REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the application of Directive 2006/48/EC to microcredit
Date: 2012-12-18
Institutions: European Commission
Subjects: administrative formalities, financial institution, job creation, microloan, youth unemployment

EUROPEAN 
COMMISSION 

Brussels, 18.12.2012  
COM(2012) 769 final 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

on the application of Directive 2006/48/EC to microcredit 

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TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

Introduction .................................................................................................................. 3 

The microcredit landscape in the European Union ...................................................... 3 

Microcredit is a concept with various definitions ........................................................ 3 

The wide spectrum of definitions is reflected in the variety of microcredit suppliers. 4 

2.2.1.  Overview of the types of institutions supplying microcredits within the EU .............. 4 

2.2.2.  Banking institutions play a key role in the EU even though microcredit is often only 

a side activity ............................................................................................................... 5 

2.2.3.  Non-banking institutions that primarily grant microcredits are another important 

supplier......................................................................................................................... 6 

2.2.4.  The public sector is one of the most influential actors on the microcredit market ...... 6 

3. 

3.1. 

3.2. 

Prudential supervision of microcredit activities within the EU resulting from the 
application of Directive 2006/48/EC ........................................................................... 7 

A large portion of microcredit providers are exempted from the application of 
prudential requirements laid down in the Directive 2006/48/EC................................. 7 

Several factors tend to mitigate the impact of the prudential requirements laid down 
in Directive 2006/48/EC on microcredit activities although there may be some 
burdensome effects ...................................................................................................... 7 

3.2.1.  The Directive 2006/48/EC does not take account of the specific nature of microcredit7 

3.2.2.  Access to public guarantee schemes enables microcredit providers to significantly 

reduce the level of own funds required to cover the credit risk they are exposed to ... 7 

3.2.3.  Most microcredit can be exempted from the large exposure limit designed to limit 

concentration risk ......................................................................................................... 9 

3.2.4.  The Directive requirements in terms of risk management help the banking 

microlenders to mitigate their risks.............................................................................. 9 

3.2.5.  Directive 2006/48/EC requires banking microcredit providers to comply with 

prudential rules to mitigate liquidity risk ..................................................................... 9 

3.2.6.  Directive 2006/48/EC may involve high administrative burdens which may reduce 

the attractiveness of microcredit as a banking business while strengthening financial 
investor confidence in microcredit providers............................................................. 10 

4. 

Conclusions ................................................................................................................ 10 

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REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

on the application of Directive 2006/48/EC to microcredit 

1. 

INTRODUCTION 

Microcredit  is  generally  recognised  –  by  Member  States,  financial  institutions, 
national supervisory authorities and more widely – as an effective financing channel 
for job creation and social inclusion, which can attenuate the adverse effects of the 
current financial crisis while contributing to entrepreneurship and economic growth 
in  the  EU.  That  is  why  the  development  of  microcredit  has  been  high  on  the 
European Commission agenda for the last few years.  

In  November  2007,  the  European  Commission  published  its  communication  “A 
European  initiative  for  the  development  of  microcredit  in  support  of  growth  and 
employment”  in  order  to  promote  a  more  favourable  environment  for  microcredit 
provision.  In  the  past  few  months,  the  European  Commission  has  been  directly 
engaged with both the microcredit sector and national public authorities  to  identify 
obstacles  microcredit  providers  face  in  deploying  their  services  throughout  the  EU 
and  to  consider  how  these  might  be  overcome  and  whether  there  is  a  need  for 
regulatory action at national or EU level. The review and discussion stage led by the 
European  Commission  has  included  a  conference  organized  jointly  with  the 
European Economic and Social Committee on 2 December 2011.  

The  willingness  to  develop  microcredit  in  the  EU  was  also  shared  by  the  EU  co-
legislators  during  the  negotiation  process  of  the  Directive  2009/111/EC1.  They 
requested  the  European  Commission  to  review  the  application  of  the  Directive 
2006/48/EC2 to microcredit. As laid down in Article 156 of the latter, the European 
Commission  has  been  asked  to  report  the  results  of  this  review  to  the  European 
Parliament and the Council together with any appropriate proposals. 

The next section aims at clarifying what is meant by microcredit with a special focus 
on  the  microlenders,  to  begin  with  a  clear  appreciation  of  the  participants  to  this 
lending  activity  and  the  issues  at  stake.  The  third  section  gives  an  overview  of  the 
prudential supervision of microlenders across the EU and identifies the effects of the 
prudential requirements on microcredit activities resulting from the application of the 
Directive  2006/48/EC.  The  last  part  concludes  whether  or  not  the  EU  banking 
prudential requirements need to be amended. 

1 

2 

Directive  2009/111/EC  of  16  September  2009  amending  Directive  2006/48/EC,  2006/49/EC  and  2007/64/EC  as 
regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements 
and crisis management.  
Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and 
pursuit of the business of credit institutions 

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2. 

THE MICROCREDIT LANDSCAPE IN THE EUROPEAN UNION 

2.1.  Microcredit is a concept with various definitions 

There is no single definition of microcredit. The term 'microcredit' is generally used 
to  refer  to  small  loans  provided  to  people  excluded  from  the  traditional  financial 
system  or  lacking  access  to  banks,  with  a  view  to  helping  them  create  or  develop 
businesses.  However,  the  definition  of  microcredit  varies  widely  amongst  Member 
States  and  stakeholders  depending  on  the  social  environment,  economic  situation, 
and policy goals.  

The  demand  for  microcredit  is  sustained  by  a  wide  spectrum  of  borrowers. 
Microcredit  may  be  only  available  to  'micro-entrepreneurs',  self-employed  people 
seeking to finance small businesses. It may also focus only on other groups such as 
socially  excluded  people  trying  to  cope  with  emergencies,  fund  education,  or  even 
acquire basic household assets.  

Microcredits are generally very small, short term and unsecured, with usually more 
frequent  repayments  and  higher  interest  rates  than  conventional  bank  loans. 
However,  beyond  this  general  description,  microcredits  are  granted  under  widely 
varying loan terms and conditions. For instance, the loan repayment term is generally 
less  than  six  months,  but  may  extend  to  ten  years.  As  regards  interest  rates,  an 
important factor determining their level is the existence of usury laws. Where usury 
laws are in place, lenders are not allowed to charge above a stated maximum interest 
rate. In Member States which do not have such restrictions, the interest rates may be 
higher than where there are usury laws. In amounts, microcredit generally refers to 
loans  not  exceeding  EUR 25,0003.  However,  a  lot  of  European  stakeholders  define 
microcredit as loans with either much smaller or much higher amounts.  

The activities carried out by micro lenders may go beyond lending and include other 
financial  services,  such  as  savings  products,  current  accounts,  payment  services, 
transfer  services,  insurance,  leasing,  and  so  forth.  This  wide  range  of  financial 
services  should  however  be  referred  to  as  'microfinance'  and  used  in  a  wider  sense 
than the term 'microcredit'. 

The lack of a consistent and generally used definition of microcredit is an obstacle to 
collecting information and data about this activity, which makes it difficult to track 
the  evolution  of  microcredit  in  the  EU.  Sound  facts  and  figures  on  the  volume  of 
microcredit and related services, particularly for the EU as a whole, are difficult to 
find. Loans with similar characteristics may be classified alternatively as microcredit 
or conventional loans, depending on the context. They can be reported as consumer 
loans,  retail  loans,  corporate  loans  or  loans  to  small  and  medium-sized  enterprises 
(SMEs). 

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The European Commission refers to this amount in the EU microcredit programmes. 

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2.2. 

The  wide  spectrum  of  definitions  is  reflected  in  the  variety  of  microcredit 
suppliers  

2.2.1.  Overview of the types of institutions supplying microcredits within the EU  

The varying definitions are reflected in the variety of legal forms used by microcredit 
suppliers.  Providers  of  microcredit  fall  under  different  categories:  commercial  and 
savings  banks,  cooperatives,  microfinance  institutions,  non-banking  financial 
institutions,  credit  unions,  foundations  and  other  types  of  non-profit  organisation 
such  as  non-governmental  organisations  and  associations.  The  microcredit  sector 
within the EU is also diverse with respect to sizes and business models. In addition to 
classifying  lenders  by  institutional  types,  microlenders  can  be  broken  down  into 
further groups:  

– 

– 

– 

– 

institutions  which  are  required  to  obtain  a  licence  to  carry  out  banking 
activities, versus those required to be registered with some banking supervisory 
authority without being required to obtain a licence or those required to be only 
registered as a legal entity;  

those  which  have  a  not-for-profit  status  versus  those  with  a  profit-making 
purpose; 

private institutions versus public ones; 

lenders which have microlending as their core business versus those for which 
microlending  constitutes  a  relatively  small  proportion  of  their  business 
portfolio. 

Lenders  can  also  be  differentiated  according  to  the  categories  of  their  borrowers: 
non-bank  institutions  often  grant  the  microcredits  provided  to  poor  households 
whereas microcredits to micro-enterprises and small businesses are mainly provided 
by banks. The microlenders also differ in terms of what products and services they 
are lawfully allowed to offer; whether they are subject to prudential supervision; and 
how administrative and business operations are funded.  

This  diversity  is  related  to  the  regulatory  environment  in  each  country  (see  section 
3).  Some  Member  States  in  the  European  Union  have  a  banking  monopoly,  which 
means  that  lending  activities  are  restricted  to  only  banking  entities.  Conversely,  in 
other  Member  States,  non-banking  institutions  are  allowed  to  grant  microcredits. 
There  are  also  some  exceptions  with  certain  jurisdictions  allowing  specific  non-
banking  institutions  to  grant  microcredit despite  the  banking  monopoly.  It  is  worth 
nothing  that  EU  banking  legislation  only  prohibits  non-banking  microlenders  from 
taking deposits.  

2.2.2.  Banking institutions play a key role in the EU even though microcredit is often only a 

side activity  

The  banking  system  is  an  important  institutional  supplier  of  microcredit  in  the  EU 
through savings, co-operative and commercial banks. These can be broken down into 
four main groups depending on their business models:  

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– 

– 

– 

– 

banks  having 
departments; 

regular  microcredit  activities  with  specialised 

lending 

banks granting microcredits through separate foundations; 

banks going into partnership with public financial institutions which define the 
credit  policy  and  assume  the  full  risk  of  the  loans  (under  certain  conditions) 
while the banks remain responsible for the credit decision; 

banks  having  indirect  involvement  in  microcredit  through  wholesale  loans, 
credit and liquidity facilities to financial institutions specialised in microcredit. 

While being only a side activity for most of these banking institutions, microcredit is 
often  considered  as  an  opportunity  to  participate  in  the  development  of  businesses 
and  clients  which  might  be  profitable  in  the  future.  Cross  selling  (where  the 
provision of loan gives banks opportunity to sell other services to the borrowers) may 
then  help  to  make  the  funding  of  microcredit  more  profitable.  Banks  can  also  be 
motivated  by  the  potential  benefits  of  collaborating  with  public  bodies  through 
public-private partnerships.  

2.2.3.  Non-banking  institutions  that  primarily  grant  microcredits  are  another  important 

supplier  

In  most  Member  States,  non-banking  institutions  carry  out  the  bulk  of  microcredit 
institutional  models  range  from  non-
provision.  The  existing  non-banking 
governmental organisations, non-profit associations, charities, trusts and foundations 
to credit unions and religious institutions. In accordance with EU banking legislation, 
apart  from  a  few  exceptions,  non-banking  institutions  are  not  allowed  to  receive 
deposits  from  the  public,  which  are  restricted  to  licensed  and  supervised  banking 
institutions.  These  non-banking  institutions  grant  microcredits  to  socially  or 
financially excluded groups as a primary activity. 

Over  time,  some  of  these  non-bank  microcredit  organisations  evolve  into  for-profit 
companies such as regulated banking institutions. This institutional transformation is 
often driven by a need for more capital and a desire to offer a wider range of services 
such as deposit taking. 

In some Member States, partnerships between non-profit organisations and banking 
or public institutions are established. The former perform an informal selection of the 
applicants  to  receive  funding  and  offer  them  assistance  after  credits  have  been 
granted while the latter provide for the funding of the credits.  

2.2.4.  The public sector is one of the most influential actors on the microcredit market 

Despite the difficulty of measuring the size of the microcredit sector, one of the most 
influential actors within the EU is the public sector that provides banking and non-
banking  institutions  with  support  aiming  at  bridging  gaps  or  failures  in  the 
microcredit  market.  This  support  is  provided  at  national,  regional,  and  European 
levels by a wide range of public actors from state-owned banks to the EU structural 
funds and other public guarantee, loan or equity schemes.  

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3. 

3.1. 

EU policy gives high priority to microcredits enabling institutions to receive funding 
from  various  European  sources  such  as  the  European  Social  Fund,  the  European 
Regional  Development  Fund,  the  European  Investment  Fund,  the  Joint  European 
Resources for Micro to Medium Enterprises (JEREMIE programme financed by the 
Structural  Funds),  the  Competitiveness  and  Innovation  Programme  (CIP)  and  the 
European Progress Microfinance Facility (Progress Microfinance). The objective of 
these  EU  programmes  is  to  encourage  financial  institutions  to  grant  microcredits. 
Other  EU  programmes  also  help  microcredit  providers  to  improve  governance, 
mitigate  risks,  and  partially  offset  the  high  administrative  costs  inherent  in 
microcredit  through  guarantees  and  technical  support,  such  as  the  Joint  Action  to 
Support Micro-Finance Institutions in Europe (JASMINE) which focuses mainly on 
the capacity building of non-bank microcredit providers. 

At  national  and  regional  levels,  a  number  of  measures  are  taken  to  promote 
microcredit funding and partially share the risk with microlenders through guarantee 
schemes.  Public  programmes  giving  direct  financial  support  to  micro-lenders  and 
borrowers are also implemented. Where state-owned banks exist, they tend to be the 
main funding providers for microcredit activities. 

PRUDENTIAL  SUPERVISION  OF  MICROCREDIT  ACTIVITIES  WITHIN  THE  EU 
RESULTING FROM THE APPLICATION OF DIRECTIVE 2006/48/EC  

A large portion of microcredit providers are exempted from the application of 
prudential requirements laid down in the Directive 2006/48/EC 

The  variety  of  institutional  forms  used  by  microlenders  is  reflected  in  the  diverse 
landscape of regulatory frameworks applied to these microcredit providers across the 
EU.  Broadly  speaking,  only  microlenders  operating  under  European  banking  law 
have to fulfil the requirements of the Directive 2006/48/EC. The trigger to fall under 
European banking law is to receive deposits or other repayable funds from the public 
and,  at  the  same  time,  grant  credits  for  its  own  account  in  accordance  with  the 
definition  of  a  credit  institution  as  laid  down  in  Article  4  (1)  of  Directive 
2006/48/EC.  That  means  that  non-deposit  taking  microlenders  are  not  required  to 
obtain a banking licence and meet the Directive 2006/48/EC prudential requirements 
unless  the  Member  States  apply  a  stricter  approach  by  allowing  only  licensed 
banking institutions to grant microcredits.  

Moreover,  whereas  the  prudential  legislation  concerning  banking  institutions  is 
harmonised to a certain extent by Directive 2006/48/EC, the regulatory approach to 
microcredit  provided  by  non-banking  institutions  differs  widely  from  country  to 
country.  In  most  Member  States,  there  are  no  specific  rules  related  to  these  non-
banking  microlenders  that  fall  in  the  scope  of  generally  applicable  corporate  laws, 
while  specific  regulatory  frameworks  for  the  provision  of  microcredit  can  be  laid 
down in the national legislation, as, for example, is the case in Italy.  

These findings have two implications:  

– 

institutions  with  similar  activities  are  not  subject  to  the  same  regulatory 
requirements across the EU; and 

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– 

Directive 2006/48/EC might not be as penalising for microcredit as might have 
been expected, given its limited scope of application. 

3.2. 

Several factors tend to mitigate the impact of the prudential requirements laid 
down  in  Directive  2006/48/EC  on  microcredit  activities  although  there  may  be 
some burdensome effects 

3.2.1.  The Directive 2006/48/EC does not take account of the specific nature of microcredit 

The  specific  nature  of  microcredit  is  not  taken  into  account  in  EU  banking 
legislation. The provision of microcredit is considered as a common lending activity 
and falls in the scope of the applicable rules on financing and providing loans. This is 
true  with  regard  to  Directive  2006/48/EC  that  does  not  make  any  reference  to 
specific  prudential  rules  related  to  microcredit.  That  means  that  there  is  neither  a 
waiver  allowing  banks  to  exempt  their  microcredit  activity  from  the  prudential 
requirements nor specific rules mitigating the prudential requirements compared with 
those applied to other banking activities.  

3.2.2.  Access  to  public  guarantee  schemes  enables  microcredit  providers  to  significantly 

reduce the level of own funds required to cover the credit risk they are exposed to 

Microcredits  may carry high credit risk – that is the risk that the borrower  defaults 
before repaying the principal and scheduled interest according to the loan contract – 
due  to  possible  over-indebtedness  of  microborrowers  and  lack  of  guarantees 
traditionally  required  by  banks.  This  credit  risk  may  be  underestimated  due  to 
information asymmetry.  

The Directive 2006/48/EC requires banking microlenders to hold a minimum amount 
of own funds to cover this credit risk in order for them to remain solvent in the event 
of  default  of  the  borrowers.  Under  this  Directive,  the  banking  institutions  can 
calculate  the  minimum  capital  using  different  methods  of  varying  degrees  of 
sophistication,  namely  the  standardised  approach  and  internal  ratings  based 
approach. Under the standardised approach, which is the simplest and most common 
approach  implemented  by  small-sized  banking  institutions,  the  minimum  level  of 
own  funds  is  determined  with  regard  to  the  riskiness  of  the  microcredits.  This 
riskiness is measured in terms of risk weights (i.e. the riskier the loan for the bank, 
the higher the risk weight). Under the standardised approach, microcredits are given 
a  weighting  of  75%4  from  the  moment  that  there  is  low  correlation  between 
microcredits5. 

Banks are required to hold tier 1 capital of at least 4% of the risk-weighted amount of 
microcredits  and  total  capital  of  at  least  8%.  That  means  that  the  minimum  total 
capital comes to EUR 600 if the microloan value is EUR 10,000 (or 6% of the loan 
value,  after  the  75%  weighting).  Nevertheless,  in  the  majority  of  Member  States, 
local,  regional,  or  national  public  authorities  have  implemented  credit  guarantee 
schemes  which  assume  some  of  the  risk  borne  by  microlenders.  These  guarantee 
schemes  generally  fix  a  maximum  amount  that  can  be  secured,  expressed  as  an 

4 

5 

Actually,  all  exposures  to  small  and  medium  enterprises,  including  microcredits,  carry  the  same  risk  weight 
irrespective of the size, nature (credit or liquidity facility, personal loan, etc.) and risk profile of the counterparty. 
A microcredit portfolio should have less risk than the weighted average risk of its constituent microcredits if there 
is a significant number of loans and the credit risk of these loans does not get worse and better simultaneously. 

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absolute amount and/or as a percentage of the borrowed amount (generally from 60% 
to 80% of the loan). Both standardised and internal ratings based approaches allow 
banking institutions to assign the risk weight of the guarantor to the protected portion 
(while  the  risk  weight  of  the  microborrower  remains  to  be  assigned  to  the 
unprotected portion). As such public guarantees often carry a 0% or 20% risk weight, 
the  minimum  level  of  own  funds  the  banking  microcredit  providers  are  required  to 
hold  to  cover  the  credit  risk  generated  by  microloans  can  be  sharply  mitigated. 
Existing capital requirements do not seem therefore to penalise microcredit activity 
since the level of own funds can be much lower than 6% of the loan amount.  

An overall increase in capital requirements and reinforcement of capital quality are 
provided  for  by  the  upcoming  prudential  rules  currently  under  negotiation,  'CRD 
IV/CRR', that will replace the Directive 2006/48/EC from 2013. These new rules that 
transpose  the  Basel  III  framework  into  the  European  banking  legislation  aim  at 
strengthening  the  EU  banking  sector  and  financial  stability.  However,  SMEs  have 
expressed concerns over the impact of these new rules6 on lending conditions, given 
the limited availability of funding sources alternative to the banking channel. That is 
why  a  provision  is  introduced  in  the  CRDIV/CRR  proposal  (Article  485  of  CRR) 
requiring the European Commission to review the capital requirements for exposures 
to  SMEs  after  three  years  from  the  entry  into  force  of  CRD  IV/CRR.  In  the 
meantime, in July 2011, the European Commission mandated the European Banking 
Authority  (EBA)  to  analyse  the  appropriateness  of  the  existing  risk  weights 
applicable to SMEs lending7 and assess the impact of (i) a possible reduction in these 
risk  weights  and  (ii)  a  possible  increase  from  EUR  1  million  to  5  million  in  the 
threshold below which exposures to SMEs benefit from these risk weights. 

In  its  report  finalised  in  October  2012,  the  EBA  warns  against  any  permanent 
modification  of  the  risk  weights  or  threshold  in  absence  of  adequate  evidence  that 
justifies  a  departure  from  the  Basel  agreement.  However,  the  EBA  suggests 
alternative measures to ease lending conditions for SMEs such as (i) the introduction 
of  a  temporary  exemption  of  the  capital  conservation,  (ii)  the  alleviation  of  capital 
requirements  during  periods  of  economic  difficulty  or  (iii)  the  introduction  of  a 
temporary supporting discount applied to capital requirements without modifying the 
risk  weights.  Without  pre-empting  the  negotiation  process  on  the  CRDIV/CRR 
proposal, any of the suggested measures would also benefit microcredit providers as 
a microcredit is treated in a comparable manner as a loan to an SME.  

3.2.3.  Most  microcredit  can  be  exempted  from  the  large  exposure  limit  designed  to  limit 

concentration risk 

Given the small size of microcredits, in theory, there is no loan the value of which 
would exceed 25% of the regulatory own funds of the banking microcredit providers 
(the concentration risk limit). However, where the microloans are guaranteed by the 
same counterparty, such as a state government or local authority, the portion of the 
loans that are guaranteed could be treated as having been incurred to the guarantor 
rather  than  to  the  microborrowers,  which  may  lead  to  a  breach  of  the  25%  limit. 
However, the exposure to the public guarantor can be exempted from the application 
of the large exposure limit.  

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7 

In particular, the introduction of the so-called capital conservation buffer (2.5% of risk-weighted assets in addition 
to the current 8% requirement) which would be phased in between 2016 and 2019.  
The risk weights are left unchanged in the CRD IV/CRR proposal. 

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3.2.4.  The  Directive  requirements  in  terms  of  risk  management  help  the  banking 

microlenders to mitigate their risks 

that  banking  microlenders  have 

Directive  2006/48/EC  requires 
in  place  a 
comprehensive  risk  management  process  to  identify,  evaluate,  monitor  and  control 
all  their  risks.  Such  requirements  help  the  microlenders  to  strengthen  their  internal 
control  frameworks  and  develop  effective  risk  management  skills  and  strategies, 
which  can  in  turn  reinforce  their  credibility  and  profitability  while  improving  the 
financial  stability  of  the  microcredit  sector.  The  development  of  efficient  internal 
control  frameworks  also  enables  banking  microlenders  to  be  less  exposed  to  credit 
risks, money laundering and employee fraud.  

3.2.5.  Directive  2006/48/EC  requires  banking  microcredit  providers  to  comply  with 

prudential rules to mitigate liquidity risk  

On the asset side, banking microlenders may lack a cushion of unencumbered, high-
quality liquid assets to enable them to face a liquidity stress, given that microcredits 
are  often  illiquid  and  transformed  with  difficulty  into  liquid  instruments  (through 
covered  bonds  issuance  or  securitisation).  On  the  liability  side,  deposit-taking 
institutions may face the risk of deposit run off especially where they have no access 
to stable sources of liquidity from other banking, public or international institutions. 

Directive  2006/48/EC  requires  that  banking  institutions,  including  microlenders, 
have  sound  liquidity  management  strategies,  policies  and  processes  to  identify, 
measure,  monitor  and  control  liquidity  risk  on  a  day-to-day  basis,  and  contingency 
plans for handling liquidity problems.  

3.2.6.  Directive  2006/48/EC  may  involve  high  administrative  burdens  which  may  reduce 
the attractiveness of microcredit as a banking business while strengthening financial 
investor confidence in microcredit providers 

The application of prudential requirements laid down in Directive 2006/48/EC might 
be  disproportionately  expensive  for  both  the  supervisory  authorities  and  banking 
microlenders especially if the latter do not pose serious risks to the overall banking 
and  payment  system.  When  measured  as  a  percentage  of  total  assets,  the  smaller 
banking  microlenders  are,  the  higher  the  costs  resulting  from  the  application  of 
prudential requirements can be. This may lower the profitability of microlending and 
reduce  its  attractiveness  as  a  banking  business.  However,  some  prudential 
requirements,  especially  those  related  to  prudential  reporting,  the  risk  assessment 
process  and  capital  adequacy  can  be  commensurate  with  the  smaller  size  and 
complexity of these institutions, which helps to alleviate the administrative burden. 

Even though microcredit institutions have no significant systemic impact in terms of 
financial stability, the failure of any one of  them  might  affect  the credibility of  the 
other  banking  microcredit  providers.  As  such,  the  reduced  likelihood  of  failure  of 
applicable firms due to the Directive should be welcomed. In addition, the banking 
prudential  requirements  can  enhance  financial  investor  confidence  in  microcredit 
providers  as  a  safe  destination  for  investor  funds.  Such  confidence  can  help 
microcredit  institutions  to  attract  more  long-term  funding  enabling  them  to  reach  a 
more significant scale and provide their customers with a wider range of services. 

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4. 

CONCLUSIONS 

The  European  Commission  recognises  the  need  to  promote  the  provision  of 
microcredit and the development of microcredit providers. It should be recalled that 
the European Commission is very active in this area notably with the JEREMIE and 
JASMINE  initiatives  and  the  European  Progress  Microfinance  Facility  launched  in 
2010  to  increase  the  availability  of  microcredit  for  alleviating  unemployment  of 
young people and helping to set up or develop their business.  

In  this  context,  neither  the  European  Commission,  nor  a  number  of  national  public 
authorities  consider  that  the  prudential  requirements  as  laid  down  in  Directive 
2006/48/EC  impede  the  development  of  microcredit  activities.  As  noted  earlier  in 
this report, these prudential rules would not seem to be as penalising for microcredit 
in the EU as might have been expected, precluding the need for tailoring them to the 
particular features of microcredit activities. Moreover, microcredit brings together a 
wide range of actors which are not subject to similar laws or rules and is dealt with in 
a  diversity  of  ways  across  Member  States  depending  on  the  policy  framework  and 
the legislation in place. Given this heterogeneous situation combined with the lack of 
a consistent and commonly used definition of microcredit, any action to modify the 
prudential  and  regulatory  framework  would  require  prior  careful  consideration  to 
ensure that microcredit activities are effectively promoted. 

It  might  also  be  argued  that  no  prudential  reform  needs  to  be  undertaken  if  the 
development  of  microcredit  is  considered  to  be  driven  to  a  large  extent  by  non-
prudential  factors.  That  does  not  mean  that  prudential  regulation  has  no  impact  on 
the  development  of  such activities,  but  that prudential factors do  not play  a  critical 
role in the development of microcredit, making any prudential reforms not necessary. 
A  number  of  areas  outside  of  the  prudential  sphere  could  instead  be  the  focus  of 
reforms. For instance, a way to foster the supply of microcredits may be to create a 
more  favourable  general  environment  for  institutions  specialised  in  microcredit  by 
facilitating their access to financial resources. This development might be promoted 
through  a  wider  provision  of  loan  guarantees,  encouraging  closer  cooperation 
between banks and non-banks or more financial transparency. 

Under this approach, the development of codes of conduct of voluntary application 
like, for instance, those which have been issued by the microcredit industry itself in 
recent years, or more recently by the European Commission,8 can help to provide a 
higher degree of recognition and credibility to those microcredit providers adhering 
to  them.  Review  of  the  consumer  protection  environment  for  microcredit,  which  is 
outside the remit of Directive 2006/48/EC, and any appropriate improvements, may 
also have positive effects on microcredit activities. 

Finally,  greater  attention  given  to  the  institutional  framework  for  self-employment 
and  microenterprises  could  also  increase  their  chance  of  success  and  make 
microcredit  more  profitable.  Measures  to  simplify  legal  and  administrative  regimes 
or to smooth the transition between unemployment or social welfare dependence and 
self-employment could be fostered as well. 

8 

In  October  2011,  the  European  Commission  issued  a  comprehensive  European  Code  of  Good  Conduct  for 
Microcredit Provision developed jointly with individual microcredit providers, banks and their respective national 
and European trade bodies, regulators, academics, and rating agencies. 

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