Corso di Laurea Magistrale in

Relazioni Internazionali e Studi Europeiclasse Studi Europei

Filling a gap: the EU's role in microfinance

Relatore: Giorgio Natalicchi Candidato: Giulia Carbonari

Anno Accademico 2013/2014

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Table of contentsIntroduction.................................................................................................................................11. European microfinance sector's analysis.................................................................................4

1.1 Genesis and short history of microfinance.......................................................................41.2. Microfinance in Europe...................................................................................................8

1.2.1 Microfinance in Central and Eastern European Countries.......................................91.2.2 Microfinance in Western European countries.........................................................10

1.3 EU's definition of microcredit........................................................................................111.4 European microfinance's actors......................................................................................111.5 European microfinance market's gaps............................................................................13

1.5.1 Market gap at the microloan level..........................................................................141.5.2 Market gap at the level of funding for microfinance..............................................18

1.6 The impact of the economic crisis .................................................................................231.7 Evolution of the European microfinance sector after the economic crisis.....................26

2. EU programmes for support for microfinance......................................................................372.1 The Competitiveness and Innovation framework Programme (CIP).............................392.2 The Joint European Resources for Micro to Medium Enterprises (JEREMIE).............432.3 Towards an EU centrally managed facility to finance microfinance.............................452.4 The Joint Action to Support Microfinance Institutions in Europe (JASMINE).............48

2.4.1 Evaluation of the JASMINE initiative....................................................................502.5 The European Code of Good Conduct for Microcredit..................................................572.6 The European Progress Microfinance Facility...............................................................58

2.6.1 Evaluation of Progress Microfinance Facility........................................................623. Evaluation of the EU programmes & future developments..................................................73

3.1 Complementarity and coordination of Progress Microfinance with other EU programmes..........................................................................................................................733.2 Evaluation of EU-backed instruments............................................................................74

3.2.1 Financial instruments for debt funding...................................................................773.2.2 Risk-sharing instruments........................................................................................783.2.3 Financial instruments for equity and long-term investments for institutional capacity............................................................................................................................793.2.4 Performance measurement instruments..................................................................80

3.3 The Microfinance and Social Entrepreneurship (MF/SE) Programme under EaSI.......814. The MFIs' point of view. Interview to Mr. Jorge Ramirez Puerto, General Manager of the European Microfinance Network (EMN).................................................................................85Conclusion..............................................................................................................................102References...............................................................................................................................105

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Abstract

The topic of this thesis is microfinance in the EU, as an instrument to fight against

unemployment and social exclusion. In particular, the thesis focuses on EU programmes for

support for the microfinance sector. The existence of market gaps both at the final

beneficiaries' level and at the level of funding for microfinance institutions (MFIs) explains

the set up of EU programmes. The issues of the social impact and sustainability of the

European microfinance sector are discussed within the interview with Mr. Jorge Ramirez

Puerto, General Manager of European Microfinance Network (EMN).

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Introduction

In many EU Member States the economic and financial crisis caused credit crunch and financial

exclusion. Simultaneously a series of alternative financial institutions with more social or ethical

characteristics developed. These institutions include ethical banks, cooperatives, new financial

instruments, such as peer-to-peer and crow funding, and microfinance institutions (MFIs).

I became very interested in these new social/ethical forms of finance, which affirm to target

persons who are excluded from the mainstream financial sector. In particular, I was interested in

analysing the phenomenon from the point of view of the EU institutions. That is to say, I wanted to

find out if the EU supports somehow this area.

I did a vast research and I found out that of all those financial forms, the EU recognises the

important social role played by the microfinance sector and consequently started programs to

support it, over the past few years. The European Commission considers microfinance an

instrument to fight unemployment and social exclusion. The Commission's Employment, Social

Affairs and Equal Opportunities DG and the Economic and Financial Affairs DG, together with the

European Investment Fund (EIF) are the EU institutions which are responsible of the programmes

which support the microfinance sector.

The existing literature about EU policies does not deal with the issue of microfinance. There is a

large amount of literature on microfinance in developing countries, but not that much in Europe, as

here the sector is relatively small and young and it has different nature and purposes than in the

South of the world. More importantly, there is no literature assessing the programmes recently set

up by the EU to support the sector. Hence, this thesis is an attempt to provide an analysis of the

nature of the microfinance sector in the EU, of the important social role that the EU institutions

recognise to microfinance, and of the policies that the EU set up to support the sector.

I deal with the topic not only from the EU point of view, but also from the point of view of who

works in the sector. For this purpose I conducted an interview to Mr. Jorge Ramirez Puerto, General

Manager of the European Microfinance Netwotk (EMN), the must relevant network of

microfinance institutions at the EU level.

I will precede as follows. Chapter 1 starts with a short history of microfinance, by presenting in

chronological order the most important worldwide experiences of microfinance, from the Irish

funds of the 1750s to the birth of modern microfinance with the Indian Grameen Bank. Then, I will

focus on microfinance in Europe, which is a relatively recent phenomenon. Compared to

developing countries, the European microfinance sector is characterized by smaller institutions

which offer a limited set of services, focusing primarily on microcredit. The actors of the European

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microfinance sector are a wide variety of institutions, including banks, cooperatives, NGOs

and non-bank institutions. The European microfinance sector presents major differences

between Eastern countries and Western countries. In Eastern Europe, microfinance began in

the 1990s after the fall of the Berlin Wall. Microfinance institutions (MFIs) played a major

role in giving credit and services to a large share of the population, since the banking sector

was not developed. In Western Europe, the majority of microfinance institutions (MFIs) were

born in the first decade of the twenty-first century, as a tool to foster self-employment for

financially and socially excluded people.

Over the past few years, public attention, including EU institutions, focused on

microfinance as an instrument for promoting employment and social inclusion, especially as a

reaction to the economic crisis. The EU define microcredit as a loan under 25.000 Euros,

given for entrepreneurship or self-employment. The European microfinance sector presents a

threefold structure: at the bottom there are final beneficiaries, in the middle there are

microfinance institutions (MFIs) and at the top there are institutions which provide funding

for MFIs. This structure presents market gaps both at the level of final beneficiaries and at the

level of funding for MFIs. This chapter presents a detailed analysis of the characteristics and

causes of these market gaps and of possible ways to fill them, based on the most recent study

of the European Microfinance Network (EMN) 'Overview of the European microcredit sector

2012-2013' and on the study of the European Investment Fund (EIF) 'Study on imperfections

in the area of microfinance and options how to address this through an EU financial

instrument'. We will see that the market gap at the funding level for MFIs legitimises the

existence of EU programmes in support for microfinance.

Chapter 2 analyses the ratio and nature of EU programmes in support for microfinance.

For the period 2007-2013, the European Commission included some instruments in support of

microfinance within the Competitiveness and Innovation Framework Programme (CIP) and

within the Joint European Resources for Micro and Medium Enterprises (JEREMIE)

Programme. However, these programmes were not properly fitted to support MFIs and were

limited in scope and instruments. Hence, in 2007 the Commission recognised the necessity of

a broader EU programme for microfinance in its Communication on a 'European initiative for

the development of micro-credit in support of growth and employment', subsequently, the

Commission and the European Investment bank (EIF) established the Joint Action to Support

Microfinance Institutions in Europe (JASMINE), for the period 2008-2013, which provides

technical assistance for MFIs. The first centrally managed EU programme which provides

financial instruments specifically for MFIs is the European Progress Microfinance Facility

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(EPMF), for the period 2010-2014. I will pay particular attention to this programme and to the

effectiveness of the various financial instruments with it provides for MFIs.

In chapter 3, there is an evaluation of the EU instruments for support for microfinance,

starting by addressing the complementarity and coordination of Progress Microfinance with

the other EU programmes. Then, I will focus on the efficiency of the EU-backed financial

instruments for debt financing, for risk-sharing and for equity and long-term investment in

MFIs. I will also address the problem of the accessibility of the financial instruments by

MFIs, in particular by small and greenfield ones. Finally, I will talk about future funding

perspective for the microfinance sector and the role that will be played by the new EU-backed

programme Microfinance and Social Entrepreneurship (MFSE), under the Entrepreneurship

and Social Innovation (EaSI) programme, for the period 2014-2018.

From chapter 1 to chapter 3 I mainly use EU official sources, thus adopting the EU’s

institutions' point of view for my analysis. However, to have an inclusive and complete

understanding of the European microfinance sector it is necessary to take into consideration

the point of view of the MFIs themselves. Hence, chapter 4 consists of an interview with Mr.

Jorge Ramirez Puerto, the General Manager of European Microfinance Network (EMN),

which is the most important European network for microfinance. I had the opportunity to

meet Mr. Ramirez at the workshop on Financial Exclusion at the fourth annual convention of

the European Platform Against Poverty and Social Exclusion, which took place in Brulles on

20-21 November 2014. In the conclusion I will present the main results of my analysis.

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1. European microfinance sector's analysis

1.1 Genesis and short history of microfinance

Scholars estimate that early systems of (informal) “microfinance”, involving microsavings

and microcredit, date back as the eighteenth and nineteenth century.1 “Microfinance” is a

modern word and a recent historic phenomenon. What really defines microfinance, and in

particular microcredit, is not the amount of money, but rather the special relationship between

the microcredit provider and the borrower. These “rules” of microfinance are some what

different from those of commercial banking institutions, as they are based on a solidarity

mechanism that is to help and support economically disadvantaged persons. Modern

microcredit took off as a tool for economic development in the 1970s, with the success of the

Grameen Bank, created by Muhammad Yunus in Bangladesh. Grameen Bank's purpose was to

reduce poverty by providing small loans to the rural poor. The bank had great success, with

over 2.565 branches reaching over 81.000 villages. The total number of microborrowers is

now 8.35 million, of which women are the 96%.2 The Grameen Banking model expanded

throughout the world: in Asia, the Pacific, Africa, Latin America and more recently, in Eastern

and Western Europe.3 Below, a short review of the world's most important microfinance

experiences, in chronological order.

Irish Funds

Irish microcredit institutions date back to the 1750s, when the Dublin Musical Society began

to make small loans under £10 offered interest-free. The success of the initiative was

enormous. By 1778, the initiative expanded the range of operations with the purpose of

providing support to small enterprises and thereby to an extent reducing the public burden of

caring for the poor. In 1822, the Irish Reproductive Loan Fund Institution was established,

which financed about 100 new funds, for a total volume of £ 55.000. For the first time the

funds charged interests. This allowed them to grow as the interests exceeded defaults,

amortization and overhead costs. The Irish Loan Funds system reached its peak in 1840s,

when 300 founds were lending annually almost 500.000 loans to the 300.000 industrious poor,

which represented about 4% of nation’s population. In this period, the interest rate on deposits

1 Seibel H. D., (2005), ‘Does History Matter? The Old and the New World of Microfinance in Europe and Asia’, Working Paper, University of Cologne, Development Research Centre, No. 2005,10.

2 Bank for the Poor: Grameen Bank (2011) ‘Grameen Bank at a Glance’. Available at: http://www.grameeninfo.org/index.php?option=com_content&task=view&id=26&Itemid=175

3 The European Microfinance Network (2013) ‘Background of Microfinance in Europe’. Available at: http://www.european-microfinance.org/europe-microfinance_en.php

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was 5.0% and 8.8% on loans. This system of Funds continued to operate until World War I.4

Raiffeisen’s Cooperatives in Germany

The cooperative movement began in Britain and France in the first decades of 19th century,

but it is necessary to wait until 1864 to see the birth in the German Rhine region of the first

lending cooperative bank specialized on farmers support. Under then impulse of major F. W.

Raiffeisen, the bank was created on the basis of the cooperative principles “Self-help, self-

responsibility and self-administration”. In 1877, mister Raiffeisen founded the

Anwaltschaftsverband ländlicher Genossenschaften, the first union of rural cooperatives with

the purpose to help not only farmers, but also artisans and small merchants. This model of

cooperatives did not offer dividends to shareholders but assigned the net profit to the reserve

fund and distributed the risk through the bond of association.5

Credit Unions and People’s Banks

Microfinance grew not just in Europe, but also in the USA (Credit Unions) and Canada

(Caisses populaires). For example, H. Plunkett founded in 1894 the Irish Agricultural

Organization Society, a network which brought together cooperative societies and cooperative

banks and which in few years included about 800 companies.6

Financial institutions developed also in colonial countries. For example see the Indonesians

people's credit bank, a network of village banks whose main goal was to promote agriculture

by providing loans to farmers. Over time, the system spread out its activities in different

sectors and expanded its range of services. In 1920s, financial institutions such as the

Lumbung Desa, Farmers Bank, Rural Bank and Rural Bank for Commerce were established.

These banks continue to exist until today, even if they have undergone many and profound

changes.7

The JAK bank in Scandinavia and Sweden

In the 1930s, during the Great Depression, the cooperative society Jord Arbejde Kapital

4 Hollis A., Sweetman A., (1996), 'The evolution of a microcredit institution: the Irish loan funds, 1720-1920'.5 International Raiffeisen Union website, available at www.iru.de6 Plunkett Foundation website. Available at www.plumkett.co.uk; Group Financier Coopératif du Canada

website, available at www.desjardins.com; Credito Cooperativo e delle Casse Rurali website, available at www.creditocooperativo.it; Association of British Credits Unions Limited, available at www.abcul.org

7 Bank Rakyat Indonesia (BRI), (1995), 'One hundred years: Bank Rakyat Indonesia 1895-1995', available at www.bri.co.id; Scmhit L., (1994), 'A history of the VolksCredietWezen in Indonesia 1895-1935', on-line version edited by Klaas Kniper available at www.gdrc.org; Prawiranata I. W., (2013), 'Sustainable microfinance in Indonesia'.

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(Land, Labour, Capital) was founded in Denmark. Its intent was to develop a local exchange

trading system and to set up a financial network based on the principle of not imposing

interest on saving deposits. This principle allowed cooperative’s members to get loans at low

cost, with an interest rate of about 2% applied to cover administration and risk costs. The

experience of the JAK bank was replicated in Sweden by a nonviolent movement, the

Riksförening för Ekonomisk Frigörelse, with the same purpose to offer a more sustainable and

feasible alternative to commercial bank loans. Today the association has a banking license,

that is necessary in order to continue operating as a financial institution.8

The Comilla and Orangi models in Pakistan

After World War II, India and Pakistan gained independence, but faced huge problems, such

as war, floods and famines which left a large share of the population exhausted and dying. In

that difficult situation, in the 1950s, Akhtar Hameed Khan, principal at Victoria College in

Comilla (East Pakistan), followed the cooperative approach and established the Pakistan

Academy for Rural Development (PARD) and the Comilla Cooperative Pilot Project, to help

people in difficulty. The cooperative's model failed in independent Bangladesh (by 1979, only

61 of the 400 cooperatives were functioning), however the experience was important for rural

community development and was exported to West Pakistan, where in 1980s the Orangi Pilot

Project and the National Rural Support Programme began as NGOs. Khan’s lesson shows

that economic and technological factors are essential for the development of an equitable

society and that the use of alternative financial mechanisms is possible on a large scale.9

Accion International in Latin America

In 1961, J. Blatchford, a young rich American, founded an organization named Accion

International and started charitable missions in Latin America. The objective of volunteers

was to enable people living in poverty to help themselves by organizing their own efforts and

talents. Soon the social projects (witch included building schools, community centers, roads)

spread out and several associations affiliated to Accion International offered 'solidarity loans',

small loans to groups of five people that were collectively guaranteed. This way, Accion

International began experimenting with micro lending and gradually focused its efforts on

developing microfinance institutions. In 1983, the first international network of microfinance

institutions was founded in order to strengthen and develop microfinance. Today, Accion

8 Jord Arbete Kapital Medlemsbank International website, available at www.jak.se9 Orangi Pilot Project, available at www.geocities.com\orangiwelfare; National Rural Support Programme,

available at www.nrsp.org.pk

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International is a modern bank that promotes experimentation and provides nascent

microfinance institutions with capital, technical resources and industry experience.10

BRAC in Bangladesh

After the devastating cyclone of 1970 and the war of independence of 1971, Bangladesh was

almost completely destroyed. F. Hasan Abed, a Bangladeshi manager of Shell Oil Company,

used funds raised in Europe to establish the non-governmental organization Bangladesh

Rehabilitation Assistance Committee (BRAC) to try improving the living conditions of the

rural poor. In three decades, BRAC has become the largest development organization in the

world, but it continued to target the landless poor, particularly women. BRAC now covers an

estimated 110 million people through its development interventions that range from primary

education, essential healthcare, agricultural support and human rights and legal services to

microfinance and enterprise development.11

SEWA Bank in India

In 1972, in India was registered the Self Employed Women’s Association (SEWA), a trade

union of Indian self-employed women workers or poor women, who had no guarantee or

salary. Two years after SEWA Bank was created, with the specific objective of improving the

living conditions of Gujarati women in their principal needs: food, clothing, shelter, health.

The institution has the goal to achieve social security and economic self-reliance for its

members, also trough modern financial services. As regard microfinance, Elaben Bhatt,

founder Sewa Bank said“Though micro savings, micro credit and micro insurance, poor

women are set on the path of self-reliance”. Today more than one million women workers

adhere to SEWA.12

ASA in Bangladesh

The Bangladeshi Association for Social Advancement (ASA), is a NGO established in 1978

whose purpose is to alleviate the conditions of rural people by social development programs

and microcredit lending. Over time, ASA has reduced its financial dependence from donors

and has evolved a low-cost system of management, savings and credit operations, this way

improving its economic sustainability. ASA has currently about 5.3 million members.13

10 Microfinance U.S. Network, available at www.accion.org11 BRAC Microfinance Programme, available at www.brac.net12 SEWA Self Employed Women’s Association website, available at www.sewabank.org13 ASA Microfinance Institution website, available at www.asa.org.bd

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NABARD in India

The National Bank for Agriculture and Rural Development (NABARD) was established in

1982 after a special act of the Indian parliament. NABARD plays a role in “matters

concerning policy, planning and operations in the field of credit for agriculture and other

economic activities in rural areas in India". NABARD is active in developing financial

inclusion policies and refinances all the institutions that work in the rural sector (more than

500 banks that on-lend funds to Self Help Groups). NABARD set up some funds to improve

promote the quality of life and employment in rural areas and its programs are extended to

individuals, traditional institutions, MFIs, cooperatives and Self Help Groups.14

Grameen Bank

In 1983, Muhammad Yunus, a professor of economics, founded the Grameen Bank (village’s

bank) in a rural Bangladeshi area. The creation of the Grameen Bank, conventionally

represents the birth of modern microfinance. “Costomers shouldn't have to go the the bank;

the bank should go to the customers” Yunus wrote in 1998, setting out the theoretical

foundations of microfinance. The concept was simple and innovative at the same time: loans

should be available to the poorest people in society (normally excluded from the financial

sector), for the development of their business projects.15 Yunus’s principal innovation was

group lending, a mechanism in which borrowers act as guarantors for each other member of

group. The joint liability condition realizes informal relationships between neighbours that

facilitate borrowing for households lacking collateral. Married women represent the bigger

share of borrowers. Since they have proved to be highly reliable, the financial risk for

Grameen Bank is very reduced. A number of services were provided, such as economic

education, health insurance, co-operation, instruction and skill development. The bank

experienced rapid growth, thanks to funding provided by the international governments and

funds. In 2006, mister Yunus and the Grameen bank received the Nobel Peace Prize.16

1.2. Microfinance in Europe

Compared to the microfinance sector in developing countries, the European one is relatively

young, immature and characterised by a wider variety of actors and institutional models. Most

of the European microfinance institutions (MFIs) are very small, indeed 70% of them have

less the 5 staff members, or give less than 100 loans per year. Generally, European MFIs do

14 National Bank for Agriculture and Rural Development website, available at www.nabard.org15 Fabbri M., (2013), 'Can microfinance ease Europe's crisis'.16 Grameen Bank website, available at www.grameen-info.org

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not provide a wide set of microfinance services, such as savings, or microinsurance, but focus

on microcredit, that is to say, they mostly give microloans. Microfinance in Europe is

different from microfinance in other regions of the world. The table below illustrates these

differences in terms of average loan amounts, size of the sector, financial performance and

social goals.

The peculiar characteristic of the European microfinance sector is its focus on addressing

social exclusion and promoting entrepreneurship, by providing credit to disadvantaged groups

and microenterprises that are not served by mainstream banks. MFIs' clients are persons who

do not have access to traditional credit, as they are considered too risky by banks. Hence,

MFIs partially fill a gap in non served or under-served markets. This unique nature of MFIs

makes economic sustainability a particularly challenging issue for them.17 The European

microfinance sector presents major difference between Easter and Western countries.

1.2.1 Microfinance in Central and Eastern European Countries

In Eastern European countries, the microfinance sector was born in the 1990s after the fall of

the Berlin Wall. Former communist countries were experiencing large unemployment and the

financial sector was not developed. Thanks to significant international donors' support,

especially from the USA, MFIs were created with the purpose to provide credit and services

17 Kraemer-Eis H., Lang H., Gvetadze S., (2013), ‘European Small Business Finance Outlook June 2013’, on behalf of the European Investment Fund (EIF).

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Global overview of microcredit loans

Social goals

€ 50–500 > 2 million

€ 500–10.000 > 20.000

>5.000

Greatest revalence

Typical average loan

amounts

Number of borrowers per

country

Financial performance

Developing countries

South America, Asia, Africa

Profitable. In part subsidised

Fighting poverty & promotion self-employment

Transitional countries

Eastern Europs

Profitable. In part subsidised

Financing for new self-employment

Industrialised countries

Western Europe, e.g UK, France, Germany

€ 1.000- 25.000

Highly subsidided

Growth financing for micro enterprises & financing new self-employment

Source: ICF GHK, (2009) Evaluation of Jasmine Technical Assistance Pilot Phase: Final Report. For European Commission DG for Regional and Urban policy

to large shares of the population. Within few years, MFIs had attracted more than I.7 million

of borrowers and 2.3 million of depositors, with an annual average client growth rate of 30%.

Overall, the sector is characterised by mature and big MFIs which have scale and are not just

sustainable, but profitable as well. MFIs mainly focus on microentrepreneurs who experience

difficulty in accessing credit. Thus, they are considered an effective tool to support financial

inclusion and economic development. The sector is not homogeneous, as among countries

there are different offer, demand and legal backgrounds. For instance, in Romania there is a

specific law for microfinance, while in Czech Republic and Slovakia the regulatory

framework for microfinance is not developed. Some countries' policies prioritise big

companies rather than small and medium enterprises (SMEs), so little public support is

available for MFIs that focus on SMEs. As a consequence, SMEs use mainstream bank's

consumer credit products that are expensive and do not provide counselling or training for the

entrepreneur, who could find himself to face over-indebtedness.18

1.2.2 Microfinance in Western European countries

Microfinance in Western Europe is a recent phenomenon, despite some ancient roots such as

the Raiffeisen in Germany, lending charities in the UK, and the Casse Rurali in Italy. The

majority MFIs were born in the first decade of the twenty first century, as an answer to

persistent unemployment and pressure on the welfare states.19 In Western countries, the

banking sector is well developed, but gives credit only to those persons or enterprises

considered less risky. Hence, MFIs' role is to provide credit and services to the most risky

groups of people, namely persons starting a business out of unemployment and social

exclusion. MFIs typical clients are disadvantages persons, such as immigrants, unemployed,

young and women. The microfinance sector in Western European countries has a strong focus

on social and pays little or no attention to profitability.20 Additionally, MFIs are small is size

and lack scale. For these reasons MFIs are not economically sustainable are are heavily

dependent on subsidies to cover costs, especially from governments and public institutions.

Economic non-sustainability is also due to the impossibility is some countries to properly

price microcredit because of rate caps, as well as the high costs of non financial services

provided by some MFIs to their clients, such as business development services (BDS). Given

18 Kraemer-Eis H, Conforti A., (2009), 'Microfinance in Europe, a market overview', on behalf of the European Investment Fund (EIF).

19 ICF and GHK (2013), 'Evaluation of Jasmine Technical Assistance Pilot Phase: Final Report', on behalf of the European Commission Directorate-General for Regional and Urban policy.

20 Kraemer-Eis H., Conforti A., (2009), 'Microfinance in Europe, a market overview', on behalf of the European Investment Fund (EIF).

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the peculiar characteristics of the Western European microfinance sector, experts doubt that

MFIs will ever reach sustainability.21

1.3 EU's definition of microcredit

As defined by the European Commission, microcredit refers to loans smaller than Euros

25.000. Additionally, microcredit typically targets micro enterprises (enterprises with less than

10 employees) and individuals wishing to become self-employed, in particular unemployed

persons and people living in poverty who are considered non-bankable.22 The EU's definition

points out the two main purposes of European microfinance: first, to provide credit to

potential self-entrepreneurs, to fight unemployment; second, to provide credit to

disadvantaged groups, to fight social exclusion. Accordingly, MFIs offer two the types of

loans: business loans, which are loans under Euros 25.000 for the development of a

microenterprise or for self-employment; and personal loans, which are loans under Euros

25.000 for personal or consumption necessities.23

The objective of microfinance is the creation or expansion of income-generating activities.

Consequently, microloans to be effective must be used in a productive way by borrowers,

otherwise they risk not only to fail their purpose, but also to increase indebtedness. Hence, it

is important that MFIs clients have entrepreneurial skills to be able to run an economic

activity and to generate an appropriate cash flow to repay the loan. Since normally the typical

MFI's clients lack such entrepreneurial skills, some MFIs provide, along with microcredit,

non-financial services such as business development services (BDS), training and mentoring.

The innovation potential of microfinance is limited as typically borrowers use credit to set up

replicative firms, which are firms that do what other firms are already doing. Thus,

microfinance is not an instrument for innovation, but it is an instrument for employment and it

can contribute to the general socio-economic growth.24

1.4 European microfinance's actors

The European microfinance market is characterised by high variety of actors. Consequently,

across Europe the provision of microcredit is heterogeneous, depending on the specific

characteristics of each MFI, such as its legal set-up, the efficiency of its management

21 Evers & Jung, (2007) ‘Status of Microfinance in Western Europe. An academic review’. European Microfinance Network (EMN) issue Paper.

22 European Investment Fund (EIF) website http://www.eif.org/what_we_do/microfinance/index.htm23 Bruhn-Leon B., Eriksson P., Kraemer-Eis H., (2013), ‘Progress for Microfinance in Europe’, on behalf of the

European Investment Fund (EIF).24 ICF and GHK (2013), 'Evaluation of Jasmine Technical Assistance Pilot Phase: Final Report', on behalf of

the European Commission Directorate-General for Regional and Urban policy.

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procedures, as well as the environment in which it operates.25

The table below illustrates different types of microfinance provision and the different types of

clients targeted.

Segment Clients Suppliers

Bank microcredit Bankable clientele: existing microenterprises and traditional microenterprises in start-up phase

Commercial, cooperative and saving banks.

Banks specialising in microcredit (e.g. ProCredit Banks in Bulgaria and Romania)

Savings and credit cooperatives, or credit unions (e.g. SKOK in Poland)

Non-bank microcredit Clientele non immediately bankable: self employed and microeterprises created by people in difficulty (e.g unemployed, social welfare recipients, immigrants, ethnic minorities)

Non-bank MFIs recognised in banking law (e.g. Adie in France)

Bank foundations (e.g. Un sol Mon in Spain)

Special bank windows or branches (e.g. La Caxia in Spain)

Local finance Traditional microenterprises, microenterprises set up by people in difficulty

Local funds (e.g. in Poland)

Community finance (e.g. CDFI in UK)

Solidarity finance (e.g. FIR, FFA in France)

Source: European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', COM (2007) 708 final, Annex 6.

Microcredit provision from the bank sector is provided by cooperative and saving banks,

savings and credit cooperatives, banks specialised in microcredit and credit unions. When

providing microcredit, all these institutions target bankable clients, in particular already

established microenterprises or traditional enterprises in their start up phase. Normally

microcredit is considered by banks not a profitable investment, given to its high cost and risk.

25 European Code of Good Conduct for Microcredit Provision (2011).

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To encourage banks to provide more microcredit, it would be useful the creation of a database

at the EU-level collecting information on microborrowers' default and losses, in order to show

the actual mocrofinance risk and ideally encourage new actors to provide microcredit.

Microcredit provision from non-bank sector is provided by non-bank MFIs recognised in

banking law, bank foundations, or special bank windows or branches. These institutions target

non-bankable persons, such as self-employed people and microeterprises created by people

belonging to disadvantaged groups, such as unemployed, social welfare recipients,

immigrants and ethnic minorities. In several EU Member States non-bank MFIs are not

authorised to collect deposits or they can lend only their own capital. Thus, non-bank MFI

experience some limitations in their microcredit provision.

Microcredit is also provided by local finance, such as local funds, community finance and

solidarity finance. These institutions target both traditional microenterprises, and

microenterprises set up by disadvantaged persons.26

Overall, the main challenge faced by European MFIs is difficulty to access stable funding.

This problem limits their possibility to growth and reach sustainability. The sustainability

issue is particularly relevant for Western European MFIs, which highly rely on public grants

and donations. Moreover, consequently the economic crisis, the availability of public support

for MFIs has become uncertain. Another important issue is the lack of homogeneous legal

framework for microcredit provision across EU Member States. In some countries, such as

Belgium, Germany, Italy and Poland, there are interest rate caps due to usury laws, which aim

to protect consumers from over-indebtedness and predatory lending practices. Usury laws

have a strong effect on microcredit provision, as they prevent MFIs the possibility to cover

the cost of their activities and thus the possibility to become sustainable.

1.5 European microfinance market's gaps

The European Commission's 'Study on imperfections in the area of microfinance and options

how to address them through an EU financial instrument'27 represents the most recent and

accurate source of information about the current situation of the European microfinance

sector. This paragraph is primarily based on the study. The market analysis contained in the

study aims to identify market failures and to assess investment needs, which could be

26 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', COM (2007) 708 final, Annex 6.

27 Unterberg M., Bennding M., Sarpong B., (2014), 'Study on imperfections in the area of microfinance and options how to address the through an EU financial instrument', report commissioned by the European Commission to Evers & Jung.

13

addressed by EU instruments. The three relevant groups of actors involved are: funding

institutions, MFIs and final beneficiaries. Given the peculiar structure of the European

microfinance market, the analysis is organised in two steps. First, it assesses the market gap at

the microloan level, then, the market gap at the level of funding for MFIs. The following

figure shows the structure of the market based on the supply and demand relationship between

the three groups of actors.28

1.5.1 Market gap at the microloan level

Micro, small and medium enterprises (MSMEs) face considerable difficulties to attract

external funding not only during economic crises, but also on an ongoing basis as a structural

problem. This market failure is due to asymmetric information, in particular moral hazard29

and adverse selection30. Information asymmetry can be reduced if the enterprise is able to

prove its worthiness, for instance via an institutional assessment or a rating exercise by an

independent agency, or via the provision of collateral. Asymmetric information is a big issue

28 Source of the figure: Unterberg M., Bennding M., Sarpong B., (2014), 'Study on imperfections in the area of microfinance and options how to address the through an EU financial instrument', report commissioned by the European Commission to Evers & Jung, p. 3.

29 Moral hazard emerges in the lending market for MSMEs (micro, small and medium enterprises), when the financial institution which should provide credit cannot state whether the potential customers are making the necessary effort to make the investment successful, or on the contrary they are engaging in risky behaviour which increases the risk of default.

30 Adverse selection occurs when banks cannot determine whether the borrower’s project is low or high risk or whether one borrower is riskier than others.

14

especially for microenterprises, young firms and start-ups. Indeed, given their nature, they

lack track records, often they have only limited collateral, and do not have long standing

relationship with financial institutions, which consequently can not assess their risk. Small

and micro enterprises lack risk assessment measurements, as the loan volumes they request

are relatively small and the required effort for risk assessment is simply disproportionate.

Banks do not see microfinance as a profitable product and due to the economic crisis are even

more risk averse. The final result is that SMEs, especially start-ups, microenterprises and

solo-entrepreneurs face the greatest difficulty accessing credit. We could simplify that: the

smaller the company, the bigger the information asymmetry and thus the higher the difficulty

to access credit. In most countries the economic crisis caused a considerable decline in the

provision of loans by banks due to their higher risk aversion which lead to more strict credit

standards. Compared to large enterprises, MSMEs especially were hit by severe credit

rationing, higher interest rates, shortened maturities and increased requests for collateral. In

2009 the rejection rates in the Euro zone rose from 12% to 18%.31 Microenterprises were hit

particularly hard, indeed according to the EU Craft and SME barometer, microenterprises

estimated their overall situation in the second half of 2012 worse than the situation of SMEs.

In particular, they estimated access to finance their most pressing problem. Such data show

clearly that in times of economic crisis already established microenterprises and start ups face

great difficulty to obtain capital. Hence the problem is even more significant for people

belonging to disadvantaged groups, which are considered even more risky by banks.32

Commercial banks' reduced lending to microenterprises and disadvantaged persons

represents an opportunity for MFIs, especially non-bank ones, to strengthen and expand their

market positions, since the increase of unemployment rates and social exclusion in many

European countries raises the demand for microfinance services. Banks' reluctance to lend

creates an opportunity for MFIs on one hand, and underlines the paramount importance of

credit risk management in the microfinance sector on the other hand.33 Overall, we can state

that the insufficient supply of funding for MSMEs constitutes a market imperfection which

can justify policies to support the provision of microfinance services.34

The availability of data on the potential demand of microfinance services in Europe is

31 Except for France, where rejection rates decreased from 12% to 7% (OECD, 2013).32 Kraemer-Eis H., Lang F., Kyriakopoulos A., (2013), 'European Small Business Finance Outlook', on behalf

of the European Investment Fund (EIF).33 Bruhn-Leon B., Erikson P., Kraemer-Eis H., (2013), 'Progress for Microfinance in Europe', on behalf of the

European Investment Fund (EIF).34 M. Bendig, M. Unterberg, B. Sarpong (2012), 'Overview of the Microcredit Sector in the European union for

the period 2010-2011' on behalf of the European Microfinance Network (EMN).

15

very limited. Before the economic crisis, in 2007 the European Investment Fund (EIF)

conducted an analysis in the framework of JEREMIE35 which estimated the demand of

microloans from persons at risk of poverty who want to set up a microenterprise around

700.000, worth Euros 6.2 billion in the EU.36 The model for estimating the demand is based

on “working population aged between 15 and 64 years, which is multiplied by the share of

people at the risk of poverty (in this case 0.16) in the EU. Out of these, the amount of

potential entrepreneurs (in this case 0.4537) is calculated, which is finally multiplied by the

share of the potential target group (in this case 0.03), for instance the share of actual micro

start-ups and enterprises with need for external finance, based on the findings of the study by

ILO (2002).38 ”39 Updated to 2012 values40, the potential demand of microloans is 1.214.000

worth Euros 8.66 billion. The advantage of this model is that it is adaptable at the European as

well as at country level. The disadvantage is that data on the number of persons entering and

exiting the working population is not available on an early basis. Furthermore, the analysis

only estimates the potential demand for microloans by start-ups set up by people at the risk of

poverty, which is an important target group of microfinance, but it does not include the

potential demand of micro start-ups by people that are financially excluded, but not at the risk

of poverty or by already established microenterprises. Therefore, the estimation is a proxy for

the ‘real’ potential demand for microloans in the EU.

Calculation at the states' level can provide a more precise picture. Calculations made in

UK, Germany, and France, which are the most mature microfinance markets in Western

Europe, confirm the fact that a considerable share of the demand for microloans in Europe is

yet unmet. That is to say, the provision of microloans is not sufficient to meet the potential

demand, resulting in unrealized opportunities for entrepreneurship as a way out of social

exclusion. In UK, Community Development Financial Institutions (CDFIs)41 received nearly

13.000 requests of business loans, for a total value of GBP 231 million. Actually, CDFIs

provided GBP 30 million to 2.600 businesses. Half of the loans provided targeted unemployed

35 Joint European Resources for Micro to Medium Enterprises. 36 European Commission (2007), 'A European initiative for the development of micro-credit in support of

growth and employment', COM (2007) 708 final. 37 Based and using the results of Euro barometer Nr. 149 38 ILO (2002), 'Micro-finance in industrialized countries: helping the unemployed to start a business'.39 Unterberg M., Bennding M., Sarpong B., (2014), 'Study on imperfections in the area of microfinance and

options how to address the through an EU financial instrument', report commissioned by the European Commission to Evers & Jung, p. 9.

40 Using as a starting point the population aged 15 to 64 years including Croatia, even if it joined the EU in 2013, and updated shares of population at risk of poverty, potential entrepreneurs and target groups.

41 In UK, CDFIs are mostly the counterpart of MFIs in the rest of Europe, even if several CDFIs offer other services, such as housing loans or community services, besides microloans.

16

people moving into self-employment.42 According to the Community Development Finance

Association (CDFA) and members of the CDFIs, in recent years demand for microloans

increased greatly and the trend is expected to continue as the gap between demand and supply

of microcredit in UK is very big. The CDFA estimates the potential annual demand for

business microloans of about GBP 1.3 billion for about 103.000 potential customers. High

increase in the demand of microloans is confirmed also by calculation conducted in France. In

France the microfinance non-bank segment is essentially accounted for by ADIE, which is the

country’s principal MFI, which disbursed 80% of the total number of microloans in 2011. In

2011, ADIE disbursed 23.000 microloans, which represents an increase of 230% compared to

the number of microloans disbursed in 2007. The identified market gap in France is between

80.000 and 130.000 business loans per year.

The data just presented refer mostly to microloan provision by non-bank MFIs. However,

in most EU Member States several banks provides loans below Euros 25.000 as part of their

general activity targeted to SMEs. The fact that microborrowers are a mere subset of banks's

regular clients, prevent the possibility to determine with precision the dimension of

microcredit provision in the bank segment. The available data are those provided by the

European Savings Banks Group for a few selected countries and institutions. Overall, such

data confirm that commercial banks are expected to reduce their lending to microenterprises

and start-ups.

Even if the presented proxies of demand and supply of microcredit in the EU have to be

interpreted with caution, it is clear the existence of a market gap in the provision of

microloans to microenterprises and start-ups out of social and financial exclusion. Indeed,

there is significant, and rising, demand for microcredit at the final beneficiary level, which is

unmet by MFIs. As stated above, in the EU the demand for microcredit is estimated up to

about 1.214.000 loans worth Euros 8.66 billion. To have more accurate data, the Commission

made the calculation again based on data at the countries' level provided by the European

Microfinance network (EMN) survey for the period 2010-201143. The total potential demand

resulted to be Euros 5.1 billion, while the volume of disbursed microloans is of Euros 2.4

billion in the EU-28 plus Switzerland, Norway and Iceland. Deducting the supply volume

from the demand volume, there is gap of around Euros 2.6 billion in the European provision

of microcredit in 2012.

42 This data needs to be interpreted carefully, as CDFIs also disbursed loans beyond Euros 25.000, which per definition cannot be considered microloans.

43 Bending M., Unterberg M., Sarpong B., (2012), 'Overview of the Microcredit setctor in the European union - 2010-2011', on behalf of the European Microfinance Network (EMN).

17

Since commercial banks continue to reduce their already limited microcredit provision

this gap is expected to widen over the next years. Even when the economies of EU Member

States will recover from the crisis, gaps in the provision financial services for

microenterprises and disadvantaged groups will remain a pressing challenge for EU public

authorities. Non-bank MFIs are unable to provide the requested volume of microcredit to

final beneficiaries because they lack access to suitable funding. Thus, policy measures at

national and European level need to provide funding for MFIs in order to close the gap in the

supply of microloans.

1.5.2 Market gap at the level of funding for microfinance

There is not a unique coherent source of data about the volume and types of funding used by

European MFIs. We have some information from the Mixmarket database44, which provides

data on debt funding volumes for some MFIs of Eastern European countries. European

networks, such as the European Microfinance Network (EMN) and the Microfinance Center

(MFC), and national networks, such as the CDFA in UK, provide information on funding used

by their members. Another source of information are the annual reports issued by larger

MFIs. Last but not least, the volume of funding provided by Progress Microfinance Facility

per country. MFIs need funding mainly to:

• increase lending to high risk clients

• built adequate funding models that combine funding for institutional capacity building

and funding for refinancing loan portfolios

• improve systems for performance measurement

Since over the past decade many new MFIs were born across European countries, the overall

demand for external funding is rising across Europe. In particular, demand of public funding

increased in Western countries, since most new MFIs are non-bank institutions and therefore

they not allowed to take deposits to refinance their lending operations. Greenfield MFIs need

funds primarily to cover start-up cost, while already established MFIs need funds to refinance

their portfolios and risk-sharing instruments for institutional development. Funding can be

supplied both by private actors and public actors at regional, national or international level.

As we said, public funding is crucial for non-bank MFIs, since they are not sustainable, as

well as for MFIs in the start-up and growing phases, as their microlending operations are still

44 See www.mixmarket.org

18

limited. Private actors, such as commercial banks or investment funds, provide funding in

Western Europe mainly in the framework of their Corporate Social Responsibility (CSR)

activities or in cooperation with public funders. In Central and Eastern European countries,

the situation is different due to the maturity of the sector and the prevalence of more

commercial models of microfinance provision. In these countries public funders are less

active, while international donor organisations are more active and provide funding for MFIs

at commercial rates. Overall, gaps at the funding level for MFIs are typically due to:

• lack of supply of funding in terms of volume

• lack of suitable or affordable types of funding

• lack of MFIs' institutional capacities to manage external funds

• lack of MFIs' investment readiness it terms of financial or social performance

measurement.45

MFIs' funding needs change at different stages of their development. In developing countries,

the theory of MFIs life cycle has been used to describe the development of non-bank MFIs.46

According to this theory, most MFIs start as NGOs and during their start-up phase they fund

their operations with grants and soft loans from donors and international financial institutions.

As the institution matures and expand its lending activities, private debt capital becomes

available. Finally, when the institution is mature, traditional equity financing becomes

available, because the MFI is seen as a profitable investment.47

Currently, the most common types of funding used by European MFIs are: debt finance,

guarantees, equity and grants. The use of deposits is not so widespread, as only bank MFIs in

Central and Eastern Europe are able to use this instrument to refinance their loan portfolio.

Most non-bank MFIs refinance their loan portfolio completely via external debt. Thus, the

estimated demand for microcredit can be used as a proxy of MFIs funding needs. In most

cases, MFIs portfolios need to cover a default rate of around 5%, which can go up to 15-20%

for MFIs which target particularly risky groups. MFIs can not cover such cost via their

operational income, hence this cost related to risk must be refinanced by external funding, in

particular via guarantees or equity investments. Small and young MFIs need higher amounts

45 See for more information: Jung M., Lahn S., Unterberg M., (2009), 'EIF Market studies on Micro Lending in the European Union - Capacity Building and Policy Recommendations' on behalf of European Microfinance Network (EMN) and Evers & Jung.

46 De Sousa-Shields M., Frankiewicz C., (2004), 'Financing Microfinance Institutions: The Context for Transitions to Private Capital', USAID Micro Report No. 8 - Accelerated Microenterprise Advancement Project.

47 Bogan V., (2008), 'Microfinance Institutions: Does Capital Structure Matter?'.

19

of funding to develop their business than bigger and established MFIs, as their portfolios lack

scale and often they also lack efficiency. Most MFIs in Europe are looking for affordable

long-term funding options at a price that reflects their limited ability to charge their clients

high interest rates. Moreover, it is important that funding resources provided to MFIs are

flexible enough to adapt to MFIs’ stage of development. Indeed, the life cycle theory makes

clear that greenfield MFIs' funding needs and different from those of mature MFIs. Funding

resources need to be flexible to adapt also to MFIs' different size and structural

characteristics. Overall, MFIs need three basic types of external funding, which serve

different purposes: debt finance for on-lending, guarantees for risk sharing, and long term

investments for building up the MFI' equity base. Additionally, MFIs need specific funding to

support their institutional development. Lack of funding for MFIs not only constraints their

lending activities, but also prevent them from offering very important non financial services,

such as Business Development Services (BDS) and coaching, to their clients.

Looking at the supply side of funding for microfinance, different policy options can be

considered to reduce this market gap and consequently to reduce the market gap at the level

of final beneficiaries. Policy actions can be both direct and indirect. Direct measures should

support already existent MFIs in developing their lending operations and new MFIs in

entering the sector, in particular via:

• financial instruments for funding MFIs' portfolios

• technical assistance to improve MFIs' the capacity building

• tax exemptions to improve private funding in MFIs (at the national level)

Indirect measures target the whole microfinance sector and aim to improve the legal and

regulatory frameworks for microlending and microenterprises throughout Europe. In

particular they include:

• set up microfinance windows in banking regulations

• improve integration of microfinance sector with welfare bridge schemes

• improve the legal status of MFIs and microenterprises.48

Policy measures for support for microfinance can be set up at regional, national or European

levels. Policy measures for microfinance set up at the Eropean level are the content of the

following chapters.

48 Evers & Jung, the New Economics Foundation (NEF), (2004), 'Policy Measures to Promote the Use of Micro-Credit for Social Inclusion', on behalf of the European Commission DG Employment, Social Affairs and Equal Opportunities.

20

The table below provides an overview of the different financial needs of MFIs at different

stages of development and of the instruments that private and public actors can provide to

close the gap at the funding level.

21

Funding needs Description Sources of funding Types of funding offers

Start-up costs and institutional development

Any cost connected to the creation or substantial expansion of a MFI

Private: donors Donations

Pubic: national/ regional governments Grant, subsidies for technical assistance

Long term investment and patient capital

Investments to build up the equity base of a MFI and provide security or financial buffer to cover loan defaults

Private: social investors, commercial banks

Equity and quasi-equity investments

Private/public: international microfinance investment vehicles

Equity and quasi-equity investments

Public: revolving funds at European, national regional level, set up by public actors

Equity and quasi-equity investments, iterent free loans

Refinancing loan capital In the absence of deposits many non-bank MFIs need to refinance loan capital via debt finance to reach scale. Bank MFIs might need additional debt finance to grow their portfolios

Private: commercial banks, private investment funds

Senior loans

Private/public: international microfinance investment vehicles

Senior loans, junior loans

Public: revolving funds at European, national regional level, set up by public actors

Senior loans

Operational costs of lending operations Funding needs arises due to a mismatch between operational income and transaction costs connected to the provision of microloans on the one hand risk costs to hedge the default of loans and on the other hand

Private/public: international microfinance investment vehicles

Guarantees

Public: European, national, regional guarantee schemes

Guarantees

Operational costs of non-financial services provided

Additional non-financial services to microenterprises can be provided in-house or by specialised service providers

Public: national and regional structural funds programmes

Grants, subsidies

Source: Unterberg M., Bennding M., Sarpong B., (2014), 'Study on imperfections in the area of microfinance and options how to address the through an EU financial instrument', report commissioned by the European Commission to Evers & Jung.

1.6 The impact of the economic crisis

The complex financial and economic crisis started in 2007-2008 generated significant

instability in financial markets and in the socio-economic scenarios of many European

countries. High rates of unemployment, poverty and social exclusion are related to financial

exclusion, that is the inability for a large number of people to access credit and banking

services. Commercial banks do not give credit to people who have a very low income, or to

people who lack collaterals, steady employment and verifiable credit history. This category of

people is therefore defined as non-bankable. Non-bankable persons may lack liquidity and

therefore they lose their ability to pay for essential goods. This can lead to a over-

indebtedness situation. As we saw in previous paragraphs, microfinance targets non-bankable

persons and help them to cope with temporary lack of liquidity or to start micro enterprises.

This way, microfinance plays an important role in fighting poverty and financial and social

exclusion.

Consequences of the economic crisis on European unemployment levels

The following statistic data are from the Eurostat publication 'Smarter, greener, more

inclusive? - Indicators to support the Europe 2020 strategy', about employment and other

labour market-related issues in key areas of the EU’s Europe 2020 strategy.49 Paid

employment is necessary for people to have sufficient living standards and social inclusion.

The shrinking of the EU’s workforce, as a consequence of ageing population, together with

the economic crisis and competition from emerging economies, such as China and India,

causes potential risk for the EU social model. Hence, it is necessary to maximise the use of

EU's potential work force by raising the employment rate over the coming years.

In order to achieve this goal, special attention must be given to some key groups, namely

women, young, older, low-skilled people and migrants. Indeed, since these groups have

relatively low activity rates, they have the highest potential. Promoting employment within

these groups would increase the overall employment rate.50 Low activity level of women and

older workers results on low employment rates. By extending the working life of older

persons can be considered “the most productive and promising answer to the demographic

challenge of structural longevity”51. Low activity rates for women aged 25-49 years is due to

49 Eurostat, (2013) data available at http://ec.europa.eu/eurostat/statistics-explained/index.php/Europe_2020_indicators_-_employment

50 European Commission (2010), 'Europe 2020: A strategy for smart, sustainable and inclusive growth'. European Commission (2010), 'An Agenda for new skills and jobs: A European contribution towards full employment'. European Commission (2013), 'Europe 2020 targets: employment rate target'.

51 European Commission Directorate-General for Employment, Social Affairs and Inclusion (2012),

23

several social causes as pregnancy, childcare or other family care duties. Additionally. the

longer women stay out of the labour market the more difficult is for them to find a job in the

long term. The economic crisis hit hard the young, dropping the employment rate of this

group by 5.4 percentage points. Similarly, migrants were strongly effected by the crisis, which

caused a decrease of the employment rate of this group of 4.3 percentage points.

The employment rate of the whole EU labour market in 2012 dropped to 68.5%, well

below the 2006 level, and 6.5 percentage points below the 2020 employment target value of

75 %. To reach the Europe 2020 employment target, the EU's workforce should increase of

17.6 million people. The biggest contribution to achieve the target employment level is

expected to be delivered by the under-employed groups listed before. The EU seeks to

overcome the crisis and create the conditions for a more competitive economy with higher

employment through some measures. In April 2012 the European Commission launched the

Employment Package52 to boost job creation in the framework of the European Employment

Strategy53. In this context, microfinance is explicitly quoted as an instrument to promote and

support self-employment, social enterprises and start-ups.

Consequences of the economic crisis on poverty and social exclusion in Europe

The European Anti-Poverty Network (EAPN)54 gives two definitions of poverty: absolute

poverty and relative poverty. “Absolute poverty or extreme poverty is when people lack the

basic necessities for survival”.55 It means the impossibility for a person to obtain a given

basket of basic goods and services whose consumption is necessary to live in a decent way.

Relative poverty “is when a person’s income and standard of life are so much worse than the

general standards of the country in which that person lives that he/she struggles to live a

normal life and to participate in normal economic, social and cultural activities.”56

The European Union focuses on relative poverty more than on absolute poverty because

the EU's goal is to try and ensure that the whole population enjoys high levels of well-being

'Employment and Social Developments in Europe 2012', p. 57. 52 The European Employment package concerns the relations between EU employment policies and other EU

policies in other areas, such as smart, sustainable and inclusive growth. It aims to identify the EU's biggest job potential areas and the most effective ways for Member States to create more jobs.

53 The European employment strategy provides a framework, the so-called open method of coordination, for EU Member States to discuss and coordinate their employment policies. The European employment strategy is planned according to the EU's priorities for job creation set up in the Annual growth survey (AGC), which opens the yearly European Semester.

54 The European Anti-Poverty Network (EAPN) is the largest European network active in the fight against poverty and social exclusion. For more informations visit the website http://www.eapn.eu/

55 European Anti-Poverty Network (EAPN) (2015). Definition available at http://www.eapn.eu/en/what-is-poverty/poverty-what-is-it#anchor1

56 European Anti-Poverty Network (EAPN) (2015). Definition available at http://www.eapn.eu/en/what-is-poverty/poverty-what-is-it#anchor1

24

and not just reaches basic standards of living. Moreover, what is considered a minimum

acceptable living standard depends on the general level of social and economic development.

Thus, a minimum standard of living necessary for survival could be insufficient to enable

people to participate to the normal economic and social life of the community. The European

Union applies a relative poverty standard according to which, people falling below 60% of

median income are considered to be at risk of poverty.

Eurostat analyses focus on the indicator ‘people at risk of poverty or social exclusion’,

consisting of three sub-indicators: monetary poverty, material deprivation and low work

intensity. There is monetary poverty when a person's disposable income falls below a certain

level. In case of material deprivation, a person has living conditions greatly constrained by a

lack of resources. Material deprivation threatens people's existence as they may feel unable to

face not only unexpected financial expenses, but also usual ones of their every day life. Low

work intensity is calculated on EU population aged 0 to 59 and it means that people in that

age bracket work less than 20% of their potential. Low work intensity is linked to

unemployment and can lead to monetary poverty and material deprivation. In 2011, monetary

poverty is the most widespread form of poverty, effecting 83.5 million people, that is 16.9%

of all EU-27 citizens. Next was material deprivation, affecting 43.4 million people or 8.8% of

the EU population. Third is low work intensity, which effects 38.5 million people, which

represents 10.2% of the population.57

The year 2009 is a turning point in the development of all three dimensions of poverty.

While monetary poverty had been stable until 2009 and started to increase afterwards, the

other two dimensions decreased until 2009 and started to increase from then. Before the

economic crisis, the number of people at risk of poverty or social exclusion had been

decreasing steadily. The indicator reached its lowest level in 2009 with about 114 million

people at risk of poverty or social exclusion in the EU. However, from 2009, the serious

impact of the economic crisis on Member States’ financial and labour markets caused an

increase of the number of affected people,.which in 2011 reached the level of 120 illion

people, that is about 24 % of the EU population. This means that almost one in four people in

the EU experienced at least one of the three forms of poverty or social exclusion.58 The

Commission's Europe 2020 strategy has the target to reduce the number of people at risk of

poverty or social exclusion from the actual 120 million to 95.7 million by 2020, lifting over

57 Eurostat, (2013), 'Smarter, greener, more inclusive? - Indicators to support the Europe 2020 strategy'.58 Eurostat (2013). Figure available at http://ec.europa.eu/eurostat/statistics-

explained/index.php/File:People_at_risk_of_poverty_or_social_exclusion,_EU-27,_2005-2011_(million_people)_new.png

25

20 million people out of the risk of poverty and social exclusion by 2020. To meet the overall

EU target on risk of poverty and social exclusion, Member States have set their own national

targets in their National Reform Programmes corresponding to the country-specific

recommendations published by the European Commission for each Member State.59 There are

considerable variations among Member States in both levels and dynamics of poverty rates

due to the uneven impact of the economic crisis on their economies, as well as differences in

the structure of their labour markets and welfare and fiscal systems.

Overall, the economic crisis poses major challenges to policy makers trying to fight

unemployment and social exclusion. They need to shift the emphasis from short-term

measures to structural reforms in order to promote high levels of employment and guarantee

adequate social protection and access to quality services, such as healthcare, childcare,

housing.

1.7 Evolution of the European microfinance sector after the economic crisis

Consequently the economic crisis, European governments and the EU institutions, focused

their attention on financial exclusion, as a phenomenon to be taken into account in the fight

against social exclusion and unemployment. Financial exclusion is closely linked to social

exclusion, as it is one of the factors preventing poor people leave out of poverty. As we live

into money-depend economies, simple tools such as a basic bank account and a credit card

have become prerequisites for many activities of daily living. Lack of access to such

instruments represents a serious obstacle for people to be economically and socially integrated

in today's society. The impossibility to access transaction services prevent the access to

broader economic opportunities and increases the risk of poverty. Financially excluded people

are refused any access to credit, or can only access it through loan sharks at unaffordable

rates. Lack of access to credit impacts access to the minimum national standard of living and

may stigmatize people. Some groups of people are more likely to be financially excluded than

others. These groups are: people with low income, people with low education, migrants, elder

people, young and women. These are the same groups of people who are at greater risk of

poverty and social exclusion. There are several factors that cause financial exclusion in EU

Member States. Some are societal factors, such as the level of income inequality and

liberalisation of financial services. Other factors depend on the supply side, these include the

financial institutions' criteria for accepting a client, the fees charged, or the geographic

59 For more information http://ec.europa.eu/europe2020/making-it-happen/country-specific-recommendations/index_en.htm

26

location of the financial institution.60

To tackle financial exclusion the financial market needs to adapt to the society's needs.

Actions from the supply side, that is to say from banks, include to make it easier and cheaper

for customers to open a basic bank account, the creation of partnerships between banks and

other kinds of organizations to reach under-served sectors of the population and to change

banks' own rules regarding the provision of their services. On the governmental side, some

measures are listed in the National Strategic Reports on Social Protection and Social Inclusion

elaborated by each country within the EU framework, such as simplified soft loans, face-to-

face counselling and debt advice services.

Microfinance offers financially excluded persons, that is to say non-bankable persons,

basic financial services, primarily microloans, but in some cases also savings and insurance.

Such services make possible for people to protect their household against financial risks and

invest in new or existing economic initiatives. Employment and job security allow satisfaction

of basic needs and provide social integration and identity, hence, as we said in the previous

paragraph, unemployment is the major causing factor for social exclusion.61 High

unemployment rates and weaknesses both in the labour market and in credit provision by the

mainstream financial sector increase the importance of mechanisms that foster self-

employment, such as microfinance. Consequently, microfinance is recognised as an

instrument to foster economic and social empowerment and improve life standards. In 2007,

the Commission's communication 'A European initiative for the development of micro-credit

in support of growth and employment'62, recognises the evidence of an emerging gap between

supply and demand of microcredit in the EU. The Communication confirms that microcredit

in Europe addresses two categories of people: microenterprises, defined as enterprises

employing less than 10 people, and disadvantage persons who wish to go into self-

employment but do not have access to banking services. Significantly, the Commission

highlights the fact that micro-enterprises cover about 91% of all European enterprises.

According to the International Labour Organization (ILO)63 financial instruments

complement public policies targeting the labour market to help creating jobs and to reduce

vulnerability of the working poor. Microcredit significantly contributes to self-employment

and job creation, as “the fiscal cost per job created is usually below that of alternative labour

market instruments and jobs created through microcredit positively contribute to

60 European Microfinance Network (EMN) (2015). Available at http://www.european-microfinance.org/61 Microfinance Centre (2011). Available at http://www.mfc.org.pl/en/content/financial-exclusion 62 COM (2007) 708.63 ILO is a specialized agency of the United Nations. Its main objectives are to promote rights at work, encourage decent

employment opportunities, enhance social protection and strengthen dialogue on work-related issues.

27

entrepreneurs’ income and self-esteem”64. Consequently, microfinance plays an increasingly

important role on the side of polices for the labour market in Europe. Hence, ILO advocates

alliances between governments and MFIs.

The sixth European Microfinance Network (EMN) 'Overview of the Microcredit Sector in

the European Union'65 covering the period 2012-2013 is the most complete and up-to-date

source of information on the development of the EU microcredit sector and on the

characteristics and performance of MFIs. The survey is considered relevant also by the EU, as

it is stated in the preface by mister Per-Erik Eriksson and mister Helmut Kraemer-Eis, both

members of the European Investment Fund (EIF) and managers of the Progress Microfinance

Facility on behalf of the European Commission DG Employment. Hence, in this paragraph I

summarize what I estimate the survey most important information are. In total, 150 MFIs of

24 European countries took part in the survey, out of 447 MFIs contacted by the EMN,

translating into a response rate of 34%. The response rate is lower than that of the 2010-2011

overviw66 but the absolute number of responses remained stable, since 60 new MFIs were

contacted. The absolute number of responses even increased substantially in some countries

that were under-represented in previous survey editions, such as Poland and Romania, which

for the first time provided data on its ten biggest credit unions. In Europe, the total number of

MFIs is estimated to be between 500 and 700. This number do not take into account credit

unions and commercial banks that provide loans below Euros 25.000 since, as we stated

before, they are not able to provide exact numbers about the scale of their microcredit

provision, since they serve microcredit clients as a mere sub-set of their regular clients. The

24 countries covered by the survey do not include all EU Member States, but only 20, as in

some Member States no active MFIs were identified or the contacted MFIs did not

participated.67 Non EU countries covered by the survey are: Serbia, Macedonia and Bosnia-

Herzegovina. Given that the survey does not include all MFIs within Europe or even within a

given country, the data are not fully representative. Additionally, the majority of the MFIs,

especially small and greenfield ones, were not able to answer questions relating to financial

performance and sustainability, as they are complex and time consuming.

64 ILO (2014). Available at http://ilo.org/global/topics/employment-promotion/microfinance/lang--en/index.htm 65 Bendig M., Unterberg M., Sarpong B., (2014), 'Overview of the Microcredit sector in the European Union -

2012-2013', on behalf of the European Microfinance Network (EMN).66 Bending M., Unterberg M., Sarpong B., (2012), 'Overview of the Microcredit sector in the European Union -

2010-2011', on behalf of the European Microfinance Network (EMN).67 EU member states which did not participate in the survey listed in alphabetical order: Cyprus (contacted),

Czech Republic (no active MFI identified), Denmark (contacted), Estonia (contacted), Finland (contacted), Luxembourg (no active MFI identified), Slovakia (contacted), Slovenia (contacted), Sweden (contacted).

28

Scale and development of European microfinance sector

The survey shows that both the total volume and the number of microloans disbursed by the

serveyed MFIs steadily increased compared to past years. In particular, in 2013, MFIs based

in EU Member States only disbursed 207.335 microloans for a total volume of Euros 1.26

billion, compared to 122.370 loans with a total volume of 872 million, in 2011. In the whole

Europe, in 2013 MFIs disbursed a total of 387.812 microloans for a volume Euros 1.53

billion, compared to 204.080 microloans for a volume of Euros 1.05 billion in 2011.

Compared to 2009, the MFIs surveyed by the European Microfinance Network (EMN)

experienced an increase of more than 400% of the number of loans disbursed and of 100% of

their total value between 2009 and 2013.68

The years between 2012 and 2013 saw an increase in the number and value of loans per

MFI. 93% of the MFIs covered by the survey in 2013 gave more than 20 loans in that year,

while in 2011 it was 78%. 85% gave more than 50 loans, compared to 69% in 2011, and 74%

gave more than 100 loans, compared to 54% in 2011. This increase is mainly due to the fact

that the survey covers a larger number of big MFIs than the previous versions. However, some

MFIs reported an increase of 40% of number of loans and of 60% of volume in 2013 as

compared to 2010.

Over time, the allocation between microloans for business and personal purpose has

slightly shifted towards business loans. In 2013 79% of microloans was issued for business

purpose and 21% for personal consumption purpose, compared to 74% and 26% in 2012. In

2013, the average loan size for personal purpose was Euros 2.136, which is significantly

lower than the average loan for business purpose of Euros 9.960.

It is evident that over the past few years there has been a remarkable growth of the

microcredit provision in Europe. Three driving forces contributed to this development: first,

an increased coverage of organizations in certain EU-member states, second, more loans

provided per MFI, third, higher average loan size per MFI.69

Table below shows the increasing trend of the number and value of the microloans

disbursed by MFIs surveyed by the EMN.

68 Jayo B., González A., Conzett C, (2010), 'Overview of the Microcredit sector in Europe 2008-2009', on behalf of the European Microfinance Network (EMN).

69 Bendig M., Unterberg M., Sarpong B., (2014), 'Overview of the Microcredit sector in the European Union - 2012-2013', on behalf of the European Microfinance Network (EMN).

29

MFIs from Eastern European countries disbursed higher numbers of relatively smaller loans

compared to MFIs from Western European countries. The lower value of the loans is due to

the lower GNI per capita in Eastern countries, but it also shows that the microcredit market in

Eastern Europe is characterized by more mature MFIs.

The greatest number of microloans disbursed, both for business and personal purposes,

was in Bosnia-Herzegovina, followed by the EU Member States Spain, France and Romania.

In France, the number of loans increased by 63% in 2013. In Romania, the ten largest Credit

Unions were included for the first time in the survey, so the value of reported loans rose to

around 104 millions in 2013, compared to 60 million in 2011. The number of microloans

issued in Spain mainly refers to the activity of one bank, which cooperates with other

institutions included public ones. It and uses its own network of branches for the distribution

of microloans, which enables it to gain scale in its microcredit activities.70

MFIs' institutional diversity

Institutional diversity in European microfinance sector is high. MFIs include NGOs,

foundations, non-bank financial institutions (NBFIs), governmental bodies, savings and

commercial banks, credit unions, cooperatives, Community Development Financial

Institutions (CDFIs), microfinance associations and religious institutions. In 2013 the share of

non-bank financial institutions (NBFIs) was 29%, 9 percentage points higher than in 2011,

becoming the most common form of MFI. NGOs or foundations are the second most common

70 Bendig M., Unterberg M., Sarpong B., (2014), 'Overview of the Microcredit sector in the European Union - 2012-2013', on behalf of the European Microfinance Network (EMN).

30

Total number and value of microloans disbursed over the EMN Overview Reports

Year 2003 2004 2007 2008 2009 2010 2011 2012 2013

Number 27000 35553 42750 90605 84523 178572 204080 324406 387812

210 295 394 802 828 779 1074 1303 1528

Responses 109/139* 94/206* 94/206* 118/170** 138/170** 102/148 ** 108/148** 122/150*** 122/150***

Value (million Euro)

Sources: Bendig M., Unterberg M., Sarpong B., (2014), 'Overview of the Microcredit sector in the European

Union - 2012-2013', on behalf of the European Microfinance Network (EMN)..Note: *Represents the overall response rate of the respective survey. **For the years 2008 – 2011 the response rate is only shown for the number and value of loans disbursed. ***For this survey edition the number of observations differs between number and value of loans. Thus, the respective lower “n” has been applied

form of MFI, with around 23%. Credit unions and cooperatives are at third place with 10%.

The share of microfinance associations, previously the third most common institutional

structure dropped by 6% compared to the EMN previous survey. Also, the share of

community development financial institutions (CDFIs) dropped by 9 percentage points, but

this was mostly due to a lower number of responses from UK MFIs. The share of banks

remains low, around 5%. The decrease of NGOs and the corresponding rise of NBFIs might

be explained by a maturing of the European microfinance sector. For instance existing NGOs

may be scaling their business and consequently they change their legal status to NBFI, since a

NBFI can offer a wider range of services and access commercial sources of capital as they

operate under a licence from the central bank. Countries with the biggest number of surveyed

MFIs, such as Bosnia-Herzegovina, Hungary, Italy and Poland are the countries with the

highest shares of NGOs or foundations. On the contrary, in Romania, 95% of the surveyed

MFIs are NBFI, including institutions working under the credit unions’ umbrella UNCAR. In

Germany, more that 50% of the surveyed MFIs are NBFIs operating under the

Mikrokreditfonds Deutschland, which gives MFIs the option to work as front-office, while

one bank takes the legally required banking function and disburses microloans.

In addition to classifying MFIs by their legal structures, they can also be distinguished by

their focus on microlending activities. At one end of the spectrum there are MFIs specialised

in microlening activities, which represents between 75% and 100% of their annual turnover.

At the other end of the spectrum there are institutions for which microlending is a minor

activity, which represents betwneen 5% and 50% of their annual turnover. For more than 46%

of the surveyed MFIs over 75% of their turnover comes from microlending operations.

Additionally, for more than 57% MFIs microlending represents 50% of their turnover. The

remaining MFIs reported that substantial part of their turnover comes from other activities

besides microlending, such as traditional banking services, business development services and

entrepreneurship and financial education trainings. In Germany 46 % of MFIs do less than 5%

of their activities in microlending. They are primarily public promotional banks whose main

activity is to provide a diversified set of financial products to SMEs and large corporations. In

Italy, nearly 33% of all the MFIs have little focus on microlending. On the opposite, in

Romania over 80% of MFIs concentrate on microlending activities only.

A clear difference between Eastern and Western European countries is evident. Of the 13

countries in which MFIs are focused on microlending, 8 are from Eastern Europe71. In

71 Bosnia-Herzegovina, Bulgaria, Croatia, Hungary, Macedonia, Poland, Romania and Serbia.

31

contrast, 7 out of 9 countries in which MFIs focus on other operations are Western countries72.

This demonstrates that Eastern European MFIs are more mature institutions that are active in

markets focused on microfinance activities, while several Western European MFIs are young

organizations with a broader set of activities.

Analysing the data as regard to the MFIs institutional types, the survey shows that the

MFIs institutional types more focused on microlending activities are microfinance

associations and NBFIs. On the opposite, for 50% of bank MFIs, and 100% of the surveyed

savings banks, micro-lending operations account for less than 5% of all activities.

Generally, the European MFIs surveyed are still young institutions, as 16% of them started

operations after 2010 and about 66% of all institutions entered the sector after 2000. Most of

the greenfield MFIs are located in Germany. This can be explained by the high number of new

institutions entering the sector thanks to the Mikrokreditsfonds Deutschland framework,

which started in 2011. Also in Romania, Spain, Lithuania and Italy a large number of MFIs

were born between 2005 and 2009. On the opposite, MFIs in Hungary, Poland, Bosnia

Herzegovina and Romania were primarily established during the 90s, consistently with the

more mature microfinance market of these countries.73

MFIs' products

In developing countries, microfinance is formed by three equal pillars, the so-called

'microfinance trinity': credit for business, credit for personal reasons, savings and insurance.

However, as we saw in chapter 1, European MFIs primarily provide business microloans.

Nevertheless, the number of MFIs surveyed providing microloans for personal purposes has

increased to about 67% in 2013 from 45% in 2011. The average duration of a business loan in

EU-countries is 42 months and 34 months for a personal loan. The average interest rate for

business loans is 10% and 15% for personal loans, however interest rates vary greatly across

European countries. They range from less than 5% for a business loan in Austria, Switzerland,

France and Italy up to 42% for a personal loan in the UK. This is mainly due to differences in

the national legal frameworks, namely the existence or not of usury laws. Other factors that

explain such big differences of interest rates among European countries include inflation

rates, refinancing costs, cost structure and MFIs' financial sustainability. It is important to note

that the European average interest rates are upwardly distorted by the extremely high rates

charged by the MFIs surveyed in the UK: 27% for business loans and 42% for personal loans,

72 Austria, France, Germany, Greece, Italy, Portugal and Spain.73 Bendig M., Unterberg M., Sarpong B., (2014), 'Overview of the Microcredit sector in the European Union -

2012-2013', on behalf of the European Microfinance Network (EMN).

32

followed by Bulgaria, 21% and 31% and Romania, 18% and 17%.

Financial products offered by the MFIs surveyed are still dominated by microloans

(business and personal), however the supply of other services has increased over recent years.

After microloans, the second most popular product is microsavings, offered by 20% of the

surveyed MFIs, which increased of 3% compared to the previous survey. Following

microsavings there is a set of other services including insurance, current and checking

accounts, money transfer services and mortgages, all offered by nearly 10% of surveyed

MFIs. Lastly, there are mobile banking services, offered by around 5% of MFIs. Some non-

bank MFIs can not use some of those financial products because of the legal frameworks in

their countries. For instance, NBFIs are not allowed to collect savings in the Netherlands or in

Romania.

Next to financial products and services, 71%of the surveyed MFIs provide non-financial

services as well. The most widespread non-financial service is financial education. In 2013 it

was offered by 58% of the surveyed MFIs, that is the double of its share in 2011. Second,

there is entrepreneurship training, offered by 45% of MFIs in 2013, compared to 30% in 2011.

This is followed by business development services (BDS), offered by 42% MFIs, compared to

38.5% in 2011, and debt counselling services, with 41%. Between 2012 and 2013 the number

of clients reached with non-financial services increased by 26%.

Politicians and researchers are promoting a new microcredit service: the so-called green

microloans, which are microloans that target environment-friendly projects. However, so far,

green microcredit it is not a widespread priority for MFIs, indeed 43% of the surveyed MFIs

do not have any policy in this regard. However, 37% said that they finance green projects

within their normal microcredit provision. Only 13% reported to specifically finance projects

related to renewable energy, energy efficiency and environmentally friendly activities. 7% of

the surveyed MFIs said that they are planning to develop products for green microfinance in

the future.74

MFIs' social mission

The most widespread mission of surveyed MFIs is microenterprise promotion, pursued by

67% of MFIs, followed by job creation, with 58%. The next most popular missions are social

inclusion and poverty reduction (56%) which gained 14 percentage point from 2011, financial

inclusion (50%) and SME promotion (45%) which lost 8 percentage points from 2011.

74 Bendig M., Unterberg M., Sarpong B., (2014), 'Overview of the Microcredit sector in the European Union - 2012-2013', on behalf of the European Microfinance Network (EMN).

33

overall, 85% of surveyed MFIs include at least one dedicated employment goal in their

mission, in the form of microenterprise/SME promotion or job creation. The three most

popular options, are supported by a significant share of all institutional types. Less than 30%

of the MFIs indicated women and minority empowerment as their specific mission.

MFIs' financial performance

One of the main issues of the European microfinance sector is MFIs' economic sustainability.

The survey shows positive growth trends of the total portfolio outstanding. In Europe in 2013

the portfolio at risk (PAR 30)75 was 13.1% in 2013, that is higher than in 2012 (12.8%) and in

2011 (12%), but markedly lower than in 2009, when it was 16%. Considering EU member

States only, a slightly positive trend can be seen, as PAR 30 decreased to 14.3% in 2013 (14%

in 2012) from 15% in 2011. The ongoing trend among the MFIs surveyed is positive,

however, PAR 30 remains quite high in some EU countries, for instance, in Spain and Poland,

where 27.3% and 21.8% respectively of the total outstanding loan portfolio was engaged in

risky loans during 2013. The analysis the portfolio at risk on the basis of MFIs' institutional

types in 2013 shows that governmental body surveyed had the best loan portfolio quality, with

PAR 30 smaller than 1%. Credit unions and cooperatives report had PAR 30 of 7%. Non-bank

MFIs had PAR 30 of 13%. NGOs and foundations reported the higher ration, with PAR 30 of

18%. Bank MFIs performed better than the non-bank MFIs, with a PAR 30 ratio of 9%. The

average write-off ratio76 decreased from 6% in 2011 to 3.5% in 2013 for all MFIs surveyed.

Among the MFIs from EU Member States the write-off ratio was a bit higher: 3.8% in 2013.

Overall, portfolio quality and financial performance is improving among MFIs, due to

decreasing impairment loss and operating expenses. This might lead to improvement in MFIs

financial sustainability.

MFIs' outreach to disadvantaged groups

The capability of microfinance to tackle social exclusion and unemployment, that is to say its

75 Definition of portfolio at risk from Inter-America Development Bank (2003), 'Performance Indicator for Microfinance Institutions'. "Portfolio at Risk (PaR) is calculated by dividing the outstanding balance of all loans with arrears over 30 days, plus all refinanced (restructured) loans, by the outstanding gross portfolio as of a certain date. Since the ratio is often used to measure loans affected by arrears of more than 60, 90, 120 and 180 days, the number of days must be clearly stated (for example PaR30). This ratio is the most widely accepted measure of portfolio quality. It shows the portion of the portfolio that is “contaminated” by arrears and therefore at risk of not being repaid. The older the delinquency, the less likely that the loan will be repaid. Generally speaking, any portfolio at risk (PaR30) exceeding 10% should be cause for concern, because unlike commercial loans, most microcredits are not backed by bankable collateral." Available at http://media.microfinancelessons.com/resources/tech_guide_IADB_portfolio_quality.pdf

76 Write-off ratio is the ratio, measured in percentage, between of the value of loans recognized as uncollectible and the average gross outstanding portfolio during period.

34

capability to improve the life standards of its final beneficiaries, is one of the most important

and essential questions for both MFIs' workers and policy makers. The data reported by MFIs

for the EMN overview are not sufficient to finally answer this question. The survey provides

data only with respect to numbers of job created and target groups outreach, but do not detail

the impact of microloans on the loan recipient/household or on his/her business activity, since

only a few of the surveyed MFIs collect this kind of information.

The survey shows that the surveyed MFIs supported a minimum of 121.270 start-ups or

microenerptises in 2013. Since on average the supported microenterprises or start-ups have

two employees, it seems feasible to say that the number of jobs created or preserved is at least

250.000. If the analysis is limited to EU member states only, the surveyed MFIs supported at

least 150.000 jobs.

As regard the type of business targeted, more than 77% of MFIs focus on registered

enterprises with less than five employees, 75% focus on start-ups, while about 67% focus on

solo entrepreneurs. Only 29% of surveyed MFIs supported entrepreneurs in the pre-start-up

phase. Registered businesses with five to nine employees show a slight increase to 52%

compared to 49% in the 2010-1011 survey. The share of MFIs targeting social enterprises

remained constant at 22%. The distribution across institutional structures shows that banks

and governmental bodies do not target informal and unregistered businesses. This is due to the

legal regulations and rules they have to satisfy to grant loans. Microfinance associations and

governmental bodies report high outreach to pre-start-up and start-ups. Non-bank financial

institutions (NBFIs) focus more on registered business with less than five employees and on

the self-employed.

Unemployed people or people on welfare benefits represent a share of 21.1% of all

microloans disbursed in Europe for disadvantaged groups. In 2013, French MFIs disbursed

microloans for almost Euros 230 million to former unemployed people, which represents 83%

of the total volume of loans they disbursed. Spain is second, with around Euros 95 million,

corresponding to 30% , followed by Germany, with around Euros 21 million (14%).

Women continue to be under-represented as a target group, compared to the gender

balance in the total population, but to a lesser extent than in previous years. In 2013, 41% of

the total of microloans disbursed were given to women, an increase of 3% compared to 2011

and of 14% compared to 2009. French MFIs distribute the most loans to women with almost

Euros 108 million, followed by Bosnia-Herzegovina with Euros 98 million.

In 2013 the share of loans dedicated to ethnic minorities was 16.6%, representing an

increase from the 12% of 2011. The highest value is presented for Spain with Euros 72

35

million, followed by Germany with Euros 33 million.

European policy makers see the young, especially unemployed young from Southern

European countries, as an important target group for microloan provision. However, so far,

only a few MFIs report focusing on this target group. The same is true for the disabled

persons.

Non-bankable persons have a share of 41% of the total value of loans disbursed in Europe.

The highest value of microloans issued to this target group is reported by the French MFIs

with Euros 179 million, followed by Bosnia-Herzegovina with Euros 124 million and Spain

with almost Euros 80 million.77

MFIs funding structure

Regarding at MFIs funding structure, it is evident that MFIs use a wide range of funding

sources, that range from EU level resources, namely the European Social Fund (ESF) and

Progress Microfinance Facility, to national, regional or local resources. In 2013, 30.5% of the

funding available to MFIs was in the form of equity, followed by about 26% from other

sources, such as earnings, collected deposits and donations. 25% of the funding came of

grants, while another 22% was available as debt financing. Guarantees played a minor role as

many MFIs as they function in a different way than the other types of funding and it is

difficult to calculate their share in the total funding structure of a MFI. Bank MFIs have a

funding structure composed primarily of debt financing and equity. In contrast, NGO,

foundation and microfinance associations rely heavily on grants (56% for associations, 41%

for NGOs and foundations). Debt financing and equity are less dominant for microfinance

associations, while for NGOs and foundations, debt financing is the second most important

funding source (29%).78

77 Bendig M., Unterberg M., Sarpong B., (2014), 'Overview of the Microcredit sector in the European Union - 2012-2013', on behalf of the European Microfinance Network (EMN).

78 Bendig M., Unterberg M., Sarpong B., (2014), 'Overview of the Microcredit sector in the European Union - 2012-2013', on behalf of the European Microfinance Network (EMN).

36

2. EU programmes for support for microfinance

Over the past years, the EU has recognised the important role played by microfinance in

promoting entrepreneurship and social inclusion. The EU recognised also the challenges faced

by the sector in terms of scale and sustainability and consequently decided to set up of a a

series of programmes to support microfinance. For the period 2007-2013, the Commission

launched the Competitiveness and Innovation Framework Programme (CIP) and the Joint

European Resources for Micro and Medium Enterprises (JEREMIE) scheme, both managed

by the EIF. Subsequently, in 2007, the Commission's Communication on a 'European initiative

for the development of micro-credit in support of growth and employment'1 recognised the

necessity of a broader EU programme. Hence, the Commission and the European Investment

Bank established the Joint Action to Support Microfinance Institutions in Europe (JASMINE),

a pilot initiative launched in September 2008 and aiming to help MFIs to improve the quality

of their operations, to grow and to become more economically sustainable. However, these

initiatives are limited scale and scope, so they have a limited market impact on the

microfinance sector. Consequently, the Progress Microfinance Facility for the period 2010-

2014 was set up as the first centrally managed EU programme specific for financial support

for microfinance. The programme continues, with some changes, for the period 2014-2018

under the Entrepreneurship and Social Innovation programme (EaSI) with the name of

Microfinance and Social Entrepreneurship.2 The following figure shows the development over

time of EU-backed microfinance instruments.3

1 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', COM (2007) 708 final.

2 Bruhn-Leon B., Eriksson P., Kraemer-Eis H., (2013), 'Progress for Microfinance in Europe', on behalf of the European Investment Fund (EIF).

3 Source of the figure: Bruhn-Leon B., Eriksson P., Kraemer-Eis H., (2013), 'Progress for Microfinance in Europe', on behalf of the European Investment Fund (EIF). p. 17.

37

The EU instruments for microfinance aim to provide resources to fit MFIs' needs and

compensate the market gap at the funding level that we analyse in the previous chapter. To be

affective the EU instruments should:

• produce a significant leverage effect by attracting co-investors

• guarantee the social impact of EU instruments, that is to say that the investments

should reach disadvantaged groups

• guarantee the geographical outreach of the instruments, that is to say that they should

cover the largest number possible of EU Member States

• be flexible so that also small non-bank MFIs are able to use them

The EU financial instruments can be delivered in two different ways. Either as direct

Commission's interventions in the form of centrally managed instruments, or started by

national or regional public institutions with resources form the Structural Fund. This

possibility was realized only rarely, an example is the German Deutscher Mikrokreditfonds,

which uses equity funding by Progress Microfinance for the beneficiaries of the national

guarantee fund for MFIs which uses Structural Fund resources. However, for a more efficient

and widespread use of this kind of instrument, it is necessary better cooperation between the

EU-backed instruments and those managed at national or regional levels.4

As attention for the European microfinance sector by public authorities increased, also

expectations from the sector increased in terms of social impact and fight against

unemployment. Hence, the performance of the EU-backed instruments needs to be measured

4 Unterberg M., Bennding M., Sarpong B., (2014), 'Study on imperfections in the area of microfinance and options how to address the through an EU financial instrument', report commissioned by the European Commission to Evers & Jung.

38

on a regular basis. A sound performance measurement is necessary for the Commission to

have an idea of the market impact of the instruments. However, generally MFIs have

developed standards to measure their efficiency which are often portfolio based and not fully

compatible with reporting standards used by the Commission to measure the impact of public

interventions in the form of grants or direct investments to final beneficiaries.5 Hence,

reporting requirements requested by the Commission can deter MFIs from applying for EU

programmes. Consequently it is necessary for the new facility under the EaSI program to

compromise between the Commission's reporting requirements and the reporting standards

that MFIs in Europe already use.6

In this chapter we analyse the EU programmes which provide financial and non-financial

support for microfinance.

2.1 The Competitiveness and Innovation framework Programme (CIP)

The Competitiveness and Innovation Framework Programme (CIP) for the period 2007-2013

reflects the goals of the Lisbon strategy to strengthen competitiveness and innovation capacity

in the European Union. CIP programme focuses on small and medium enterprises (SMEs)7

and aims to increment their productivity, innovation capacity and sustainable growth, by

providing better access to finance, better use of information and communication technologies

(ICT) as well as addressing environmental issues.8 CIP is a relevant instrument in the context

of the economic crisis, as it made possible to finance some growth-enhancing actions crucial

for SMEs. CIP is composed by three specific sub-programmes: Entrepreneurship and

Innovation Programme (EIP), ICT Policy Support Programme and Intelligent Energy-Europe

Programme (IEE).9 Interests in SMEs and in eco-innovation are cross-cutting priorities

reflected within the whole CIP program.

The Entrepreneurship and Innovation Programme (EIP) promotes entrepreneurship,

industrial competitiveness and innovation. EIP facilitates access to finance and investment for

5 Bendig M., Unterberg M., Sarpong B., (2014), 'Overview of the Microcredit sector in Europe 2012-2013', for European Microfinance Network (EMN).

6 Unterberg M., Bennding M., Sarpong B., (2014), 'Study on imperfections in the area of microfinance and options how to address the through an EU financial instrument', report commissioned by the European Commission to Evers & Jung.

7 Recommendation 2003/361/EC defines small and medium enterprises (SMEs) as enterprises with less than 250 employees and with an annual turnover not exceeding Euros 50 million, and/or an annual balance sheet total not exceeding Euros 43 million.

8 Decision 1639/2006/EC of the European Parliament and of the Council of 24 October 2006 establishing a Competitiveness and Innovation Framework Programme (2007-2013).

9 Europa, summary of EU legislation. Available at http://europa.eu/legislation_summaries/information_society/strategies/n26104_en.htm

39

SMEs during both their start-up and grow phases.10 It also provides SMEs with information

and advice on funding opportunities and on EU legislation. Moreover, the programme

encourages the exchange of best practices between Member States in order to create a better

administrative and regulatory environment for entrepreneurship and innovation. It also

supports the promotion of eco-innovation.11

The ICT Policy Support Programme promotes the adoption and use of information and

communication technologies (ICT). It is part of the Digital Agenda for Europe and

incorporates the instruments previously financed by the eTen, eContent and Modinis

programmes.12

The Intelligent Energy – Europe Programme (IEE) supports improvements in energy

efficiency, the adoption of new and renewable energy sources, greater market penetration for

these energy sources, energy and fuel diversification, an increase in the share of renewable

energy and a reduction in final energy consumption.13

CIP total budget is about Euros 3.6 billion for the period 2007-2013. 60% of it, which is

Euros 2.170 billion, is allocated to the EIP14, 20% of the total budget is for the ICT Policy

Support Programme and the last 20% is dedicated to the Intelligent Energy-Europe

Programme, that means Euros 730 million for each of the two programmes. To achieve its

goals, CIP uses several instruments, both financial and not. Not financial instruments include

projects, networks and analyses. The three different CIP programmes use the same set of

instruments to simplify the way CIP works for its users.15

CIP financial instruments

Studies show that 60% of European SMEs depend on a large extend on bank loans for

external financing. As we said in chapter 1, provision and access to credit for SMEs face some

difficulties. First, management costs for the provider are significant as loans to SMEs are

usually small. Second, access to information about SMEs can be difficult as they operate on

local markets and are not subject to external ratings. Third, management structure in SMEs

10 European Commission website, available at http://ec.europa.eu/cip/eip/index_en.htm11 Eco-innovation is defined as “any form of innovation intended to achieve sustainable and environmental-

friendly development by reducing the impact on the environment or by using natural resources in a more efficient and responsible manner”. Definition of the EU available at http://europa.eu/legislation_summaries/information_society/strategies/n26104_en.htm#key

12 European Commission website, available at http://ec.europa.eu/cip/ict-psp/index_en.htm13 European Commission website, available at http://ec.europa.eu/cip/ict-psp/index_en.htm14 One fifth of EIP budget, that is Euros 430 million, is dedicated to eco-innovation.15 European Investment Fund website, available at

http://www.eif.org/what_we_do/guarantees/cip_portfolio_guarantees/

40

creates additional complexity for risks evaluation.16 CIP financial instruments aim to make

funding for SMEs easier, by developing bank loans access, that is the most important channel

for SMEs external finance, and equity investments, that are the more suitable source of

finance for SMEs with high growth potential. CIP financial instruments are managed by the

European Investment Fund (EIF) through national and regional financial intermediaries,

which can be banks and venture capital funds.17 There are two kinds of CIP financial

instruments: the hight growth and innovative SME facility (GIF) and the SME guarantee

facility (SMEG).

The high growth and innovative SME facility (GIF) – CIP equity instruments

Small scale innovative businesses have a high potential to create new jobs, but their risk rate

is often too high to be considered acceptable for commercial banks. As a consequence, many

promising businesses do not have a chance to start because they lack access to finance. Lack

of access to traditional loans can be overcome by finding business partners willing to provide

finance in return for a share in the company. These shareholders can be venture capital funds,

which are professional investors ready to invest in high growth potential businesses taking on

higher risk. Hence, the EIF invest half of CIP budget for financial instruments in venture

capital funds, which in turn invest in SMEs with high grow potential. GIF provides risk

capital for innovative SMEs both in their starting-up phase and in their expansion phase.

Between 2007 and 2012, GIF scheme made available Euros 2.3 billion for fast growing

SMEs. 18

The SME guarantee facility (SMEG)

The SME guarantee facility (SMEG) offers guarantees to loans lent by financial

intermediaries with whom the EIF has partnered up. This way, entrepreneurs or small

enterprises that do not have sufficient collateral to offer and that would otherwise be rejected

by banks can get loans. CIP guarantees do not provide liquidity to the financial intermediaries,

but are based on risk-sharing with them. The EIF sign contracts for guarantees and counter-

guarantees only with financial intermediaries that create new SME loan portfolios for high

risk enterprises.

16 European Commision and EIB Group (2013), 'Joint report, Supporting small and medium-sized enterprises in 2012'.

17 European Investment Fund website, available at http://www.eif.org/what_we_do/guarantees/cip_portfolio_guarantees/

18 European Commision and EIB Group (2013). 'Joint report, Supporting small and medium-sized enterprises in 2012'.

41

CIP offers four kinds of guarantees instruments:

• “loan guarantees. Guarantees for loans to SMEs with growth potential.

• microcredit. Under the CIP Microcredit Guarantee Window, the EIF provides

guarantees for loans up to Euros 25.000 to microenterprises with up to 9 employees.

This kind of microloans particularly fit entrepreneurs starting a business. Microcredit

intermediaries may also receive some support to partially offset the high

administrative costs of microloans.

• equity and quasi-equity guarantees. Guarantees to existing equity guarantee schemes

and providers of mezzanine finance to support investments in businesses with up to

249 employees.

• securitisation. Guarantees to support securitisation structures to assist financial

intermediaries in mobilising debt finance for SMEs.”19

Thanks to its guarantee scheme, between 2007 and 2013 CIP has helped over 200.000 SMEs

to access over Euros 13.3 billion in loans. Each Euro that has been put into CIP guarantee had

a leverage effect of Euros 30 in bank loans.20

CIP financial instruments performance

Up to the end of 2013, Euros 1.1 billion of CIP budget has been able to stimulate more than

15 billion of loans and equity for SMEs, the number of loans provided is about 326.000, while

the number of SMEs supported is more than 275.000. The utilisation of CIP financial

instruments is 65% of the total budget, the number of intermediaries that have signed a

contract with the EIF is 46, for 61 agreements, in 21 Member States. The target of CIP was to

provide Euros 30 billion for more than 315.000 enterprises and create or maintain directly

about 380.000 jobs.21

Regarding as the role played by microfinance, it is relevant to point out that under the

SMEG, the EIP reached out more than 240.000 SMEs, 90% of which have 10 or less

employees, which are the target beneficiaries of Microcredit Guarantee Window. Under the

SMEG, 12 of the 52 transactions signed by the end of 2012 were signed under the Microcredit

Window.22 The expected volume of debt finance to be supported by these deals is about Euros

19 European Commision and EIB Group (2013). 'Joint report, Supporting small and medium-sized enterprises in 2012'. p. 11

20 European Commision and EIB Group (2013). 'Joint report, Supporting small and medium-sized enterprises in 2012.'

21 European Investment Fund website http://www.eif.org/what_we_do/guarantees/cip_portfolio_guarantees/22 In France, Ireland, Spain, Norway, Poland, Serbia, Montenegro, Croatia, Slovakia and 3 deals in Turkey.

42

1 billion. Most of the guarantees are direct guarantees to intermediaries that provide loans

directly to microenterprises, in particular to high-risk SMEs. This results in higher cap rates,

hence the leverage effect under the Microcredit Window is therefore generally low.23

Overall, the Final Evaluation of the Entrepreneurship and Innovation Programme 24

considered GIF instruments successful in supporting the development of innovative SMEs

with high growth potential.

Regarding as microcredit, however, GIF funding instruments are not suitable microcredit

providers, as investments into high growth SMEs differ from funding to disadvantaged

groups, which are the main target of MFIs. Hence, the follow up of CIP, the Programme for

the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME)25 for

the period 2014-2020, does not envisage a Microcredit Window in its guarantee facility. A

microcredit window fit better Commission programmes with social objectives rather than

programmes for competitiveness and innovation.26

2.2 The Joint European Resources for Micro to Medium Enterprises (JEREMIE)

The Joint European Resources for Micro to Medium Enterprises (JEREMIE), is an initiative

of the Commission and the European Investment Fund (EIF) for the period 2007-2013.

JEREMIE's objectives are to improve access to finance for SMEs and to develop micro credit

in regions supported by the European Regional Development Fund.27 The JEREMIE initiative

gives Member States the opportunity to use part of their Structural Funds to invest in

revolving instruments such as venture capital, loans or guarantee funds.28 These instruments

are managed by a national or regional Managing Authority through a holding fund with a

revolving nature.29

23 CIP Performance Report (2013). JCM-02-2013.24 Center for Strategy & Evaluation Services, (2011), 'Final Evaluation of the Entrepreneurship and Innovation

Programme'.25 Regulation (EU) No 1287/2013 of the European Parliament and of the Council of 11 December 2013 establishing a

Programme for the Competitiveness of Enterprises and small and medium-sized enterprises (COSME) (2014 – 2020). 26 Unterberg M., Bending M., Sarpong B., (2014), 'Study on imperfections in the area of microfinance and

options how to address them through an EU financial instrument', evers & jung on behalf of the European Commission DG Employment, Social Affairs and Inclusion.

27 European Investment Fund website. Detailed information about JEREMIE Program available at http://www.eif.org/what_we_do/resources/jeremie/

28 European Commission website. Detailed information about JEREMIE Program available at http://ec.europa.eu/regional_policy/index.cfm/en/funding/special-support-instruments/jeremie/#4

29 The EIF has produced 55 gap analyses for EU Member States and regions interested in JEREMIE, through a standard evaluation methodology. The European Commission has published the Executive Summaries of the JEREMIE evaluation studies which can be found on: http://ec.europa.eu/regional_ policy/funds/2007/jjj/jeremie_en.htm.

43

Functioning

JEREMIE does not target directly SMEs, but enables Member States to set up financial

instruments with money from the European Regional Development Fund (ERDF) and the

European Social Fund (ESF) to support directly or via a holding fund SMEs.30 The holding

funds can provide the financial intermediaries with guarantees, equity investments, loans,

securitisation and venture capital. In turn, the financial intermediaries provide SMEs with

loans and equity investments. Since 2007, a number of Managing Authorities at national and

regional level have started establishing holding funds. Each JEREMIE operation is

individually tailored to the needs of the Member State or region following the evaluation of its

operational programme. Implementation of JEREMIE through holding funds have some

advantages. First of all flexibility as they are able to re-allocate the resources to various

financial instruments and products, depending on the real demand, after consultation with the

Managing Authorities. Second, the holding funds have a revolving nature. That means that

resources invested in JEREMIE that are repaid become available for reinvestment. Third,

Structural Fund investment attract co-financing. This way, JEREMIE seeks to maximize the

leverage effect and provide support for a larger number of enterprises.31

JEREMIE peformance

Between 2007 and 2013, Euros 1.2 billion from Structural Funds have been deployed,

leveraging a total of Euros 3.2 billion in 10 EU countries and regions. 14 holding funds have

been set up and 60 guarantee deals and 20 equity transactions have been signed. Under the

2014-2020 programming period, the EIF is assessing market needs across EU Member States

to plan a second generation financial instruments, the European Structural & Financial

Instruments (ESIF).32

As regard microfinance, European MFIs received JEREMIE support and lent microloans

in support of microenerprises. However, the use of JEREMIE's financial instruments by MFIs

has been limited, since Managing Authorities rarely see MFIs as their target group for their

programmes and the majority of MFIs lack the know how to use many of the financial

instruments offered.

30 European Investment Fund (2012), 'JEREMIE - A new way of using EU Structural Funds to promote SME access to finance'.

31 European Unvestment Fund (2010), 'Handbook on Jeremie Holding Fund Operational Procedures'.32 European Investment Fund website, available at http://www.eif.org/what_we_do/resources/jeremie/

44

2.3 Towards an EU centrally managed facility to finance microfinance

In 2007, the Commission proposed the establishment of a new facility for microcredit in its

'European Initiative for the Development of Microcredit in Support of Growth and

Employment.'33 The proposals included in the initiative represent a starting point for concrete

actions aimed at developing and implementing microcredit in the European Union. The

initiative fits within the EU policy to promote entrepreneurship, social inclusion of

disadvantaged persons as well as renewed trust-based social links. The initiative proposes to

set up support structures for microfinance at national level, to create a guide of good conduct

for microfinance to spread good practices within the sector, and to set up a EU fund dedicated

to MFIs, to help finance their activities. The initiative has four different strands: improving

the legal and institutional environment for microcredit in the Member States; changing the

climate in favour of entrepreneurship; promoting the spread of best practices; providing

additional financial capital for microcredit institutions.

The main proposals for each strand are illustrated below.

Strand 1. Improving the legal and institutional environment in the Member States

Microcredit is considered to have a self-sustaining nature in the long-run, but it needs is a

series of actions improving its legal and institutional environment. Following are areas areas

of improvement should be achieved at national level.

1. “Create an environment allowing the development of microfinance institutions (MFIs)

and covering all segments of the clientele. Given the number and diversity of potential

clients, all types of bank and non-bank MFIs should have easy access to financial

resources allowing them to develop microcredit. This implies that banks should be

encouraged to develop microcredit operations. This goal hat can be better achieved by

a wider provision of loan guarantees and, as portfolios develop, by securitisation.”34

2. “Help microcredit to become sustainable by relaxing interest caps on loans, as they

block any possibility of covering the costs of microcredit. It must be underlined that,

given the small size and short duration of loans, the absolute value of the interest, even

with a high rate, is small... In Member States where interest caps are implemented, it is

advisable to fix them at a sufficiently high level to allow lending institutions to cover

33 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', COM (2007) 708 final.

34 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', p. 6.

45

costs, while evaluating its economic and social impact regularly.”35

3. “Allow MFIs to access borrower databases to facilitate their evaluation of the risks.”36

At national level, it is necessary that all MFIs, including non-bank ones, should be

allowed to access records held by the Central Bank. At EU level, it is desirable the

creation a common database together with common EU wide rating tools.

4. “Reduce operating costs applying favourable tax schemes.”37 That is to say, tax

exemption for MFIs or reductions in taxes for individuals or enterprises that invest in

their activities or intervene by providing grants.

5. “Adapt national regulation and supervision to the specificity of micro-finance. If MFIs

do not receive deposits or other repayable funds from the public and are not

prudentially consolidated by a credit institution, the Capital Requirement Directive38

does not oblige them to be subject to specific harmonised capital requirements. It is

also important that regulation and supervision put in place by Member States must be

proportionate to the costs and risks faced by MFIs, so that they do not put a brake on

the supply of microcredit and the growth of MFIs.” 39

6. “Ensure that single market rules are applied to microcredit.”40 That means the

possibility for microcredit providers which are not credit institutions to enjoy EU law

which allows banks authorized in one EU Member State to operate elsewhere in the

Union by means of cross-border services or through establishment of branches.

7. “Incorporate microcredit into regulation and accounting standards.”41 The risk of

negative over-regulation, which limits operational flexibility and imposes high burden

to MFIs, can be reduced by making a prior inventory of best practices and by

confronting the proposed legislative framework with the reality of national microcredit

operations.

35 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', p. 6-7

36 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', p. 7.

37 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', p. 7.

38 Directives 2006/48/EC and 2006/49/EC.39 European Commission, (2007), 'A European initiative for the development of micro-credit in support of

growth and employment', p. 7.40 European Commission, (2007), 'A European initiative for the development of micro-credit in support of

growth and employment', p. 8.41 European Commission, (2007), 'A European initiative for the development of micro-credit in support of

growth and employment', p. 8.

46

Strand 2. Further changing the climate in favour of entrepreneurship

EU Member States should implement the following actions to promote a more favourable

environment for the development of microcredit within the national institutional, legal and

commercial framework. The Commission could help in this effort by drafting an inventory of

good regulatory practices and by indicating quantitative targets for loans.

1. “Improve the institutional framework for selfemployment and microenterprises. It

requires measures to lower legal, tax and administrative barriers, such as exemption

from social insurance charges for start-ups, simplified registration procedures for new

microenterprises and access to more numerous and less expensive outlets.”42

2. “Design solutions to enable unemployed people and welfare recipients to make the

transition into selfemployment. This process can be supported by measures including

temporary public income support during the transition combined with provisions to

allow a return to unemployment benefit or social welfare assistance in case of

failure.”43

3. “Increase chances of success of new microenterprises through training, mentoring and

business development services. Microcredit can help new entrepreneurs and non-

banked people access finance, however access to finance does not in itself solve all the

problems on the demand side. New entrepreneurs need side services covering training,

mentoring or coaching to improve the enterprise’s chances of success. However, as

business development services are costly, they make microenterprises business less

attractive to the commercial banking sector and experience shows that such services

tend to rely on public and/or volunteer support.”44

Strand 3. Promoting the spread of good practices

Encouraging MFIs to share experience and best practice and to use a common language will

help them to work together more effectively and develop the sector. The following

instruments are needed.

1. “A central body with microfinancial expertise to coordinate and monitor action in

support of microfinance at EU-level. The European Investment Fund (EIF) could be

42 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', p.8.

43 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', p. 8.

44 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', pp. 8-9.

47

such central body, as it shows the operational capacity in this respect.”45

2. “A microcredit specific label to improve the visibility of investment funds dedicated to

microcredit, to improve citizens' confidence and to steer resources towards MFIs with

the best social and financial performance.”46

3. The establishment of a code of conduct for MFIs. This would be an excellent way to

spread ethic and customer-friendly best practices among MFIs and to increase

confidence in a microcredit label.

Strand 4. Providing additional financial capital for new and non-bank MFIs

The European Commission intends to set up a microcredit facility to target the most

promising non-bank MFIs through calls for proposals. Ideally, such facility would combine

technical assistance services with financial funds from the EU Structural Funds, the European

Investment Bank (EIB), as well as other banks and donors. Such microcredit facility would

aim to help MFIs becoming self-sustaining on one hand, and it would support the whole

sector, by conducting market analysis, establishing guidelines and promoting trainin best

practice in the sector on the other hand.47

2.4 The Joint Action to Support Microfinance Institutions in Europe (JASMINE)

The Joint Action to Support Microfinance Institutions in Europe (JASMINE) is a pilot

initiative, for the period 2008-2011, of the Commission, the European Investment Bank (EIB)

and European Investment Fund (EIF). JASMINE is the operational outcome of the official

communication 'A European initiative for the development of microcredit in support of

growth and employment'. The original idea was that JASMINE should provide both financial

and non-financial services to MFIs, but the concept has evolved over the years. As a result,

JASMINE provides only technical assistance to MFIs, while financing is provided by the

European Progress Microfinance Facility (EPMF) (of which we will discuss in the next

paragraph). JASMINE pursues three main objectives. First, dissemination of good practice

among MFIs. Second, support to the development of MFIs' institutional governance,

information systems, risk management and capacity building. Third, support to MFIs to

45 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', p. 9.

46 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment', p. 9.

47 European Commission, (2007), 'A European initiative for the development of micro-credit in support of growth and employment'

48

become more sustainable.48

JASMINE has an overall budget of about Euros 6 million for the period 2008 to 2013.

95% of the facility is funded by the Commission, while the European Investment Fund (EIF)

finances the remaining 5% . The EIF manages the Facility on behalf of the Commission (DG

Regio). 49

Two types of services are made available under JASMINE. First, JASMINE Technical

Assistance, consisting in an institutional assessment or rating followed by tailor-made

training, to beneficiaries selected via annual calls for expression of interest. Second,

JASMINE Business Development Services for the entire microfinance sector, consisting in

workshops, the drafting and spread of the European Code of Good Conduct for Microcredit

Provision, the JASMINE Helpdesk50;and JASMINE OnLine, a web-based information

platform, currently under development. JASMINE Online, once launched, will provide data

on the European microfinance sector, a list of microcredit providers who have adopted the

Code of Good Conduct, business information from networks, service providers, funders and

investors. The Helpdesk will become a part of JASMINE OnLine when it is eventually

launched.51

JASMINE Technical Assistance

JASMINE provides the first and only technical assistance initiative for MFIs in the EU.

JASMINE Technical Assistance is an initiative financed by the Commission and managed by

the European Investment Fund (EIF), provided free of charge to the selected MFIs.

Beneficiaries can choose to receive either an evaluation/diagnosis or a an institutional rating

performed by JASMINE partners Planet Rating and Microfinanza Rating. The evaluation or

rating phase takes in average 3 months. After that, the beneficiaries are contacted by the

Microfinance Centre (MFC) to define a training plan best suited to their needs according to

the assessment or rating report. The MFC provides between 5 to 12 days of training to the

staff of the selected MFI. JASMINE Technical Assistance facility targets both bank and non-

bank MFIs active in the EU. Non-bank MFIs can be greenfield MFIs that want to improve

their internal processes through an assessment, as well as mature MFIs that want to increase

48 European Investment Fund website http://www.eif.org/what_we_do/microfinance/JASMINE/06_fei_jasmine_a4.pdf

49 European Commission website, available at http://ec.europa.eu/regional_policy/index.cfm/en/funding/special-support-instruments/jasmine/#1

50 Jasmine helpdesk and workshops are delivered by the European Microcredit Network (EMN).51 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the

European Commission, Directorate-General for Regional and Urban policy.

49

the quality of their operations and improve their found raising possibilities, through an

institutional assessment or a rating exercise. Bank MFIs non specialised in microfinance can

ask for a rating exercise to receive an independent opinion on their microcredit operations and

mentoring to increase their staff knowledge in the sector.52 An institutional assessment

highlights MFI's strengths and weaknesses and offers recommendations for improvement.

Thus, it is written for the MFI's staff. Differently, a rating exercise highlights areas of risk and

is directed primarily to external audiences, in particular to investors.

After an initial preparatory phase, the implementation of JASMINE Technical Assistance

started in 2010, while the implementation of JASMINE business development services started

in 2011. Subsequently, the pilot phase of JASMINE 2008-2011 was extended for a period of

two years until 2013.

Eligibility criteria of Jasmine are quite broad. Over the annual calls, they evolved to be

more inclusive for different types of MFIs and for MFIs at different stages of development. In

2010 call, JASMINE was restricted to non-bank microcredit providers focusing in particular

on specialised small microcredit providers, based locally and with strong local roots. In 2011

there has been a shift towards more mature microcredit providers53, while in 2012 JASMINE

was opened up to greenfield organisations, smaller organisations,with less than 150 clients,

and also banks for the first time.54

2.4.1 Evaluation of the JASMINE initiative

In November 2013 the Commission's DG for Regional and Urban Policy published the final

report 'Evaluation of the JASMINE technical assistance pilot phase' to provide an independent

assessment of the implementation and effectiveness of the JASMINE Technical Assistance

facility from 2008 to 2012. The evaluation uses a variety of sources: desk research; an online

survey of technical assistance beneficiaries, rejected applicants, workshop participants and

Helpdesk users; interviews with relevant official of the Commission and of the two rating

agencies.55 The main outcomes of the evaluation are presented below.

52 European Commission's DG Regio website http://ec.europa.eu/regional_policy/index.cfm/en/funding/special-support-instruments/jasmine/#4

53 At least 2 years old and with 300 or more customers. 54 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the

European Commission, Directorate-General for Regional and Urban policy.55 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the

European Commission, Directorate-General for Regional and Urban policy.

50

Performance of JASMINE Technical Assistance

JASMINE beneficiaries reflect the diversity of the European microcredit sector. They

represent a wide range of institutional forms. About 50% of them are non-bank MFIs however

also bank MFIs participated, as a consequence of the broadening of JASMINE eligibility

criteria in 2011. Beneficiaries represent a mix of greenfield and mature institutions. In line

with the characteristics of the European microcredit sector which is dominated by specialised

institutions, the majority of the beneficiaries focus on micro lending, in particular 60% of

them provides business lending, 25% provides personal lending, while 13% provides both.

JASMINE expanded its geographical coverage from 7 Member States in 2010 to 14

Member States in 2012. In total, 48 microcredit providers received JASMINE Technical

Assistance between 2010 and 2012, this represents about 15% of the European known pool of

microcredit providers.56 About 50% of MFIs are concentrated in three countries: Romania,

Germany and Bulgaria, while MFIs from certain countries are under-represented, notably

Spain and Italy. In some countries, namely Czech Republic and Denmark, there was no take-

up of JASMINE as those countries lack a microcredit sector.

The EIF uses European and national networks to publicise the calls for expression of

interest for JASMINE Technical Assistance.57 27% of respondents to the online survey said

that heard of the Technical Assistance thanks to the European Microfinance network (EMN),

which consequently was the most cited channel of communication. Overall, publicity through

networks worked well, as it is evident by the growing interest in JASMINE and the positive

beneficiary feedbacks. However, a couple of respondents pointed out the necessity to use

tailored communication channels to reach out to newly established MFIs, which might not be

members of any network.

The programs offered were designed to fit the variety of European MFIs. Indeed, an

institutional assessment is more appropriate for young MFIs, while a rating is more suitable

for mature MFIs, especially for bank MFIs. Between 2010 and 2012, out of 48 institutions

that benefited from JASMINE Technical Assistance, 39 opted for an institutional assessment,

12 for a rating exercise and 3 for both of them. Almost all of the MFIs that chose a rating

exercise are based in Eastern Europe58, as Eastern European countries are characterised by a

56 The latest European Microfinance network (EMN) survey identifies 376 microcredit providers in Europe excluding commercial banks and credit unions, of which 332 are located in EU countries. The actual number of microcredit providers in the EU is likely to be in the order of 400 to 600.

57 About European microcredit networks, links to the calls are placed on the EMN and MFC websites. About national networks, an example is the Community Development Finance Association (CDFA) in the UK. Some countries, as Greece and Czech Republic, do not have microcredit networks.

58 Primarily Romania and to a lesser extent, Bulgaria.

51

more mature microcredit sector than Western Europe. As the majority of MFIs which

benefited from JASMINE Technical Assistance are small institutions, they said that a rating

exercise was not suitable for them. However, some of them expressed the intention to receive

a rating exercise in the near future, as they saw this “as the ‘next step’ after having had an

institutional assessment and also as a way of tracking the progresses made”.59 The evaluation

points out that in some cases MFIs were not able to understand the difference between an

institutional assessment and a rating exercise.

The assessment/rating process lasts about three months and comprises three steps. First,

the rating agency contacts the beneficiaries and asks them background documents and data.

Second, about a month later, staff from the rating agency carry out an on-site mission to

collect further evidence. Finally, based on all the evidence collected, the rating agency

prepares the assessment/rating. Overall the beneficiaries were satisfied with the way the rating

agencies worked and with the reports they received. Both the rating agencies added social

criteria to their standard institutional assessments to adapt them to peculiar nature of MFIs.

However, the two agencies have different approaches and the annual reports submitted to the

EIF differ in terms of structure, format and level of detail. This makes it hard to compare them

and synthesise information.

The main weaknesses assessed by the two rating agencies are listed below. “About risk

management, the most notable problems are: weak internal audit processes and procedures,

also due to the absence of an internal audit department, and inadequate control mechanisms,

for instance separation of tasks, formalised controls and limitation of power. About social

impact, this is not articulated, measured or monitored, as there is not systematic data

collection on customer satisfaction and the social background of the borrower”.60 In addition,

many MFIs do not offer business development services (BDS). Weaknesses have also been

assessed as regard to information systems. Other weaknesses are: strong dependence on

public funds, sub-optimal strategic planning (for instance absence of up-to-date 3-5 year

business plans) and lack of marketing strategies. It could come as a surprise that 16 out of 21

beneficiaries have rated poorly on social impact, given the strong social focus of European

MFIs. However, the low rating depends on the fact that most MFIs do not track the social

impact of their lending.

The two rating agencies have made some recommendations as regards the evolution of

59 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the European Commission, Directorate-General for Regional and Urban policy, p. 35.

60 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the European Commission, Directorate-General for Regional and Urban policy, p. 42-43.

52

JASMINE. First, they asked for a more flexible timeline. This request meets also the

beneficiaries' wishes, which found the timing too pressing. The agencies proposed also to

improve the link between assessment and training. They suggested that a “first part of the

training could take place before the assessment/rating with a focus on already known areas of

weaknesses, while a second part could follow-up with a focus on the issues identified in the

reports.”61 However both the Commission and the beneficiaries noticed that training and

assessment/rating are not necessarily inter-dependent and linked. “Training is design to

enhance the workforce skills and competences, while assessment/rating aims to strengthen

organisational systems, processes and procedures.”62 The Commission pointed out as well that

a two stages training would be more costly. Finally, given the lack of data about European

MFIs the rating agencies recommended the development of a knowledge sharing platform

similar to MIX market63 tailored to the EU context. JASMINE OnLine which is currently

under development will provide such a tool. Some greenfield MFIs participated in JASMINE

primarily to receive the training, while didn't consider the assessment/rating exercise useful,

given their stage of development. Thus, they proposed that MFIs should be free to participate

to the training without the assessment/report. MFIs introduces changes to their operating

models and loan assessment procedures as a result of the institutional assessments/rating.

However, some MFIs, especially from Western European countries, criticised the institutional

assessments/rating to be too generic and not suited to their particular market situation and

operating models.

As regard the training, the majority of MFIs were very satisfied, only few said that the

training was too generic and that some trainers lacked flexibility, as they did not change the

content of the training even when it was not entirely relevant. The training should be

delivered in the local language by national experts familiar with local regulatory and market

conditions. In Germany, given the consistency of the microfinance market64, the MFC

subcontracted the delivery of training to the Deutsches Mikrofinanz Institut (DMI).

Significantly, German MFIs reported that the training well suited their national context and

their business model.

Overall, both the that assessment/rating and the training should be more tailored and move

61 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the European Commission, Directorate-General for Regional and Urban policy, p. 43.

62 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the European Commission, Directorate-General for Regional and Urban policy, p.43.

63 MIX market is a platform that provides MFIs with self-report financial and portfolio data. MFIs are awarded ‘diamonds’ of transparency according to the amount of information posted. See http://www.mixmarket.org/

64 This is due to restrictions on MFIs operational models, in particular the existence of interest rates caps.

53

away from a one-size-fits-all model. Additionally, MFIs requested funding for the

implementation of the assessment/rating and of the European Code of Good Conduct for

Microcredit Provision, in particular in case they need a new management information system.

With respect to the Code of Good Conduct for Microcredit Provision, 47% of JASMINE

beneficiaries use it in their organisations; 30% are aware of it, but do not currently use it,

among them, 89% plan to use it in the future; 23% of the beneficiaries are not aware of the

Code; 57% believe the Code should be completed with EU legislation.

JASMINE helped raise awareness of EIF-backed financial instrument, included Progress

Microfinance Facility and helped MFIs to become more ready to apply for the Facility

through the institutional assessment/rating processes. Indeed, 10 out of 48 JASMINE

beneficiaries also participated in Progress Microfinance.65

Performance of JASMINE Business Development Services

JASMINE Business Development Services include workshops, the draft and spread of the

Code of Good Conduct for Microcredit Provision, JASMINE HelpDesk and JASMINE

Online, still under development.

According to the European Microfinance Network (EMN), which has the role to provide

the workshops, the topics are selected both on the basis of what MFIs consider more

interesting and following the EIF and DG Regio’s strategic priorities. Every year, the EMN

collects suggestions from previous workshops and asks its members additional suggestions. In

2012 the EMN received 30 proposals of workshop topics by its members. Subsequently, the

EMN selects the topics with the EIF and DG Regio. The workshop topics address key issues

for the European microcredit sector, such as regulation, sustainability, governance, risk

management, performance reporting and the Code of Good Conduct. Given the short duration

of the workshops and the generic nature of content, the impact on learning is limited and the

goal is to raise awareness. The topic suggested include: “the use of technology (particularly

mobile technology) to deliver products and services; measuring social outcomes; sharing

findings from the pilot implementation of the Code of Good Conduct; reaching out to under-

served market segments; loan appraisal techniques for specific sectors such as social

enterprises or creative businesses; developing appropriate management information systems;

'back to basics’ workshops on issues as financial and liquidity management.”66 In general,

65 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the European Commission, Directorate-General for Regional and Urban policy.

66 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the

54

workshop participants represent the whole spectrum of European MFIs and tend to be locally

based to limit the cost of attending a 2-3 hour workshop in another country.

The JASMINE Helpdesk67 is hosted on the Commission’s website. It is managed by the

EMN, Eurom and Evers & Jung. “The Helpdesk handles enquiries in English, Spanish,

French, German, Romanian and Italian. However, the online template is only available in

English, so this constrains the delivery in alternative languages.”68 Up to mid 2013, 140

enquiries have been handled by the Helpdesk, precisely 40 in 2011, 67 in 2012, 33 in 2013

over a five month period. Such data show that the number of enquiries handled so far is

limited, but growing. 72% of the enquiries were about JASMINE Technical Assistance and

more in general EU-backed funding for MFIs. An online survey was set-up to collect the

users' feedback about the Helpdesk. The survey received 15 responses, which is a response

rate of 13%. 80% of respondents said that they were satisfied with the services provided by

the Helpdesk, while 20% considered it not a useful service, for instance because they found it

was unable to provide a comprehensive answer. Overall, given the general paucity of

information sources on European microcredit, the Helpdesk can be considered a useful

instrument. The inclusion of the Helpdesk within JASMINE Online could improve its

visibility.69

MFIs' opinion of the Code of Good Conduct, which the last JASMINE Business

Development service, has been already assessed previously.

Impact of JASMINE on employment and outreach to disadvantaged groups

Most MFIs said that JASMINE Technical Assistance led to improvements in their governance

systems, operational procedures, strategic planning process, and management information

systems. More importantly, a number said that the Technical Assistance led to a better

relationship with the customers. For instance, thanks to the training some MFIs learnt how to

handle customers who face difficulties in repaying their loans, and established alternative

repayment options instead of just taking away the collateral. Additionally, some MFIs

introduced financial education to tackle over-indebtedness situations. Other MFIs decided that

each client should have one loan officer dealing with the account from start to finish.

JASMINE has also positively affected the beneficiaries' possibilities to attract additional

European Commission, Directorate-General for Regional and Urban policy, p. 69.67 http://ec.europa.eu/regional_policy/thefunds/instruments/jasmine_helpdesk_en.cfm68 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the

European Commission, Directorate-General for Regional and Urban policy, p. 70.69 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the

European Commission, Directorate-General for Regional and Urban policy.

55

external funding, in particular, 27% of MFIs who received the training and 37% of those who

received an institutional assessment or rating exercise. As regard the outreach to

disadvantaged groups, some MFIs said that as a consequence of JASMINE Technical

Assistance, their loan officers started request additional information on the financial situation

and repayment capacity of potential clients and that could help MFIs to attract new

customers.70

Conclusion and Recommendations

Between 2008 and 2012, that is the period covered by the evaluation, JASMINE budget of

Euros 4.3 million has been used to deliver technical assistance to 48 European MFIs, which

collectively received 572 days of training. 495 microcredit stakeholders, including investors,

policy makers and academics, participated in 17 workshops organised by the European

Microfinance network (EMN), which handled also over 100 Helpdesk enquiries.

Overall, JASMINE pilot phase can be considered a success. This is evident from the

growing demand over time for JASMINE Technical Assistance, from the positive MFIs

feedbacks and from demand for more assistance.

Overall, MFIs think that JASMINE Technical Assistance could be improved by a wider

offer of assessment products, for instance a social rating. JASMINE could also provide MFIs

with financial or mentoring support to help them to implement the recommendations emerged

by the assessment/rating and to measure and demonstrate the social value that MFIs provide.

MFIs proposed that the Commission could change the financing formula for JASMINE

Technical Assistance so that “the first time Technical Assistance is offered free of charge and

any successive interventions are co-financed by the beneficiary on a declining basis. For

instance, Jasmine could cover 80% of total costs for the second intervention and 60% of total

costs for the third intervention."71

JASMINE Business Development Services should commission regular market studies aim

to measure the social impact of microfinance in Europe. In this perspective, JASMINE Online

would represent a useful database of data on performance and evolution of the sector and a

forum for MFIs for networking, knowledge sharing and mutual learning.

70 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the European Commission, Directorate-General for Regional and Urban policy.

71 ICF-GHK, (2013), 'Evaluation of the Jasmine technical assistance pilot phase. Final Report', on behalf of the European Commission, Directorate-General for Regional and Urban policy, p. 79.

56

2.5 The European Code of Good Conduct for Microcredit

In 2011, the Commission promoted the creation and widespread use of the 'European Code of

Good Conduct for Microcredit Provision', as an important initiative to support the European

microfinance sector. We saw in the previous paragraph that the Code was develop within

JASMINE Business Development services.

The development of the Code came from the recognition that there was a need for a

unified set of standards as a response to the different national regulatory frameworks in which

MFIs operate. The purpose of the Code aims to set out good practice guidelines and to

identify common expectations and principles. The Code emerged thanks to a close

consultation with a large number of stakeholders, of which particularly important are the

European Microfinance Network (EMN), the Microfinance Centre (MFC) and the

Community Development Finance Association (CDFA).

The Code should ensure that MFIs clients are treated in a fair and ethical way. For

investors and funders, the Code should guarantee that the sector operates with transparent and

widely shared reporting standards. For regulators, the use of the Code by MFIs assures that

they operate according to sound business practices and principles.

The Code of Good Conduct is organised in a practical way and is divided into five

sections addressing: customer and investor relations, governance, common reporting

standards, management information systems and risk management. Each section identifies

several clauses that need to be implemented by MFIs, specifying the difficulty level for their

implementation. Some of those clauses have been identified as priority clauses, as they are

seen as particularly important. The priority clauses of each section are presented below.72

I. Customer and investor relations

This section of the Code covers the rights of customers and investors and the obligations of

MFIs towards them. The priority clauses are:

• MFIs must give sufficient information to customer, in particular disclosing costs as

annual percentage rate.

• Customers have the right to withdraw from credit agreement or repay within 14 days

and have access to mechanisms that to deal with customer complaints.

II. Governance

This section details standards for MFIs management and board. The priority clauses are:

72 European Code of Good Conduct for Microcredit Provision (2011)

57

• MFIs should produce a business plan that is reviewed regularly and ensure that it

covers a minimum number of aspects of business.

• MFIs should have a board of directors or equivalent, which should be composed of a

majority of independent members.

• MFIs should have an external audit on annual basis.

III. Risk management

This section comprises common approaches and procedure for managing risk. The priority

clauses are:

• MFIs should have processes to identify and assess risks. Appoint senior manager are

accountable for risk management.

• MFIs should limit credit risks by requiring that two people approve every loan.

• MFIs should have explicit internal audit function adjusted to size of organisation.

IV. Reporting standards

This section specifies which indicators microcredit providers must collect, report and disclose.

The priority clauses are:

• MFIs should adhere to a common way of measuring and reporting portfolio at risk and

their operational sustainability ratio.

• MFIs should publicly disclose their social mission, their operational sustainability

ratio number, the number of complaints by applicants as a percentage of applicants

and past and current customers.

V. Management information systems (MIS)

This section section details common standards for management information systems. The

priority clause is:

• MFIs should have a management information system that produces operational and

financial reports, and that monitors loan portfolio quality and information about

clients.

2.6 The European Progress Microfinance Facility

On 2009, in response to the crisis73, the Commission adopted two legislative proposals, one to

73 See the Communication ‘A Shared Commitment for Employment’. COM(2009) 257 of 3 June 2009.

58

set up the European Progress Microfinance Facility, the other to use resources from the

Progress programme to fund it.74 The Progress Microfinance Facility entered into force on

April 2010.75

The strategic objective of Progress Microfinance is to set up an EU microfinance facility

to give credit to unemployed people and open the road to entrepreneurship for persons

belonging to disadvantaged groups. Progress Microfinance wants to be a response to the crisis

addressing some structural problems related to access to finance.76 The facility aims to

generate approximately 45.000 loans for these target groups over the period of the facility,

that is up to 8 years.77 As the crisis caused reduced level of lending in Europe, the

effectiveness of Progress Microfinance Facility is related to the ability to reach out to

disadvantaged groups and enterprises that have difficulties to access financing for their

businesses. Moreover, by serving bank MFIs, Progress Microfinance could help in risk

sharing with the bank sector in order to alleviate current lending constraints. However, later

we will see that this fact has some negative effects.

Functioning

The functioning of the Facility is built on the CIP experience and is based on a EU

contribution for 4 years to the European Investment Bank (EIB) group. The Facility will run

for a maximum period of 8 years. At the closing of the Facility, remaining capital will be

returned to the Community budget. Progress Microfinance provides, two kinds of financial

instruments: guarantee instruments, and debt instruments (also called funded instruments),

which include senior loans, subordinated loans, risk-sharing loans and equity participation.

The functioning of these instrument is illustrated in the next paragraph. The European

Investment Bank does not provide direct financing to microentrepreneurs, microbusinesses or

individuals. New entrepreneurs or micro-enterprises should contact the participating financial

intermediary selected by the EIF in their country or region.

The figure below explains the functioning of Progress Microfinance Facility78

74 Decision No 283/2010/EU of the European Parliament and of the Council of 25 March 2010 establishing a European Progress Microfinance Facility for employment and social inclusion.

75 Sources used for this paragraph: Commission Staff working document on the Decision of the European Parliament and the Council establishing a European Microfinance Facility for Employment and Social Inclusion. Ex-ante evaluation. SEC (2009) 907. Europen Commission official website ec.europa.eu

76 European Investment Fund (EIF) website, available at http://www.eif.org/what_we_do/microfinance/progress/

77 Commission Staff working document on the Decision of the European Parliament and the Council establishing a European Microfinance Facility for Employment and Social Inclusion. Ex-ante evaluation. SEC (2009) 907.

78 Source: European Investment Fund website. http://www.eif.org/what_we_do/microfinance/progress/index.htm

59

Eligible intermediaries are public and private institutions established in the EU Member

States that provide microcredit or guarantees to individuals or microenterprises. To be an

intermediary under Progress Microfinance provides some advantages, namely intermediaries

can increase loan volumes, gain new customers, attract new investors from the private sector

and reinforce their organisation to develop economies of scale and become more

economically sustainable. The EIF selects the intermediaries on the basis of the following

criteria: financing capacity, operational capabilities, and expected impact, for instance

volumes and geographical reach. After EIF approval, contractual arrangements are set up with

the selected intermediaries.79

Funding

The Progress Microfinance Facility is funded by the Progress programme budget. Progress

(Community Programme for Employment and Social Solidarity) has been established on 2006

for the period 2007-2013.80 It provides financial support for the implementation of the

European Union’s objectives in the field of employment and social affairs. Progress budget is

of Euro 743 million over the period 2007-2013, used to finance analysis, mutual learning,

awareness-raising and dissemination activities, as well as assistance for the main players. The

programme is divided into five sections corresponding to five main fields of activity:

employment, social protection and inclusion, working conditions, diversity and combating

discrimination, and equality between women and men.81

During the negotiations to decide Progress budget, the European Parliament had decided

79 European Investment Fund website. http://www.eif.org/what_we_do/microfinance/progress/index.htm80 Decision No 1672/2006/EC of the European Parliament and of the Council of 24 October 2006 establishing a

Community Programme for Employment and Social Solidarity.81 European Commission website, available at http://ec.europa.eu/social/main.jsp?langId=en&catId=327

60

to add Euro 100 million for Progress Microfinance. The budget also covers the costs related to

the preparatory actions, monitoring and evaluation of the the Facility. Such costs should not

exceed 1% of the budget. Taking into account the risk profile of the targeted final

beneficiaries, and based on the experience of the Competitiveness and Innovation Framework

Programme (CIP), it has been calculated that the leverage effect will be a ratio between 1 and

5. That means that Progress Microfinance 100 million budget could allow to leverage

approximately 500 million of microcredit to final beneficiaries. A smaller budget than the one

provided risks not to be enough to alleviate lending constraints and boost the microfinance

provision for the targeted groups. However, even if investing a higher amount could be

desirable, the EU decided that the re-allocation of a higher amount from Progress would

negatively affect its objectives and priorities, as pointed out in the European Economic and

Social Committee opinion.82

Coordination of the Facility

The Coordination of Progress Microfinance is ensured by the CIP/JEREMIE coordinating

committee, which shall meet regularly at the level of senior management and with

representatives of the EIF to provide general guidance and coherent action. Day-to-day

implementation is delegated to the European Investment Fund Programme Management Unit

of the Economic and Financial Affairs Directorate General (DG), since this Unit has the

responsibility for the implementation of the CIP in the period 2007-2013. The Commission set

up an investment committee composed of representatives of the Commission's Employment,

Social Affairs and Equal Opportunities DG and the Economic and Financial Affairs DG, in

order to ensure the coherence between implementation and the objectives of Progress

Microfinance and the general EU objectives in the field of employment and social affairs.83

Progress Microfinance is complemented by other instruments, first of all the European

Social Fund (ESF). The ESF technical assistance helps to improve NGOs and Public

employment services within the Member States to set up microcredit provisions and training

services for the microentrepreneurs. Second, Progress Microfinance action should be

complementary to JASMINE Technical Assistance.

82 European Commission, (2009) Proposal for a decision of the European Parliament and of the Council establishing a European Microfinance Facility for Employment and Social Inclusion (Progress Microfinance Facility) COM(2009) 333 final.

83 European Parliament and Council, (2010), Decision of 25 March 2010 establishing a European Progress Microfinance Facility for employment and social inclusion. Decision No 283/2010/EU.

61

Monitoring and evaluation

The EIF reports on a yearly basis information on the implementation of Progress

Microfinance, in particular on: the number and size of loans, the reach out to disadvantaged

groups, the number of agreements signed with MFIS and the leverage effect. At the end of the

4 year mandate period, an evaluation will take place to assess to the extent to which the

objectives of the Facility have been reached.

The following paragraph is based on the yearly final reports on the implementation of

Progress Microfinance drafted by the Commission.

2.6.1 Evaluation of Progress Microfinance Facility

Implementation of the European Progress Microfinance Facility in 2010

In line with Article 8 of the Decision establishing the European Microfinance Facility, in

2011, the Commission drafted the first annual report based on the implementation reports

submitted by the European Investment Fund (EIF).84 Following I illustrate the main findings

of the Commission's report.

The report focuses on the key features of the Facility, the design of the products and the

first stages of implementation. To provide the financial instruments two separate structures

have been set up: a guarantee instrument and an investment vehicle, the Fonds commun de

placement-fonds d’investissement spécialisé (FCP-FIS), which provides the funded

instruments: risk-sharing, equity and debt.

Out of the 100 million budget, 25 million are allocated for the guarantee instrument and

75 million for the funded ones. An important assumption of the EU initial 100 million

investment was that it could attract additional funding from third parties. In 2010, the

European Investment Bank (EIB) co-financed additional 100 million for the funded

instruments window of Progress Microfinance. The leverage effect expected is 6 Euros in

microcredit every Euro committed in the guarantee instrument, while funded instruments are

expected to have a leverage ration of between 1 and 3.85

Guarantee instruments

The guarantee window is managed by both the Commission and the EIF under a Fiduciary

Management Agreement concluded between them on 1 July 2010. Open calls are published in

84 Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2011) 195 final.

85 Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2011) 195 final.

62

the EIF website, through which interested intermediaries can apply for guarantees.

Applications are evaluated by the EIF, then they must be approved by the EIF Board and the

Commission, that negotiates the contracts and signs them with the intermediaries. The

diagram below illustrates how the guarantee instrument works.86

guarantee

EU budget

EIF

Guarantees

counter-guarantee

Guarantee institution

Microcredit provider

Microcredit provider

guarantee

Final beneficiaries

microloans microloans

The EIF issues either guarantees directly to microcredit providers to cover their microloan

portfolios, or counter-guarantees to guarantee institutions which, in turn, issue guarantees to

microcredit providers. In both cases, the maximum guarantee rate is 75% of the underlying

microcredit or guarantee portfolio. The EIF guarantees cover the first loss, but a cap is also

agreed for each guaranteed portfolio, based on the expected cumulative losses of the portfolio.

“The maximum liability for the facility is set at 20% of each guaranteed portfolio. Guarantees

have a term of up to three years. They are provided free of charge, unless the microcredit

provider fails to disburse 90% of the agreed volume of microloans, in that case, it has to pay a

commitment fee. This provides the necessary incentive to achieve the agreed microloans

volume and make the funding arrive to the final beneficiaries.”87 The EIF must promote a

balanced geographical distribution for the Facility, respecting a concentration limit per

country and issuing guarantees in at least 12 member States before the end of 2016.

86 Source of the figure: Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2011) 195 final.

87 Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2011) 195 final. pp. 6-7.

63

By the end of 2010, two operations were signed under the guarantee instrument, with the

Belgian MicroStart and with the Dutch Qredits. MicroStart in specialised in microloans to

non-bankable persons, in particular unemployed people, beneficiaries of welfare payments

and migrants, who want to start a microenterprise. MicroStart also provides business

development services (BDS) to its clients. In contrast to the majority of Belgian MFIs which

mostly give loans of about 15.000 Euros, MicroStart focuses on small loans of 2.000 to 3.000

Euros.88 This way, MicroStart's action extends the reach of microfinance in Belgium, which

up to now has focused on larger projects. MicroStart received from Progress Microfinance a

guarantee of 111.375 Euros for a portfolio of microloans of 2.7 million Euros, at a guarantee

rate of 75% and a cap rate of 5.5%. Also Qredits offers both microloans and business

development services (BDS) to established entrepreneurs or start-ups from disadvantaged

groups, such as the unemployed, people on welfare benefits, young and elderly people or

people with a bad debt registration.89 Qredits received from Progress Microfinance a

guarantee of 1.300.500 Euros for a microloan portfolio of 20.4 million Euros, at a guarantee

rate of 75% and a cap rate of 8.5%. Before Qredits received the guarantee, only 34% of its

portfolio was dedicated to start-ups, because of the high risk of the group, but thanks to the

guarantee, it relaxed its collateral requirements and reach out to more risky clients.90

Funded instruments

Four types of funded instruments are offered to reach a wide range of final beneficiaries:

senior loans, subordinated loans, risk sharing loans and equity participation.

Senior loans provide standard debt financing of loan portfolios. They are offered as long-

term financing in the range of 5-7 years, depending on the intermediaries' debt servicing

capacity. The main advantage of a senior loan is that the microfinance programme set up by

the MFI is totally financed by the EIF. This way, the risk is taken by the EIF, which share the

risk with the MFI (counterparty risk).

Subordinated loans provide 50% of the funds of the MFI's programme. Also in this case

there is counterparty risk by the EIF. This instrument has the advantage of facilitating found

raising activities for the MFI and enhances the image of its programme.

Risk-sharing loans fund 50% of the programme (as is the case of subordinated loans) plus

88 Microstart's first operations are directed to several impoverished areas of Brussels, such as Saint-Gilles, Saint-Josse-ten-Noode and Schaerbeek. Those areas have high density of immigrants and the unemployment rate ranges from 27% to 32%.

89 Qredits information about applicants' over-indebetedness are provided by the Credit Bureau.90 Implementation Report from the Commission to the European Parliament, the Council, the European

Economic and Social Committee and the Committee of the Regions. COM (2011) 195 final.

64

they offer the advantage of partially hedging the credit risk of each microloan lent by the MFI.

The risk taken by th EIF is both counterparty risk and portfolio risk.

With equity participation the EIF invest up to 1/3 of the funds of the programme, acting as

a strategic partner in the MFI's capital. The risk taken by the EIF is 100% up to its investment.

To receive funded instruments, interested intermediaries submit applications directly to

the EIF. The figure below explains how the Progress Microcredit funded instruments window

works.91

Investment

European Commission

Funded instruments

Microcredit provider

Microcredit provider

Final beneficiaries

Microloans

Microfinance vehicle

European Investment Bank Other investors

European Investment

Fund

Umbrella fund: EU Microfinance Platform

Subfund: European Progress Microfinance Fund

Su

Microloans

Direct investment

(Loans, equity, risk-sharing)

Manage- ment

Indirect investment

The funded instruments window started its operation only at the end of 2010, thus only one

contract has been signed, with the Bulgarian Mikrofond. Mikrofond is a non-bank MFI

specialised in relatively small loans, averaging around 3.000 Euros. Mikrofond's main

customers are non-bankable microentrepreneurs, in particular members of Bulgaria’s Roma

community. Thanks to its branches spread all over the country, Mikrofond covers rural areas

where not many banks are present, filling a gap in credit supply. Mikrofond received a senior

91 Source of the figure: Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2011) 195 final.

65

loan of 3 million Euros, thanks to which it could expand its microlending activities, especially

in rural areas, and to target more specifically the Roma community that is at particular risk of

social exclusion, poverty and unemployment.

Overall, MFIs showed greater interest in funded instruments than in guarantees, which

means that the way the EU resources have been divided between the two windows of Progress

Microfinance (75% versus 25%) has been right. Of the range of products offered under the

funded instruments window, senior loans have been the most in demand (63%), as it is the

easiest funded instrument to use for MFIs.

Implementation of the European Progress Microfinance Facility in 2011

In 2012 the Commission published the report on the implementation of Progress Microfinance

during the year 201192 of which I illustrate the main outcomes.

By March 2012, the EIF had signed 18 contracts with 16 microcredit intermediaries, in

particular 8 non-bank MFIs93, 7 banks94 and 1 public institution95. MFIs at all territorial levels

are represented, as some of them cover a whole country, while others operate on a regional or

local scale. Contracts for guarantees have been signed in 6 Member States96, while funded

instruments have been issued in 9.97

Guarantee instrument

Applicants for guarantees are MFIs that either already focus on risky groups98 or want to

extend their microcredit provision to them. In other cases, a guarantee is used to improve

borrowing conditions, for instance the MFI applies lower interest rates or looses collateral

requirements. This is the case of Patria Credit (RO) that in return of a guarantee, has been

required to lower its interest rate by 2.9 percentage points and accept a personal guarantee

from its clients instead of requiring them to put up real collateral. Since in 2010 demand for

the guarantee instrument fell behind expectations, the term of the guarantees was extended

from 3 to 6 years. This generated increased interest in the instrument, and by March 2012, 6

92 Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2012) 391 final.

93 MicroStart (BE), Mikrofond and JOBS MFI (BG), Créasol (FR), Qredits (NL), Inicjatywa Mikro (PL), FAER and Patria Credit (RO).

94 Central Cooperative Bank (CY), Pancretan Cooperative Bank (EL), Siauliu Bankas (LT), FM Bank (PL), Millennium Bank (PT), Banca Transilvania (RO) and Volksbank Slovenia (SI).

95 ICREF (ES).96 BE, EL, NL, PL, PT, RO.97 BG, CY, EL, ES, FR, LT, PL, RO and SI.98 Like MicroStart (BE) that especially targets people with a migrant background.

66

guarantee operations had been launched.99

Funded instruments

In 2011, 13 MFIs opted for senior loans, which provide them additional liquidity that they

could use to on-lend as microcredit. As in the previous year, senior loans have been the most

popular funded instrument so far. “For subordinated loans, MFIs are required to generate a

microloan portfolio of at least twice the amount of the loan received. During the period under

exam, 1 MFI (Volksbank Slovenia) had signed an agreement for a subordinated loan. For risk-

sharing loans, microcredit providers are required to match the amount of the loan received,

thus the leverage effect is at least double the initial amount. Risk-sharing loans are most likely

to be chosen by banks, particularly in the context of down-scaling projects. Up to date, no

risk-sharing loans contracts have been signed. For equity funding, MFIs are required to

generate a microloan portfolio of at least three times the amount of the equity investment

received. So far, zero equity contracts have been signed.”100 The figure below shows the

volume of Progress Microfinance operations as of 31 March 2012.101

Member State

Intermediary Instrument Support to intermediary (EUR)

BE microStart Guarantee 111375BG Mikrofond Senior Loan 3.000.000BG JOBS MFI Senior Loan 6.000.000CY Cooperative Central Bank Senior Loan 8.000.000FR Créasol Senior Loan 1.000.000EL Pancretan Cooperative

BankGuaranteeSenior Loan

803.2508.750.000

LT Siauliu Bankas Senior Loan 5.000.000NL Qredits Guarantee 750.000PL FM Bank Guarantee 1.940.000PL Inicjatywa Mikro Senior Loan 4.000.000PT Millenium Bank Guarantee 309.488RO Patria Credit Guarantee

Senior Loan960.000

8.000.000RO FAER Senior Loan 1.000.000RO Banca Transilvania Senior Loan 7.500.000

SI Volksbank Slovenia Subordinated Loan 8.750.000ES ICREF Senior Loan 8.000.00012 M.S. 16 microcredit providers 18 contracts 73.874.068

99 Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2012) 391 final.

100 Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2012) 391 final, p. 7.

101Source of the figure: Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2012) 391 final.

67

The total amount of funds provided by the EIF is 73.87 million Euros, of which 4.87 million

under the guarantee window and 69 million under the funded instruments window. The

amount provided under the guarantee window is far below the 8 million expected for the end

of 2011. However, the EIF has confirmed that there is a rising demand for guarantees, also

due to the extension of the term of the guarantees from three to six years. Under the funded

instruments window, the 69 million Euros of commitments to microcredit providers exceeds

the expected 44 million.

Up to date, the EIF has not formally rejected any application. However a number of

microcredit providers decided not to apply, after a first contact with the EIF. This happened

for two reasons: either in the case of guarantees, MFIs found that funded instruments better fit

their needs, or, for the funded instruments, the amounts requested by the MFI were too high,

the risk quality insufficient, or the lending practices questionable.102

Impact at micro-borrower level

The target of Progress Microfinance is to provide Euros 500 million to final beneficiaries,

corresponding to 46.000 microloans. A number of provisions create clear incentives for

intermediaries to ensure that the target will be meet. For instance, under a senior loan, in case

the MFI fails to reach the agreed volume of microloans, it must repay the loan early.

Similarly, guarantees are provided free of charge, but if the MFI disburses less than 90% of

the agreed volume of microloans, it has to pay a commitment fee. The 18 agreements signed

so far generated a microcredit volume of Euros 26.8 million103, which is 15,72% of the

expected amount, corresponding to 2.933 microloans104, that is the 17.8% of the volume

expected. According to the EIF, these data are in line with the typical non-linear process of the

build-up of microcredit portfolios, characterised by a slow start followed by a strong rise. This

is due to the fact that after the agreement is signed, the MFI must prepare to begin

microlending activities, especially when it uses a new instrument. For instance, the MFI might

need some time to find a bank to cooperate with.105

Social impact of Progress Microfinance

The EIF reports to the Commission on the social and employment impact of Progress

102Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2012) 391 final.

10317.8 million under the guarantees and 9.1 million under the funded instruments.1041.834 under the guarantees and 1.099 under the funded instruments.105Implementation Report from the Commission to the European Parliament, the Council, the European

Economic and Social Committee and the Committee of the Regions. COM (2012) 391 final.

68

Microfinance, based on the informations provided by MFIs. The effectiveness of the facility

in job creation can be measured by the number of unemployed and inactive people who

started a business with the help of a microloan lent thanks to Progress Microfinance. The

social effect is measured by the capacity of outreaching to disadvantaged groups. This kind of

social impact reporting is not a usual practice. Up to 2011, only 5 MFIs had started lending

under Progress Microfinance and data is only available from two of them, namely MicroStart

and Mikrofond. Given the small sample size, data on the employment and social impact

cannot be considered representative and it is too early to draw conclusions about the social

and employment impact of Progress Microfinance. However, data provided by MicroStart and

Mikrofond suggest that Progress Microfinance helps create jobs and serves disadvantaged

groups.106

Implementation of the European Progress Microfinance Facility in 2012

Following we illustrate the main findings of the Commission's report on the implementation

of Progress Microfinance in 2012.107

By March 2013, 26 MFIs in 15 Member States participated to Progress Microfinance

Facility, using one or both of the Facility’s windows. In particular, there was 1 public

institution108, 11 non-bank MFIs109 and 14 bank MFIs.110 Since the previous Implementation

Report, 11 new MFIs have signed contracts under Progress Microfinance, 6 of which are from

countries not previously covered by the Facility, namely Austria, Ireland and Italy. Overall, 29

contracts have been signed for both guarantees and funded instruments. By the end of 2012,

the guarantee instrument made possible 2.920 microcredits for 2.836 clients worth Euros 28

million, while funded instruments resulted in 3.358 contracts being signed with 3.253 final

beneficiaries worth Euros 21 million. Compared to 2011 data, the volume of guarantee-based

microloans increased by 61% and that of microloans backed by funded instruments by 122%.

The leverage effect is 5.5, in line with the expectations, however, further agreements with

MFIs and full utilisation of disbursed volumes are needed in order to reach Progress

106Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2012) 391 final.

107Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2013) 562 final.

108ICREF (ES)109Adie (FR), Créa-Sol (FR), Crédal Société Coopérative (BE), FAER (RO), Inicjatywa Mikro (PL), JOBS MFI

(BG), Microfinance Ireland (IE)5 , microStart (BE), Mikrofond (BG), Patria Credit (RO), Qredits (NL)110Banca di Credito Cooperativo Mediocrati (IT), Banca di Credito Cooperativo Emilbanca (IT), Banca

Popolare di Milano (IT), Banca Transilvania (RO), Banco Espirito Santo (PT), Cooperative Central Bank (CY), Erste Bank der österreichischen Sparkassen AG (AT), FM Bank (PL), Millennium bcp (PT), Pancretan Cooperative Bank (EL), Sberbank banka (SI)6 , SEFEA (IT), Societe Generale Expressbank (BG), Šiaulių bankas (LT).

69

Microfinance final target by the time the facility closes in 2020.111

Social and employment impact

The 2012 Implementation Report is the first one that provides data on social and employment

impact from a useful number of MFIs. Some MFIs changed their internal procedures and

systems to be able to collect the data required. In total, data on 4.688 final beneficiaries out of

6.089 have been provided.

Regarding the outreach to young people, even if 84% of people who have received a

microloan are between ages 25 and 54, there is a significant 5,22% of final beneficiaries

younger than 25. This is more than the 4% average rate of self-employment in this age group

reported by the 2011 EU Labour Force Survey (LFS).112

Almost 40% of the entrepreneurs who received a microloan were women, this data

represents an improvement compared the European average, where the share of wonem

entrepreneurs is only 34.4%.113

As low educational background is usually associated with higher risk of unemployment, it

is important to observe that people with only primary education or no education account for

7.28% of all beneficiaries and more than 50% had only secondary education.

One of the main goals of Progress microfinance is to foster job creation via self-

employment and start-ups. Hence, it is important to notice that 31% of final beneficiaries said

they were unemployed or inactive at the time of their loan application and Progress

Microfinance has given them the opportunity of using the loan to start their own business.

Almost 80% of supported enterprises are less than three years old, while 41% were only

established six months or less before the microloan application. These data confirm that

access to finance is a significant obstacle during the start-up phase of a new business, obstacle

that the facility helps removing. Start-up support seems stronger among guarantee covered

and non-bank MFIs. This is in line with the initial assumption of guarantees being used in

cases of riskier clients, complemented by funded instruments, in particular by senior loans,

used to target greater numbers of less risky clients.114

111Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2013) 562 final.

112http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-12-040/EN/KS-SF-12-040-EN.PDF. 113http://ec.europa.eu/enterprise/newsroom/cf/itemdetail.cfm?item_id=6358 =en&title=UnleashingEurope’s-⟨

entrepreneurial-potential-to-bring-back-growth.114Implementation Report from the Commission to the European Parliament, the Council, the European

Economic and Social Committee and the Committee of the Regions. COM (2013) 562 final.

70

Implementation of the European Progress Microfinance Facility in 2013

The following data are from the fourth and last Commission's report on the implementation of

Progress Microfinance in 2012.115

There has been an increase in geographical coverage of the facility, as of the 25 new

contracts signed, 5 were concluded with intermediaries from Member States where Progress

Microfinance support had not been used before, namely Denmark, Slovakia and the United

Kingdom. As a consequence, in 2013 Progress Microfinance support was present in 18

Member States.

Microcredit providers rose from 26 in 2012 to 40 in 2013, of which 18 are non-banks

MFIs (6 more than 2012), 20 are bank MFIs (7 more than the previous year) and 2 are public

institutions (1 more than 2012).

Senior loans were the only funded instrument used in 2013, with 9 new contracts signed.

Some MFIs received both a guarantee and a funded instrument, but the two instruments must

always cover different portfolios. Some intermediaries also to receive the same type of

support multiple times. This can happen in two situations, either the MFI managed to disburse

a sufficient number of microloans to enable it to apply for new support, or the same

instrument covered a different portfolio, that is to say, the MFI used it to provide microloans

to clients with different characteristics.

The 54 contracts signed until the end of 2013 bring the total amount disbursed by Progress

Microfinance to Euros 135 million. For guarantees, for reason similar to the previous year, the

net amount is relatively low, 2.11 million as of the end of March 2014, with two

intermediaries (FM Bank and Qredits) that received almost 90% of it.

At the reporting date, there were 12.690 final recipients, with some of them benefiting

from more than one microloan. More precisely, funded instruments enabled 5.942 clients to

benefit from 6.236 microloans, worth Euros 51.6 million, while thanks to guarantees,

intermediaries were able to offer 7.016 microloans to 6.748 microborrowers, for a total of

Euros 69.3 million. Such numbers represent a strong increase, but there is still a significant

market gap to be filled. Additionally, almost 2.000 potential final beneficiaries have not been

successful in applying for a microloan.

Social and employment impact

Collecting data on the social and employment impact does not impose a significant burden on

115Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2014) 639 final.

71

MFIs, but may be difficult for those whose systems still heavily rely on paper. Thus,

complying with the social reporting requirement could have a positive effect on a MFI

organisation.

The social reports provided by MFIs in 2013 confirm that, with financial support,

disadvantaged groups find a way out of unemployment. 60% of the people who benefited

from a microloan were either unemployed or inactive at the time of their application, which is

significantly higher than the 32% reported in 2012. As microborrowers benefiting from

Progress Microfinance are non-bankable persons, it is likely that they would have remained

unemployed without such support.

More than 36% of recorded entrepreneurs are women, slightly less than the 39% reported

in 2012.Regarding at the young, the facility increased its impact with 5.9% of recipients in

this age group, compared to 5.2% of 2012. Information on support given to minority groups

remains limited, given the difficulty in finding data, due to either legal restrictions or the

sensitivity of the issue.

More information is expected to be collected in future thanks to individual interviews in

addition to questionnaires. We do know, however, that some intermediaries have significantly

outreached to Roma communities, for instance Adie in France and Mikrofond in Bulgaria. The

sector distribution remains broadly similar to 2012, with 31% of final recipients coming from

trade and 21% from agriculture.116

116Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2014) 639 final.

72

3. Evaluation of the EU programmes & future developments

3.1 Complementarity and coordination of Progress Microfinance with other EU

programmes

MFIs need several types of instruments to improve their efficiency and to become more

sustainable. They need funding to refinance the portfolios, risk-sharing instruments to reduce

the portfolio risk and non-financial technical assistance to improve institutional capacity.

For this purpose, over the past years, the EU provided different complementary

instruments, of which Progress Microfinance has the specific purpose to fill the microfinance

market gap at portfolio funding level. In particular, Progress Microfinance's risk-sharing

instruments aim to optimise MFIs' portfolios, so that MFIs can reach out to riskier target

groups.

Other EU instruments have been created to address other MFIs' needs and they are

complementary to Progress Microfinance, such as the Competitiveness and Innovation

Programme (CIP), which provides guarantees for microcredit portfolios under its Microcredit

Guarantee Window. Since Progress Microfinance has been created, it has the first call on

microcredit deals. This means that contracts may be concluded under the CIP only when it is

not possible under Progress Microfinance, for instance when no budget is available under

Progress Microfinance, when the MFI operates in a non-EU Member State, or or when

Progress Microfinance has reached its concentration limit per Member State.1

Business development services (BDS) for new entrepreneurs who want to start a business

are crucial for their success, but those services are costly to provide for MFIs. For this reason,

MFIs supported by Progress Microfinance should cooperate with organisations that provide

these services, in particular with those financed by the European Social Fund (ESF).

With the JEREMIE programme, Member States and regions can use part of their Social

Fund appropriations to improve access to finance for SMEs. We have an example of the

complementarity of Progress Microfinance and the use of European Social Fund in Ireland,

where the Going for Growth initiative, designed to provide BDS for women start-ups, is

funded in part through the ESF Human Capital Investment Operational Programme 2007-

2013.2 Successful participants of this initiative may apply for a microloan from Progress

Microfinance Ireland in order to finance their newly born business ideas.3

1 Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2012) 391 final.

2 The European Social Fund in Ireland 2007-2013. Available at http://www.esf.ie/en/hci-overview.aspx3 Implementation Report from the Commission to the European Parliament, the Council, the European

Economic and Social Committee and the Committee of the Regions. COM (2013) 562 final.

73

Provide technical assistance for MFIs is not the objective of Progress Microfinance, but

that of the JASMINE pilot initiative. Between 2009 and 2011, JASMINE successfully

improve MFIs capacity building. The complementarity of JASMINE and Progress

Microfinance is evident by the fact that JASMINE helped prepare MFIs to apply for Progress

Microfinance and several Progress Microfinance intermediaries had at a later stage applied for

JASMINE.

Under JASAMINE the European Code of Good Conduct for Microcredit Provision was

developed, setting out good practice guidelines and common standards for European MFIs.

The Code will be complemented by JASMINE Online, as soon as it will be developed, which

aims to provide information on the European microfinance sector and spread the knowledge

and use of the Code. Moreover, under the EaSI program, the observance of the Code may

become a condition for MFIs to obtain funds.

The new Microfinance and Social Entrepreneurship (MF/SE) program, under

Employment and Social Innovation (EaSI) program, is the follow-up of Progress

Microfinance for the period 2014-2018. Considering JASMINE Technical Assistance's

positive impact and its complementarity with Progress Microfinance, the Commission decided

to include capacity building activities, such as legal advice and tailor-made training, within

the Microfinance and Social Entrepreneurship program.4 I will illustrate the new Microfinance

and Social Entrepreneurship (MF/SE) program in paragraph 3.3.

3.2 Evaluation of EU-backed instruments

The Commission's report 'Study on the imperfections in the area of microfinance and options

to address them through an EU financial instrument'5 addresses the impact of the EU

instruments for microfinance, with a particular focus on Progress Microfinance and explains

the main features of the new centralized program for microfinance under EaSI. The report is

the main source of information for this and the next paragraphs.

The following table displays an overview of the amount funds provided between 2010 and

2012 by Progress Microfinance, the Microfinance Window under SMEG (CIP) and the EPPA

initiative in Central and Eastern Europe, Western Europe, UK and Ireland, Southern Europe

and Scandinavia.

4 Implementation Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. COM (2013) 562 final.

5 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument' evers & jung for European Commission DG Employment, Social Affairs and Inclusion.

74

Amount of EU-backed debt funding used

Amount of EU-backed guarantee funding used

Amount of EU-backed equity funding used

Percentage of estimated total funding

Central and Eastern Europe

15.9 m EUR 7 m EUR - ~4%

Western Europe 1m EUR 16.5 m EUR 5 m EUR ~2%

UK and Ireland - 1.7 m EUR - ~3%

Southern Europe

2.4 m EUR 21.1 m EUR 1.5 m EUR ~3%

Scandinavia - - - 0.00%

Source: M. Unterberg, M. Bending, B. Sarpong (2014), Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument' evers & jung for European Commission DG Employment, Social Affairs and Inclusion.

In Scandinavia, UK and Ireland, EU-backed financial instruments played an insignificant role.

In supporting the microfinance sector. In Western Europe the amount of EU-backed guarantee

funding is markedly higher than the amount of debt finance. This could be due to difficulties

in accessing the EU debt funding instruments, or availability of low-cost debt funding from

domestic public sources, including EU Structural Funds, or from cooperating banks. In

Eastern Europe the use of EU-backed debt funding instruments is higher, since the market is

more mature and MFIs have bigger portfolios. In Southern Europe the use of EU funding is

rising, because of the decrease of bank funding following the financial crisis that hit the

financial markets in these countries very hard. Like in Western Europe, the use of EU

guarantee funding is more widespread than the use of EU debt finance.

Overall, crowding out of private funding has not occurred. On the contrary, EU-backed

funding instruments often acted as a catalyst for private funding, especially in the case of

guarantees and long-term investments to non-bank MFIs.6

Accessibility of the instruments

The accessibility of EU instruments is an issue for non-bank MFIs because of leverage

requirements, regional restrictions and the design of the instruments. Some young or small

MFIs could not sign deals with the EIF because either the leverage they could provide was

considered too low, or the risk of investing in them was considered too high. Leverage

requirements are important to make EU instruments effective, however the requirements

6 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument' evers & jung for European Commission DG Employment, Social Affairs and Inclusion.

75

could be lowered for start-up MFIs.

Instruments that do not call for co-funding but are purely backed by Commission’s funds,

like guarantees, can take higher risks and are therefore more accessible for young non-bank

MFIs which focus on risky target groups.

Some MFIs reported that they cannot access some of the funding offers because they do

not operate in an EU Member State or because of volume limits for EU-backed funding in the

country they operate in. This problem could be overcome by opening up the funding offers to

non-EU countries and by rising the limits for individual deal volumes in countries with many

MFIs.

In the case of national/regional Structural Fund based programmes, accessibility strongly

depends on the initiative of the national/regional Managing Authorities in implementing

financial instruments for microcredit. Many MFIs do not have access to programmes, in

particular those funding business development services, because they are not seen as a target

group. Thus, MFIs networks need to be more active in addressing this issue at the national

and regional level. An example of successful lobbying to national Managing Authorities is the

German Deutscher Mikrokreditfonds that made Euros 100 million available for risk-sharing

and capacity building for MFIs.7

Future funding perspectives for MFIs

MFIs funding needs are expected to grow across Europe. In Eastern Europe the market is

developing further with established MFI actors reducing their activity, while new actors are

entering the market. In Central and Eastern Europe international private investors are

expected decrease their activities due to the development of the financial sector, stricter

regulation and high losses on microfinance investments. This vacuum will not be filled by

domestic funding either from the banking sector or from the public one, as they are not

developed enough.

In Western and Central European countries non-bank MFIs are maturing and increasing

their ability to absorb higher levels of funding. The availability of international funding will

remain limited due to low profits, since MFIs target more risky groups. Funding from the

private sector at national or regional level is expected to decline, due to budget restrictions

and high deficits. However, private domestic funding may increase, as social investors and

banks' corporate social responsibility programmes are looking for investment opportunities

7 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion.

76

which combine social impact with a moderate financial return. New financial forms, such as

crowd funding and peer-to-peer might increase the funding volume for the microfinance

sector, but to a very limited extent.

Overall, both MFIs and investors consider EU-backed funding over the next years crucial

for the microfinance sector.8

3.2.1 Financial instruments for debt funding

Senior loans

Senior loans are standard debt finance instrument easy to manage even for non experienced

non-banks MFIs. Senior loans invest in MFIs portfolios and have a relatively low leverage

effect, but this could be enhanced by requiring additional co-funding for each individual deal.

The use of EU resources for senior loans is revolving resulting in ongoing back-flows into the

originating fund.

Social impact of senior loans is low as they only increase the MFIs' on-lending capacity

without directly supporting the outreach to more vulnerable groups. Social impact can be

increased via stricter eligibility criteria and requirements for improved lending conditions.

However, these measures may prevent MFIs from using this instrument.

Under Progress Microfinance there was large demand for senior loans, that indicates a

good fit to market needs. Also in future it is expected a substantial demand for this type of

instrument throughout the EU.9

Subordinated loans

Subordinated loans are a sophisticated financial instrument that can be used either by bank

MFIs or by very mature non-bank MFIs. Subordinated loans' leverage effect is higher than

that of senior loans, but lower than risk-sharing instruments. The use of EU resources is

revolving.

Subordinated loans mainly influence the MFIs' refinancing ability, thus the social impact

of this instrument is difficult to assess. Indeed, MFIs specialised on microlending can use this

instrument to increase their outreach to risky groups, while bank MFIs with a broader range of

lending activities may use it for a general refinancing of portfolios.

8 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion.

9 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion.

77

“The use of subordinated loans under Progress Microfinance was very limited (only one

deal), indicating a missing fit to market needs. This was due to two main causes. First, the

terms to maturity under Progress Microfinance were not long enough.10 Second, in most

member States national regulators are used to fairly straightforward products, while

subordinated loans under Progress Microfinance have a lot of clauses they do not understand

at first. However, in future growing demand of subordinated loans is expected by bank MFI,

since banking regulation is imposing higher capital requirement, and by mature non-bank

MFIs that are planning to transform into banks”.11

3.2.2 Risk-sharing instruments

Risk-sharing loans

Risk-sharing loans are complex financial instruments which both refinance loan capital and

provide risk-sharing. Due to their complexity, they target only bank MFIs.

The instrument has a higher leverage effect than senior loans as MFIs need to co-fund up

to 50% of the target portfolio. The use of EU resources is revolving but some funds are lost,

due to the risk-sharing element.

The social impact of risk-sharing loans is higher than that of senior loans, as the risk-

sharing element allows MFIs to reach out to riskier groups.

Under Progress Microfinance only one deal for risk-sharing loans has been signed and the

future demand is expected to be low, as banks can use other funding and risk-sharing

instruments to engage in microlending activities. Thus risk-sharing do not meet the

microfinance market needs for funding.12

Guarantees

Direct guarantees are a sophisticated financial instrument for risk-sharing that can be used by

bank MFIs as well as by non-bank MFIs, if the central mechanisms, in particular the cap

amounts, are sufficiently explained. Counter guarantees are just for guarantee institutions.

Guarantee instruments have the highest leverage effect of all the financial instruments.

10 In the market, subordinated loans are offered with terms to maturity of 10 years and more to function as an equity capital relief instrument. Those terms are much longer than the terms offered under Progress Microfinance.

11 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion. p. 52.

12 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion.

78

The use of EU resources is not revolving as the funds that are used for the first loss are lost if

the defaults of the guaranteed portfolio reach the cap rate.

The social impact of the instrument is high, as it allows MFIs to outreach to risky groups

and to reduce collateral requirements.

The uptake of the guarantee instrument under Progress Microfinance was very good and

more successful than under CIP. The future expected demand for direct guarantees is high, as

MFIs need this kind of instrument to share the risk of their portfolios and/or to attract

additional funders. Overall, guarantees, especially direct guarantees fit well the microfinance

market's funding needs.13

3.2.3 Financial instruments for equity and long-term investments for institutional

capacity

Equity investments

Equity investments, both direct and indirect, provide long term investment in the equity base

of MFIs. Equity investments target either bank MFIs or non-bank MFIs that are able to issue

shares.

The volume of funding needed for each individual deal is higher than for risk-sharing

instruments but lower than for debt funding ones. Equity investments have a high leverage

effect as they are always done as co-investments with other long-term investors. The use of

EU resources is revolving in the long-run but some funds may be lost, in case of bankruptcy

of the MFI.

The social impact of the instrument is difficult to assess because it works at the level of

institution and not of portfolio. The instrument could foster MFIs' social outreach if it is

complemented by technical assistance and if MFIs implement the Code of Good Conduct.

Under Progress Microfinance no equity deal was signed. This was partly due to the lack of

flexibility of the instrument. However, future expected demand for equity investments is high

as both bank and non-bank MFIs are looking for ways to strengthen their equity base to

develop their institutional capacity and attract private funding.14

13 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion.

14 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument' evers & jung for European Commission DG Employment, Social Affairs and Inclusion.

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Repayable grants and soft loans

Repayable grants are grants that the MFI pays back if revenues reach a certain limit. They are

a very simple financial instrument that provides long term investments to non-bank MFIs that

are not able to issue shares. A similar instrument are soft loans with very low interest rates and

long repayment periods.

These instruments have a low leverage effect as the investments are used for capacity

building and co-funding is not involved. Flexibility is very high as these instruments can be

tailor-made for each deal.

Social impact is higher than that of equity instruments as there is a close correlation with

capacity building strategies for higher social outreach.

The future expected demand for repayable grants and soft loans is high as MFIs are

looking for funding to implement their capacity building activities initiated under Jasmine

Technical Assistance and also to be able to implement of the Code of Good Conduct.15

3.2.4 Performance measurement instruments

Measurement to assess performance and social impact of EU-backed instruments must be

conducted at both the MFIs level and the level of final beneficiaries. However, most European

MFIs limit their monitoring systems to financial information about their clients without

including data on the social impact and effects on employment of the microloans provided.

That is to say that, MFIs performance reporting systems are mostly implemented at the level

of portfolios.

In the case of Progress Microfinance representatives of MFIs and of the European

Investment Fund (EIF) said that reporting requirements were so burdensome for some MFIs

that they deterred them from apply.

For the new Microfiance and Social Enterpreneurship facility it is necessary to introduce

performance measurement requirements that on one hand allow standard reporting at MFIs'

portfolios level and on the other hand assure that the relevant data at the level of final

beneficiaries is collected by the MFIs in a way that the Commission can use without

additional work. Hence, MFIs are required to collect data at the final beneficiaries’ level and

make them accessible by request to the EIF, to the European Commission and to contracted

service providers.

Performance indicators at MFIs intermediaries level focus on their financial performance,

15 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion.

80

including data on the number and average volume of loans provided, portfolio at risk and

annual default rate. Performance indicators at the level of final beneficiaries should include

socio-demographic information (age, sex, educational level, ethnicity) and information on

employment status before microloan provision. In case of business microloans, the financed

business should specify sector, size, number of jobs that were created or secured, employees'

share of women, ethnic minorities/migrants, disabled persons.

Social performance indicators need to be consistent with those listed within the European

Code of Good Conduct. This way, MFIs' social performance measurement can be

standardized across the European microfinance sector. Additionally, data could be put into

JASMINE Online, once developed, to be published to microfinance sector's stakeholders.16

3.3 The Microfinance and Social Entrepreneurship (MF/SE) Programme under

EaSI

The EU programme for Employment and Social Innovation (EaSI) is the fourth pillar of the

EU Initiative for Employment and Social Inclusion 2014-2020, together with the European

Social Fund, the Fund for the European Aid for the most Deprived and the European

Globalisation Adjustment Fund.

EaSI started in January 2014 with a budget of about Euros 920 million for the period

2014-2020, managed directly by the European Commission. EaSI objectives are the

employment promotion, improvement of working conditions and social protection and fight

against social exclusion and poverty. In pursuing these objectives, EaSI focuses particularly

on vulnerable groups.17 EaSI brings together and extends the coverage of three existing

programmes: Progress (Programme for Employment and Social Solidarity), Eures (European

Employment Services) and the European Progress Microfinance Facility. To these three axes

will be allocated respectively 61%, 18% and 21% of the EaSi budget.18

The European Progress Microfinance Facility will continue, with some changes, with the

name of Microfinance and Social Entrepreneurship (MF/SE). The new centrally managed EU

facility should provide both the financial instruments of Progress Microfinance and some

services of JASMINE. The total budget for the Microfinance and Social Entrepreneurship

(MF/SE) is around Euros 193 million for the period 2014-2020. Of the total budget, Euros

16 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion.

17 European Commission website, available at http://ec.europa.eu/social/main.jsp?catId=108118 European Commission's Employment, Social Affairs& Inclusion DG website

http://ec.europa.eu/social/main.jsp?catId=1081&langId=en

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96.5 million would be dedicated to support social entrepreneurship, 87,5 million to promote

access to microfinance and almost 9 million to institutional capacity building.19

The Microfinance and Social Entrepreneurship program represents an attempt to create a

consistent centrally managed EU instrument for microfinance support, following on from the

criticisms that the EU microfinance support has been divided among several, even if

complementary, programmes. At the end of 2016, the remaining funds of Progress

Microfinance, estimated to be nearly Euros 70 million, will be paid back to the Commission,

which decided, together with the Parliament, to use those funds for the new facility.20

MF/SE is available for intermediaries that operate in the EU member states, while

intermediaries that operate in EFTA and candidate countries may access it on the basis of the

respective agreements on participation in Union programmes.

The facility should be based on the experience of Progress Microfinance, but the

efficiency of the individual financial instruments needs to be improved. They need to be more

flexible to fit different needs of different types of European MFIs and at different stages of

development. It must be taken into account that the funding needs of the European

microfinance sector are changing due to a maturing of MFIs in Western Europe and a change

in the funding framework for MFIs in Eastern Europe. Demand for debt finance will increase

on a general level, especially from the bigger Eastern European MFIs. Also demand for risk-

sharing instruments will continue to be high, especially from greenfield non-bank MFIs.21

Funding demand from the microfinance sector surpasses the budget available at EU level.

Thus, EU-backed funding aims to attract additional funding from public and private sources

into the sector. In particular, via integration with funding instruments based on the EU

Structural Funds at the national or regional. Additionally, with the CIP Microfinance Window

closed under COSME and the future of JASMINE still unclear, EU backed support to

microfinance sector must integrate different support activities for microfinance by DG

Employment, DG Regio and DG Enterprise.22

Access to MF/SE funding should be conditional on the adherence to institutional social

19 European Commission DG Employment Social Affairs & Inclusion website, available at http://ec.europa.eu/social/main.jsp?catId=1084&langId=en

20 European Parliament and Council, (2013), Regulation of 11 December 2013 on a European Union Programme for Employment and Social Innovation ("EaSI") and amending Decision No 283/2010/EU establishing a European Progress Microfinance Facility for employment and social inclusion. Regulation (EU) No 1296/2013.

21 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion.

22 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion.

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performance standards listed in the Code of Good Conduct to safeguard the highest possible

impact on the final beneficiaries. It is crucial that the provision of funding at EU level respects

the principle of additionality, that means that EU funding should not replace existing funding

or distort competition in the internal market. On the opposite, they should create a leverage

effect.

As we said, MF/SE facility provides two integrated elements: a financial facility, based on

the experience of Progress Microfinance, and a technical assistance scheme for sector support,

based on the experience of JASMINE.23

Financial facility

The facility is organised in three pillars with separate budgets. The first pillar offers debt

finance instruments, the second offers risk-sharing instruments and the third equity

instruments. Budget allocation to these pillars should fit the needs of the microfinance sector

and have a focus on the creation of leverage effect. To safeguard an even geographical

distribution there are country quotas, which ideally should be based on the current market gap

within the Member States. Greenfield non-bank MFIs should be allowed to combine equity

investments with debt or risk-sharing instruments.

Debt instruments include senior loans and subordinated loans, with a revolving nature,

managed by a managing institution. Risk-sharing instruments to support loan portfolios

include direct and counter guarantees. Co-funding at deal level is an option, if MFIs attract

additional debt finance on the basis of the reduced risk exposure of their portfolios. Because

of the non-revolving usage of the funds, strict country quotas need to be in place to ensure EU

wide coverage. Equity and equity-like instruments include both direct and indirect equity

investments and repayable grants for non-bank MFIs. Instruments in this pillar need to be

integrated closely with the Technical Assistance scheme of the programme to prepare MFIs to

receive the equity investment. Additionally, repayable grants and equity investments should

provide funding to adjust MFIs' organisational capacity to the standards of the Code of Good

Conduct.24

23 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion.

24 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion.

83

Technical Assistance (TA) scheme

The TA-Platform is based on the JASMINE experience. Its main goals are:

• improve standards of transparency, rating and performance measurement in the

microfinance sector, for instance through further development and implementation of

the Code of Good Conduct, JASMINE Online and the JASMINE HelpDesk

• promote studies on the European microfinance sector and widespread best practice

exchange on successful funding models of European MFIs.

The TA-Platform, similarly to JASMINE HelpDesk, should be managed by contracted service

providers. To have continuity in the provision of the service, it seems advisable that those

service providers are the European Microfinance Networks (EMN) and the Microfinance

Centre (MFC).

It is fundamental that the TA-Platform is integrated closely with the ongoing work of DG

Regio in the framework of JASMINE and with national and regional initiatives that use EU

Structural Funds, as JASMINE Business Development Services will most probably be

included within the new TA scheme.25

25 Unterberg M., Bending M., Sarpong B., (2014), 'Study on the imperfections in the area of microfinance and options to address them through an EU financial instrument', Evers & Jung for European Commission DG Employment, Social Affairs and Inclusion.

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4. The MFIs' point of view. Interview to Mr. Jorge Ramirez

Puerto, General Manager of the European Microfinance Network

(EMN).

In the previous chapters we analysed the role of microfinance in Europe from the EU

institutions' point of view, and in particular by that of the Commission and the European

Investment Fund (EIF). To have a complete and coherent understanding of the European

sector, it is necessary to take into consideration the point of view of the MFIs themselves. For

this reason, the 27th of February, I conducted an interview to Mr. Jorge Ramirez Puerto, the

General Manager of European Microfinance Network (EMN).

The European Microfinance Network (EMN) is the most important European network for

microfinance. It has more than 10 years of experience in promoting microfinance and

supporting microentreprises and self-employment against social and financial exclusion. The

EMN has over 80 members, across the European countries, including bank and non-bank

MFIs, cooperatives as well as other networks. As we saw chapter 1, the EMN bi-annual

surveys on the European microfinance market are recognized by the EU institutions as the

most reliable and complete source of data. Additionally, the EMN played a crucial role in

cooperating with the Commission and the EIF in setting up and implement some the EU

programmes for microfinance, in particular, the EMN delivered the workshops of JASMINE

Business Development Services, managed the JASMINE HelpDesk and co-operated in the

drafting of the Code of Good Conduct for Microcredit Provision.

Mr. Jorge Ramirez Puerto is the EMN’s General Manager since 2012. He has a BA in

Economics and Business Administration and a MA in European Studies. Mr. Ramirez worked

in several European countries for different public and private organizations and has developed

a long experience in the management of internationally funded projects addressing economic

development policies, such as foreign trade, EU integration, entrepreneurship, innovation,

R&D, low carbon economy and SME financing.1

Why is it so difficult to get information about microfinance's outreach to final beneficiaries?

Why MFI’s do not collect data or have difficulty in collecting it?

One of the main problems of the European microfinance sector is that we do not know how

1 European Microfinance Network (EMN) website, available at http://www.european-microfinance.org/index.php

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good we are. We assume that we are good, but MFIs are not spending money or time on

collecting data about the impact of their activities. And that is a big problem because at the

end of the day we do not attract investors because we give them an economic return, since we

will never be profitable, but because we give a “social return”. But to say that we need to

spend time and money collecting data on the social impact.

Does not the default rate provide a sufficient measure on “how good” MFIs are?

The default rate is a measurement of the part of the portfolio at the risk, in particular

microfinance sector is using the PAR 60. Looking at the data in Europe on PAR 60, the

microfinance sector is better than the mainstream financial sector. In terms of risk, as we are

the last opportunity for many people, we are even better than the mainstream financial sector.

But in terms of impact, we don’t know exactly. I mean, every time we give a microloan we do

not know how well we change our clients' lives. Are we actually generating more employment

when we give microcredit for entrepreneurship? If we do, how much? Recently the ILO, the

International Labour Organization, did a study in France and one of its conclusions was that

every company that was supported by the microfinance sector in France, or every new

company that is going to be set-up, generates or maintains on average 2.6 jobs during 3 years.

This is the kind of study that we need in the sector, but this is only happening in France

because the French government put half a million Euros to do this study. But MFIs are not

going to do it, as it requires too much time and it is too expensive. However, the European

Investment Bank decided to spend 300.000 Euros for the same guys that did the study in

France, which are the guys from the University of Geneva, in Switzerland. The EIB hired

them to do a study at the European level. Then we will see what is European microfinance

sector's impact. I have heard some things about the results of the final EPMF (European

Progress Microfinance Facility)2 impact study, that is meant to be published at the end of

March, and the results are not that big in terms of jobs creation or impact on clients. It seems

that Progress had a smaller impact than the impact assessed in France by the ILO study, which

is a bit disappointing.

What do you think is the reason of this outcome?

It is smaller because 50 of the intermediaries that have been supported by Progress were

financial institutions (big mainstream banks). Financial institutions normally target a kind of

people for whom the impact is not that big. That is one of the main problems with Progress.

2 Parts in brackets are added.

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Progress should be designed to support those MFIs who have no chance to get investment

from the private sector. Progress is public money, so it should be placed where the private

money will never go. So why did Progress spend 50% of its budget on institutions that do not

need that money? Big banks do not need that money. It is small MFIs or big non-bank MFIs

that need that money. We (non-bank MFIs) target different persons. Normally, banks do not

serve the bottom of the economic pyramid. It is MFIs who actually are reaching out to

socially and financially excluded people and then if you invest money and give a microloan

there, the impact is much bigger. So I think that one of the problems of the result of Progress

is that they spent too much money for banks and thus, indirectly, for strands of the population

where the impact is not that big. We lobbied a lot the European Investment Fund, which is

actually executing Progress on behalf of the EIB and DG Employment. We talked a lot with

the EIF about this problem, but the EIF keeps saying that theyare interested in volume. They

want to finance projects that are of million Euros. Projects that give hundreds and thousands

of credits, not projects that provides tens or one hundred credits. Via Progress, they do not

want to support one hundred MFIs, they prefer to finance twenty bigger financial institutions.

Is it because it is easier or less costly for the EIF?

It is much easier and less risky for the EIF to finance a formal financial institution (bank), as it

gives them more reassurance, that is to say that it is less risky for them to invest in it.

However, the EIF is also investing in MFIs because on average the microfinance sector, still

needs some years and a lot of help to build up institutionally and to give enough guarantees

that MFIs can be a wise investment. That is why, the Commission set up JASMINE, to give

some technical assistance and capacity building for MFI’s in order to support them to grow

up, to have better skills and to be able to be more attractive for potential investors, not only

the EIF but also banks and private investors. Overall, the EIF and the Commission use this

excuse, they say: “for us it is wiser to invest in financial institutions that already have some

experience and have bigger scale, they have thousands of clients rather than hundreds of

clients”. The point is that the EIF does fewer and less risky operations, investing in twenty-

five big banks rather than in one hundred, smaller and more riskier MFIs.

Do big mainstream banks tend to finance entrepreneurs who are already their clients?

That is exactly the point. When banks get guarantees from the EIF, how do they use these

guarantees? The EIF, via Progress, guarantees portfolios that fulfil the criteria of the definition

of microfinance at the EU level. But this definition is very wide. Right now, the definition by

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the European Commission of what is microcredit, is a loan under 25.000 Euros given for

entrepreneurship or job creation purposes. Anyone institution can do that—everybody!. That

definition does not mean anything, and actually the point of microfinance is the social aspect.

Microfinance is for social excluded people, thus support should be given to organizations that

have social purpose. A bank will always give kind of loans under 25.000 as a CSR (Corporate

Social Responsibility) or as a marketing exercise, but it will never get to the bottom of the

pyramid because it is too risky.

How can we be sure that EU funds reaches out to disadvantaged groups?

You cannot, since the current definition does not say explicitly that only excluded people

should be the target of Progress. For instance, Progress gave 20 million Euros to a big Spanish

saving bank. For sure the portfolio of this bank fits the criteria of microfinance definition, but

that does not mean that much. Indeed, in that case Progress is financing a line for

entrepreneurship of a saving bank, but that line is not for excluded people. The problem with

Progress is that it does not target more risky institutions and the impact is much lower that the

impact that would be generated by MFIs. Overall, we (MFIs) are happy that there is money

from European programmes, such as JASMINE and Progress, but I am afraid they are not

properly adapt.

Do you think that the use of the Code of Good Conduct could change this situation?

Yes, the Code is going to have a strong influence, since the Commission will only accept to

give Progress to the organizations that are in the process to adopt the European Code of Good

Conduct. That means that the MFIs that want to apply for Progress need to get the

certification. But there is a problem. The project to create the European Code of Good

Conduct started about three years ago. The Commission set up a working group with

approximately 15/20 MFIs from all across Europe to work over a draft that was written by the

University of Salford. The draft of University of Salford proposed a series of clauses, such as

minimum criteria about management and relationship with clients. Then, the MFIs selected by

the Commission expressed their opinion on the clauses and had a strong say in what the Code

was meant to be. But most of those MFIs were medium and big MFIs. When I say medium

and big MFIs, I am talking about 70, 60, or 50 staff members, which for the sector is

relatively big. So the Code is pretty much aligned with the institutional situation of MFIs

which have already big volume and experience. However, on average, European MFIs have

only 5, 6, 7 staff members. For these small MFIs is going to be quite difficult to fulfil the

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criteria of the Code and, as a consequence, it is going to be very tough for small MFIs to

access to Progress in the next budgetary period, since it is going to be required to follow the

Code of Good Conduct. The Code of Good Conduct has a good side, as it sets targets of

minimum criteria for quality that MFIs should try to achieve. We can say that the Code is the

mirror in which the sector should watch itself. It is great that the Code is going to push the

sector to make an effort to change management procedures in order to implement the Code,

and that is going to increase the quality of the sector. The Code is good because it is a mark of

quality for MFIs, and like I said before, one of the problems of the EIF and the Commission is

that they consider too risky to invest in small and new MFIs because they think that they do

not give guarantees for them to invest in, even if it is public money. We (EMN) had a role of

observers during the elaboration of the Code; there were many members of the EMN in

working groups, and in fact we are happy with the product.

Do you think that it is important that some financial help is available for small MFIs to

implement the Code?

Yes. With the new JASMINE, it is foreseen that MFIs which have special difficulties to access

the Code will get some specific technical assistance—not financial support, but technical

assistance.

Overall, it seems to me that Progress Microfinance talks a lot about social inclusion, but it is

not very effective. is it because the intermediaries are not the proper once?

What is not appropriate is that money from the European Commission would be better spent

if they targeted proper microfinance institutions because the sector has much bigger impact

than normal financial institutions. If you want to work on social exclusion, MFIs are

specifically designed for that, while banks are not. They have other purposes, which is to get

more money, basically. That is why we insist about the fact that the new definition of

microfinance should forget about the quantity and stop talking about entrepreneurship only.

The definition should focus on who is providing microfinance, social purpose organizations,

and for what, for targeting socially excluded people.

Would it be advisable to focus more on social inclusion rather than on entrepreneurship?

Exactly. Entrepreneurship is just one way to work for social inclusion. Very often, we use this

“employment and entrepreneurship argument” to lobby, because very often when you talk to

politicians and public administrations about stuff on employment and entrepreneurship,

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everybody pays attention. If you talk about social exclusion, nobody cares. Entrepreneurship

and employment are only one of the tools to fight against social exclusion. Social exclusion is

much bigger than that. So even personal microfinance/consumer microcredit is very important

to avoid social exclusion because loans for punctual needs, such as for a scholarship, or to

refurbish the house or to buy a car, can be as important for social inclusion than a loan to set

up a small company. So it is not only about entrepreneurship or self employment and it is not

about the amount of the loan. The amount, 25.000 Euros, is totally different in Romania than

in the Netherlands. So the thing we want to lobby for is to focus on who is providing

microcredit and for what. If our definition of microcredit is accepted, which if we are

successful could take four or five years because this is quite a slow process, that will exclude

financial institutions from the game. Because they are not social purpose organizations and

they are not targeting the most socially excluded people.

Do you think that the EU institutions want to move on that direction?

The problem is that when Progress and JASMINE were designed, around 2006-2007, the

sector was just born in Europe. There were very few proper MFIs in the sector. At the time, it

was thought, as we needed to build up the sector, so we needed everybody there. It didn't

matter if you were a financial institution, or an insurance company, or whatever. We needed to

try and define a project that was very inclusive, in which everybody could be considered a

microfinance providers, so that everybody could jump in and create an inertia that would

generate then a sector. After 8 years, there is a sector. Now there are plenty of MFIs in

Europe, well in some countries there are more than in others, but you can find MFIs in

Europe, so there is a sector. Now, this sector has some experience, now we are saying that we

(MFIs) are the real actors because we are targeting socially excluded people and we have

social purpose, we are a social purpose organization. We are losing money because nobody

wants to invest in the bottom of the pyramid—even financial institutions which say they do

social or they use the name “micro”, are not doing it. So MFIs say that if there is public

money to help social inclusion, it should go only to MFI’s, and not to financial institutions.

One of my purposes, in the secretariat in Brussels is to do advocacy to try and convince the

Commission that not everybody can use the word “micro” any more. it should be accepted

that microfinance implies a very strong social component and it is not about offering simply

small loans. Of course it’s going to be tough because banks are using this “micro word” very

happily for marketing purposes or for CSR. Corporate Social Responsibility is like a

commitment to try to revert to society the benefit that you get from your clients. Very big

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companies have always a budget for social activities. But from the point of view of the big

companies it is considered a marketing exercise, they use it for advertising, for instance they

say “We invested two million Euros in this NGO and we generated 20 jobs”. There is going to

be a meeting next month with the new Commissioners for employment and one of the points

for discussion is to try and make them see that the definition of microcredit should be

reconsidered. It is something that we started putting on the table six months ago, more or less.

So one of the things I have to do when I give conferences every week is to put it on the table

and make people start discussing about it, because first of all, you have to create the debate.

Once you create the debate, you have a certain inertia, maybe people will start asking question

themselves, and then you go to the public authorities. In this case, you go to the Commission

and you say, “Look, there is a debate, and actually because of this definition, you are having

consequences in the way you are using public money, and this public money is not so well

spent because we think that actually if you use this definition, you are giving the field to

actors that are not actually doing microfinance, from our point of view.” So, it is going to be

long, it is going to be tough, but we have to fight this fight. We started these discussions some

time ago and people are already paying attention to this definition. Last summer I talked to the

director of the ILO study about this issue and he totally agreed with me, and it was nice that

the issue was included in the study.

I would like to have your opinion about the sustainability of microfinanc, as it seems to be a

big issue.

It is indeed. In terms of sustainability, talking about Progress, it provided approximately 100

million Euros for the whole Europe. Actually that is peanuts. It is not that much. Actually we

do too much noise about something that is not that important. I mean, Progress could be

important for smaller MFIs, while medium and big MFIs are way over this figure. Hence, in

terms of sustainability, Progress is not addressing the problem, as the amount provided is not

big enough to help medium and small MFIs to be sustainable. Actually, even though in

Europe we have Progress, everything related to microfinance is still a national level in terms

of regulation. There is no regulation at European level for microfinance and we do not want it

actually.

Why not?

MFIs will never agree on that. In UK, they see microfinance in a total different way than in

France or in Eastern European countries. What we want is to to be able to do microfinance. It

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is not about having the regulation, it is about just to be able to do it. Think about many

countries like Germany or in the Balkans, MFIs cannot operate if they do not do it via bank,

and that complicates a lot of operations. In Spain, there is a proposal of regulation in which

MFIs ask the Government to let them to borrow money, so to get money from investors and to

be able to lend it to clients, which now is not possible in Spain unless you have a banking

license. In other countries, such as Germany, Serbia, Croatia and Portugal, you cannot give

credit if you do not have a banking license. There is also another problem that is very

important for the sector, that is interest cap rates. It is different among European countries, but

let’s say, in the Western Europe, I am talking from Portugal to Germany, normally there are

interest cap rates, because of usury laws. So in most of these countries, there is a maximum

interest rate that you can apply to a loan, which is normally around 9, 10, 11%, depending on

the country. We calculated that in the European microcredit sector, just to cover the costs, the

interest rate should be 25%, because giving microcredits is very expensive. Operationally, it is

much more expensive than normal credit from the mainstream financial sector. Just think that

we are providing also the BDS (business development services), or training and mentoring

services. These services are very expensive, and at the same time there is risk, risk that at the

end you just quantify it in terms of interest. So if you transfer all these costs, it gets to

approximately 25%. this interest rate just covers the cost, MFIs will not even earn money.

Imagine that we are in Belgium, where you can give microcredit to only 10% interest rate.

Who is covering the gap between the 10% and the 25% that is actually costing you to give

this microcredit? The reality is that in Western European countries every time you give

microcredit, you lose money. So who can cover this 15% percent? Basically public

administrations, and that’s why many MFIs in Western continental Europe are constantly

working with public administrations to convince them to dedicate part of their social budget

to MFIs. They use the argument that this would have a much lower costs and a much bigger

impact than any social program that public administrations could implement. That is a change

of mind for many public administrations, as they do not see themselves as lenders, they prefer

just to give grants. This is the situation in Western Continental Europe, but then you go to the

UK, where there is light regulation from the financial regulatory body. Moreover, there is no

interest cap rate. So actually, you can apply the rate that you prefer, since at the end of the day

it is an agreement between the organization and the client. So, you can find MFIs that are

applying microcredits with interests between 25 and 40%. Those MFIs are sustainable.

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Do you think that there is an ethical issue about applying such high interest rates to the

poorest groups of the population?

Indeed there is a big discussion there. There has always been discussion about what is

acceptable, or ethical, regarding interest rates. I agree with both sides to be honest. There are

people who say that microfinance should give credits at affordable interest rates, but what do

you define as affordable? Affordable for who? For the client or for the MFI? Because if you

think about the client, affordable should be market interest rates, which is about 5-6%, which

is the rate at which normally banks give credit, if they give it. That would be affordable for

clients, but what about the MFIs? If MFIs do not have continuous and strong public support,

they would disappear within three years. Ideally, we should be allowed to apply operational

costs to the interest rates and then if we have a benefit at the end of the year, as social purpose

organizations we have to reinvest it in the credit. In the UK you have all the spectrum, you

have shark lenders who will break your legs if you do not pay, you have cash lenders who are

giving a credit for 200% interest rate, you have MFIs with social purpose, which give micro

credits for between 20 and 40% interest rate, you have totally social organizations, which give

credit at rates lower than 10%, but they are losing money and need constant public injection in

the form of capital debt otherwise they will disappear. Bare in mind that one of the things that

makes microcredit very expensive in Western European countries is how to get to the clients.

For microfinance, as for any other sector, in order to be affordable or in order to be able to

reduce costs, it is necessary a big demand of your services. That is one of the reasons why

microfinance flourished in the South (developing countries). In the South, about 50-60 % of

the population is financially excluded. So you find vary easily and in a very cheap way,

clients, thousands and hundreds of thousands of clients. That allows you to gain scale and

reduce your marginal costs. In the South, you do not even need to get out from the MFI

because people are coming to you, as you are the only possibility. On the contrary, in Europe

we have to work constantly with social organizations to get into segments of the population

and to be able to attract clients. Also for BDS (Business development services) scale is

important. For these activities, the bigger is the number of clients, the cheaper it is going to be

marginally, individually for the MFI. For instance it not the same if you do a training for 5

people or for 100, as marginally the cost is much lower if you do it for 100 at once. So,

economies of scale are very difficult in Europe because clients are not that many and they are

spread. Especially in Western European countries, it is very difficult for MFIs to expand on

neighbourhoods, since the branching strategy is very expensive. So how to make these clients

move from one side of the city to where you have the branch and trust you? This kind of

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clients are not going to trust you easily, as they think “How comes that there is an MFI that,

while everyone is rejecting me, is accepting me? Is this a sort of mafia or something weird?”.

So we have to work a lot with social organizations because people trust social organizations,

which can be the bridge. For instance, we work with churches, or migrants' communities. In

Western Europe you do not find a massive share of population which is financially excluded,

so what we have to do is a surgical activity. In Eastern Europe there is a different scenario. It

is more similar to Southern microfinance, as you find big bags of the population that are

financially excluded, for instance in Romania, in Bulgaria, or in Poland. At the same time,

there is a very strong presence of the credit union, which where the only financial institutions

that were able to operate under the communist regimes. They have developed a very strong

social component, and now they are one of the main actors of microcredit in Eastern

European countries. When the communist regime fell apart, there were no actual financial

institutions, so the gap, the percentage of the population that was financially excluded was

massive. So they started to have this figure, that they called non-banking financial institutions,

which did not have a banking license and so couldn't take deposits. They were financial

institutions without the deposit side, they were just lenders. They started to flourish in Eastern

European countries, and many of them have a very strong social component. They generated a

sector very quickly in the 90s because there was this massive need, this gap. So nowadays we

find that MFIs in Eastern European countries have a much bigger scale, and they also have a

regulatory framework that allows them to apply interest rates accordingly to the costs. So it is

a little bit different than in the UK, but in the end the result is the same: they cover the cost

and have surplus, which they can reinvest for more microcredit, if they are non-profit

organizations.

Support for microfinance from the European Union, in terms of volume, in terms of

money, has been maintained, compared to the previous budgetary period, and that is quite a

success, since all the other projects have been reduced in terms of budget. The EU spotted that

there was a gap, there was a need and there were actors that could take on lead, which are the

MFIs. The European Commission should focus on these organizations, which are going to

have bigger impacts because actually they are working with social excluded people, but these

organizations are the smallest and the less sustainable, particularly in Western European

countries. That is why they created the Jasmine, to try to help these small organizations to

have a certain scale or institutional quality, and now they have been further pushing, creating

the European Code of Conduct. But these MFIs are still struggling, so they should be

particularly targeted because they have bigger impact, but at the same time, the Commission

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should not forget the MFIs that have managed to be successful, and now they have a certain

scale, not only because they have public support but because they manage to have a proper

management and more elaborated mechanisms and they protected themselves, via public

grants or via alternative partnerships with banks, or with other financial institutions, or

organizations from the private sector. For these organizations, we asked the Commission to

put within Progress equity instruments. These organizations that have certain scales, need

investors, which means capital or quasi-capital. MFIs that are in a growing stage, or have a

smaller scale, probably need guarantees, not capital, because the EIF is not going to invest

capital in a small MFI working on the more excluded people, as it is too risky. So the point is

that Progress should be defined and executed in a way that suits better the sector. There

should be equity for the MFIs that that have managed to reach a certain scale and have been

successful in their respective countries, but at the same time you also have to keep focused on

smaller MFIs that have more difficulties to increase the portfolio because of institutional

incapacity, or because they are too young, or because they are targeting very risky people.

Are some non-bank MFIs becoming banks as a natural step of their maturing process, or

because they are forced to do it by national regulation to be able to take deposits?

I do not see that in Western European countries, it is only happening in Eastern European

countries, where some MFIs are getting such a big scale that they are like mainstream

financial institutions with tens of thousands of clients. Those MFIs got such a big scale that

they become really big organizations, and some of them bought banking licenses or banks that

were bankrupt, just to get the banking license, and then they became mainstream financial

institutions. It is more an exception rather than a rule. I have not seen in Western European

countries, MFIs becoming banks, as they don’t have such a scale. And I do not see MFIs in

Western European countries to get that scale in a few years.

As regarding regulation, if a country makes a regulation that says that you need a banking

licence if you want to continue the activities that you are doing, the only option for the MFI is

to close down because they will never get to the figures. I mean, for instance in Belgium, if

you want a banking license, you need 60 million Euros balance sheet in capital. This is totally

out of mind for any MFI. It’s too much, they won’t make it. This is the situation in the

majority of Western European countries, so I don’t see MFIs actually reach that level of

business. So if you force the MFI’s to become banks, what will happen is that you just destroy

the sector. While in in Eastern European countries, you can find some MFIs that are really big

and have scale because of the need in the society.

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What we want is that Progress does not target bank financial institutions. It does not

matter if they are from East or West. Progress funding should go to non-banking financial

institutions, which is a broader sector, in which you can include foundations, NGO’s, lenders

or whatever, but not organizations with a banking license. Because these organizations can

finance themselves via deposits, which is the best way to finance a financial institution apart

from the fact that they have such a scale that they can attract all the kind of private investment

for their social, or whatever they call them, projects.

Do you think that MFI’s should be non-profit organizations, if they manage to have a surplus?

Ideally, I would love to see many MFIs to have a surplus. I can say that more than 90% of

MFIs that are operating in Europe, are non-for-profit organization, so if they get to have

surplus one day, they will be happy to reinvest it in the business because they will have to do

it as non-profit organizations, they have to reinvest surplus in more microcredit. I think that is

the key. I mean, banks, if they get a benefit, they just share it with shareholders, which is

everybody, because most of us, one way or the other, are shareholders in big banks; but that is

not social purpose, is it? It’s about another private organization giving money to the owners.

Social purpose needs to be very well controlled by a board of directors which has very clear in

mind that it’s a not-for-profit organization. Of course, you always need to head to

sustainability. The big question is: should you prioritize your own sustainability in order to

provide more microcredit, or should you go like a Taliban just thinking about the clients’

sustainability? If that’s the case, you better have a lot of public funds, otherwise, you will die

in two years. And that is a permanent balance in European microfinance. If you want to target

the bottom of the bottom, and go ahead and forget about sustainability, just thinking of clients,

you will disappear in a couple of years because you are not going to be able to make your

organization sustainable unless you have a lot of public money, which is not the case and it’s

going to be every time less and less the case because there are big constraints on public

budgets.

Could the elimination of cap rates be the solution of the sustainability problem?

Probably cap rates should be relaxed. The problem is that socially it is not going to be very

easily accepted. Particularly in Continental Europe, they are difficulties to accept high interest

rates, even if you explain very clearly where do these interest rates come from. People see a

rate higher than 10% as usury, normally. In many conferences when I am talking to general

public, I always ask this question “do you know how much is the interest rate that your credit

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card applies to you when you get over the limit at the end of the month?”. nobody knows and

when I tell them that it is between 30 and 40% they get very surprised. The interest rate is so

high because when you use a credit card, you are asking for credit—automatic credit—and

that is risky. To give you another example, when you are watching TV in the morning, you

can see lots of commercials of cash lenders, or quick credit. These commercials are in the

morning because the head to retired people in particular. They give a quick loan up to 3.000

Euros, applying between 40 and 60% of interest rate, and that is considered acceptable. So

why would you not accept the microcredit high interest rates? People say “because you are

targeting socially excluded people, so the most vulnerable people and you are applying to

them high interest rates”, and then I answer that it because it is very expensive to lend to these

people. We want to do it but we need to find a balance—we need to find a balance between

trying to protect the clients, but at the same time trying to protect our organizations. Probably

we will never manage to transfer all our costs to the costs of the credit, in order to cover the

operational costs, the 25% that I mentioned before. We will never reach that, we will never be

able to transfer the cost, the real cost to the microcredit; that is why we need help from public

administrations. Of course, on regional, local, national level but also at the European level to

cover this gap. Public administrations should help us for the reason they care the most about,

which is support employment, where we are the most effective instrument.

Actually you do not know if you are the most effective instrument , as you said you don’t know

the social impact of microfinance. The sector still has to prove it.

That’s the point. Exactly. We think we are very nice, but we do not have a mirror to test it.

EMN's conference last year was all about that: “microfinance and unemployment: how good

are we?” (11th MNE Annual Conference in Lisbon, on June 19th and 20th, 2014), We can

only cover the gap if we have alternative collaborations with other financial institutions, such

as banks and public administrations. We need to try and diversify our partnerships.

Traditionally we have always been working with banks, as many banks are actually

refinancing the debt of MFIs. For instance, in the case of France, you have BNP Paribas, that

is refinancing all the debt of ADIE, every year. Also Credit Cooperatif is investing on MFIs,

for instance ADIE and CréA-Sol. The CDC, which is the Caisse des Dépôts et Consignations

(a financial organization created in 1816, and part of the government institutions under the

control of the Parliament) has its own products for personal microfinance, namely France

Active and Initiative France, which are two pseudo public organizations which provide

personal loans. If you think about the relation between ADIE and BNP Paribas, BNP Paribas

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is not doing this because it likes it, but because the government is at its back, pushing and

pushing and asking BNP to refinance ADIE's debt even if it is not going to be profitable for

BNP, as part of its CSR (Corporate Social Responsibility). Every year ADIE is only covering

25% its costs via the interest rates its applies to the clients, so we’re talking about 75% of the

costs of ADIE that needs to be refinanced every year. This is a very typical model from

France in which there is a strong presence of public support either directly via public

administrations, or indirectly via banks that have been pushed by the public authorities. This

model has been transferred to Belgium and to Italy. In the case of Belgium, one of the

shareholders of MicroStart is BNP Paribas Fortis, because BNP Paribas bought Fortis bank

when it collapsed four years ago, so BNP Paribas Fortis is refinancing the debt of MicroStart.

In Italy you have PerMicro, in which the same role was played by Banca Nazionale del

Lavoro, which was bought by BNP Paribas. This model of collaboration between MFIs and

banks was set up by Maria Novak, who is the big guru for microfinance in Europe. She

created ADIE twenty years ago, she created the model in France and then she replicated it in

Belgium and Italy. This model is very institutional, as it depends totally on public

administrations and a bank aligned with the public administrations. In other countries, the

model is different. In Germany, since it is difficult to legally allow MFIs to lend money, they

created the DMI model (Deutsches Mikrofinanz Institut) which is very complex, between

MFIs and the GLS Bank. In this model, MFIs are just like brokers; they look for clients, and

then they tell GLS Bank to which clients microcredit should be given. GLS Bank has the role

to manage a fund that is partially its own money and partially European Social Fund's money,

so German government's money. This model worked very well for three years. Suddenly last

summer, there were some changes in the board of GLS and they decided to quit microfinance

in Europe. They will continue to do microfinance to support the government's projects in the

South. As a consequence, last year, DMI could not give more microcredits, so they have been

negotiating with three other banks in Germany, but they did not reach an agreement. The

German government has opened a call to ask for financial institutions who could take on the

role of GLS, which is basically the role of hosting the fund, putting some of its own money,

and giving effectively the microcredit. The DMI told me that two banks have already applied.

Why do banks participate in that model that is costly for them?

I think it is social responsibility, I think it is part of the social commitment. Also, probably

these banks can advertise the thing they are participating in as a project which is generating

one or two thousand of jobs. You should also consider that the entity of their loss depends on

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the nature of their collaboration with the DMI. Every time the bank gives a microloan it gets

money from the fund, as a way to somehow guarantee the microcredits it is given. The point

is that overall this operation costs money to banks, so the question is: are banks going to

prioritize microcredit projects for financial inclusion, or are they more focused on other kinds

of social projects? Because in the end, microcredit social inclusion projects are competing

with many other kinds of social projects everywhere. We (microfinance providers) should be

able to show or sell ourselves better. First of all, by knowing how good we are, as we don’t

know it very well, yet.

Maybe you will discover you are not so good.

That would be pretty funny, but it could be. I mean, microcredit in some countries has bad

publicity. There is a very thin line between the social purpose and commercial purpose. The

temptation is always there. Ten years ago, there were big crises in the microfinance sector in

Latin America, in Bangladesh with Grameen Bank, and in Bosnia, in those cases this line

between social and commercial was totally crossed and in the end, bank MFIs became totally

commercial. They generated a lot of over-indebtedness among the clients. That was probably

one of the first negative impacts of microfinance. So the question is: where s the line? Where

s the limit? We have to be careful. Over-indebtedness is a big problem in the South, but not

much in Europe, because the sector does not have such a big scale. Over-indebtedness in

Europe is something that could be very easily avoided with a credit bureau, which means that

in every country you should have a central office in which there is information of every

person that gets a microcredit. But for a sector with such a small scale, it is not easy to have a

credit bureau. Also, you would become like banks. Banks have to share this information, not

only because legally they have to do it, but because it is very valuable information. I mean,

you will probably reject a credit to a potential client if this person has been defaulting for

another bank, so if you have this information you do not give another credit. But that is a

problem because you put this person in a vicious circle. Maybe that person had just temporary

economic problems, but now is in a better situation, but he will always be rejected by the

banking sector. MFIs should target this segment of population, people who are financially

excluded, because MFIs look at other aspects rather than just risk. That is why we should be a

social purpose organization.

Should MFIs have agreements with banks to get information about people who default in

order to target them?

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Yes, indeed part of the collaboration of MFIs with banks is sharing this information. But MFIs

should not only get information, but also give it, since it could be useful for another MFI to

have that kind of information. Imagine that you are an MFI and you give money to a client,

but then he runs out of money or he needs more money to pay your microcredit, and he goes

to another MFI in another city.

Do you think that new technologies and new financial instruments are going to change the

microfinance sector?

New technologies are going to change the sector and we want them to be more relevant for

two reasons: first, they can increase MFIs' outreach capacity and make the relationship with

clients easier; second, they can reduce operational costs. However, regarding at the first point,

you need to consider that some MFIs typical clients have basic educational gaps. So forget

about them using a website platform. Probably in the next generation this will not be a

problem any more. IT (information technology) needs to be used first of all to reduce

operational costs. Some MFIs in Europe like Qredits, in the Netherlands have managed to

have almost 90% of the relationship with the clients via on-line platforms. That means that

activities can be automatized and you can reduce a lot operational costs. The other side of the

coin is that little by little credit is moving upwards on the pyramid of the population,

neglecting the bottom of the pyramid. You cannot build up an entire on line based platform for

this segment of population, as one of the characteristics of microfinance is personalised

approach, which means to target every client individually and to address his special needs,

since we are talking about very particular people who are very difficult to standardize.

Training and accompanying measures often need to be tailor made and the follow up always

needs to be tailor made. We will never be able to do mobile banking as banks do. The last

time I went to the branch of my bank was 4 years ago, since then I have never been there.

Considering the kind of clients of microfinance, it is very difficult to reach that, as you need a

personalised approach. Another thing is the role of the new technology-based platforms like

crowd funding or peer to peer systems. Their role is very interesting. Microfinance in

developing countries is using this kind of platforms, but in Europe the scale of the crowd of

the platform is very small. The only country in which the crowd has some size is the UK.

EMN's next conference in June in Dublin will be totally dedicated to the theme that banks are

traditionally good partners for MFIs and have been very important for the development of

microfinance, but any other alternative is welcomed, included these platforms for crowd

funding, like Kiba or like M-Pesa, which is doing mobile banking in Kenya and just started

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operating in Romania. There is only one experience in Europe of peer-to-peer crowd funding

for microfinance, which is Babyloan in France, but unfortunately it is really struggling. Banks

see the crowd and peer lending sector like a very marginal thing. But it is going to be an

opportunity that MFIs surely will take into consideration.

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Conclusion

In chapter 1 we saw that two categories of actors face particularly big problems in accessing

credit, namely microenterprises and start-ups and disadvantaged persons. Banks do not give

credit to these subjects as they are considered risky clients. The economic crisis aggravated

this problem as banks became even more risk adverse. Consequently, financial exclusion

increased during the crisis, together with poverty and social exclusion.

Microfinance targets those persons who are not served by the mainstream financial

institutions. This way microfinance tackles financial exclusion and consequently poverty and

social exclusion. Furthermore, next to personal microloans, MFIs primarily give microloans

to start a business, hence microfinance tackles also unemployment, which is one of the main

drivers for poverty and social exclusion.

However, MFIs are not able to provide all the requested amount of microcredit in Europe,

that means that the microfinance market has a gap at the level of microcredit provision for

final beneficiaries. This is caused by the fact that MFIs do not have access to stable external

funding, which means that there is also a gap in the microfinance market at the funding level.

In chapter 2 we saw that the European Commission recognised both the important role played

by the microfinance sector and the presence of these gaps in the market. Consequently, the

Commission set up some programmes for support for microfinance. The two most important

programmes are JASMINE, which primarily provided technical assistance for MFIs and

promoted the creation of the Code of Good Conduct, and Progress Microfinance, which was

the first program specialised in providing EU-backed financial instruments for MFIs.

In chapter 3 we analysed the efficiency of the EU-backed financial instruments to

conclude that between the instruments for debt funding, senior loans fit well MFIs needs,

while subordinated loans did not fit the market's needs. Between risk-sharing instruments, risk

sharing loans are not useful as they can be used only by bank MFIs, while guarantees proved

to be very effective. About financial instruments for equity and long-term investments for

institutional capacity, equity instruments proved to be flexible and thus to fit well market

needs, as well as repayable grants and soft loans which complement technical assistance and

are useful instruments especially for small MFIs.

The accessibility to EU-backed instruments is no easy for small non-bank MFIs because

of leverage requirements, regional restrictions and the complexity of some instruments

offered. Additionally, small MFIs will find even more problematic to access the new

Microfinance and Social Entrepreneurship program since the Commission decided that

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compliance with the Code of Good Conduct is a prerequisite for applying. Compliance with

the Code is problematic for small MFIs because the Code is aligned with the institutional

situation of MFIs which have already big volume and experience. However, the Code of Good

Conduct is positive as it sets targets of minimum criteria for quality that MFIs should try to

achieve. The Code pushes MFIs to make an effort to improve their management procedures

and the implementation of the Code is a mark of quality for MFIs. This is fundamental as one

of the main problems for the majority of MFIs is that the European Investment Fund (EIF)

and the Commission consider too risky to invest in small and new MFIs. They consider wiser

to invest in bank MFIs as they already have some experience and have bigger scale. The EIF

prefers to do fewer and less risky operations by investing in few big banks rather than in many

smaller and more riskier MFIs. Progress Microfinance spent 50% of its budget on big banks.

The problem is that banks do not serve the bottom of the economic pyramid. On the contrary,

non-bank MFIs reach out to socially and financially excluded people, hence, if Progress

invests money on them the social impact is much bigger. One of the problems of Progress

Microfinance is that it spent too much money for banks and thus, indirectly, for strands of the

population where the impact is not that big. The EIF, via Progress, guarantees portfolios that

fulfil the criteria of the EU definition of microcredit. that is a loan under 25.000 Euros given

for entrepreneurship or job creation purposes. The definition is meaningless as the point of

microfinance is not the entity of a microloan, but its social purpose. Banks give loans under

25.000 as part of their Corporate Social Responsibility or as a marketing exercise, but they do

not target the bottom of the economic pyramid because it is too risky. Additionally, the EU

definition of microcredit as loan under Euros 25.000 may not fit countries that are well under

the average EU per-capita GDP levels, in particular Eastern European countries. The impact

of Progress Miccrofinance was smaller than expected because 50 of the intermediaries that

have been supported by Progress were big mainstream banks, which target a kind of people

for whom the impact is not that big. As Mr. Ramirez said, in future banks should not get EU

funds for microfinance, which should be allocated for non-bank MFIs only, because they are

social purpose organizations and because they do not have chance to get investment from the

private sector.

However, before increasing the volume of microfinance support it is fundamental to

assess the social impact of the microloans. One of the main problems of the European

microfinance sector is that we do not know exactly it social impact. This is due to the fact that

MFIs are not spending money or time on collecting data about the impact of their activities.

This is a big problem because non-bank MFIs do not attract investors thanks to an economic

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return but because they give a “social return”.

Sustainability is the other main issue for European MFIs. Progress provided

approximately 100 million Euros for the whole Europe, which is not even remotely enough to

tackle the problem. Medium and big MFIs are way over this figure, while that amount of

money could be useful if it was spent for small MFIs only. The sustainability issue is related

to interest caps present in many countries. If you transfer all the costs to give a microloan, the

interest rate gets to approximately 25%. This interest rate just covers the cost, MFIs would not

even earn money. In many countries there are interest caps at around 10%, thus MFIs need to

constantly try and convince public administrations to dedicate part of their social budget to

them. They use the argument that this would have a much lower costs and a much bigger

impact than any social program that public administrations could implement. This is why it is

fundamental that microfinance sector is able to prove its social impact. Another solution could

be to relax the cap rates. However, in Continental Europe there are difficulties to accept high

interest rates as people see a rate higher than 10% as usury. There has always been discussion

about what is acceptable, or ethical, regarding interest rates. Interest rates should be

affordable, but if they are affordable for clients, that means interests at market level around

6%, MFIs would disappear in few years. So, interest rates should be affordable for MFIs as

well. Ideally, MFIs should be allowed to apply operational costs to the interest rates and if

they have a benefit at the end of the year, as social purpose organizations they should reinvest

it in the credit.

To fill the gap in the provision of microcredit in Europe, MFIs need to collaborate with

banks and public administrations, as well as use new instruments such as peer-to-peer and

crowd funding. New technologies could help MFIs to make the relationship with clients easier

and, most importantly, reduce operational costs.

The European microfinance sector is growing and the EU programmes helped creating the

sector over the past years. However, EU financial instruments need to be more flexible and

should target only non-bank MFIs. The EU definition of microcredit should shift from a

quantitative to a qualitative one and from business microloans to microloans for personal

purposes. Overall, I think that microfinance is important because it serves segments of the

population that otherwise would be non served by the main financial sector. Moreover,

microfinance plays an important social role, as targets the most vulnerable persons of the

society and tries to improve their life condition. The main problem of microfinance is the

sustainability issue. Non-bank MFIs need support from the public sector, but to obtain that

support they need to prove better their social impact.

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