are illegal. The only exception is a small clutch of modest homes in the middle of the village that were built by locals on land bought by ETP under a scheme launched by the organization in 2010.

While the initiative was a success, however, it was not expanded or followed up. The problem, says Blazej, is that it was based on charity rather than business principles.

“The ETP scheme was pioneering, but it wasn’t scalable or sustainable because it was dependent on grants,” says Blazej.

Slovenska Sporitelna’s programme, by contrast, is run on a strictly commercial basis. From the bank’s perspective, it has to at least break even – although any profits will go back into the scheme – while the participants are subject to the same conditions as any other borrower.

In another sprawling settlement outside the village of Lenartov, which in terms of prosperity is closer to Kojatice than Rankovce, we meet a young Roma father who failed to keep up payments and therefore lost the right to a plot of land.

“He was one of our most promising cases, but they had problems in the family so he stopped saving,” says Blazej. “It’s a shame, but we can’t make exceptions, even if we see that he’s capable, because if we do it once then it will be standard.”

Equally, Blazej is adamant that the bank will be firm about repossessing homes if families fall behind on their loan repayments. This is not about recouping potential losses. As Blazej notes, there would be little demand for properties in Roma settlements. The idea is to teach financial literacy and discipline in communities that are used to living hand-to-mouth on meagre state subsidies.

“We take the land as collateral for the loan,” he says. “Obviously it has close to zero value, but that’s the tough part of financial inclusion.”

The hope is that this rigorous approach will also help to reconcile hostile locals to the project.

“They think the Roma are getting something for free, but it’s not true,” says Blazej. “They are being treated like anyone else who gets a loan.”

This is key, given that it is locals who have stymied previous attempts to address the Roma housing issue. These have mostly been based on attempts to legalize existing settlements. This depends on the owners of land on which they are built agreeing to sell it – which they have largely refused to do.

Blazej’s project has likewise met with resistance from villagers. 

“They think that they are encouraging criminals and that if they make the Roma more comfortable then more will arrive,” he says. “They also worry about being outnumbered. They are afraid that their next mayor will be Roma.”

He says the key is to get local officials on board, which in itself can be challenging. In Fricka, a tiny town on the Polish border where one Roma house is being built, the local mayor has been hostile – although, as he is currently under investigation for fraud, there is a chance that he will soon be replaced. Another mayor turns up for meetings incapably drunk.

Others are more helpful. The mayors of Lenartov, Rankovce and Kojatice have been very supportive of the project. Blazej says having the heft of one of country’s biggest banks behind the project helps.

“We can really push because we are a heavyweight,” he says.

So far, 20 houses have been started in five villages, and the first 10 are due to be completed before the start of winter. As of late summer, work on the others had been delayed by a shortage of bricks caused by Slovakia’s construction boom.

Blazej’s target is to have 100 homes financed by the end of next year, after which, he hopes, the project can be rolled out across Slovakia. As he notes, with Roma already making up 9% of the country’s population, the need to address the housing question is becoming increasingly urgent.

“People want to ignore the problem and hope that it will go away, but that’s not going to happen,” he says. “There are only two options: you address the problem or you will lose. People don’t understand that.”

While potentially game-changing in itself, the Roma housing project is only part of a much wider social banking programme launched by Erste in October 2016.

The idea behind the initiative was to use the group’s core competencies to promote financial inclusion and prosperity across its seven-country network, with a particular focus on populations in emerging Europe left behind during the transition to a market economy.

“On average, these societies made significant progress over the past 20 years, but some layers of society didn’t benefit,” says Peter Surek, Erste’s head of social banking. A study commissioned by the group in 2016 suggested that 15 million people in its countries of operation – 27% of the adult population – were at risk of poverty or social exclusion.

Andreas Treichl, the group’s veteran chief executive, says the initiative was also inspired by Erste’s origins as a social banking enterprise. The lender was set up in 1819 to give ordinary Austrian workers access to financial services.

“We wanted to get back to our roots,” says Treichl.

The idea was not entirely new. Erste already had a number of financial inclusion projects running across its network, including Romanian microfinance firm Good.bee Credit and Zweite Sparkasse, a bank set up in 2006 to provide account facilities for Austrians turned down by mainstream lenders.

What the new programme did was to unite these activities under one umbrella and lay out a coordinated social banking strategy for the group. It identified three target constituencies – first-time entrepreneurs, low-income populations and social organizations – and tasked newly created social banking units in each of the central and eastern Europe subsidiaries with developing local programmes to support them.

In the Balkans, where unemployment is high, the main focus has been on job creation. A microfinance model developed in Slovakia, which provides training and mentoring as well as funding, has been rolled out across Erste’s subsidiaries in Serbia, Bosnia and Croatia over the last two years.

“A lot of people in our region shy away from starting businesses because they are aware of a lack of financial education,” says Treichl. “It’s one of the biggest barriers to entrepreneurship.”

Over the last two years, nearly 6,000 would-be entrepreneurs have taken part in Erste’s education programmes, and the group’s social banking units have disbursed just under €60 million in loans to the segment.

In central Europe, access to jobs is less of a problem, but a toxic combination of financially undereducated populations and – until recently – weak consumer lending regulation has left many people struggling with over-indebtedness.

A priority for the social banking teams at Slovenska Sporitelna and its Czech counterpart, Ceska Sporitelna, has therefore been helping borrowers to restructure their debt and avoid eviction. Again, it is a model that is now being emulated by other Erste subsidiaries such as BCR in Romania.

“We are taking a step by step approach,” says Surek. “We want to be sure something works in one country before we take it to other markets.”

Another key tenet of the social banking initiative is that, as with the Roma housing project, it should be financially self-sustaining. Erste Foundation, the group’s non-profit controlling shareholder, has committed to support the programme with capital on the condition that it is not run at a loss.

“You can’t develop social banking unless it pays for itself,” says Treichl. “The ability to make money equals your ability to accumulate capital and then use that again to do social banking. Every cent that we earn will go back into the programme, but we intend to run it as a profitable business.”

Some parts of the business – work with over-indebted populations, training entrepreneurs and financial literacy – are clearly not revenue-generating, so profits will have to come from areas such as the funding of social organizations.

This is one of the most innovative aspects of the social banking project. In emerging Europe, NGOs are largely dependent on state subsidies and grants. Donation levels remain low – “people still believe that the state should take care of those in need,” says Surek – while banks have traditionally shunned the sector.

“It is complex and poorly understood, so it has been neglected,” says Surek. “Banks are nervous about financing institutions that don’t make a profit, the deal size is seen as too small to justify the work required, plus there is the difficulty of enforcing collateral. Taking houses away from children with disabilities or pensioners is a reputational risk.”

Erste believes the sector can be funded on a sustainable basis – at least in a social banking context – and has started offering a range of financing options including investment loans, bridge loans and working capital loans.

“We are the first bank in the region to lower the barrier that was excluding NGOs and non-profits from financing,” says Surek. “We can’t do everything ourselves, so supporting the sector is a very good way to increase our social impact.”

The initiative has attracted the attention of the European Investment Fund, which in June signed a ground-breaking agreement with Erste’s seven member banks to guarantee €50 million of funding for social organizations. The agreement – the first of its kind in Europe – will allow the group to provide funding at reduced rates and with less onerous collateral requirements to more than 500 NGOs in Austria and CEE over the next five years.

Erste also wants to encourage NGOs to become self-sustaining through the development of revenue-generating businesses. Last year saw the launch in Hungary of Seeds, a programme designed to help organizations create social businesses. The initiative, which also provides seed grants via the Erste Foundation, will be extended to the rest of the group’s markets next year.

Supporting NGOs is already a big focus for Slovenska Sporitelna’s social banking team. Jana Vlasicova, a 20-year veteran of the non-profit sector, joined the bank in 2014 to lead the financing effort. Vlasicova has had ample first-hand experience of the funding difficulties faced by Slovak NGOs.

“In the early years of independence most of the financial support came from abroad, but that ended when Slovakia joined the EU,” she says. “Since then NGOs are funded mainly by domestic resources, which are quite limited.” 

State support has been particularly patchy. Regular funding is only provided for a limited range of services. Women’s refuges and homeless shelters, for example, are not eligible for grants. Even when funding is available, NGOs have to reapply annually, and payment often arrives months late.

Vlasicova says scepticism about NGOs in policymaking circles has not helped. Unlike in neighbouring Czech Republic, where NGOs are seen as partners by politicians, in Slovakia they are viewed with mistrust.

Former prime minister Robert Fico, who resigned in March following mass protests about the murder of a local journalist, frequently repeated the populist trope that they were all agents of George Soros.

“Some state representatives and officials are suspicious of NGOs,” says Vlasicova. “They see them as troublemakers.”

In theory EU membership opened up funding opportunities, but in practice these proved difficult to access.

“Many EU funds are administered through refunds, so NGOs still have to find the money first themselves,” says Vlasicova. “That’s a problem for many of them.”

Bank funding, meanwhile, has been all but nonexistent.

“I have some clients who literally went to every bank in Slovakia,” says Vlasicova. “They knew they could repay the loan and they could prove it, but because of their non-profit status the banks all said no.”

That is where Slovenska Sporitelna comes in. In the three years since the bank launched its NGO funding drive, it has issued €3 million of loans to 45 non-profit clients in Slovakia, with individual tickets ranging from €2,000 to €500,000.

Even with goodwill, Vlasicova says initial discussions with risk management were tough.

“They didn’t understand how such entities could survive in Slovakia based on grants and sometimes state support,” she says. “I was able to convince them it was possible.”

Back in eastern Slovakia, we take a detour to the city of Presov to visit one of Slovenska Sporitelna’s flagship NGO clients.

Once a wealthy trading post, as shown by the handsome churches and Renaissance palaces in the old town, Presov missed out on Slovakia’s post-communist auto industry boom due to poor transport links. Today, job opportunities are few and most of the young have left for more prosperous areas. Around 40% of the city’s population are pensioners.

Bucking the trend is Lukas Kvokacka. A lawyer by training, he spent five years at PwC, including a year and a half in London, before returning to his home town in 2016 to run Centre Barlicka, a community centre on the outskirts  of Presov.

Barlicka began life in 1999 as an association formed by the parents of children with disabilities to offer care and education support services not provided by the state. The organization led a peripatetic existence for three years before moving to its present site in 2002. At the time the building, part of a former school, was all but derelict.

“We wanted the building next door, but they gave us this one because the roof was leaking,” says Lukas’s mother, Anna, who set up the association after her daughter was born with cerebral palsy.

Now in her 60s, Anna ran the centre for 17 years, while at the same time working nights as an ER doctor. “She would leave for work at 6pm, then come back at 6am, shower and head off to the school,” recalls Lukas.

She also wrestled with innumerable funding crises. At one point, promised support from the German government was cancelled at the last minute due to Slovakia’s entry into the EU. Subsequently, a €25,000 grant from the EU took four years to reach its destination.

“They just kept coming up with new reasons not to pay us,” says Anna. “For any company that would be hard enough. For an NGO, it’s crazy.”

Nevertheless, under Anna’s leadership Barlicka steadily expanded into a full-service community centre for the disabled, providing day care, physiotherapy and early intervention for parents of younger children as well as teaching.

It also has a workshop where older children and adults make handicrafts for sale. This is not a revenue-generating business – “obviously the products could be made five times cheaper in China,” says Kvokacka – but part of a programme to help people with disabilities find work.

“It teaches them about discipline,” says Kvokacka. “Some of them have ADHD (attention deficit hyperactivity disorder), some have been spoiled by their parents. They need to learn how to concentrate on one activity for three hours, even if they’re bored or don’t like it.” 

On the same principle, Barlicka employs 22 people with disabilities – including Lukas’s sister, Patricia – on a part-time basis as receptionists, cleaners and in the centre’s colourful café. The next step will be a move to supported community living.

“We have just bought a flat in this block, which we will use as a training flat,” says Kvokacka. “The idea is that people with disabilities will be able to come here for a month to try living independently but still with support from the centre.”

This emphasis on independence is in sharp contrast to Slovakia’s old socialist system, which pushed parents to give up disabled children at birth and kept them in state care for the rest of their lives.

Lukas tells the story of a nearby home for the disabled where one woman has not left her room since 1972.

“At first she wanted to, but there wasn’t anyone to help her,” he says, “Later there was, but by then she was too scared to go out.”

Barlicka does now provide full-time care but only for pensioners. In 2010 the centre opened an emergency ward for the parents of children with disabilities who had themselves become incapacitated. This proved so popular that the facility was rapidly expanded and now houses 50 elderly patients.

For this side of the business cash was slightly easier to come by, in that the Slovak state provides regular funding for care of the elderly. As Lukas notes, however, payment can be erratic.

“This is the first year when our annual funding came through at the end of February,” he says. “Normally it’s the end of March or April. The record was May 19. To have to cover 80 sets of wages from January until mid May is no joke.”

The centre also still needed additional funding to expand its capacity. That is where Slovenska Sporitelna came in. In 2016, the bank provided a €100,000 loan to Barlicka for the construction of a new annexe on the first floor, which will house 12 pensioners when completed next year.

It was the first bank financing the centre had ever received. Lukas says his family had long since given up on banks.

“In the 2000s we spoke to some of them, but because we are an NGO they wouldn’t even discuss the possibility of a loan,” he says. “All NGOs in Slovakia gave up on financing from banks because it was common knowledge that it was impossible to get.”

To see Erste's support for entrepreneurs in action, we head south to Romania – specifically to Prahova County, an hour’s drive north of Bucharest.

Here, on a small plot of land in the village of Ungureni, Dumitrache Catalin Mihail produces potted flowers – petunias, geraniums, fuschias and busy lizzies – for sale to markets all over Romania.

Under communism, the property was part of a farming cooperative where vegetables were grown and canned in an on-site factory. After 1989, as elsewhere in Romania, the land was 

Few of the new owners managed to extract value from their plots beyond subsistence farming, but when Dumitrache took over he was determined to make his a commercial success. He started by cultivating bell peppers but switched to flowers in 2007.broken up and distributed among the cooperative workers, who included Dumitrache’s parents.

“I was always buying flowers for my wife, so I decided to grow them!” he says.

Dumitrache was one of the first clients of Erste’s Romanian microfinance operation, Good.bee, after it was set up in 2009. His initial loan of €1,000 was repaid within four months.

“I paid it back as soon as I could, even though it wouldn’t have cost any more to pay over a year,” he says. “I didn’t like being in debt.”

Nevertheless, he has since taken a further seven loans from Good.bee. The latest, for €100,000, helped finance the purchase of an array of new equipment for his three large greenhouses – sliding trays for the flower pots, automated watering devices and a potting machine.

Although his business now has an annual turnover of around €1 million, Dumitrache sees no point in approaching traditional lenders – even though a bank loan would be cheaper than microfinance.

“I tried to discuss loans with banks in the past but they wouldn’t look at me,” he says. “I think that would still be the case.”

This is the constituency Good.bee was set up to serve – rural and agricultural clients who struggle to gain access to bank financing. Originally launched in poverty-hit eastern Romania, the firm now has 23 offices across the country and 2,000 active clients. Average loan size is around €7,000.

Good.bee is jointly owned by Erste Group and the Erste Foundation, and until now has been separate from BCR, the group’s Romanian subsidiary. That is due to change later this year, however, when the firm will come under the purview of Stefan Buciuc, BCR’s head of social banking.

A passionate believer in the value of entrepreneurship as a social development tool, Buciuc says funding for the sector is urgently needed in Romania, where many banks stopped lending to smaller firms after the financial crisis as non-performing loans in the segment soared.

“They got burned and now they won’t lend to businesses with ratings below a certain level,” he says. “But if we don’t go below that line, we’ll never be able to develop the entrepreneurship culture we need in this country.”

BCR is already doing its bit to help. Last year, the bank signed up to StartUp Nation, a government programme designed to support small and medium-sized enterprises and micro businesses. Firms can apply for grants, which are paid at the end of a two-year period, and in the meantime obtain bridging loans from participating banks. To date, BCR has financed 2,000 early-stage businesses under the scheme.

Last year also saw the bank provide a second round of funding to one of its oldest social banking clients, Impact Hub, a social-working space for startup and early-stage entrepreneurs in Bucharest. Part of an association than spans 100 cities worldwide, Impact Hub Bucharest was founded by Oana Craioveanu, a former interbank trader at Citi, with two friends. After the financial crisis, the three got together to set up an NGO to promote social entrepreneurship.

In the process they realized there was a gap in Bucharest’s business infrastructure.

“People from different communities – NGOs, investors, startups – didn’t have a space to meet and work together in,” says Craioveanu. This was the inspiration for the creation of Bucharest’s first co-working centre. After starting in two rooms in the old town, Impact Hub quickly moved to a 600 square-metre space with financial help from BCR.

Last year it expanded again, this time to a 1,600 square-metre office in Timpuri Noi Square, a new state-of-the-art office and residential complex to the southeast of downtown Bucharest.

The colourful new facility has 60 co-working places, which are occupied by young firms from sectors ranging from tech to food to fashion, as well as a clutch of lawyers, financial advisers and web designers.

It also offers an array of programmes for entrepreneurs, including a 10-week accelerator for early-stage startups, a one-year incubator for more developed teams and support for Romanian expats returning to start small businesses.

Another popular option is mentoring from established entrepreneurs, something Romania’s business community seems to be becoming more open to.

“For a while there was a process of trying to educate them about why they could and should contribute their time to helping the younger generation,” says Craioveanu.

She sees this as part of a broader change in attitudes towards society among the newer generation of successful Romanians.

“We are starting to understand that if we are to do business and live in this country, we need to find a way to not only operate our business but contribute to the ecosystem,” she says. “The previous generation wasn’t interested in that. They didn’t care about sustainability.”

Buciuc agrees that younger Romanians are becoming more socially aware and is keen to foster the trend. Since 2009 he has run an NGO that recruits volunteers for annual clean-ups of the country’s streets, in which more than 1.4 million Romanians have participated.

He is equally keen to build social awareness at BCR and has to date persuaded more than 30 staff to donate their time to helping the social banking unit.

“During communist times, nothing encouraged people to volunteer,” he says. “The party took care of everything and you just did what the party told you. We have to recreate civil society and a volunteer culture.”

Like his fellow social bankers at Erste, Buciuc is a firm believer that sustainable development in emerging Europe cannot be achieved without addressing social inequality.

“There are huge gaps in Romanian society,” he says. “In the main cities, people have good access to jobs and education, but in the smaller towns and rural areas this is not the case. Education standards are very poor, employment opportunities are scarce and healthcare is inadequate.

“ We talk about prosperity, but we can’t create the society we want without supporting those left behind. We have to tackle the gap in our society. Everything we do in social banking is built around that.”

These are the areas that the United Nations says banks need to consider when accepting their responsibilities in shaping and financing a sustainable future.