Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions A European initiative for the development of micro-credit in support of growth and employment
Date: 2007-11-13
Institutions: European Commission
Subjects: EU initiative, economic growth, employment aid, employment policy, micro-enterprise, microloan

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 13.11.2007 
COM(2007) 708 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE 
EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMITTEE OF THE REGIONS 

A European initiative for the development of micro-credit in support of growth and 
employment 

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE 
EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMITTEE OF THE REGIONS 

A European initiative for the development of micro-credit in support of growth and 
employment 

1. 

WHY AN INITIATIVE IN THIS FIELD? 

While micro-credit takes many forms, and performs different roles, in the Member States and 
regions of the European Union it is often used as a means of encouraging the growth of self-
employment  and  the  formation  and  development  of  micro-enterprises.  In  many  cases  this  is 
linked to efforts to promote the transition from unemployment into self-employment. As such, 
micro-credit can play an important role in the realisation of the Lisbon strategy for growth and 
jobs and the promotion of social inclusion in accordance with the modern emphasis on "flexi-
curity"1 (the combination of flexibility and social security)2.  

While  there  is  an  active  micro-credit  sector  in  many  Member  States  and  regions,  and  a 
number of actions have been taken at Community level to reinforce the growth of the sector, 
there  is  clear  evidence  that  much  more  can  be  done.  In  its  Communication  on  financing 
SME's  of  2006  the  Commission  drew  attention  to  one  of  the  obstacles  in  the  way  of 
developing micro-credit, calling on Member States: 

"to ensure that national legislation facilitates the provision of microfinance (loans less than 
€25 000). Such loans offer an important means to  encourage entrepreneurship through self-
employment  and  micro-enterprises,  in  particular  among  women,  and  minorities.  This 
instrument favours not only competitiveness and entrepreneurship, but also social inclusion"3 

The  present  Communication  proposes  ways  in  which  this  and  other  obstacles  could  be 
eliminated, or their significance reduced. Concretely, it proposes the following: 

First,  it  invites  the  Member  States  to  adapt  as  appropriate  national  institutional,  legal  and 
commercial  frameworks  necessary  to  promote  a  more  favourable  environment  for  the 
development  of  micro-credit.  The  Commission  is  willing  to  help  the  Member  States  on 
matters  of  targeting  and  by  compiling  an  inventory  of  good  regulatory  practices. 

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COM(2007)359 – "Towards common principles of flexi-curity 
Accordingly,  this  document  is  not  concerned  with  matters  of  "financial  inclusion"  or  "microfinance". 
These broader concepts integrate other financial services such as savings, micro-insurance or transfers. 
COM(2006)349  –  29/06/2006  –  p.7  –  "Implementing  the  Community  Lisbon  Programme:  Financing 
SME Growth – Adding European Value 

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Secondly, it proposes the establishment of a new facility with a dedicated staff to provide:  

•  technical  assistance  and  general  support  for  the  consolidation  and  development  of  non-

bank micro-finance institutions (MFIs) in the Member States and regions;  

•  information  and  publicity  regarding  this  initiative  for  Member  States,  regions,  banks  and 
MFIs  in  general.  This  would  include  the  publication  of  brochures,  the  organization  of 
conferences and seminars, exchange visits etc; 

•  technical  manuals,  guides  and  software  designed  to  help  MFIs  adopt  best  practices,  with 
assistance  from  specialized  centres;  draft  guidelines  for  the  creation  and  management  of 
MFIs, etc; 

•  greater  access  to  finance  for  selected  “model  MFIs”  through  the  provision  of  financial 

resources (seed capital) combined with technical assistance. 

Financial support for this facility would come from the existing technical assistance budget of 
the  Structural  Funds  (European  Regional  Development  Fund  -  ERDF)  managed  by  the 
European Commission. In view of the interest expressed by the European Investment Fund in 
this  field,  the  facility  could  be  managed  within  the  Fund  which  is  also  responsible  for  the 
JEREMIE initiative to support access to finance to SMEs. 

2. 

EVIDENCE  OF  AN  EMERGING  GAP  BETWEEN  SUPPLY  AND  DEMAND  FOR  MICRO-
CREDIT IN EUROPE 

In general terms,  micro-credit in Europe addresses two  groups:  “micro-enterprises”, defined 
as  enterprises  employing  less  than  10  people  (which  covers  some  91%  of  all  European 
enterprises)  and  “disadvantaged  persons”  (unemployed  or  inactive  people,  those  receiving 
social  assistance,  immigrants,  etc.)  who  wish  to  go  into  self-employment  but  do  not  have 
access to traditional banking services. Micro-credit is of particular importance for rural areas 
and can play an important role in helping to integrate ethnic minorities, and immigrants both 
economically and socially. An overview of the distribution of the market is given in Annex 2. 

Over recent decades, the EU economy has evolved from one driven by large-scale industrial 
enterprises  to  a  greater  dependence  on  smaller  businesses,  including  one–person  business, 
mostly  in  services.  This  has  led  to  increased  demand  for  micro-credit.  For  example,  while 
only 16% of the European active population is self-employed, 45% of Europeans would now 
appear to prefer to work for themselves rather than as employees4. In the EU as a whole, the 
potential demand for micro-credit that could be granted by non-banking financial institutions 
for  start-ups  could  be  well  over  half-a-million  new  customers5.  This  is  a  figure  that  could 
grow significantly over the years due to potential demand, the recycling of micro-loans and 
the expected positive impact of the proposed micro-credit initiative.  

Assessing the availability, or supply, of micro-credit in the Member States appears to be quite 
difficult. In terms of the size of individual loans estimates suggest the typical micro-loan in 
Europe is of the order of EUR 7000 – 8000. Surveys conducted by the Microfinance Centre 
for Central and Eastern Europe (MFC) in EU Member States in Central and Eastern Europe 

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Eurobarometer survey 06/2004 
The calculation is based on Eurostat figures and set out in Annex 4  

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and by the European Microfinance Network (EMN) throughout the EU provide information 
on the volume of loans. Banks themselves do not keep specific statistics on micro-credit, and 
what  data  they  have  can  be  ambiguous  in  that  some  loans  are  classified  as  personal  credit, 
while  others  form  part  of  a  larger  category  of  loans  to  SMEs  or,  in  some  countries,  are 
combined  with  loans  to  agriculture.  The  savings  and  credit  cooperatives  that  are  highly 
developed in Central and Eastern Europe, and the credit unions in the United Kingdom and 
Ireland,  essentially  lend  to  individuals  and  do  not  distinguish  the  proportion  of  the  lending 
which is used as micro-credit to enterprises as opposed to, for example, private consumption6.  

On the whole, micro-credit is developing in many of the new Member States, and a similar 
trend can be discerned over recent years in the EU-15. However, much remains to be done to 
exploit its full potential7 especially in view of the potential demand referred to above.  

3. 

TOWARDS A EUROPEAN MICRO-CREDIT INITIATIVE 

A  closer  look  at  the  dynamics  of  micro-credit  supply  and  demand  reveals  that  micro-credit 
operations  need  to  be  seen  in  a  broader  legal  and  support  framework  because  financial, 
employment and social welfare systems are interrelated. Although micro-credit is not a new 
concept,  it  is  important  to  note  that  it  is  diversely  dealt  with  in  the  Member  States  of  the 
Union, depending on the policy framework and the legislation in place. Indeed, the EU and 
Member  States  have  already  taken  measures  to  promote  micro-credit,  but  these  measures 
appear to be quite specific and sometimes only locally applicable. 

Micro-credit uses a financial approach to business development, so that the costs of capital, 
risk  and  operating  expenses  are  appropriately  covered,  ensuring  the  sustainability  of  the 
institutions  and  services  provided.  However,  the  problem  of  suitable  access  to  finance  for 
micro-enterprises and the potential self-employed remains and is recognised as such. Both the 
Council  and  the  European  Commission,  in  partnership  with  the  national  authorities,  have 
initiated a series of actions (see Annex 3). 

These efforts combined with the efforts of certain Member States are unlikely by themselves 
to increase the supply of micro-credit on a sufficient scale and within a reasonable time-frame 
in the absence of deliberate and comprehensive actions devised by the authorities at national 
and  Community  level.  In  spite  of  their  increasing  awareness  of  the  future  potential  of  the 
micro-credit  market,  the  evidence  suggests  that  banks  engage  in  micro-credit  activities, 
(directly or, more often, in partnership with non-bank institutions) where they are encouraged 
to  do  so  by  public  support  mechanisms  (for  example,  the  EU's  PHARE  programme,  the 
European  Investment  Fund  (EIF)  and  the  European  Bank  for  Reconstruction  and 
Development (EBRD). 

There  is  therefore  scope  for  more  action  in  this  field,  building  on  the  work  at  Community 
level  and  on  the  work  of  banks  and  MFIs  and  their  mutual  co-operation.  The  proposed 
initiative has four different strands: 

(1) 

Improving the legal and institutional environment in the Member States; 

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See Annex 5. 
For example, according to the market development analysis done by MFC in Poland at the request of 
EIF, only 15% of micro-enterprises use micro-credit. The total market gap amounts there to about two 
million potential clients. 

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(2) 

(3) 

(4) 

Further changing the climate in favour of entrepreneurship; 

Promoting the spread of best practices, including training; 

Providing additional financial capital for micro-credit institutions. 

Given  that  banks  generally  already  provide  access  to  finance  for  existing  micro-enterprises 
and  traditional  start-ups,  this  document  focuses  on  the  more  difficult  segment,  that  of  what 
might  be  called  the  "non-bankable"  market8.  Note,  however,  that  any  improvement  in  the 
institutional environment and the spread of best practice will benefit both segments. 

3.1. 

Strand  1:  Improving  the  legal  and  institutional  environment  in  the  Member 
States  

The  institutional  framework  in  the  Member  States  appears  to  be  often  ill-suited  to  the 
development  of  micro-credit.  Indeed,  it  is  because  micro-credit  is  usually  not  addressed 
specifically  in  the  national  or  Community  legislation  that  the  statistics  on  micro-credit  are 
underdeveloped. 

Releasing  the  potential  for  the  growth  of  micro-credit  however  does  not  require  a  major 
investment of scarce public resources. On the contrary, one of the attractions of micro-credit 
lies  in  its  self-sustaining  nature  in  the  long  run.  What  is  generally  required  is  a  series  of 
actions  improving  what  can  be  broadly  described  as  the  legal  and  institutional  environment 
for micro-credit. 

The  following  highlights  seven  areas  where  improvement  can  be  achieved  at  national level, 
citing examples of best practice where available. 

Create an environment allowing the development of micro-finance 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  micro-credit.  This 
supposes  that  banks  be  encouraged  to  develop  micro-credit  operations.  This  development 
could  be  achieved  by  a  wider  provision  of  loan  guarantees  and,  as  portfolios  develop,  by 
securitisation.  It  also  supposes  that  credit  unions  or  similar  institutions  involved  in  micro-
credit  operations  keep  or  receive  the  authorization  of  collecting  savings  and  are  entitled  to 
finance income generating activities.  

It is worth mentioning that the Commission, in co-operation with Member States and CEBS, 
operates  a  web-based  system9  referred  to  as  the  Capital  Requirement  Directive  (CRD) 
Transposition Group, where the general public may ask questions in relation to CRD through 
this  facility.  This  medium  would  also  be  available  for  any  clarification  on  the  treatment  of 
micro-credit under the CRD. 

Help  micro-credit  to  become  sustainable  by  relaxing  interest  caps  for  micro-credit 
operations 

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Those who lack collateral, steady employment and a verifiable credit history. 
http://ec.europa.eu/internal_market/bank/regcapital/transposition_en.htm 

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Alongside  measures  specific  to  different  categories  of  intermediaries,  there  are  measures 
common  to  all  micro-credit  institutions  and  programmes.  One  of  these  is  the  relaxing  of 
interest rate caps on loans to enterprises, which block any possibility of covering the costs of 
micro-credit. 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.  Simple  access  to  credit  is  the 
most  important  factor  for  micro-entrepreneurs  in  Europe,  as  elsewhere.  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  costs,  while  evaluating  its  economic  and  social  impact 
regularly,  as  is  done  for  example  in  Ireland,  so  that  the  security  of  borrowers  is  not 
undermined.  In  Germany, the interest rate ceiling  in a  given  sector  cannot exceed  twice the 
average rate or be more than 12 points higher than it.10  

Allow MFIs access to borrower databases and facilitate their evaluation of the risks 

Among  other  general  measures,  access  of  credit  bureau  information  that  records  borrower 
defaults  is  important  for  all  micro-credit  institutions,  including  non-banks.  In  certain 
countries, notably the United Kingdom, community development finance institutions (CDFI) 
are  encouraged  to  supply  data  to  credit  bureaux.  In  other  countries,  notably  France,  these 
records  are  held  by  the  Central  Bank  and  recognised  micro-credit  institutions  cannot  yet 
access them. 

Common  databases  at  EU-level  on  default  and  losses  related  to  micro  finance  (individuals, 
enterprises  and  MFIs),  together  with  common  EU  wide  rating  tools  consistent  with  best 
practice  in  the  sector  can  support  credit  institutions  in  developing  microfinance  operation. 
Such  tools,  used  by  banks  applying  the  most  sophisticated  approach  to  credit  risk,  would 
allow them to fully benefit from the provisions of the Capital Requirements Directive11. These 
data bases could best be developed by market stakeholders. 

It  is  important  to  mention  that  the  required  contribution  of  equity  capital  can  be  limited  by 
loan guarantees and, as portfolios develop or are combined, by securitization. 

Reduce operating costs applying favourable tax schemes 

More  favourable  tax  regimes  are  equally  important  for  an  emerging  industry,  whether  they 
consist  of  tax  exemption  for  MFIs  or  reductions  in  taxes  for  individuals  or  enterprises  that 
invest in their activities or intervene by way of grants. Thus, in the United Kingdom, under 
the  Community  Interest  Tax  Relief,  individuals  or  companies  can  deduct  25%  of  an 
investment in the form of loans, securities or risk capital from taxable income over five years. 
In France, the philanthropy law allows a tax deduction of 66% on gifts up to 20% of taxable 
income for individuals, and 60% of outlays up to 0.5% of turnover for companies.  

Adapt national regulation and supervision to the specificity of micro-finance  

Under EU legislation12, MFIs fall under the scope of EU prudential regulation if they receive 
deposits  and  other  repayable  funds  from  the  public,  in  which  case  they  are  regulated  and 
supervised  accordingly.  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 

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See Annex 8. 
Directives 2006/48/EC and 2006/49/EC 
Article 4 of Directive 2006/48/EC. 

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Directive  does  not  oblige  them  to  be  subject  to  specific  harmonised  capital  requirements. 
Where  Member  States  apply  prudential  rules  to  institutions  which  do  not  take  customer 
deposits,  it  is  important  that  any  further  regulation  and  supervision  put  in  place  must  be 
proportionate to its cost and to the risks that MFIs pose, so that it does not put a brake on the 
supply of micro-credit and the growth of specialist MFIs. 

Ensure single market rules are applied to micro-credit 

In  Europe,  regulatory  harmonisation  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. It is worth examining to what extent and under what conditions similar rights could 
be enjoyed by micro-credit providers which are not credit institutions within the meaning of 
EC law. 

Incorporate micro-credit into regulation and accounting standards 

Experience,  notably  in  Rumania,  shows  that  over-regulation  can  have  a  negative  impact  on 
the development of micro-credit if it limits flexibility of operation or imposes high burden to 
the  lenders.  This  risk  can  be  reduced  by  making  a  prior  inventory  of  best  practices  and  by 
confronting  the  proposed  legislative  framework  with  the  reality  of  national  micro-credit 
operations. A way to increase visibility of micro-credit in the long run would be to categorize 
it as such in banking industry practice and the new accounting standards (IFRS). 

3.2. 

Strand 2: Further changing the climate in favour of entrepreneurship 

Europe’s  shift  towards  knowledge,  services  and  new  technology  under  the  renewed  Lisbon 
Strategy  of  2005  could  be  boosted  by  greater  attention  to  three  factors  in  the  link  between 
business  generation  and  micro-credit  at  three  levels:  adapting  of  the  micro-enterprise 
institutional  framework;  smoothing  the  transition  between  unemployment  and  micro-
enterprise creation; and providing technical support to micro-entrepreneurs. 

Improve the institutional framework for self-employment and micro-enterprises  

Employment policies increasingly need to ensure equal treatment to the self-employed and to 
wage-earners.  Recognising  self-employment  and  micro-enterprises  requires  a  programme  of 
publicity and consciousness-raising in schools, universities and employment agencies, aimed 
at  public  opinion  in  general.  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  micro-enterprises  and  access  to  more  numerous  and  less  expensive 
outlets. A new concept in Germany “Ich AG”, (I Incorporated) disseminates the idea that self-
employment  is  a  viable  and  challenging  career  choice.  In  France,  the  creation  of  micro-
enterprises  has  been  recognised  as  a  way  of  integrating  the  unemployed,  who  benefit  from 
certain exemptions from social charges for the first three years. 

Design solutions to enable unemployed people and welfare recipients to make the transition 
into self-employment 

Smoothing  the  transition  between  unemployment  or  social  welfare  dependence  and  self-
employment is essential. Possible measures include 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.  For  example,  Irish  welfare  recipients  may  continue  to 

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receive social welfare benefits on a decreasing scale over four years. Such a policy requires 
that welfare and employment agency officials be specifically trained on the different aspects 
of  enterprise  creation  and  self-employment  issues  so  as  make  them  competent  to  advise 
potential candidates.  

Increase  chances  of  success  of  new  micro-enterprises  through  training,  mentoring  and 
business development services 

While  micro-credit  can  help  new  entrepreneurs  and  socially  excluded  people  gain  access  to 
finance, there is also evidence that access to finance does not in itself solve all the problems 
on the demand side. The complexity of the micro-enterprises' environment demands a supply 
of  business  development  services  and  requires  on  the  part  of  the  starting-up  entrepreneur 
various competencies that he can often not demonstrate. Training, mentoring or coaching the 
new  entrepreneur  are  essential  to  improve  the  enterprise’s  chances  of  success.  As  business 
development services raise costs, they make micro-enterprises business less attractive to the 
commercial  banking  sector.  Experience  shows  that  such  services  tend  to  rely  on  public  and 
volunteer  support.  Last  but  not  least,  outsourcing  activities  linked  to  loan  transactions 
(business plan preparation, business monitoring, etc.) helps facilitate access to credit. Greater 
use  of  the  resources  made  available  through  the  ERDF,  ESF  (European  Social  Fund)  and 
EARDF  (European  Agricultural  Regional  Development  Fund  to  promote  entrepreneurship, 
innovation and business start-ups could also help fill the gap (see Annex 7).  

Proposal 1 

From  theory  to  practice:  Promoting  micro-credit  and  micro-enterprise  development  at 
national level 

One  way  of  taking  the  above  10  issues  under  Strands  1  and  2  forward  would  be  to  invite 
Member  States  to  undertake  a  programme  of  reform  aimed  at  improving  the  conditions  for 
micro-credit  according  to  national  circumstances  and  priorities.  In  view  of  the  focus  in  the 
Lisbon  strategy  improving  access  to  finance,  in  general,  and  promoting  micro-credit  in 
particular,  Member  States  are  encouraged  within  the  context  of  their  National  Reform 
Programmes under the Lisbon strategy to take on board those actions necessary to promote a 
more  favourable  environment  for  the  development  of  micro-credit  which  fall  within  the 
national institutional, legal and commercial frameworks. The Commission could also help the 
Member States by indicating quantitative targets for loans and by compiling an inventory of 
good regulatory practices. 

3.3. 

Strand 3: Promoting the spread of best practices  

Allowing  banking  and  non-banking  institutions  to  continue  their  activities  and  to  develop 
sustainable  actions  is  a  key  factor  in  proving  the  value  of  micro-credit.  Using  public  aid  to 
take temporary measures that disappear once public support is discontinued is not efficient. It 
is more useful to support the development of banking services and permanent non-bank MFIs, 
with a view to encouraging them to share experience and best practice and to use a common 
language  that  will  help  them  to  work  together  more  effectively.  If  non-bank  organisations 
have  much  to  learn  from  the  banks,  the  opposite  is  also  true,  as  methods  developed  for 
providing  and  recovering  micro-credit  differ  from  traditional  banking  techniques.  This 
exchange of know-how would allow inter alia better integration of quantitative methods such 
as  scoring,  which  are  beginning  to  extend  to  micro-credit  and  trust-generating  contact,  on 
which the micro-project and its reimbursement depends. Dissemination of best practices is an 

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important  factor  in  the  development  of  micro-credit  which  will  continue  to  be  fostered  by 
existing resource centres such as the Microfinance Centre for Central and Eastern Europe, the 
European Microfinance Centre13 and the banks themselves. 

A central body with micro-financial expertise 

The  scope  of  the  work  to  be  carried  out  suggests  that  there  is  a  need  for  oversight  and 
coordination, for example by a central body with financial and social expertise and the ability 
to  monitor  and  coordinate  action  in  support  of  micro-credit  and  to  act  as  a  permanent 
discussion partner for those in the field. The EIF, which is already involved in JEREMIE and 
in  micro-credit  guarantee  schemes  on  behalf  of  the  European  Commission,  has  proven  its 
operational capability in this respect. 

A micro-credit specific label to better involve EU citizens  

It should be possible to increase the available funds for MFIs by taking measures to encourage 
individuals or socially responsible enterprises to invest in them. Green investment funds" are 
increasingly  attracting  private  contributions  and  savings.  In  the  same  way,  a  micro-credit 
specific label could be developed to improve  the  visibility  of investment funds  dedicated to 
micro-credit,  improve  citizen's  confidence  in  microfinance  investment  vehicles  and  steer 
resources towards MFIs with the best social and financial performance. 

The need for a code of conduct for MFIs 

One way to increase confidence in a micro-credit label would be to draft a code of conduct for 
MFIs, which would be an excellent way to spread ethic and customer-friendly best practices 
among MFIs. This code would be best worked out by the different stakeholders. It would be 
based  on  the  social  and  financial  performances  of  MFIs  as  described  in  section  4. 
(Communication and evaluation) and would take their commercial behavior into account. 

It should be mandatory for MFIs to give information about their legal status, supervision and 
compliance with the Code of Conduct in the documents they publish 

3.4. 

Strand 4: Providing additional financial capital for new and non-bank MFIs 

Fostering  the  development  of  micro-credit  in  Europe  requires  a  complex  set  of  initiatives 
calling  on the involvement  of stakeholders, national  and European institutions. Many  of the 
suggestions developed in the previous pages underline the importance that action at EU level 
could  have  in  providing  impulse  to  and  coordinating  actions  in  favour  of  micro-credit.  To 
respond to this challenge, the Commission intends to strengthen its contribution by setting up 
in the framework of EU cohesion policy a specific micro-credit facility providing funding and 
technical assistance to new and non-bank MFIs to enhance the supply of micro-credit. 

This facility would target the most promising non-bank MFIs by means of calls for proposals. 
Ideally, it would combine the provision of technical assistance with funding mobilised from 
various  sources,  such  as  EU  structural  funds,  the  EIB,  the  EUROFI  network,  banks  and 
donors.  It  would  aim  at  helping  MFIs  becoming  self-sustaining  and  it  would  contribute 
improving  the  use  of  micro-credit  in  the  EU  by  conducting  market  analysis,  establishing 

13 

The MFC and EMN are already highly active in the areas of information, training, technical assistance, 
etc. 

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guidelines and promoting training and learning opportunities that incorporate best practice in 
the field. 

A dedicated support structure for micro-credit 

Proposal 2 

In order to set this facility up rapidly and with a cost-effective structure, it is proposed to ask 
the  European  Investment  Fund  (EIF)  to  create  and  host  a  dedicated  unit  within  their 
JEREMIE department. 

Its  activities  would  cover  technical  assistance  and  general  support  for  the  consolidation  and 
development of MFIs e.g. handling information and publicity about the micro-credit initiative 
aimed  at  Member  States,  regions,  banks  and  MFIs  in  general;  publishing  brochures, 
organizing  conferences  seminars  and  exchange  visits,  etc.;  drafting  manuals  and  guides 
designed to help MFIs adopt best practices in setting up and management of MFIs; facilitating 
access to finance for MFIs by mobilising financial resources (seed capital). 

The funding for the staffing of the unit and the technical assistance work to MFIs would be 
covered  through  the  technical  assistance  budget  of  the  Structural  Funds  managed  by  the 
European Commission. 

A possible scheme for the micro-fund is outlined in Annex 9. 

4. 

COMMUNICATION AND EVALUATION 

Communication  is  necessary  to  raise  awareness  of  the  micro-credit  initiative  among  all 
stakeholders, public authorities, bankers, financial intermediaries and end-users. Appropriate 
campaigns need to be designed in order to support the launching of the micro-credit initiative 
and area-specific permanent information needs to be provided and will need to be designed to 
ensure long-term promotion of micro-credit in Europe. 

Evaluation at various levels needs to be given careful consideration to assess the economic 
and social impact of the initiative in the framework of the Lisbon strategy. Objectives have to 
be set early, to make change measurement possible. (See Annex 10). 

5. 

CONCLUSION 

The proposed initiative seeks to develop micro-credit in the European Union in the framework 
of the Lisbon Strategy and represents a further step to the Communication of the Commission 
"Financing SME Growth – Adding European Value"14. It recommends setting up a dedicated 
support  structure  for  micro-credit  with  the  view  to  develop  mentoring  services  which  are 
essential to support micro-borrowers setting up a business, to develop good market practices 
by creating a specific micro-credit label and a guide of good conduct. It also seeks to improve 
the  provision  of  capital  and  proposes  to  set  up  of  a  micro-credit  fund  which  would  help 
finance the loan activities of MFIs, In view of the need for a number of changes at national 
level in terms of the institutional and legal frameworks supporting micro-credit, it is proposed 

14 

COM 2006/349 - p.7 

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10 

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that  these  aspects  could  feature  in  the  annual  Lisbon  governance  cycle.  In  other  words,  by 
their  inclusion  in  the  National  Reform  Programme  Member  States  could  be  encouraged  to 
introduce  reforms  that  are  appropriate  in  their  circumstances  to  encourage  micro-credit. 
Appropriate communication campaigns must be undertaken in order to boost micro-credit in 
Europe and contribute to its development in the longer run, and evaluations carried out. All 
these  elements  are  complementary  and  are  important  for  the  development  of  a  favourable 
environment for the sustainability and expansion of micro-credit in Europe. 

This  initiative  fits  with  the  European  Union's  policy  to  promote  entrepreneurship  and 
economic  initiative,  to  promote  "flexi-curity",  the  social  inclusion  of  disadvantaged  persons 
and to develop human capital and renew trust-based social links, which correspond to the true 
meaning  of  the  word  “credit.”  The  expected  impact  of  implementing  this  initiative  would 
initially be an increase in entrepreneurship and job creation with direct and indirect effects on 
growth.  In  countries  that  have  large  ethnic  minorities,  for  example  in  central  Europe,  or 
receive large numbers of immigrants, micro-credit could play a significant role in integrating 
the relevant groups both economically and socially. 

The proposals included in this initiative would provide a base to start concrete actions aimed 
at developing and implementing micro-credit in the European Union.  

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6. 

ANNEXES 

6.1. 

ANNEX 1: About micro-credit 

Micro-credit  is  the  extension  of  very  small  loans  (micro-loans)  to  entrepreneurs,  to  social 
economy enterprises, to employees who wish to become self-employed, to people working in 
the  informal  economy  and  to  the  unemployed  and  others  living  in  poverty  who  are  not 
considered bankable. It stands at the crossroads between economic and social preoccupations. 
It contributes to economic initiative and entrepreneurship, job creation and self-employment, 
the development of skills and active inclusion for people suffering disadvantages. 

Micro-credit has also proven its cost effectiveness as a public policy tool, costing a fraction of 
equivalent  passive  labour  market  measures:  the  average  cost  of  support  for  micro-credit 
schemes in Europe is reported to be under €5 000 per job created 15.  

Experience  shows  a  survival  rate  of  well  over  60  %  after  two  years  for  businesses  set  up 
thanks  to  micro-credit.  In  purely  economic  terms  public  support  for  micro-credit  is 
worthwhile even if the job created only lasts a year. 

Micro-credit is defined by: 

–  its  target:  micro-entrepreneurs,  the  self-employed,  and  socially  excluded  people  lacking 

access to traditional sources of capital; 

–  its  object:  the  creation  or  expansion  of  income-generating  and  job-creating  activities  or 
micro-enterprises, whose principal need is usually the financing of initial investment or of 
the working capital; 

–  the small amount of the individual loans required which in turn relates to the limited debt-
servicing capacity of the target clientele. Typically, this amount does not exceed EUR 25 
000.  The  average  micro-loan  provided  by  Micro-finance  Institutions  (MFIs)  in  Europe  is 
approximately 7 700 euros;16 

–  a more labour-intensive delivery system for making loans, involving greater knowledge of 
borrower capacity and a close relationship with the borrower, especially during the start-up 
phase of the micro-enterprise, through mentoring and general business support. 

15 

16 

Estimates of between €1 000 and €8 000 - Financial Instruments of the Social Economy in Europe and 
their  impact  on  job  creation,  1997.  Under  €5  000  -  Finance  for  Local  Development  2002: 
http://www.localdeveurope.org 
This  amount  varies  according  to  the  target  population  and  the  GDP  per  inhabitant.  According  to 
Overview of the Micro-credit Sector in Europe (EMN, 2004- 2005), the average micro-loan in the EU-
15 is € 10 240, while in new Member States (EU-12) it is € 3800. 

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12 

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6.2. 

ANNEX 2: The market pyramid 

6.3. 

ANNEX 3: Review of Community initiatives on micro-credit 

–  The new JEREMIE (Joint European Resources for Micro and Medium Enterprises) scheme 
has been set up with the support of the European Investment Fund (EIF) to improve access 
to finance, including micro-credit, in European regional programmes for 2007-2013. It can 
provide  micro-credit,  guarantees  for  both  loans  and  equity  and  venture  capital  finance  to 
SMEs.  In  the  past,  national  and  regional  programmes  supported  by  the  Structural  Funds 
have  provided  capital  and  other  support  in  a  less  systematic  way  for  micro-credit 
operations, for example, in disadvantaged urban areas. 

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13 

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–  Under  the  growth  and  employment  initiative  (1998-2000),17  and  the  multi-annual 
programme  for  the  promotion  of  enterprise  and  entrepreneurship,  in  particular  SMEs 
(2001-2005),18  the  European  Union  provided  partial  guarantees  to  cover  portfolios  of 
micro-loans for borrowers lacking security. These provisions have been extended to cover 
2007-2013 with the Competitiveness and Innovation Framework Programme (CIP).19 This 
micro-credit  guarantee  window  is  managed  by  the  European  Investment  Fund  (EIF)  on 
behalf of the European Commission.  

–  The  Community  Action  Programme  to  Combat  Social  Exclusion  (2002-2006)  supported 
the  European  Microfinance  Network  (EMN)  and  the  Microfinance  Centre  (MFC)  for 
Central  and  Eastern  Europe  and  the  New  Independent  States  with  a  view  to  promoting 
microfinance  as  a  tool  to  fight  social  and  economic  exclusion  and  to  promoting  micro-
entrepreneurship and self-employment. 

–  With  the  same  support,  these  organisations  and  Community  Development  Finance 
Association  (CDFA  –  United  Kingdom)  led  the  trans-national  exchange  project  "From 
exclusion  tot  inclusion  through  micro-finance"  whose  purpose  was  to  reduce  the  lack  of 
information  exchange  between  organizations  working  in  the  area  of  social  and  financial 
exclusion  in  the  East  and  West.  New  Member  States  have  developed  micro-credit  with 
strong  institutions  capable  of  serving  thousands  of  socially  and  financially  excluded 
people,  but  are  now  facing  an  environment  which  has  new  challenges  and  opportunities. 
Western  institutions  have  developed  tools  that  fit  the  EU  environment  (such  as  a  mix  of 
financial and non-financial services to excluded people) but their programmes tend to have 
a relatively smaller client base due to design issues and generally stricter environment. The 
final reports provide new data about characteristics of micro-credit in the EU, based on a 
mapping  exercise,  and  express  recommendations  to  policy  makers,  practitioners  and 
networks. 

–  Under  the  same  programme,  a  study  of  “policy  measures  to  promote  the  use  of  micro-
credit for social inclusion” (2005) showed that micro-credit might play a more important 
role  in  the  active  inclusion  of  vulnerable  groups  of  people  if  policies  in  the  economic, 
employment  and  social  fields  were  retargeted  accordingly.  He  elaboration  of  different 
relevant  policy  dimensions  -  the  micro-entrepreneurial  context,  the  legal  framework, 
funding and support, the “financial bridge” and the “welfare bridge”- has lately allowed the 
creation  of  a  tool  for  a  multidimensional  and  contextualised  benchmarking  of  national 
microfinance environments named "Evaluation Scorecard" (see Annex 6).  

–  Since 2001 the EQUAL initiative has supported 300 development partnerships developing 
and  testing  new  ways  to  promote  “Entrepreneurship  for  All”.  These  partnerships  have 
identified key barriers or obstacles that prevent disadvantaged groups and deprived areas 
from  being  able  to  set  up  viable  businesses,  developed  integrated  support  packages, 

17 

18 

19 

Council Decision (98/347/EC) of 19 May 1998 on measures of financial assistance for innovative and 
job-creating small and medium-sized enterprises (SMEs) - the growth and employment initiative, OJ L 
155, 29.5.1998. 
Council Decision (2000/819/EC) of 20 December 2000 on a multiannual programme for enterprise and 
entrepreneurship, and in particular for small and medium-sized enterprises (SMEs) (2001-2005), OJ L 
333, 29.12.2000, 
Decision  No  1639/2006/EC  of  the  European  Parliament  and  of  the  Council  of  24  October  2006 
establishing  a  Competitiveness  and  Innovation  Framework  Programme  (2007  to  2013),  OJ  L  310, 
9.11.2006. 

EN 

14 

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including  microfinance,  and  demonstrated  the  advantages  and  benefits  of  an  integrated 
approach (focusing on creating an entrepreneurial culture, providing tailor-made business 
support, facilitating access to finance, and supporting business consolidation and growth). 
EQUAL  also  supported  a  platform  and  a  number  of  conferences  for  exchanging  and 
validating good practice in supporting inclusive entrepreneurship. 

–  Article 11 of Regulation 1081/2006/EC on the European Social Fund states that ESF “[…] 
assistance  shall  take  the  form  of  non-reimbursable  individual  or  global  grants, 
reimbursable grants, loan interest rebates, micro-credits, guarantee funds and the purchase 
of goods and services in compliance with public procurement rules.” 

–  Under  the  new  generation  of  rural  development  programmes,  the  European  Agricultural 
Fund  for  Rural  Development  (EAFRD)  may  co-finance  expenditure  in  respect  of  an 
operation  comprising  contributions  to  support  venture  capital  funds,  guarantee  funds  and 
loan funds. EAFRD supports also the creation and development of micro-enterprises20 

–  The  newly  created  European  Globalisation  Adjustment  Fund,  which  can  intervene  to 
mitigate  the  economic  and  social  impacts  of  restructuring  and  relocation,  can  provide 
support for redundant workers to create new businesses or move into self-employment.21 

–  The  Commission  has  organised  working  groups  on  micro-credit  with  representatives  of 
Member  States,  and  a  2004  conference  in  Brussels  in  partnership  with  the  institutional 
networks concerned. In April 2006, a report "The regulation of Micro-credit in Europe"22 
and in November 2003, a report “Micro-credit for small businesses and business creation: 
bridging a market gap.”23 were published 

–  Single market initiatives have included the integration of the financial services market and 
the simplification of administrative constraints on enterprises. In this area, administrative 
and  other  constraints  represent  a  much  bigger  obstacle,  relative  to  their  size,  for  micro-
enterprises  than  for  larger  businesses.  The  "White  Paper  on  financial  services"24  and  the 
"Green  Paper  on  retail  financial  services  in  the  single  market25"  have  provided  useful 
guidance in this respect. 

–  Efforts have been made to simplify competition and state aid rules regarding the granting 

of public aid to micro-enterprises.26 

–  In  2005  and  2006,  the  European  Investment  Fund  (EIF)  supported  microfinance  through 
securitisation  in  two  milestones  transactions  in  the  Western  Balkans  and  South-East 
Europe.  The  EIF  structured  and  co-arranged  the  securitisation  of  loans  to  microfinance 
institutions and acted as a guarantor in the first securitisation of micro-loans in Europe. 

20 

21 

22 
23 
24 
25 
26 

Article 71(5) of Regulation No 1698/2005 of 20 September 2005 on support for rural development by 
the European Agricultural Fund for Rural Development (EAFRD), OJ L 277, 21.10.2005, and Articles 
50 to 52 of Regulation No 1974/2006 (the relevant implementing rules), OJ L 368, 23.12.2006. 
Regulation  (EC)  No  1927/2006/EC  of  the  European  Parliament  and  of  the  Council  of  20  December 
2006 – OJ L 406 on establishing the European Globalisation Adjustment Fund, OJ L 406, 30.12.2006. 
http://ec.europa.eu/enterprise/entrepreneurship/financing/docs/microcredit_regulation_report_2007.pdf 
Commission Working Paper SEC (2004) 1156. 
COM(2005) 629 of 1.12.2005. 
COM(2007) 226 of 30.04.2007. 
Commission  Regulation  No 1998/2006 of 15.12.2006 on  the  application  of  Articles  87  and  88 of  the 
Treaty to de minimis aid, OJ L 379, 28.12.2006. 

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15 

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–  “Preparatory  Action  for  SMEs  in  the  new  financial  environment”,  a  development  of 
PHARE’s SME Finance Facility, is encouraging institution-building by funding technical 
assistance for small, regional banks and credit institutions, especially in the new Member 
States, with a particular focus on micro-loans to SMEs.27  

27 

Commision Decision PE/2004/2632. 

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16 

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6.4. 

ANNEX 4: Estimated demand for micro-credit in the EU 

Micro-loans for Commencing Business Activity 

EIF  has  analysed  access  to  debt  financing  by  SMEs  and  potential  entrepreneurs  in  the 
framework of JEREMIE evaluations. The following figures are based on the last Eurostat data 
available (2004) and examine the provision of micro loans primarily by non-banking financial 
institutions  (loan  funds,  micro  finance  institutions,  credit  unions,  etc.)  to  the  disadvantaged 
group of people ‘at risk of poverty’ subject to the following assumptions: 

At  risk  of  poverty  group  –  group  in  relative  income  poverty,  i.e.  individuals  living  in 
households  where  equivalised  income  is  below  the  threshold  of  60%  of  the  national 
equivalised median income28 

Potential  entrepreneurs  –  group  of  people  of  productive  age  (16-64)  facing  the  risk  of 
poverty;  it  is  assumed  that  on  average  only  45%  of  this  group  would  be  willing  to  set  up 
micro-enterprises (source : Eurobarometer 2005). 

Target group – number of potential entrepreneurs who actually have set up micro businesses; 
it is assumed that this group represents at most 4% of potential entrepreneurs (source : ILO29 
study 2002 on micro-finance in industrialized countries).  

The methodology for estimating demand for micro finance for commencing business activity 
can be shown as follows: 

28 

29 

EN 

and 

See  Eurostat’s  definition  (‘Income  Poverty  and  Social  Exclusion  in  the  EU  25’,  Statistics  in  Focus  – 
Population 
at: 
http://epp.eurostat.ec.europa.eu/portal/page?_pageid=1996,39140985&_dad=portal&schema=PORTAL
&screen=detailref&language=fr&product=sdi_ps&root=sdi_ps/sdi_ps/sdi_ps1000 
ILO : International Labour Office 

Conditions, 

13/2005) 

available 

Social 

data 

and 

17 

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According  to  this  methodology,  the  figures  can  be  calculated  for  the  EUR15  (old)  Member 
States and EU-12 (new) Member States as follows 

EU-15

EU-12

A: 258 m * 16% = 41.2 m

A: 72.2 m * 16%= 11.5 m

B: 41.2 m * 45% = 18.6 m

B: 11.5 m * 45% =   5.19 m

C: 18.6 m * 3% = 557 000 loans C:   5.19 Mio * 3% = 155 900 loans

Potential demand for micro-loans for EU-15: 

557 000 * €10 000 = €5 570 million 

Potential demand for micro-loans for EU-12: 

155 900 * €3 800 = €575 million 

TOTAL EU-27 

712 900 loans - €6 145 million 

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18 

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6.5. 

ANNEX 5: Supply of micro-credit in Europe 

Information about the supply of micro-credit in Europe (27) is very uncertain. The MFC and 
EMN  conducted  two  surveys  in  2005,  but  they  provide  only  a  partial  view  of  the  real 
situation. 

The  MFC  survey  covers  the  ten  countries  of  Central  and  Eastern  Europe  that  are  new 
members  of  the  European  Union.  It  lists  bank  and  non-bank  institutions  providing 
microfinance  and  loans  to  SMEs  in  these  countries.  In  both  cases  available  statistics  cover 
much  more  than  micro-credit  alone.  In  many  countries  no  data  are  available.  Adding  up 
country figures thus provides only a rough figure, but the total number of clients by different 
types of institutions is estimated at 671 000.  

The  EMN  survey  covers  the  pre-2004  European  Union  (15  Member  States),  three  new 
members (Poland, Slovakia and Hungary), Switzerland, and Norway. With a few exceptions, 
it does not cover the banking sector and micro-credit cooperatives. In all, 110 organisations 
responded,  of  which  89  are  de  facto  lenders,  while  the  others  work  in  partnership  with 
Spanish  savings  banks.  Here,  too,  the  figures  are  only  very  approximate.  The  major 
conclusions that can be drawn from the survey are as follows: 

–  At present the three large MFIs created before 1996 dominate the market. Out of a total of 
27  000  loans  disbursed  in  2005,  Adie  (France),  Finnvera  (Finland)  and  Fundusz  Mikro 
(Poland)  account  for  70%.  The  first  of  these,  created  by  volunteers  without  up-front 
capital, works in partnership with banks; the second was set up at the initiative of the state; 
the  third  has  benefited  from  exceptional  funding  (to  the  tune  of  USD  20  million)  from 
USAID. 

–  At the extreme opposite, 65% of MFIs disburse no more than 100 loans a year. 

–  The  majority  of  institutions  are  very  young:  70%  were  set  up  after  2000,  and  17%  from 

2005. 

–  In the EU-15, the sector’s growth rate was on the order of 15% between 2004 and 2005. 

–  The average loan amount is 7 700 euros, with wide variations (€10 240 in the EU-15 and 

€3 800 in the new member countries). 

–  The sector’s average repayment rate is 92%. 

–  Over half the MFIs offer parallel advisory and training services. 

The diversity of MFIs is illustrated in the following table. 

EN 

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Diversity of micro-credit institutions in Europe 

Type of Institution
Special windows of commercial banks

Special windows of savings banks
Savings bank foundations

Public development banks
Private companies
Microfinance banks

Credit unions

Non-bank institutions

Examples
Bulgaria, Romania
supported by the EBRD
La Caixa (Spain)
Un Sol Mon (Spain)
Créasol (France)
Finnvera (Finland)
Fundusz Mikro (Poland)
ProCredit Banks
(Bulgaria and Romania)
United Kingdom, Ireland, Czech
Republic, Romania, etc.
Adie (France),
ANDC (Portugal)
NCN (Norway)

The  ProCredit  Banks,  specialising  in  microfinance,  are  undergoing  rapid  expansion  in 
Bulgaria and Romania, as well as in many countries bordering the EU. At this stage they do 
not appear replicable in Western Europe. 

Credit  unions  represent  a  significant  part  of  the  small-loan  market  in  several  member 
countries, but are not geared primarily to production credit. 

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20 

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6.6. 

ANNEX 6: The segmentation of the micro-credit market  

EN 

21 

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Two  specific  business  models  have  been  developed  in  Europe  to  serve  the  micro-credit 
market: 

–  Direct intervention by financial institutions addresses the bankable clientele segment. It is 
often  facilitated  by  guarantee  funds  (such  as  CONFIDI  in  Italy)  and  official  advisory 
agencies such as chambers of commerce offsetting costs, including risks; 

–  Partnership  between  financial  institutions  and  non-banking  institutions,  serving  as 
intermediaries for a public that is not immediately bankable, but which becomes so, once it 
acquires  a  balance  sheet  and  credit  history.  Since  in  some  countries  (e.g.  Portugal  and 
Italy)  lending  by  non-banks  is  not  allowed,  partnerships  between  banks  and  business 
support  services  leave  the  non-bank  sector  the  task  of  preparing  projects  and  monitoring 
loan  repayment,  while  the  financial  institution  grants  the  loan  and  accounts  for  it  in  its 
balance sheet. In other countries, MFIs are authorized to borrow and on-lend  

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6.7. 

ANNEX 7: Providing mentoring and business support 

Micro-credit has already proved to be an efficient tool to promote entrepreneurship and self-
employment  among people who do not have access to finance or who are furthest from the 
labour market where they can benefit from adequate mentoring. Successful experiences have 
demonstrated that even low-qualified people and people facing social difficulties can recover 
autonomy though self-employment if they are properly accompanied through the development 
of a project. However, setting up and increasing investment in loan funds, which offer micro-
credit, does not suffice and not all business proposals or people are "investment ready" 

This is why the provision of business development services is important. These may include 
training, 
assistance  with  business  plans,  management,  bookkeeping  and  computer 
identification  of  suppliers  and  support  for  marketing,  as  they  are  essential  to  ensure  proper 
operations and help the new entrepreneur build a sustainable activity. Business development 
services may utilise both direct contact and new technologies (Internet, mobile telephone).  

Traditional  micro-enterprises  very  often  receive  advice  from  institutional  networks  such  as 
chambers  of  commerce  and  crafts.  People  in  difficulty  receive  such  support  from  social 
networks and, in some countries, local authorities. Incubators and networks supported by the 
EC,  such  as  European  Information  Centres  and  Innovation  Relay  Centres,  could  play  an 
important part in this activity.  

In implementing their strategies for micro-credit development, Member States could usefully 
mainstream good practice developed in EQUAL-led development partnerships since 2001. As 
the Structural Funds and especially ESF can provide assistance to Member States and support 
national or multi-country initiatives on training, common report standards and the application 
of  new  technologies  to  financial  services,  the  Commission  intends  to  support  the  following 
initiatives through ESF technical assistance in order to intensify the use of micro-credit as a 
tool for active inclusion of all on the labour market: 

•  research  aiming  to  improve  knowledge  of  the  target  groups,  their  social  and  economic 

situation and their financial and business needs; 

•  integrated  tools  to  assess  the  effectiveness  of  support  schemes  and  actions  to  promote 

inclusive entrepreneurship locally or regionally; 

•  validation  of  and  exchange  of  good  practice  in  mentoring  and  business  support  services 
complementing  the  provision  of  micro-credit,  with  the  aim  of  financial  capacity  building 
among  micro-credit  customers  (teaching  people  how  to  manage  income  flows  in  such  a 
way that they can gradually capitalise their activities);  

•  validation and exchange of good practice in capacity building for microfinance institutions, 
including the development of benchmarking and accreditation services in order to provide 
a means to track and guide progress; 

•  research  on  issues  associated  with  the  transition  from  welfare  to  entrepreneurship  with  a 
view to supporting the development of products and methods suited to the specific needs of 
micro-credit customers. 

Other ways of supporting micro-enterprises are the options for creation of new SMEs under 
the  European  Agricultural  Fund  for  Rural  Development  (EAFRD)  as  well  as  the 

EN 

23 

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establishment  of  business  networks  between  them  in  rural  areas.  Training  support  and 
upgrading of the skills are also eligible ways of enhancing the business development of these 
business units. Provision of basic services under the EU rural development policy, including 
ICT, further facilitates their operations and adaptability to the economic situation and to the 
competitive markets in which they operate. 

These initiatives at European level will complement policies on micro-credit at national level 
taking into account that there is a need for an approach that combines delivery of loans and 
mentoring. 

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6.8. 

ANNEX 8: Comments on financial institutions delivering micro-credit 

Banks 

As  regards  banks,  the  new  Capital  Requirements  Directive30  (implemented  on  1  January 
2007),  gives  banks  the  option  of  using  different  methods  to  calculate  their  capital 
requirements,  ranging  from  simple  allocation  into  different  categories  of  loan,  to  the  use  of 
sophisticated quantitative modelling techniques. The new capital rules are more risk-sensitive, 
in that they differentiate between types of loan based on the risk of the underlying borrower.  

-  For  direct  bank  loans  to  micro-enterprises  or  individuals,  either  standard  retail  bank’s 
weighting or internal rating and loss assessments apply.  

Under  the  standard  approach,  the  weighting  of  assets  applicable  to  a  ratio  of  8%  equity  is 
75%, thus yielding an effective ratio of 6%. As noted above, this is a reduction from the 8%, 
which was applied under the old scheme (100% x 8%). 

Under  the  internal  rating  approach,  used  by  larger,  more  sophisticated  banks  ,  as  far  as  the 
bank has not sufficient track records to demonstrate the actual repayment rates, micro-credit 
may  be  considered  as  relatively  riskier  and  on  the  whole  less  attractive,  given  its  higher 
distribution costs, than other types of loans.  

For encouraging banks to use an internal approach tailored to microfinance, it may be relevant 
to build common data bases collecting information at EU-level on default and losses related to 
micro finance (individuals, enterprises ), as well as common rating tools consistent with the 
best  practices  in  the  sector.  This  may  demonstrate  the  actual  micro-finance  cost  of  risk  and 
encourage incomers to enter this market.  

-  For  credit  lines  provided  to  MFIs,  specific  ratings  may  be  relevant.  This  approach  would 
also  be  facilitated  by  establishment  of  a  common  data  base  and  a  common  rating  tool 
mentioned above, consistent with standard criteria, making it possible to measure the results 
of non-bank MFIs from the point of view of risk. 

In both cases the required contribution of equity capital could be limited by loan guarantees 
and, as portfolios develop or are combined, by securitization.  

Credit unions 

- Credit unions are mutual financial cooperatives, one of the core principles of which is that 
funds  deposited  by  members  are  utilised  to  provide  loans  to  members.  The  members  of  a 
credit  union  are  linked  by  a  "common  bond"  of  membership  (geography,  employer, 
vocational, common interest, etc) which creates a strong community link for the cooperative.  

Credit unions provide micro- and social finance services to their members. They play a major 
role in providing micro-credit in many EU regions. However, in some EU Member States in 
which credit unions operate, they face limitations as regards savings mobilisation from their 
members and provision of small loans to legal persons such as small businesses.  

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Directives 2006/48/EC and 2006/49/EC. 

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It  may  be  possible  for  micro-enterprises  (or  the  individuals  running  them)  to  fall  within  a 
particular common bond, but a general permission to lend to any micro-enterprise cannot exist 
as  there  would  then  be  no  difference  between  a  credit  union  and  a  bank.  It  is  the  common 
bond (i.e., a restricted client base on both sides of the balance sheet) that is the main argument 
for credit unions to be exempt from EU banking regulation and supervision.  

Non-bank institutions 

- As regards non-bank institutions, in several European countries these are not authorised to 
lend  or  can  only  lend  their  capital.  The  principal  step  would  thus  be  to  authorise  them  to 
borrow  from  banks  in  order  to  play  the  role  of  intermediary  vis-à-vis  a  clientele  which  the 
banks cannot reach directly. It might also be useful to authorise them to finance their activities 
with  withdraw  able  share  capital  exempt  from  bank  regulation,  as  is  the  case  in  the  United 
Kingdom  for  Community  Development  Finance  Institutions,  or  as  it  is  the  case  with  wage 
savings in France for institutions recognized as “solidarity enterprises.” It must be underlined 
however  that  if  non-bank  institutions  would  finance  their  activities  via  retail  savings,  then 
they  are  taking  deposits  and  would  fall  within  the  definition  of  "credit  institution",  and  be 
regulated / supervised accordingly. 

All MFIs 

-  Finally,  as  regards  all  MFIs,  taking  micro-credit  into  account  by  creating  a  specific 
category for retail credit for banks and non-bank institutions, would allow to develop statistics 
and appropriate rules for micro-credit. Attention should also be paid to lifting within definite 
limits  the  interest  rate  caps  on  credit  to  enterprises,  as  this  would  contribute  to  help  these 
operators to better cover their operating costs and envisage sustainability; 

Similarly,  access  to  records  of  borrower  performance  should  be  considered  as  a  factor  of 
development of micro-credit, as helps reducing risks, and hence, costs. 

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6.9. 

ANNEX 9: A possible scheme for the Micro-fund 

The objective of the European initiative for the development of micro-credit is the promotion 
of micro-credit throughout the EU. One of the measures foreseen in the initiative concerns the 
setting up of a fund (“Fund”) providing seed capital and technical assistance to selected non-
banking  Micro-finance  Institutions  (MFIs),  helping  them  to  become  self-sustainable  and 
creating models for the whole sector. It is proposed that the Fund, would be managed by EIF.  

The Fund’s legal structure will be chosen having regard to various aspects, including taxation. 
More in particular the Fund’s legal form should permit: 

(a) 

(b) 

(c) 

to raise capital in the form  of equity, donations, issuance of bonds (including 
bonds with different repayment priorities), debt financing etc; 

to  invest  directly  in  MFIs  by  means  of  senior  and  subordinated/junior  debt, 
equity  investments,  contributions  to  risk  funds  and  reserves,  start-  up  grants 
etc; 

to  invest  in  operations  providing  indirect  funding  to  MFIs  (both  debt  and 
equity), including the participation in structured operations originated by MFIs 
such as securitisation transactions. 

In  addition,  the  Fund  is  expected  attract  a  variety  of  investors/donors  which  may  have 
different  investment  preferences  e.g.  in  terms  of  risk  profile  of  the  investments,  geographic 
areas of operation of the MFIs, or actions/type of investments to be carried out and entities to 
be financed. This aspect may be solved by the possibility offered by the Luxembourgish law 
of  setting  up  “umbrella  funds”,  i.e.  to  create  several  separate  compartments  under  a  single 
legal entity. 

The Luxembourgish legal framework offers a wide range of legal forms for this type of funds, 
incorporated  companies  (SICAV,  SICAF,  SICAR,  Fonds  d’investissment 
either  as 
specialisés) or non-incorporated companies (Fonds de placement). 

The Fund’s investor base could include: 

(a) 

Donors/sponsors; 

(b) 

Shareholders  and  Investors  (banks-Eurofi,  EIB,  EC,  private  persons, 
foundations, etc);  

(c) 

Investors/donors/sponsors with specific objectives 

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6.10.  ANNEX 10: A multidimensional Evaluation Scoreboard 

Evaluation  could  be  conducted  at  different  levels.  Member  States  could  conduct  an  annual 
evaluation of the progress of micro-credit for the Spring European Council, to be included in 
the Commission’s Spring report. In order to achieve this, the European initiative for Micro-
credit should be incorporated into the National Lisbon Reform Plans. Under the open method 
of coordination,31 progress in meeting individualised, national targets relating to micro-credit 
could  be  evaluated  by  applying  a  scoring  system  based  on  the  different  factors  of  progress 
noted above. An example of such a scoring system is given below. 

For  micro-credit  supported  by  the  European  regional  programmes,  progress  could  also  be 
monitored in the network or in Regions for Economic Change. This activity would take the 
form  of  twinning  between  regions  participating  in  the  JEREMIE  programme,  promoting 
mutual  exchanges  on  best  practice.  While  currently  geared  to  technological  innovation,  the 
Network  of  Regions  for  Economic  Change  could  perfectly  well  open  itself  to  social  and 
financial innovation. 

Evaluation  could  also  include  activities  by  banks  and  investment  funds.  Their  micro-credit 
activities could be explicitly included in the rating agencies’ criteria for socially responsible 
investment. 

Finally, a code of conduct would enable micro-credit institutions financed by JEREMIE to be 
monitored  and  evaluated  on  the  basis  of  international  social  and  financial  performance 
indicators.  They  could  also  be  subject  to  more  precise  rating  by  specialised  agencies. 
Financing  of  MFIs  from  European  funds  would  be  linked  to  their  results,  and  would 
inevitably have an impact on their private financing as well. 

The following graph shows six countries’ scores as given in a micro-credit study carried out 
for the Directorate-General for Employment and Social Affairs in 2004.32 

The  two  networks  (MFC  and  EMN)  are  currently  developing  software  (eScorecard)  that 
should  make  it  possible  to  produce  annual  national  and  European  reports  with  a  view  to 
monitoring the national environments in which micro-credit is developing. Support for such 
an initiative would facilitate evaluation.  

31 

32 

The  OCM  is  based  on  the  common  definition  of  objectives  and  measuring  tools,  comparison  of 
performance among States and exchange of best practice (benchmarking). 
Policy  measures  to  promote  the  use  of  micro-credit  for  social  inclusion  by  FACET  BV,  Evers  Jung, 
New Economics Foundation, supported by MFC and EMN. 

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