EU rural review : a publication from the European network for rural development. N° 13, Autumn 2012.
Date: 2013-05-30
Institutions: Directorate-General for Agriculture and Rural Development
Subjects: rural development, rural region, serial publication

EU Rural Review N°3
EU Rural Review N°13

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Editorial ...............................................................................................................................................................................................................2

Financial EnginEEring instrumEnts  
and rural dEvElopmEnt programmEs ...............................................4 

thE scopE For Financial EnginEEring 
instrumEnts undEr Eu rural dEvElopmEnt 
policy .................................................................................................................................................................................................................................14

supply and dEmand For rural Financial 
EnginEEring instrumEnts........................................................................................................................21

lEarning From thE Eu structural Funds ...............................27

thE rolE oF thE national rural nEtworks  
in Facilitating accEss to FinancE...............................................................................34

Financial instrumEnts undEr thE nrn  
rural EntrEprEnEurship thEmatic initiativE ....................38

glossary .................................................................................................................................................................................................................44

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Editorial 

Rural development 
financial instruments: 
opportunities,experiences 
and challenges

I nnovative proposals for rural develop-

ment policy in the period 2014-2020 
are likely to result in the introduction 
of measures to increase the capability of 
EU Member States to help rural enter-
prises access the finance they need to 
grow their businesses. This is expected to 
increase business-led rural development 
activity and economic growth through-
out the EU countryside. These new devel-
opment opportunities for rural Europe 
build on the options that exist within the 
current rural development policy frame-
work to access different types of financial 
support.

Financial engineering instruments (often 
shortened to ‘financial instruments’) ex-
ist in many different forms. They include 
Loan Funds, Guarantee Funds, Venture 
Capital Funds, Equity Funds and Interest 
Rate Subsidy schemes. The common de-
nominator between these instruments is 
that they provide an alternative option to 
grant funding and they can all recycle the 
initial allocation of monies used to set up 
the funds and thus stimulate further rural 
development.

instruments  can  be 
Such  financial 
used  by  Member  States  in  their  Rural 
Development Programmes (RDPs) to help 

channel co-finance from the European 
Agricultural Fund for Rural Development 
(EAFRD) into business support projects 
covering a wide range of rural enterpris-
es. Use of EAFRD financial instruments 
in RDPs has been limited to date, but de-
mand is increasing and this is expected 
to further intensify as more flexibility is 
introduced. 

Flexible approaches to the rules govern-
ing  RDPs  use  of  financial  instruments 
are being proposed for the next round 
of EAFRD support. The intention is to en-
courage the use of RDP financial instru-
ments in a way that complements grant 

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EU Rural Review N°13

Abbreviations and acronyms used in this issue of Rural Review

cElF
csF
cip

dg rEgio

EaFrd

Eca
EiB
EiF
Enrd
ErdF
Eu
EsF
hol

community Enterprise loan Fund
common strategic Framework
competitiveness and innovation Framework 
programme
European  commission's  directorate-
general for regional policy 
European  agricultural  Fund  for  rural 
development
European court of auditors
European investment Bank
European investment Fund
European network for rural development
European regional development Fund 
European union
European social Fund
highland opportunity limited

imsEa

iti
JasminE

JErEmiE

JEssica

mFi
ngo
nrdp
nrn
rcgF
rdp
rFtF
smE

institute of Food services for the agricultural 
market
integrated territorial investment
Joint  action  to  support  microfinance 
institutions in Europe
Joint  European  resources  for  micro  to 
medium Enterprises
Joint  European  support  for  sustainable 
investment in city areas
micro-finance instrument
non-governmental organisation
national rural development plan
national rural network
rural credit guarantee Fund of romania
rural development programme
rural Finance task Force
small and medium sized Enterprise

funding support, thereby making invest-
ment projects and rural economic growth 
more realistic and attainable.

For  example,  a  rural  business  that  re-
ceives an RDP grant to cover a proportion 
of an investment may also, in the future, 
be able to secure assistance from an RDP-
funded Loan Fund to help finance part 
of the remaining proportion. In addition, 
the same business might be able to make 
use of other financial instruments, such 
as an RDP-funded Guarantee Fund, to ob-
tain a bank guarantee for a loan. Interest-
Rate Subsidy schemes, Venture Capital 
Funds and equity options co-financed by 
RDP resources could also provide other 
useful services that contribute to mak-
ing investment projects more feasible for 
rural businesses. All such RDP support 

would  be  subject  to  compliance  with 
State Aid and other pertinent EU rules.

Information gap

At  present,  an  information  gap  exists 
about  the  RDP  financial  instruments’ 
potential as a tool to stimulate rural de-
velopment  and  tackle  the  challenges 
presented by the global economic crisis. 
Hence, this 13th edition of the EU Rural 
Review helps to explain why, when, where 
and how different types of RDP financial 
instruments can be used to contribute to 
policy goals for rural development, and 
wider EU economic development. 

The articles draw on experiences from 
other  EU  funds  and  highlight  key  les-
sons  learned  from  people  involved  in 

coordinating successful financial instru-
ments. Attention is focused on a group 
of financial instruments that are new to 
the majority of RDPs. The main issues in-
volved in choosing and using these types 
of  financial  instruments  are  discussed 
and examined by informed stakeholders.

The  release  of  this  publication  by  the 
European network for Rural Development 
(EnRD) is timely, as it coincides with the 
preparations underway for the next gen-
eration of RDPs. Another important ob-
jective, therefore, is to raise awareness 
among RDP stakeholders about the op-
portunities and considerations involved 
in using financial engineering tools to 
strengthen development in rural Europe. 

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Financial engineering 
instruments and  
Rural Development 
Programmes 

A total of 88 Rural Development Programmes (RDPs) are currently 

being implemented in the EU Member States. Between them, 

they have a budget from the European Agricultural Fund for Rural 

Development (EAFRD) of €96.2 billion (at 2011 prices). This EAFRD 

financial support can be divided into two main categories,  

non-repayable grants and financial engineering instruments. 

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Financial engineering 

instruments and  

Rural Development 

Programmes 

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EU Rural Review N°13

“Demand from rural businesses for our RDP has 

been extremely high and that led to a huge number 
of approved applications. In order to extend the reach 
of our RDP, we decided to use financial engineering 
instruments. In this way, we supported more than  
750 applicants, covering more than €275 million 

worth of rural development projects.”

Viviana Vasile, Support Unit - Romanian Rural Network

T he EAFRD is the main source of 

co-financing for Member States’ 
RDPs and most of it is allocated 
using grant-type support systems. one 
of the strengths of the RDPs’ grant-type 
support instruments is that they are able 
to attract significant demand, because 
this form of support does not need to be 
repaid. This enables beneficiaries (espe-
cially rural small and medium-sized en-
terprises (SMEs) without sufficient money 
to fully fund their projects through in-
ternal resources and/or commercial capi-
tal) to access non-repayable funds that 
can be used to part-fund projects. Such 
projects contribute to the development 
of rural areas by increasing competitive-
ness, maintaining jobs, introducing new 

products and services, or improving qual-
ity standards.  

However, the apparent strength of grant 
funding ‘hides’ a number of weaknesses 
associated with non-repayable develop-
ment aid. For instance, this approach can, 
potentially, introduce inefficiencies into 
the market and lead to the misallocation 
of scarce resources. Sometimes, recipi-
ents of grant money may also regard the 
financing as ‘free money’ and, therefore, 
a risk occurs that the necessary financial 
diligence is not fully applied. 

In addition, for the most part, grants are 
paid retrospectively; after the relevant 
project component has been realised and 

financial proof has been submitted. The 
scope for advance payments is limited, 
and the sometimes complex administra-
tive procedures to access grant funding 
can also potentially hamper such fund-
ing systems. Another disadvantage of a 
grant is that once it is utilised, it disap-
pears from the ‘public purse’ and cannot 
be re-used. 

RDPs that are based solely on grant sup-
port systems may, therefore, experience 
limitations in their overall potential to 
support  rural  development.  However, 
innovative financial engineering instru-
ments can form part of an RDP’s funding 
toolkit and these can offer complemen-
tary benefits to conventional grant-based 

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EU Rural Review N°13

approaches. one of the main benefits is 
that the funds within the financial instru-
ments can be recycled for further rural 
development.

Recycling RDP funds

To  improve  the  availability  of  capi-
tal for rural investment and promote 
the efficient use of rural development 
funds, the European Commission has 
provided Member States with the pos-
sibility to apply financial engineering 
actions in the form of Guarantee, Loan 
and Venture Capital Funds. These finan-
cial instruments can be recycled and 
used to facilitate further and addition-
al access to funds for agricultural, the 

food industry and other rural sectors. 
Recycling in this context means that the 
initial allocation of public funds is used 
on an on-going basis to support differ-
ent RDP beneficiaries. Hence, more and 
multiple development benefits are pos-
sible for rural areas for a given amount 
of public funding. 

Financial  instruments  can  be  set  up 
through Holding Funds or through di-
rect contributions to Equity Funds, Loan 
Funds and Guarantee Funds. The ben-
eficiaries  of  financial  instruments  can 
be SMEs, as well as other organisations 
such as community or social enterprises, 
public-private partnerships and bodies 
such as trusts, established to supervise 

specific projects, such as a rural energy 
initiative, for example.

In  addition  to  recycling  public  funds, 
financial engineering instruments also 
have the potential to leverage capital, i.e. 
draw in additional private or other public 
funding, and to encourage recipients to 
introduce better financial management 
and business planning, due to the non-
grant  nature  of  the  funding,  and  thus 
contribute to a more sustainable busi-
ness environment. 

For rural businesses, there could be the 
added benefit of building up a good track 
record and becoming better prepared for 
commercial creditors and investors. This 

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EU Rural Review N°13

The  advantages  of  the  financial  engi-
neering instruments presented in Table 
1 include their potential to offer more 
favourable  conditions  for  rural  devel-
opment projects than those offered by 
banks or other, purely commercial lend-
ing institutions. In addition, the scope 
of RDP Guarantee Funds may facilitate 
better access to commercial credit, while 
Interest  Rate  Subsidies  can  ease  rural 
SMEs’ debt repayment by reducing the 
amount of interest to be paid from their 
own means.

effect is due to the similarity of some criteria 
used in financial engineering instruments 
(in particular, for the Loan Funds) to those 
applied  by  commercial  financial  institu-
tions to assess recipients’ creditworthiness. 
Such criteria may include the availability 
of guarantees or collateral, the perceived 
ability to repay the loan, the company track 
record and the quality of the management. 

In the 2007-2013 programming period, the 
legal basis for EAFRD financial instruments 
is provided by Article 71(5) of Regulation 
(EC) no 1698/2005 and Articles 49-52 of 
Regulation (EC) no 1974/2006. Table 1 sum-
marises some of the main types of financial 
engineering instruments that are possible 
within RDPs. 

©  TIM HUDSon

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EU Rural Review N°13

Table 1: Review of potential RDP financial engineering instruments 

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Loans from revolving Loan FundsDefinitionA loan is a form of financial debt including the principal (the amount lent by the lender) and the interest (the cost of the loan). The obligations of the borrower and lender related to repayment (and any guarantees) are defined in a contract (legal loan or credit). A revolving Loan Fund refers to a source of money from which loans are made for multiple small business development projects. The issue of other loans for new projects is made possible as individual projects pay back their loans.UtilityLoan Funds using EAFRD co-financing can offer more favourable conditions to SMEs than commercial credit. This type of financial instrument can be ideal for SMEs that are able to comply with EAFRD funding criteria, but unable to secure commercial credit. Venture Capital (V/C) FundDefinitionA VC Fund is private financial capital usually targeted at early-stage, high-potential, high risk businesses. A VC Fund makes money by taking equity in the companies it invests in, which usually have a novel technology.  In exchange for the high risk that can be involved in investing in smaller, unproven business ventures, the VC Fund can sometimes take significant control over company decisions, in addition to a significant portion of the company's ownership (and value).  UtilityA VC Fund may be relevant if an analysis of SMEs in an RDP territory confirms that the rural businesses there demonstrate development potential and a strong capacity for innovation.  VC Funds can be considered attractive for new companies with limited operating history that are too small to raise capital on the public markets and which have not reached the point where they are able to secure a bank loan. These financial instruments may also be appropriate in cases where SMEs are willing to give up some control over company decisions.  
 
 
EU Rural Review N°13

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Guarantee FundDefinitionA Guarantee Fund is used to provide a financial guarantee for credit sought by a rural business or organisation and eases access to funding from banks. The Guarantee Fund deposits an amount that is used by the bank as collateral for the credit it provides to the rural development project. Once the credit is paid back, the guarantee is released by the bank back into the Guarantee Fund.UtilityA Guarantee Fund is a suitable option if analysis of SMEs in an RDP area confirms that a critical mass of SMEs exists that are not able to provide sufficient guarantees or collateral to secure credit from commercial sources. Use of the Guarantee Fund option can increase such SMEs’ ability to successfully apply for commercial credit.Interest Rate Subsidy DefinitionIn the frame of RDPs, Interest Rate Subsidies are a means of supporting the payment of interest on loans. These are based on a calculation method indicated in the Member State’s RDP.UtilityOffering an Interest Rate Subsidy can be appropriate in situations where a critical mass of rural businesses demonstrate that they are able to secure loan funding (e.g. have adequate collateral or can provide guarantees required by commercial lending institutions), but the SME owners are uncertain about the stability of their company cash flow. Loan funding may be considered a risk by the SME and hence prevent the SME from committing to the loan (and thus stop them from carrying out the development project). An Interest Rate Subsidy scheme could help provide a financial cushion for such SMEs and give them the confidence they need to proceed with their projects. Equity Fund DefinitionAn Equity Fund takes an ownership interest in a company, represented by the shares issued to investors.UtilityAn Equity Fund may be relevant if an analysis of SMEs in an RDP territory confirms that the rural businesses there demonstrate development potential, have a strong capacity for innovation, and remain open to the idea of having external shareholders influence the company’s decision-making processes. RDP co-finance for Equity Funds can be considered attractive for new companies, with limited operating history, that are too small to raise capital on the public markets, and which have not reached the point where they are able to secure a bank loan.EU Rural Review N°13

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Experiences from other EU development 
initiatives, such as the Structural Funds, 
show that financial engineering instru-
ments  can  also  leverage  considerable 
private sector funding. This means that 
EU funds allocated to financial engineer-
ing instruments can ‘go further’, not just 
because they are recyclable but also be-
cause they use a smaller proportion of EU 
funds to achieve the same result - hence 
leaving more funds available for other 
SME investment projects. 

Such leverage effects1 have been dem-
onstrated, in varying degrees, in different 
Member States that use financial instru-
ments. These experiences indicate that 
RDP use of financial instruments can have 
a powerful catalytic effect, unlocking pri-
vate financing and other public sector 
funding. 

from 

In  addition,  experience 
the 
Structural Funds also suggests that RDP 
funds that are channelled through finan-
cial instruments could be augmented by 
interest, dividends and other gains, creat-
ing further scope for investment in rural 

development.  It  has  also  been  shown 
that the participation of private sector 
funding partners provides specific exper-
tise and knowledge regarding, among 
other things, how to improve the perfor-
mance of the enterprises or organisations 
leading the rural development project, 
which leads to better quality projects and 
greater financial discipline. 

Current state-of-play

nevertheless, despite their advantages, 
analysis of the uptake of the financial en-
gineering instruments presented in Table 
1 shows that only eight Member States 
have indicated an interest in such EAFRD 
instruments. These are Belgium, Bulgaria, 
France, Greece, Italy, Latvia, Lithuania and 
Romania. These countries are providing 
support through RDP Axes 1 and 3, tar-
geting  activities  under  measures  121 
(modernisation of agricultural holdings), 
123 (adding value to agricultural and for-
estry products), 312 (business creation 
and development) and 313 (encourage-
ment of tourism activities). The estimated 
total  public  expenditure  for  such  RDP 

financing  tools  is  around  €531  million 
between 2007 and 2013. This represents 
a very small proportion (0.3%) of the 88 
RDPs’ overall budget. 

RDP financial expenditure data indicates 
that only five Member States (Bulgaria, 
Italy, Latvia, Lithuania and Romania) are 
actively  using  EAFRD  financial  instru-
ments.  The  most  popular  non-grant 
type financial instruments are Loan and 
Guarantee Funds. none of the Member 
States  that  have  introduced  financial 
engineering instruments into their RDPs 
have set up a Venture Capital Fund or in-
stituted an Interest Rate Subsidy scheme 
(as of May 2012). 

A study2 carried out by the European 
network for Rural Development (EnRD) 
in 2012 identified some of the barriers, 
as perceived by RDP stakeholders, to 
a wider use of financial instruments in 
the current EAFRD programming pe-
riod. The feedback from RDP Managing 
Authorities  was  that  financial  instru-
ments were seen as requiring additional 
management resources, and there was 
uncertainty about the complexity of ad-
ditional control rules that would need 
to be applied. Concern was also raised 
about the risk of incurring financial cor-
rections and budget cuts if the financial 
instruments were not operated prop-
erly, and some Managing Authorities 
believed that demand was not strong 
for RDP financial instruments because 
the commercial market was able to fulfil 
rural SMEs’ investment needs.

Under the current EAFRD regulation it 
is difficult to combine RDP grants with 
support from financial instruments and 
this can act as a further disincentive for 
Managing Authorities.

The relatively low up-take of financial in-
struments by the 88 RDPs in the current 
EAFRD  programming  period  is  in  part 
attributed to these issues and concerns. 

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(1)  European Court of Auditors Special Report No.2/2012. Financial instruments for SMEs co-financed by the ERDF. 
(2)  http://enrd.ec.europa.eu/app_templates/filedownload.cfm?id=E6109191-9B8E-3ACA-BE4F-780D87307DC1

 
 
 
EU Rural Review N°13

Future prospects

Due  to  the  advantages  offered  by  fi-
nancial instruments for RDP applicants 
and administrations, greater emphasis 
is  expected  to  be  placed  on  financial 
engineering  instruments  in  the  next 
EAFRD programming period (between 
2014 and 2020). This process will be as-
sisted by the introduction of a Common 
Strategic Framework (CSF)3, which will set 
out common and consistent implemen-
tation rules for EU Funds under shared 
management. 

The new CSF toolkit will include greater and 
clearer scope for the uptake of financial en-
gineering instruments. RDPs will be able to 
make use of these new opportunities to 
introduce a broader range of options, to 
help potential beneficiaries gain access to 
EAFRD co-financing in the RDPs. 

one of the main anticipated CSF innova-
tions concerns the provision of adequate 
flexibility to allow RDP financial instru-
ments to be used in combination with 
conventional  grant  schemes.  The  aim 
behind this increased flexibility is to im-
prove rural SMEs’ access to RDP financial 
support. In such circumstances, farmers 
and other beneficiaries of RDP grant sup-
port would be able to use financial instru-
ments to cover the guarantees that are 
required for some investments. 

other  options  will  allow  enterprises  to 
combine RDP grants with RDP loans from 
a financial instrument, in order to cover a 
higher proportion of the total project costs. 
This could make it easier for rural SMEs to 
achieve the total financial package required 
for a project, and so should act as an incen-
tive to encourage more people to invest in 
rural development initiatives. 

The  socioeconomic  and  environmen-
tal fabric of Europe’s countryside could 
benefit  from  such  an  upsurge  in  de-
velopment activity. Thus RDP financial 
instruments present many possibilities 
for helping Member States to find new 
ways of tackling the economic crisis in 
rural areas.

For  such  reasons,  rural  development 
stakeholders are increasingly interested 
in understanding the potential scope of 
different  financial  engineering  instru-
ments in supporting EAFRD implementa-
tion. Further information is presented in 
the following sections, which explains in 
more detail how the EAFRD can be used 
for such purposes, what the important 
issues  are,  and  what  the  future  might 
hold  for  EAFRD  financial  engineering 
instruments.

©  TIM HUDSon

(3)  Title IV of Common Strategic Framework regulation (Articles 32-40)

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Guarantee Funds help rural SMEs secure access to development finance

guarantee  Funds  play  an  important  role  in  facilitating  rural 
development activity because they can help rural businesses secure 
full funding packages for their development projects.

typically, a farm or other rural smE that successfully applies for 
an rdp grant to help finance a development project receives a 
proportion of the overall project capital. the business still needs 
to find the remaining funds for the investment. a bank loan could 
be used to cover the remaining proportion, but most banks ask 
for some kind of loan security in order to protect their money 

should the project fail. without this security, the smE may not be 
able to receive a loan and implement the development project. 
a guarantee Fund can fill this financing gap by offering security, 
in the form of a guarantee to pay back the bank loan in the event 
that the project fails. 

the Eu structural Funds have an established track record in providing 
the co-financing that is needed to set up such guarantee Funds, and 
rural development programmes have also started to use co-financing 
from the EaFrd for similar purposes.

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in southern italy, for example, a guarantee Fund is using EaFrd 
co-financing to improve access to rural finance for farmers who 
want to invest in improving the competitiveness of their business 
activities. this Fund is managed by the institute of Food services for 
the agricultural market (imsEa), which is a public sector body closely 
aligned to the ministry of agriculture.

these issues drove the demand to set up a guarantee Fund for 
farmers that was co-financed by the EaFrd. ismEa is fully responsible 
for managing the guarantee Fund, which was designed under the 
supervision, and with the support of the ministry of agriculture. the 
Fund’s operating rules (such as caps and procedures) were developed 
with input from the farmers’ unions and the italian banking association.

giorgio venceslai from imsEa explains: “in italy we have a central 
guarantee Fund, but this does not cover agricultural business, and 
we were aware that farmers were concerned about problems they 
experienced in accessing loan guarantees from commercial sources 
for their development projects. it was especially difficult for business 
start-ups and young entrepreneurs in the farming sector to obtain 
such financial help. in addition, the introduction of the new bank 
capital regulations (known as Basel ii) implied that there was a need 
for a state guarantor to provide a more powerful protection in order 
to improve the risk rating of farmers.”

mr venceslai explains how the financial instrument works: “a farmer 
goes to the bank and applies for a loan. the bank assesses the request, 
taking into account the credit rating of the farmer and the financial 
sustainability of the project. if the securities or guarantees provided 
by the farmer are not sufficient then the bank sends a guarantee 
request to our Fund. the farmer does not make the request himself, it 
is made only by the bank. our Fund targets smEs, so larger enterprises 
cannot be guaranteed. we can cover up to 70% of the loan for most 
businesses and this can increase up to 80% in the case of young 
farmers. micro or small enterprises are not eligible for guarantees 
valued at over €1 million and a cap of €2 million is in place for medium 
enterprises.”

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some  useful  lessons  have  already  been  learnt  from  the  italian 
guarantee Fund experience. “initially, many farmers thought it was 
for free and the guarantee was a type of ‘gift’ from the state,” says mr 
venceslai, who continues, “so the main challenge was to explain to 
farmers that although the guarantee Fund was to help them, it had 
to respect basic financial principles and that the business still had 
to be responsible for its own risk, rather than the Fund. sometimes 
we are not able to help every farmer because we have to protect 
the Fund from projects that, for various reasons, are assessed to be 
too high risk.”

reinforcing this point and reflecting on the key success factors 
involved in managing a guarantee Fund using EaFrd co-financing, mr 
venceslai notes, “we are still relatively new but i can already highlight 
five key lessons. Firstly, a guarantee Fund needs a robust risk rating 
model. this is fundamentally important. secondly, a long-term view 
of the activity is beneficial, especially during the first years, which can 
be quite challenging. thirdly, a good information technology system 
is an essential tool. the fourth point to note is that a successful fund 
needs skilled employees, who are able to manage the guarantee 
requests and understand both the banks’ and the farmers’ needs. last, 
but by no means least, is the importance of having a strong alliance 
with the farmers’ unions and the banks.”

these success factors are highly relevant for other guarantee Funds 
using rdp funds to help improve access to development finance for 
rural businesses. another example is found in romania, where EaFrd 
resources have been used to establish the rural credit guarantee 
Fund of romania (rcgF).

speaking about the rationale behind the rcgF, its deputy general 
director, ileana Bratu, says: “the rural credit guarantee Fund of 
romania was introduced following our experience of working with 
the Eu’s sapard pre-accession programme, which provided funding 
support for rural areas. this work identified the problems that were 
faced by rural businesses in accessing credit. such problems created 
an obstacle to development in rural areas, which was a high priority 
for support, and also hindered the uptake of funding assistance 
provided by the Eu.”

“under these conditions it was considered necessary to develop a 
financial instrument that could increase access to funding in the 
national rural development plan (nrdp) by improving the ability 
of businesses to obtain credit to finance private contributions to 
rural investment projects.” this demand for a guarantee Fund was 
described in the nrdp, and the managing authority had a significant 
involvement in the design of the rcgF.

EU Rural Review N°13

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it was considered useful to provide flexibility in the rcgF so that it 
could assist different types of rural businesses. as such, it includes 
EaFrd co-financing from both axis 1 and axis 3 of the nrdp (e.g. 
measure 121 - modernisation of agricultural holdings; measure 123 
- adding value to agricultural and forestry products [including the 
corresponding state aid schemes]; measure 312 - support for the 
creation and development of micro-enterprises; and measure 313- 
Encouragement of tourism activities).

as with the italian case, the rcgF provides guarantees which cover up 
to 80% of the loan requirement. ms Bratu notes that, “the guarantee is 
provided in the loan currency and the guarantee validity period can 
be equal to the loan tenor, plus a period of up to 60 calendar days. 
once approved, the guarantees can be payable within 15 days after 
we receive a request from the bank to cover a loan application from 
an eligible business. we have good working relations with the banks, 
and agreements have been established to ensure that the banks notify 
the Fund about any event that might result in a credit risk.”

Further information:

italy: http://www.ismea.it/flex/cm/pages/ServeBLOB.php/L/IT/
IDPagina/113 

romania: http://www.madr.ro/pages/dezvoltare_rurala/Brosura-
FGCR-2010.pdf 

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The scope for financial 
engineering instruments 
under EU rural 
development policy 

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The scope for financial 

engineering instruments 

under EU rural 

development policy 

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EU Rural Review N°13

Support from the European Agricultural Fund for Rural Development 

(EAFRD) can be distributed as grants or in the form of more innovative 

financial engineering instruments. Moves towards greater alignment 

of EU funding rules are expected to help facilitate a broader menu of 

EAFRD financial instruments in the future.

T he range of rural businesses and 

development organisations that 
can benefit from EAFRD financial 
engineering  instruments  is  vast  and 
includes all sections of the agricultural 
sector, food industry enterprises, forest 
owners and forest managers, as well as 
non-agricultural micro-businesses oper-
ating in rural areas, farmers diversifying 
their activities into non-agricultural busi-
ness, enterprises operating in the field of 
rural tourism, and enterprises developing 
rural heritage projects.

Such a significant scope for EAFRD sup-
port offers many rural development op-
portunities and it is possible (subject to 
compliance with rules concerning State-
Aid or overcompensation4) for benefi-
ciaries to combine support from various 
EAFRD financial instruments. These in-
struments can invest in, or provides guar-
antees to, enterprises and organisations 
during their start-up and early stages of 
development. Proposals for growth and 
expansion can also be supported using 
EAFRD financial instruments.

Interest in EAFRD financial instruments 
at  Member  State  level  has  continued 
to  grow  and  the  current  EAFRD  legal 
framework provides a flexible basis ac-
tion. However, certain criteria and condi-
tions are included in the legal framework, 
such as restrictions on using the EAFRD to 
support firms that are classified as being 
‘in difficulty’. other aspects of the regula-
tory framework reinforce the need for the 
effective use of EAFRD financial instru-
ments, including the reuse of resources 
allocated to such instruments to finance 
further financial engineering actions. 

(4) 

 For information about State-Aid and Overcompensation see: http://ec.europa.eu/competition/state_aid/studies_reports/sme_handbook.pdf

15

 
 
 
 
EU Rural Review N°13

Designing EAFRD 
financial instruments

A  clear  process  for  designing  EAFRD 
financial  instruments  is  needed,  and 
Member State authorities should follow a 
number of key steps to set up a new fund. 
This involves, firstly, carrying out internal 
discussions at national or regional level 
to identify the demand for a new fund, 
and confirming the necessary political 
support for this approach. Amendments 
to the Rural Development Programme 
(RDP)  may  be  required,  as  well  as  to 
national  or  regional  rules  concerning 
EAFRD administrative procedures. once 
the legal foundations are in place, a fund 
manager is selected and an agreement is 
signed between the Managing Authority 
and the manager of the fund.

Intermediary organisations may then be 
selected to help implement and promote 
the fund. These can also contribute to the 
essential monitoring and control systems 
that  form  part  of  the  fund  manager’s 
reporting  obligation  to  the  Managing 
Authority.  Agreeing  protocols  for  the 
closure of a fund is another important 
aspect that needs to be considered dur-
ing  the  design  and  start-up  stages.  It 
may take around six months to carry out 
all these preparatory steps, prior to the 
launch of the fund.

The  Managing  Authority  and  the 
European Commission may undertake 
certain pre-launch checks on an EAFRD 
financial instrument, to ensure that it sat-
isfies the following criteria:

•	   All  Funds  using  EAFRD  co-financing 
must be set up as independent legal 
entities; 

•	 Evidence  should  show  that  they  are 
either  newly  established  under  an 
agreement between the shareholders, 
or constitute a separate block of finance 
within an existing financial institution; 
•	 In addition, the fund must have its own 
distinct set of accounts that differenti-
ate it from other EAFRD awards. 

The European Commission remains out-
side the scheme and cannot be a partner 
or shareholder in the fund.

other checks can cover the terms and 
conditions  of  the  EAFRD  contribution; 
in particular the targets for deliverables 
over  the  duration  of  the  instrument’s 
existence, the instrument’s investment 
strategy  and  planning,  its  monitoring 
and implementation system, as well as 
the ‘winding up’ provisions for the closure 
of the instrument.

once  approved,  co-finance  from  the 
EAFRD can be transferred to a rural devel-
opment financial instrument. The EAFRD 
co-finance is generally paid either as a 
single sum or in instalments. EAFRD co-
financing has to be declared as expendi-
ture in the same year that the funds are 
transferred to the financial instrument. 

An initial amount is transferred to allow 
the functioning of the fund in the first 
two years. The national contribution to 
the fund must be executed at the same 
time  as  the  EAFRD  contribution.  The 
measure and axis co-financing rate (of 
the RDP) should always be respected and 
a pro-rata approach is necessary in cases 
where several measures with different co-
financing rates apply.

As with all EAFRD projects, financial in-
struments need to be carefully monitored 
to track their performance and to provide 
the  management  information  needed 
to steer them towards their objectives. 
A monitoring activity plan must be sub-
mitted at the end of each financial year 
to the Managing Authority. 

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EU Rural Review N°13

Monitoring activity plans for RDP financial instruments should contain information covering: 

•	 the credit or guarantee portfolio for the coming year; 

•	 a breakdown of annual management costs covered by the fund, 

•	 data showing the exposure rate for the current year; 

•	 target indicator estimates for the annual default rate;

•	 details of any modifications concerning the credit or guarantee 

criteria, terms and conditions; 

taking into account the ceilings in the funding agreement; 

•	 any other information foreseen in the funding agreement. 

all of this information is fed into the managing authority’s own 
annual reports.

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The Commission’s 
proposal for financial 
instruments after 2013

EAFRD financial instruments operating 
at the moment are mostly managed by 
publicly-owned bodies, and finance is 
mostly going to medium or long-term 
investments  supporting  medium  to 
large-sized projects. Scope to further 
expand  the  reach  of  rural  financial 
instruments  (e.g.  into  smaller-scale 
credits and/or non-public fund man-
agement) is anticipated, following the 
adoption of the new Common Strategic 
Framework5 (CSF). This CSF will apply 
to the EU funding period from 2014 to 
2020 and aims to provide a clear and 
common rule book for the EAFRD and 
other EU funds. 

The  introduction  of  the  CSF  rules  will 
see the EAFRD becoming a core compo-
nent of the ‘CSF Funds’. The CSF Funds 
will also include the European Regional 
Development Fund (ERDF), the European 
Social  Fund  (ESF),  the  Cohesion  Fund 
(CF)  and  the  European  Maritime  and 
Fisheries Fund (EMFF). The CSF is to be 
sufficiently detailed to provide genuine 
improvements in the coordination be-
tween EU funds, but sufficiently flexible 

to allow each policy covered to fulfil its 
respective mission. Provisions on finan-
cial instruments are part of Title IV of the 
proposed CSF Regulation (Articles 32-40). 
It is important to note that no new legal 
rules governing financial instruments are 
proposed for the new EAFRD Regulation 
and the CSF will act as the main reference 
here.

This approach is being proposed to sim-
plify and harmonise policy delivery by 
clarifying the rules around access to com-
plementary  funds  for  administrations 
and applicants. It will help to optimise 
synergies between the CSF Funds, and 
lead to improvements in each fund’s ef-
fectiveness and efficiency. Harmonisation 
is anticipated concerning the rules for 
eligibility,  monitoring,  reporting  and 
evaluation, implementation and control 
requirements. These would all apply to 
EAFRD financial instruments.

This more comprehensive legal frame-
work will provide clear rules to enable 
more combinations of financial instru-
ments with other forms of support, in 
particular with grants. This should make 
a wider range of options easier to imple-
ment, and stimulate the design of well-
tailored assistance schemes.

(5)  See Commission Staff Working Document “Elements for a Common Strategic Framework 2014 to 2020 the European Regional Development Fund, 

the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund 
SWD(2012) 61 final

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EU Rural Review N°13

A  number  of  new  developments  in 
the  management  of  rural  financial  in-
struments  have  also  been  proposed. 
options for ‘funds of funds’ using co-fi-
nancing from more than one EU source 
are  being  discussed,  and  proposals  to 
give  Managing  Authorities  the  option 
of  directly  managing  RDP  Loan  and 
Guarantee Funds are also included in the 
draft CSF regulation. EU bodies - like the 
European Investment Bank or European 
Investment Fund - could also take on new 
partnership roles in instruments that in-
clude EAFRD co-finance. Similarly, an in-
ternational financial institution in which a 
Member State is a shareholder could also 
play a role in using the EAFRD to support 
the development of rural areas. Possible 
options may exist for an instrument to be 
set up at EU level, and, interestingly, CSF 
flexibility also provides scope for EAFRD 
instruments to be used in a transnational 
or cross-border context.

Another noteworthy aspect of the CSF 
refers to the provision of ‘off-the-shelf’ 
models for financial instruments. These 
aim to help simplify the process of set-
ting up financial instruments at Member 
State level. The models aim to draw on 
best practice approaches to the planning, 
implementation and evaluation stages 
in  the  programme  cycle  of  different 

financial instruments. They are also being 
prepared to work in different operating 
circumstances and to allow the needed 
flexibility for Member States authorities 
to adapt them to their own specific ter-
ritorial development needs at national 
and/or regional levels. 

Ex-ante planning

one of the most important aspects of the 
draft CSF regulation regarding financial 
instruments is the reference to the rel-
evance of preparatory work. In order to 
ensure that the RDP funds are being used 
to target demand-led activity, all financial 
instruments are to be required to make 
an appropriate ex-ante assessment. Each 
financial instrument will require its own 
ex-ante analysis to determine the market 
demand for the support. This is aimed at 
encouraging the design of well-informed 
financial instruments that address gaps in 
funding services. 

Each  new  financial  instrument  would, 
therefore, have to address development 
needs that have been confirmed by an 
accurate  gap  assessment. The  ex-ante 
analysis  would  assess  the  market  de-
mand and match the fund size accord-
ingly. Added value would also need to 
be demonstrated to ensure that the right 

type of financial instrument was being 
proposed to address the identified mar-
ket failures or funding gaps. This good 
practice  approach  to  planning  rural 
development assistance should reduce 
any risk of overlap with existing financial 
supports. The ex-ante assessments would 
need to be transparent and subject to 
audit. If correctly applied, they represent 
a useful tool for strengthening the qual-
ity of EAFRD outcomes and encourag-
ing coherent approaches to public fund 
management. 

Assessments could be integrated as part 
of  the  ex-ante  evaluations  carried  out 
during the design of the 2014-2020 RDPs, 
or undertaken during the next program-
ming period, prior to the launch of a new 
financial instrument.  

Questions about how CSF funds could be 
used after the closure of the 2014 – 2020 
programmes  still  have  to  be  clarified. 
Because  financial  instruments  recycle 
funding, these instruments may continue 
after 2020. It is anticipated that resources 
and gains attributable to an RDP must be 
used for a period of at least eight years 
after the closure of the RDP, and during 
that time the funds must continue to be 
used in line with the RDP’s aims.

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EU Rural Review N°13

Ex-ante assessments for rural financial instruments: good practice approaches

a review of Eu-funded financial instruments by the European court of 
auditors6 identified good practice approaches to ex-ante assessments. 
a ‘gap assessment’ carried out by the European investment Fund (EiF) in 
sweden was highlighted as representing a model that could be useful 
for replication elsewhere.
•	 the EiF’s gap assessment was finalised in January 2007 and included: 
•	 a full nationwide analysis of  the supply of, and demand for, smE 
finance, by type of financial instrument and, where applicable, taking 
regional specificities into account;

•	 areas where the existence of financing gaps could or could not 

reasonably have been established;

•	 references to previous and other Eu support that could address the 

financing gaps; 

•	 information on the intended structuring of the co-financed funding 
(fund allocation), including a link to the operational programme 
submitted to the commission for approval; 

•	 information  on  potential  financial  intermediaries  capable  of 

implementing the funding scheme.

the analysis of the need for smE financing support was carried out 
through a consultation process, which received input from a wide 
spectrum of market participants, in both the public and private sectors. 
a programme of interviews with key stakeholders was followed by a 
large workshop. 

valuable ex-ante insights into the state-of-play concerning smE demand 
for financial assistance were gained from the gap assessment, which 
assisted in the subsequent design and implementation of EiF support 
to smEs in sweden. 

(6)  http://enrd.ec.europa.eu/app_templates/filedownload.cfm?id=E610A03D-963D-173A-D287-6451904FC151

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EU Rural Review N°13

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The Swedish Perspective  

the swedish rural network capital group was established to 
address the imbalance between rural decline and metropolitan 
growth, whereby investment was flowing to the cities but there 
was dwindling investment in rural areas. the group wanted to find 
out whether investors did not see large enough potential returns 
from rural enterprises or if there was a lack of entrepreneurs 
providing compelling investment opportunities. they wanted 
to know what was holding one or both of these groups back.

only a small percentage of rural businesses stated that they had 
difficulties in finding investment. however, the group, comprised 
of individuals with extensive experience in various aspects of rural 
entrepreneurship and finance, are of the opinion that these results 
must be interpreted carefully. Business expansion is stymied. rural 
sweden has been in decline for many years, exacerbated by ever 
decreasing local services.

agricultural enterprises reported least problems. capital intensity 
is high; they have bought large and labour-efficient plant and 
machinery using their land and forest as collateral. in contrast, 
other business owners are forced to choose between mortgaging 
(and risking) their family home or not taking a loan at all.

the group observed that conventional economic theories and 
concepts do not explain how globalisation and the interaction 
between banks and rural and urban contractors affect the local 
economy. disinvestment is not a market failure; it is rather a 
result of leakage from the local economy. nationwide, household 
savings are captured by financial institutions and reinvested in 
enterprises. however, rural entrepreneurs receive far less help with 

financing than corporations in bigger cities. listed corporations 
benefit most from globalisation and this is especially true in 
times of financial crisis.

the group also considers that rural financial institutions, savings 
banks and cooperative banks, originally set up to promote the 
local economy and the financial interests of its members, have 
turned into profit-focused bodies. these institutions have been 
instrumental in driving a long downward spiral, whereby a diluted 
local economy leads to even more dilution. Banks see greater 
risks and lower profits from investments in smaller businesses in 
rural areas, especially in areas with shrinking economic activity.

regardless of what policy advisors offer as a solution to reverse 
this trend, most share the view that the society of the future 
will be constrained and fundamentally changed by the lack 
of cheap energy.  we know that global fossil fuel supplies will 
decline while demand initially grows in asia. 

this means that we are facing a historically large and rapid 
transition of society as a whole with a highly uncertain outcome. 
we hope that with technological development and functioning 
markets, we will have time to re-allocate resources and invest in 
this transition. however, the risk is that we have already taken 
on a generally high level of debt to finance a fossil fuelled-based 
infrastructure that is becoming obsolete. Enterprises, both rural 
and urban, will need to rapidly rearrange their balance sheets 
and, despite being in debt, have to find a way to procure new 
infrastructure without incurring even more debt.

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EU Rural Review N°13

Supply and demand  
for rural financial  
engineering instruments

Financial engineering instruments are supporting European rural SMEs using 

various funds available, from EAFRD to Structural funds, and demand is growing 

at a steady pace while an information gap about the options available to them 

still exists. In rural parts of some Member states SMEs are excluded from financial 

support from lending institutions determining a `rural financing gap’ as a recent 

survey conducted by the ENRD Rural Entrepreneurship Thematic initiative on Rural 

Finance demonstrated.   

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EU Rural Review N°13

Rural areas are estimated to gen-

erate 48% of the EU’s gross value 
added and provide 56% of the 27 
Member States combined employment. 
An important characteristic of the rural 
economy is that it contains mostly small 
and  medium-sized  enterprises  (SMEs), 
many of which are micro-businesses with 
a high proportion of self-employment. 
These rural SMEs represent a large poten-
tial client-base for financial engineering 
instruments.

Rural SMEs clearly have considerable po-
tential to create employment, and they 
can play an important role in the recovery 
from the current global economic crisis. 
Access  to  finance  for  SMEs’  economic 
growth and development is widely rec-
ognised as a crucial element for Europe’s 
economic recovery. 

A  synthesis  report  from  the  European 
Commission7  reveals  that  nearly  300 
financial  instruments  are  being  used 
to  provide  Structural  Fund  support  to 
businesses in the EU Member States in 
the period 2007-2013. These comprise 
Loan Funds (43%), Equity Funds (36%) 
and Guarantee Funds (21%). The com-
bined  support  budget  for  SMEs  totals 
€7.4 billion and, by the end of 2010, the 
funds had assisted 20 858 investments 
in  enterprises,  using  €3.150  billion  to 
mobilise  some  €4.3  billion  of  overall 
development  funding.  This  helped  to 
create and/or safeguard around 91 000 
jobs. Many of these financial instruments 

operate in rural areas but they are often 
limited to supporting non-agricultural 
activities.  However,  farmers,  foresters 
and  agri-food  businesses  have  similar 
development needs to other businesses, 
and so demand would appear to be high 
for  financial  instruments  within  Rural 
Development Programmes (RDPs), to fill 
this gap.

Various financial institutions are in the 
business of supplying SMEs with devel-
opment finance. A study by the World 
Bank8 confirmed that the range of pro-
viders of financial services to rural SMEs 
stretches from informal to formal insti-
tutions and includes: public, private and 
cooperative banks, other financial institu-
tions, non-governmental organisations 
(nGos), micro-finance institutions, com-
munity-based financial organisations and 
money lenders.

EU and national development assistance 
is  also  available  for  SMEs  through  dif-
ferent  sources  of  co-financing,  includ-
ing  the  European  Agricultural  Fund 
for  Rural  Development  (EAFRD),  the 
Structural  Funds,  the  Competitiveness 
and Innovation Framework Programme 
(CIP), and the European banks, such as 
the European Investment Bank, amongst 
others. 

Demand trends

patterns that are monitored by Eurostat. 
The key demand trends observed for EU 
SMEs include:
•	 A shift has occurred in SME behaviour 
in  the  EU  since  2009,  with  increased 
reliance on external financing (i.e. not 
from own resources). The proportion 
of SMEs using external financing rose 
from 27% to 56% (on average) in the 
Eurostat sample;

•	 Most SMEs in the Eurostat survey noted 
that their main reason for seeking ex-
ternal finance was to create working 
capital, or to purchase land, buildings, 
equipment or vehicles; 

•	 Most requests for external assistance 
from EU SMEs are for less than €100 000, 
although significant demand does exist 
for loans of up to and over €1 million;
•	 Bank loans remain the most widely used 
source of external finance for SMEs; 
•	 only a very small proportion of SMEs 
use  ‘other  financial  institutions’  as  a 
source of external finance;

•	 SMEs  in  the  Eurostat  survey  felt  that 
banks  are  becoming  less  willing  to 
provide loan funding and an improve-
ment in the supply of bank loans was 
not anticipated in the immediate future; 
•	 The SME success rate in obtaining exter-
nal finance fell between 2007 and 2010. 
The proportion of partially successful or 
unsuccessful requests for loans doubled 
in this period. 

Demand from SMEs for financial assis-
tance continues to follow a number of 

A supply-side market failure is apparent. 
While SMEs’ reliance on loans for their 
external  funding  needs  continues  to 

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(7)  Titled: Financial Engineering Instruments Implemented by Member States with ERDF Contributions. Programming Period 2007-2013.  
See http://ec.europa.eu/regional_policy/thefunds/doc/instruments/financial/financial_engineering_report_2012.pdf

(8)  The World Bank (2007). Community-based Financial Organizations: A Solution to Access in Remote Rural Areas? Agriculture and Rural Development 

Discussion Paper 34. Accessible at: http://siteresources.worldbank.org/INTARD/Resources/combasedfinance.pdf

22

 
 
 
EU Rural Review N°13

increase, banks’ willingness to provide 
such loans is declining, and with it the 
actual supply of bank loans. 

Information about how such trends and 
issues specifically affect rural businesses is 
limited. This information gap is attributed 
to two reasons: firstly, surveys tend not to 
specify whether individual SMEs in a sur-
vey sample operate in predominantly ru-
ral, intermediate, or predominantly urban 
areas, thus making it difficult to draw any 
conclusions relating to rural enterprises; 
secondly, some surveys of SME access to 
finance exclude SMEs whose activities re-
late to agriculture, forestry or fishing. 

Despite the absence of specific rural data, 
the diversity of business enterprises that 
operate  in  our  countryside  today  pro-
vides reason to assume that rural SMEs 
are also affected by the aforementioned 
market  failures.  In  fact,  market  failure 
could  actually  be  exacerbated  in  rural 
areas for reasons outlined below.

Supply factors

In  rural  parts  of  some  Member  States, 
SMEs  can  have  difficulty  accessing  fi-
nance to help them fulfil their rural devel-
opment potential. Where rural businesses 
are excluded from financial support from 
lending institutions, rural development 
policy faces an acute challenge. This ‘ru-
ral financing gap’ can be attributed to a 
number of issues:

Europe’s  lending  institutions  are  now 
applying stricter controls on the finance 
that they provide. This is a result of inter-
national agreements that are designed to 
reduce the risk of future economic crises9. 
The result is that SMEs that are consid-
ered to be high-risk from an investment 
point of view are experiencing increased 
difficulties  in  accessing  development 
finance.

Some  rural  SMEs  may  be  considered 
higher risk than other businesses because 
they can be seen as being more sensitive 
to unreliable factors such as weather or 
economic  and  seasonal  fluctuations. 

©  TIM HUDSon

Rural SMEs may also be disadvantaged 
by a lack of knowledge among lending 
institutions about the rural economy’s 
operations and opportunities. The latter 
may occur when lenders are located far 
away from rural businesses.

A survey presented in the Final Report 
of  the  ENRD  Rural  Entrepreneurship 
Thematic  Initiative:  Rural  Finance10, 
gathered information on commercial 
banks’ perception of risks, trends, and 
preferences  related  to  credit  lines 
available to rural enterprises. Survey 
findings were based on the responses 
from six banks in four Member States 
(Hungary,  Latvia,  Malta  and  the 
United  Kingdom)  and  showed  that 

the majority of respondent banks do 
not  apply  any  special  formal  criteria 
to rural enterprises. However, the risks 
related to lending to rural enterprises 
were  estimated  by  banks  as  either 
equal  to  or  higher  than  the  risks  for 
non-rural  enterprises.  The  findings 
of the EnRD survey corresponded to 
the  results  of  surveys  conducted  for 
the  European  Central  Bank  and  DG 
Enterprise and Industry. 

one  of  the  interesting  findings  of  the 
EnRD survey was that banks were more 
inclined to welcome applications from 
rural businesses that were in receipt of 
funding  support  from  national  or  EU 
sources. 

(9)  For further information about the new regulations governing banks and other financial institutions see http://www.bis.org/bcbs/basel3.htm
(10)  http://enrd.ec.europa.eu/app_templates/filedownload.cfm?id=84638378-F1F0-1325-D38A-E3A85D31BAB4

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EU Rural Review N°13

Development proposals that had already 
been scrutinised via public sector ‘due dil-
igence’ checks were considered to carry 
less risk. For example, projects that had 
already been screened against EAFRD eli-
gibility criteria would be looked on more 
favourably by lenders. Banks considered 
EAFRD  co-financing  to  be  important 
because it helps to safeguard cash-flow, 
provides better overall viability, and leads 
to higher quality projects. 

other factors affecting the perceived 
risks attributed to rural SMEs by lending 
institutions relate to the overall busi-
ness acumen and capacity of rural firms. 
Businesses need to be able to convince 
financial institutions of their project’s 
viability and creditworthiness. Hence, 
SMEs that are able to demonstrate per-
sonal know-how about business and fi-
nancial planning, risk management and 
self-assessment techniques are more 
likely to receive support from lenders. 
Conversely, SMEs that are not able to 
adequately explain their competitive-
ness and growth potential may not be 
able to convince lenders of the merits 
of their proposals. 

Access to appropriate business support 
schemes for rural SMEs (including afford-
able business advisory services and tech-
nical  assistance)  is,  therefore,  another 
inter-related factor that can influence the 

rural financing gap for SMEs. In addition, 
a lack of relevant information about the 
availability of business financing options 
may also hinder both the supply of, and 
the demand for support11.

Rural Development 
Programme 
opportunities

Conclusions from this overview of the 
supply of, and demand for rural financ-
ing indicate that whilst the demand for 
financing exists, an array of supply-side 
obstacles may prevent rural SMEs from 
securing finance for their development 
projects.  Consequently,  market  failure 
trends  may  be  a  driving  force  behind 
rural SMEs seeking out other, alternative 
sources of funding in order to survive. 

An expansion of financial engineering in-
struments provided to rural businesses 
using the EAFRD in the Member States’ 
Rural Development Programmes (RDPs) 
could play a valuable role in addressing 
this challenge. As noted in the previous 
pages of this EU Rural Review, RDP credit 
schemes (i.e. Loan, Venture Capital and/
or Equity Funds) can be designed to offer 
more favourable conditions than com-
mercial  sources  of  funding.  Likewise, 
RDP co-financed Guarantee Funds may 
improve access to commercial credit, and 
RDP co-financed Interest Rate Subsidy 

instruments  could  help  to  ease  rural 
SMEs’ debt repayment by reducing the 
amount of interest to be paid from their 
own resources. 

Decision-making processes regarding the 
expansion of these types of RDP financ-
ing opportunities need to consider many 
questions to ensure the proper use of 
public funds. These questions underscore 
the importance of financial engineering 
instruments  being  introduced  only  in 
cases where a thorough analysis of the 
rural financing gap has been undertaken. 

RDP stakeholders interested in expand-
ing  the  availability  of  EAFRD  financial 
engineering  instruments  can  take  ad-
vantage of the lessons that have already 
been learnt from other EU policy areas. 
Cohesion policy, for instance, has been 
a pioneer of a great many financial en-
gineering instruments, designed to sup-
port SMEs in all parts of Europe. 

An interview with a cohesion policy spe-
cialist on page 27 provides very useful 
insights into the balance between the 
demand for, and supply of, alternative 
tools for filling SME financing gaps. 

Furthermore,  the  article  on  page  21 
covers various considerations that need 
to be taken into account when design-
ing a financial engineering instrument 
for  rural  SMEs,  balancing  the  needs 
and demands of the recipient and the 
provider. 

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(11)  See the article on page 34 for information about how National Rural Networks can help to address this issue.

 
 
 
Highland opportunities 

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Scotland’s northern region contains some of Europe’s most 
isolated rural areas, where business opportunities are limited 
by natural handicaps and depopulation pressures. The effects 
of the economic crisis have hit hard in this area, but a package 
of financial instruments has been designed to help the region’s 
rural businesses to get started and to grow. Co-finance from the 
European Regional Development Fund (ERDF) has provided 
important funding to establish these financial instruments, 
which mainly target non-farm businesses.

a company limited by guarantee was set up by the highland council 
municipality’s economic development department to manage the 
different funds. highland opportunity limited (hol) is a company 
with no issued share capital. it has one member, the highland council. 
no profit or dividend is distributed to the sole member from the 
company’s on-going operations and any surpluses are retained for 
re-investment in the company’s client base of micro-enterprises 
and smEs. 

hol has a net asset value of £4.1 million (equivalent to around €5.15 
million) and its annual investment programme is around £570 000 
(equivalent to around €715 000). this comprises mostly of loans from 
several different funds.

Opportunity Fund

an ‘opportunity Fund’ offers discretionary loans to new and growing 
businesses in the highland council area of scotland. this Fund has 
been operating successfully for 26 years, during which time it has 
received co-financing from the ErdF. its main priority is loans of 
between £1 000 and £50 000 (equivalent to around €1 250 to €62 
500), which can be unsecured, where there is a strong business plan. 

loans of over £50 000 and up to £250 000 (equivalent to around €312 
500) can be provided when adequate finance is available in the fund, 
and when there is security over a business asset. in addition, larger 
loans must demonstrate strong potential for generating economic 
development in the highlands. loan conditions for self-employed 
entrepreneurs require a personal obligation to repay, or in the case 
of limited companies, a directors’ guarantee is needed.

Exceptionally,  and  where  there  is  a  business  with  high  growth 
prospects and a clear investment exit route, equity investment may 
be considered through the opportunity Fund.

EU Rural Review N°13

Community Enterprise Loan Fund

hol’s community Enterprise loan Fund (cElF) provides loans to 
assist ‘non-profit distributing’ community-based enterprises in the 
highlands. a typical client is an entity with a constitution, such as a 
society, club, trust or company, which does not pay any dividend 
or surplus to its owners, but re-invests in the business. 

many such community enterprises provide lifeline social services 
that may not be viable as commercial ventures in the highlands, 
but survive and thrive with community support and finance. other 
examples include care organisations, heritage and cultural groups, 
youth organisations, sports clubs and so on. 

loans of up to £50 000 (equivalent to around €62 500) are available 
from the cElF, at interest rates from 5%, depending on the risk profile 
and whether security is provided or not. the maximum duration of 
a loan is seven years. loans above £50 000 may also be considered 
in special circumstances. the cElF received co-financing from the 
ErdF to help it launch its support for social enterprises. hol also 
has a loan facility from social investment scotland (a third sector 
community development Finance initiative, set up by the scottish 
government in 2001).

Youth start-up support

hol has an agency agreement with youth Business scotland to 
support young entrepreneurs in the highlands and northern isles. 
through the opportunity Fund, hol offers loans to match the 
loans provided by youth Business scotland. in aggregate, such 
loans are available up to £10 000 (equivalent to around €12 500) at 
a fixed interest rate of 3%, and for terms of up to five years.  youth 
Business scotland also offers grants of up to £1 000 (equivalent to 
around €1 250) in some cases, and market test grants of up to £250 
(equivalent to around €310) to support pre-start market research.

youth Business scotland targets young people aged 16–25 (or up 
to 30 if they have a disability or are geographically disadvantaged 
by being located on one of the scottish islands) who are starting 
or growing a business. it is particularly aimed at those who may 
be disadvantaged. Business planning advice, training and aftercare 
support from a business mentor are all part of the package of 
assistance.

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EU Rural Review N°13

Highland Business Growth Fund

this hol scheme offered a two year, unsecured, interest-free debt 
bond to any eligible business in the highlands that required access 
to finance to set up or expand. 

Business sectors targeted by this Fund reflected the highland 
council’s economic development priorities for hol, as well as 
the priorities of the region’s ErdF operational programme (which 
co-financed the Fund). these included smEs operating in tourism 
and culture, energy, food and drink, life (and other) sciences and 
the creative industries, together with new start-ups. the retail 
sector was not eligible.

with a robust business plan, an eligible business could access 
an interest free loan, with no capital repayments during the first 
two-year period, to help them obtain a matching bank or other 
commercial loan. new business start-ups could also obtain a seed 
finance grant as part of the scheme, to help them launch their 
enterprise. the scheme operated between april 2009 and april 
2010. twenty businesses were assisted and 62 jobs created or 
retained as a result.  demand was high because of the attractive 
interest rate and the repayment holiday at a time when commercial 
lending was difficult to access.  

compliance concerns raised by the scottish government were 
later withdrawn but delayed reimbursement of the ErdF grant to 
hol. this delay, combined with the reduced loan receipts due to 
the two-year capital repayment deferral, put considerable strain 
on hol’s cash flow and is still impacting on the funds available 
for re-investment.

Rural development funding

Explaining the rural development assistance provided by hol’s 
financial instruments, its chief Executive, marie mackintosh, said: 
“hol has always aimed to address the market failure in mainstream 
commercial lending by supporting smEs and social enterprises that 
have either been turned down by, or cannot raise sufficient funding 
from other sources.  as recessionary pressure has grown in recent 
years we find that bank lending policies have become stricter, and 
smEs are struggling to cope as their overdraft facilities are reduced 
or withdrawn, adding to their operating difficulties.  our interest 
rates are competitive and there is normally no arrangement fee.”  

“while hol is looking for growth outcomes and economic impact 
from  our  investments,  we  also  recognise  that  in  the  current 
economic climate it is important to support business resilience. 
many smEs need to survive the downturn and we expect that they 
will thrive once trading conditions improve.”

“a large part of our success is that we package our affordable financial 
assistance with a wide range of general and specialist business advice, 
which is free-of-charge, from our Business gateway and Enterprise 
Europe network staff teams.”

“in the year to march 2011, hol provided 36 loans valued at £566 000 
(equivalent to around €710 000), and this supported the creation or 
retention of 126 jobs.  in the year to march 2012 a total of 33 loans 
were approved, with a combined value of £597 200 (equivalent to 
around €750 000) and creating or sustaining 180 jobs.”

“one example of how our loan Funds have helped rural smEs is the isle 
of skye Bakery, which was established in 2007 to provide fresh bread, 
biscuits and oatcakes to the local community, to substitute for imported 
products.  By spring 2010, the business had outgrown the owner’s 
domestic kitchen and needed to move into, and fit out, commercial 
premises. a hol opportunity Fund loan of £3 000 and a highland 
Business growth Fund debt bond of £7 800 (equivalent to around €9 
800) was awarded and formed part of the £49 000 (equivalent to around 
€61 500) investment. the hol support also helped to lever grant support 
from a local trust, as well as a £7 800 bank loan. By autumn 2011, the 
bakery was in full production and three new full-time jobs had been 
created. the company had also opened an eco-café and a shop selling 
local produce. the applicants acknowledge that the hol loans helped 
to attract finance from other sources.”

“another example is the nearby isle of skye Ferry community interest 
company, which has received three community Enterprise loan 
Fund awards. the most recent, in december 2011, was a £25 000 
(equivalent to around €31 250) unsecured loan, repayable over 
three years, to carry out an engine upgrade and other repairs to the 
ferry. the project has helped to sustain employment for five local 
people,” adds ms mackintosh. “the isle of skye Ferry is an exemplar 
of a social enterprise in a remote rural location. not only is the ferry 
service successful in providing employment where there are few 
alternatives, it has also helped to connect two otherwise very isolated 
parts of scotland. the ferry offers an alternative tourist experience 
to the skye Bridge, and it was called into service earlier this year 
when road access to the coastal village of stromeferry was cut off 
for months due to a landslide.”

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EU Rural Review N°13

Learning from 
the EU Structural Funds’ 
experience  

Financial instruments might be relatively new to the European rural 

development policy toolbox, but the previous examples from Scotland 

highlight the fact that EU regional development policy has been making use 

of financial instruments for a much longer period. The importance of such 

tools has grown steadily, and the experience gained of channelling Structural 

Funds through financial instruments could provide valuable lessons for rural 

development policy.

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EU Rural Review N°13

EU cohesion policy provides a legal 

framework for the operation of 
a range of financial instruments 
throughout  rural  and  urban  Europe. 
In this context, Member States agree 
on  a  flexible  set  of  implementation 
rules for the Structural Funds. once in 
place, these EU rules and regulations 
then  become  the  guiding  principles 
for Member States, as they implement 
Structural Fund programmes. Details 
agreed  within  this  regulatory  frame-
work set out the scope and core char-
acteristics of Structural Fund financial 
instruments.  Member  States  use  the 
EU’s regulatory framework to help them 
design a diverse collection of Structural 
Fund financial instruments.

António  Gonçalves  is  Head  of  Unit 
for  Financial  Engineering  and  Major 
Projects at the European Commission’s 
Directorate-General for Regional Policy 
(DG REGIo). He works very closely with 
Structural Fund financial instruments and 
reports that the use of such instruments 
is on the increase. “For the next program-
ming period [2014-2020], the European 
Commissioner with responsibility for EU 
cohesion  policy  has  indicated  that  he 
wants to triple the proportion of fund-
ing that is channelled through financial 
instruments. It is part of the Commission’s 
stated aim, to emphasise the importance 
of using financial instruments in order 
to close the gap between scarce public 
resources and investment needs, and also 
to attract the participation of the private 
sector.”

As noted earlier in this edition of the EU 
Rural Review, money from the European 
Regional Development Fund (ERDF) has 
been  used  to  set  up  or  boost  several 
hundred different financial instruments, 
of  various  shapes  and  sizes.  Finnvera 
Loans, for example, uses ERDF support 
to assist development projects in west-
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and  venture  capital.  An 
ERDF  investment  of  €2.8 
million  in  Finnvera  has 
contributed to a total fund 
of €16.4 million, enabling 
support to be provided to 
about 1 500 projects. In the 
southern Italian region of 
Calabria,  €18.75  million 
from the European Social 
Fund (ESF) has been com-
bined  with  finance  from 
Fincalabria,  the  regional 
public financial institution, 
to create a total fund of €37.5 million, 
which provides micro-credit and guar-
antees for micro-credit. By January 2012, 
this financial instrument had supported 
around 1 300 entrepreneurs.

Different  patterns  are  evident  in  the 
use of financial instruments by Member 
States.  In  general  terms,  wealthier  EU 
countries  that  receive  less  cohesion 
funding per capita have typically shown 
a greater interest in financial instruments 
than  grants.  “The  countries  receiving 
lower resources have a tendency to be 
more selective in terms of the funding 
they provide. Financial instruments are 
seriously considered before making any 
decisions on the forms of financing,” ob-
serves Mr Gonçalves.

of cohesion policy funding available to 
support SMEs [via financial instruments],” 
Mr Gonçalves adds. Support to SMEs is 
in fact the area in which cohesion policy 
financial instruments have had the most 
impact. “Support  to  SMEs,  particularly 
through loans and guarantees, could be 
transposable to rural development, with 
the necessary adaptations.”

Mr Gonçalves notes that cohesion policy 
is also “providing a lot of support in terms 
of  risk  capital  for  start-ups  at  an  early 
stage. In the case of individual farmers, I 
don’t think this would be replicable. But 
in terms of financing farming business or 
business set-ups it might be replicable. 
Perhaps for the transformation of an ag-
ricultural product, for example.”

Boosting small business

Getting it right

In terms of the objectives, he notes that: 
“up  to  now,  financial  instruments  in 
cohesion  policy  have  been  applied  to 
support small and medium-sized enter-
prises (SMEs), urban regeneration, urban 
renewal and energy efficiency.” From a ru-
ral development point-of-view, the most 
relevant lessons are likely to come from 
the cohesion policy experience of using 
financial instruments to support SMEs.

“Up until December 2010, we estimated 
that there was approximately €8.1 billion 

Mr Gonçalves puts forward three main 
lessons  for  rural  development  policy, 
based on the experience of the financial 
instruments for cohesion policy: 
•	 financial instruments should be used to 

address a need; 

•	 the  provision  of  such  instruments 

should be demand-driven; and 

•	 the  public  policy  interest  should  be 
carefully balanced with the interests of 
private sector fund managers.

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Financial instruments, he says, should be 
used “where there is a real need and a real 
added value to their use. It is important 
to do a proper ex ante analysis of what 
the needs are, and why these needs are 
not being addressed by the market. So if 
a farmer goes to a bank and cannot get 
a loan, why is it? Is it because the bank 
is  not  interested  because  the  farmer’s 
business is too small or is too high risk? 
If the bank is willing to give a loan, we 
should not displace it. We come in when 
the bank is not willing to give a loan, even 
though the project could be viable, de-
spite its high risk. These are the areas we 
should cover with financial instruments 
supported with EU funds, be it in rural 
development or cohesion policy.”

In terms of ensuring that financial support 
is  demand-driven,  Mr  Gonçalves  says  it 
is important to identify problems in the 
provision of finance and “design the finan-
cial instrument exactly to respond to that 
problem. There should be a good balance 
between what the needs are and how the 
market  operates,  and  efforts  should  be 
made to try to adapt instruments to ac-
cepted market best practices.”

Cohesion policy has learned its own les-
sons in this respect. “one of the problems 
we faced in the past was that some in-
struments were created as supply-driven 
instruments, as if driven by the logic of, 
‘we have the money, so why not create a 
financial instrument?’” explains the Head 
of Unit at DG Regio.

we can address that need? The resources 
placed in financial instruments should be 
adapted to the identified investment re-
quirements of an area.” 

This  approach  offers  the  managers  of 
public funds an easy and fast way to com-
mit their funds, so they can say that they 
have done the job they were asked to do. 
However, this is not necessarily the best 
approach, since it does not provide the 
necessary assurance that public money is 
being used for the best possible purpose.  

Hence, Mr Gonçalves notes that, “in fu-
ture we should first analyse the problem, 
to identify where the need is, and how 

Financial instrument design also needs 
to take into account the special nature 
of EU funding. “We cannot forget that we 
are talking about taxpayers’ money, so 
we cannot do exactly the same things 
as a private investor might do,” he em-
phasises. “We have to introduce certain 
restrictions that normal market operators 
do not have, which makes the financing 
of risky ventures a very delicate matter, 
which needs careful research and follow-
up supervision.”

EU Rural Review N°13

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This leads on to the third main lesson 
for Mr Gonçalves – that public policy in-
terests should be balanced with those 
of fund managers. “Fund managers,” he 
remarks, “are there for profit, and we are 
there for public policy objectives - you 
have to find a way of aligning these inter-
ests so that by making profits the private 
investors are also serving public policy 
objectives.”

He summarises: “we provide funding for 
public policy objectives but we accept 
that the private investor needs to make 
a profit, otherwise they don’t come on 
board.”

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EU Rural Review N°13

Fine tuning

The Commission is refining its use of fi-
nancial instruments for cohesion policy 
in the light of a report by the European 
Court of Auditors12 (ECA), published in 
March 2012. The report recommended 
more robust assessments of the fund-
ing  gap  affecting  SMEs  that  apply  for 
support via financial instruments. It also 
identified a need to revise regulations to 
make them fit for the purposes of creat-
ing financial instruments, rather than just 
grant funding. Taking steps to use funds 
to leverage greater amounts of private 
investment was another key ECA recom-
mendation. The issues spelt out by the 
report could provide further guidance 
for financial instruments in rural devel-
opment policy.

on the subject of leveraging private in-
vestment (which is one of the main justi-
fications for using financial instruments), 
Mr Gonçalves makes the point that, “the 
ECA clearly states that for guarantees, co-
hesion policy achieved a leverage that is 
as high or higher than any other type of 
financial instrument. In terms of equity, 
the leverage was lower but still respecta-
ble. In some cases the amount leveraged 
was up to three and a half times the EU 
contribution.”

on the use of loans to leverage private 
investment, he says that, “the European 
Court of Auditors mentions that up to 
€2 for each euro invested by the EU was 
achieved and that we could achieve a 

much higher leverage. However, we have 
to take into account that we are working 
within  the  context  of  cohesion  policy, 
engaging with diverse regions and pro-
viding support in areas of market failure.”

be developed, according to pre-defined 
terms and conditions; rules pertaining to 
the management of funds are clarified; 
and the reporting of fund operations will 
be strengthened and streamlined.

Mr Gonçalves adds that the ECA report 
has been taken into account in the pro-
posals  put  forward  by  the  European 
Commission for the 2014-2020 program-
ming period. “The ECA also criticised the 
fact that the regulations were not adapt-
ed to financial instruments, so we tried to 
fill this gap, and the future regulations 
will have more detailed rules about the 
use of financial instruments.”

The end result should be a situation in 
which cohesion funds and rural devel-
opment  funds  can  work  side-by-side. 
“Clearly, within the programmes there are 
demarcations in terms of what actions 
can be supported, by the ERDF or the ESF 
on one side, and the rural development 
funds on the other. These delimitations 
will also be applicable to financial instru-
ments,” says Mr Gonçalves.

The road ahead

A Commission staff working document13, 
published in February 2012, provides a 
useful  summary  of  the  key  issues  and 
how  the  Commission  will  tackle  them 
during the period 2014-2020. This will 
also be relevant to financial instruments 
used to promote rural development, as 
the Financial Regulation for 2014-2020 
will set out common rules for the use of 
financial instruments in all policy areas 
financed by the EU budget.

The working document outlines a num-
ber of changes, including: financial in-
struments will be designed on the basis 
of ex-ante assessment that will identify 
market  failures  or  shortcomings  in  fi-
nancing;  financial  instruments  can  be 
combined  with  grants;  ‘off-the-shelf’ 
standardised financial instruments will 

Improvements  to  the  system  are  wel-
come  because  financial  instruments 
are  clearly  here  to  stay.  Mr  Gonçalves 
concludes  that, “financial  instruments 
will always be necessary, and are prob-
ably even more necessary now because 
we are in a situation of fiscal constraint. 
Budgets are becoming tighter and I don’t 
think this situation is going to alter after 
the current economic crisis. The process 
of fiscal consolidation will be maintained 
and, therefore, there will be less and less 
money available for grants and govern-
ments  will  be  a  lot  more  selective  in 
terms of the grant money that is avail-
able. Therefore, economic activity that 
can  potentially  become  self-financing 
should be supported through financial 
instruments and not through grants.”

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(12)  Special Report No 2/2012, Financial instruments for SMEs co-financed by the European Regional Development Fund, available at http://eca.europa.eu/

portal/pls/portal/docs/1/13766742.PDF

(13)  SWD (2012) 36 final, Financial Instruments in Cohesion Policy, available at http://ec.europa.eu/regional_policy/sources/docoffic/official/communic/

financial/financial_instruments_2012_en.pdf 

 
 
 
EU Rural Review N°13

Further online information sources:
commission staff working document - Financial instruments in 
cohesion policy 
http://ec.europa.eu/regional_policy/sources/docoffic/official/
communic/financial/financial_instruments_2012_en.pdf  

Financial Engineering instruments implemented by member states 
with ErdF contributions. synthesis report 
http://ec.europa.eu/regional_policy/thefunds/doc/instruments/
financial/financial_engineering_report_2012.pdf 

annexes to the synthesis report on Financial Engineering 
instruments implemented by member states with ErdF 
contributions. 
http://ec.europa.eu/regional_policy/thefunds/doc/instruments/
financial/financial_engineering_annex_2012.zip 

Factsheet: Financial instruments in cohesion policy 2014-2020 
http://ec.europa.eu/regional_policy/sources/docgener/
informat/2014/financial_instruments_en.pdf 

designing micro-finance operations in the Eu: a manual on how 
to build and implement micro-finance support programmes using 
the EsF

http://www.cop-ie.eu/sites/default/files/COPIE_ESFManual_
Access_to_Finance_print.pdf 

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EU Rural Review N°13

Sources of European investment support for rural financial instruments

a  number  of  joint  initiatives  supported  by  the  European 
commission  and  the  European  investment  Bank  (EiB)  or  the 
European investment Fund (EiF) have relevance for rural Europe. 
these  are  partnerships  between  the  European commission’s 
directorate general for regional policy (dg rEgio) and a number 
of international Financial institutions (iFis), including the EiB group.

the EiF financial instruments include JErEmiE and JasminE. the 
JErEmiE (Joint European resources for micro to medium Enterprises) 
initiative is designed so that EiF support can complement Eu 
cohesion policy. JErEmiE combines resources from the European 
commission and the EiB, as well as funds from national public 
authorities and/or other financial institutions. JErEmiE’s structure is 
unique, and it offers member states the opportunity to use part of 
their structural Funds to provide risk financing to smEs by means of 
equity, loans and guarantees. this is done via a revolving ‘holding 
Fund’, which acts as an umbrella fund. Flexibility in JErEmiE’s 
structure allows for innovative financial engineering products 
that encourage micro-enterprises and smEs (from rural and other 
areas) to move away from grant dependency, via a range of different 
financial solutions that are designed to fit their development needs. 

JasminE  (Joint  action  to  support  microfinance  institutions 
in Europe) is a technical assistance initiative for micro-finance 
institutions (mFi) in the Eu. JasminE uses finance from the European 
commission and is managed by the EiF. support through this 
instrument aims to expand the range and capacity of organisations 
that are involved in offering micro-finance to smEs in the Eu. it can 
be used by non-bank mFis (including those eligible to access rural 
development co-finance) to help them scale-up their operations 
and maximise the impact of their micro-finance products on micro-
enterprise development. 

Joint European commission/EiB initiatives include JaspErs  
and JEssica. JaspErs (‘Joint a ssistance to support projects 
in European regions’) is a technical assistance partnership 
between the European commission (dg regional policy), the 
EiB, the European Bank for reconstruction and development, 
and germany’s kreditanstalt für wiederaufbau (kfw ).  JaspErs 
provides  assistance  to  help  member  state  authorities  to 
undertake crucial preparatory work on large-scale development 
projects. rural  areas  can  benefit  from  JaspErs  because  its 
planning  support  helps  to  safeguard  the  quality  of  large 
projects, such as transport networks, energy grids and territorial 
regeneration plans. JaspErs operates in the 12 m ember states 
that joined the Eu since 2004, as well as in croatia.

JEssica (Joint European support for sustainable investment in 
city areas) previously focused on urban areas, but scope exists 
to extend its reach into some aspects of Eu rural development 
policy.  referring  to  JEssica’s  potential  rural  reach,  an  EiB 
spokesperson explains that, “for the 2014-2020 programming 
period of Eu funding, an expansion of the scope and scale in the 

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use of financial engineering instruments is foreseen, together 
with an enhancement of the flexibility of such instruments. in 
this context, scope could potentially arise for enhanced dialogue 
and exploration of partnership possibilities between JEssica and 
vehicles for rural development, such as Eu rural development 
programme  funds,  especially  in  the  fields  of  energy-related 
investments or the integration of food chains.”

“JEssica’s remit still lies within the promotion of integrated solutions 
for sustainable urban development. a potential expansion of the 
programme’s remit could envisage enhancing synergies between 
urban and rural areas (in terms of logistical infrastructure, fostering 
mobility and networking). however, such actions would have to 
be carefully designed and based on enabling legal bases. potential 
integrated JEssica actions in the field of carefully calibrated urban-
rural partnerships would therefore be contingent on the delegation 
of specific competences by the national managing authorities 
to the EiB.”

 
 
 
EU Rural Review N°13

Further information can be found at: 

•	 JEREMIE: http://www.eif.org/what_we_do/jeremie/index.htm 

•	 JASMInE: http://www.eif.org/what_we_do/microfinance/

JASMINE/index.htm 

•	 JESSICA: http://www.eib.org/jessica 

•	 JASPERS: http://www.jaspers-europa-info.org

another opportunity for closer ties between Eu rural development 
policy and Eu institutions like the EiB could arise in the form of 
a “development  platform  to  promote  capacity  building  and 
exchanges of experience between urban and rural areas». such an 
initiative could potentially favour functional urban-rural exchanges. 
the commission further proposes enhancing the use of financial 
engineering and technical assistance instruments and a more 
effective and efficient coordination of structural and cohesion 
Funds resources to maximise synergies. this is to be achieved by 
capitalising on ‘multi fund’ operational programmes and cross-
financing capabilities at programme or operations level. in this 
context, the role of a new tool, the integrated territorial investment 
(iti), could be instrumental, as it allows for bundled funding from 
several priority axes of one or more operational programme. 
results could thus deliver multi-dimensional and cross-sectoral 
interventions. within such a context, it could potentially have 
relevance to the downstream financing of functional interventions 
into  urban  and  neighbouring  rural  areas,”  concludes  the  EiB 
spokesperson.

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EU Rural Review N°13

The role of National Rural 
Networks in facilitating 
access to finance  

National Rural Networks (NRNs) are tasked with helping Member State authorities to 

improve the effectiveness of their Rural Development Programmes (RDPs). NRNs use a 

range of tools to analyse and promote good practice approaches to implementing RDPs and 

they are aware of the potential that financial instruments offer. The experience of Latvia’s 

NRN highlights some useful steps that can be taken by NRNs to promote RDP financial 

instruments.

Amid  the  recent  economic  tur-

moil,  it  can  be  easy  to  forget 
that the EU country hit hardest 
by the 2008-2009 global financial crises 
was  Latvia.  Between  2008  and  2010, 
the  Latvian  economy  contracted  by  a 
quarter, while the unemployment rate 
increased to about 23%. Many of those 
who remained in work also had to accept 
dramatic wage cuts.

one consequence of the crisis was that 
banks  stopped  lending  to  businesses, 
including  farms  and  other  enterprises 
in rural areas. Dzintars Vaivods, project 
manager for the Latvian national Rural 

network Support Unit, says that although 
the Latvian economy overall returned to 
growth in 2010, and has continued to re-
cover from the crisis, the hangover from 
the economic downturn persists.

an even worse situation than farmers, be-
cause the last two to three years were not 
very good for this sector. Rural tourism is 
a sector that the banks don’t finance at 
all,” he adds.

“There was a period when banks didn’t 
provide any finance, even to very good 
projects,” Mr Vaivods says. “The situation 
has since improved a lot, but banks are 
still hesitant, especially when it comes 
to small businesses.” Restricted access to 
finance can hinder farm expansion pro-
jects, or plans to move into new areas of 
production. other rural businesses also 
suffer. “Rural tourism companies are in 

Although rural businesses generally suf-
fer from a lack of easy access to finance, 
and thus are limited in the investments 
they  can  make,  some  sub-sectors  or 
types of enterprise struggle more than 
others. The biggest challenges, says Mr 
Vaivods, are faced by young farmers, new 
farmers who want to take over existing 
farms, smallholders and semi-subsistence 
farmers.

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The role of National Rural 

Networks in facilitating 

access to finance  

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In particular, RDP measure 112 caps sup-
port for young farmers at €40 000. often, 
more  than  this  is  needed,  but  banks 
are  not  filling  the  funding  gap.  Semi-
subsistence farmers, support for whom is 
capped at €7 500, face similar difficulties.

Banks could be encouraged to be more 
active in lending to these segments of the 
farming community if guarantees, which 
could be backed by the RDP funds, were 
provided. In Latvia, a Loan Fund for farm-
ers was set up in 2010 as a reaction to 
the economic and financial crisis, and this 
could be built on to also provide targeted 
guarantees.

Bridging the gap

Where market failures persist, there is a 
potential role for RDP funds to provide 
support for financial instruments, in ad-
dition to the more traditional RDP grants. 
Mr Vaivods outlines a number of actions 
that could be taken to bridge the gap be-
tween rural enterprises’ need for finance 
to underpin their growth and the avail-
able supply of funds.

At the policy level, steps could be tak-
en  so  that  the  segments  of  the  rural 
economy that are under-served by the 
commercial banks are targeted with sup-
port. “The rural economy will benefit if 
there are more appropriate instruments 
providing support for smallholders and 
young farmers,” Mr Vaivods suggests. “We 
have RDP measures for young farmers 
and semi-subsistence farmers but often 
this is not enough.”

“There  are  some  segments  of 

farming  where  there  is  re-
ally a market failure,” he says. 
The reasons for this vary. Young farmers 
from the Baltic States and elsewhere in 
the  EU,  for  example,  find  it  difficult  to 
get access to finance because they don’t 
have a track record or banking history 
and, in principle, represent a greater risk 
to the banks. Smallholders, meanwhile, 
suffer because “larger farms are always 
more stable and interesting for banks,” Mr 
Vaivods notes, adding that, “smallholders 
are under more intense market pressure 
and cannot compete with larger farms. 
Sometimes they have higher costs per 
unit of production, though not always”.

Rural enterprises can also suffer because 
banks  are  not  sufficiently  discerning 
when choosing who to lend money to. 
Returning to the issue of rural tourism, 
Mr Vaivods says that good businesses can 
sometimes lose out. “In rural tourism, the 
main problem is that there used to be 
many unsuccessful projects, and tourism 
was not an investment priority in the re-
cession. But some rural tourism sites are 
well located and provide good services. 
Banks should, therefore, consider them 
in a more selective way.”

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Mr  Vaivods  says  that  establishing  the 
Latvian  Loan  Fund  for  farmers  was  a 
good idea. However, it has been slow to 
start working and, in the meantime, the 
Latvian economic situation has improved 
and banks have started to lend again, al-
beit cautiously. “The market situation is 
much better and the market could pro-
vide loans to farmers,” says Mr Vaivods. 
The Loan Fund could, therefore, be re-
targeted, to concentrate on smallholders 
and new farmers. “The Fund is function-
ing, but can only provide partial support 
for these market segments,” he adds.

Some restructuring of RDP support could 
also be pursued. At present, young farm-
ers can obtain a grant to cover 80% of 
their investment, and developed farms 

can receive a grant that covers 40%. But 
for smallholders and semi-subsistence 
farmers, “there should be something in 
the middle,” Mr Vaivods suggests. If these 
farmers could get grants of 60% or 70%, it 
might be easier for them to obtain bank 
finance to fill the gaps.

More  support  could  also  be  provided 
to agricultural exports. In Latvia, EU re-
gional development funds provide back-
ing for export support programmes, but 
agricultural agencies are not directly in-
volved and agricultural exports are often 
overlooked. 

Mr Vaivods believes that support for ag-
ricultural exports would be best concen-
trated on specific sectors. He gives the 

example of cranberries. “Cranberries are 
one of our country’s niche products. We 
are one of the top five producers in the 
world. It is a good business, but capital 
intensive, and there are not many farms. 
It would be good if they could get some 
[export] support using financial instru-
ments  designed  for  this  type  of  rural 
enterprise”. 

For other agricultural exports, like grain 
or milk, finance is not the main issue. 
Rather, it is a question of improving co-
operation, but there is some resistance 
to this in Latvia. “People still associate 
cooperation with the collectivisation 
from  Soviet  times,  and  they  think  it 
is not a good way to do business,” he 
says. “People  prefer  to  work  alone.  I 

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EU Rural Review N°13

think this is one of the biggest [rural 
development] challenges we face. Its 
solution  may  be  a  matter  of  genera-
tional change.”

Learning by doing

The financing of rural businesses is not 
just  about  banks  extending  loans  or 
RDP funds providing guarantees, how-
ever. The Latvian nRn has realised that 
farmers and rural entrepreneurs need to 
be equipped with the necessary skills to 
obtain funding and work with financial 
institutions.

Hence, the Latvian nRn has set up spe-
cific training programmes for rural en-
trepreneurs. “If you have a loan you must 
cooperate with the bank, prepare a cash 
flow  statement,  make  repayments  on 
time, and so on,” says Mr Vaivods, adding 
that, “farmers must be prepared for this, 
and through the nRn we provide special 
financial management training”.

So  far,  two  of  these  nRn  training  pro-
grammes  have  been  put  in  place. The 

first is for young people and is aimed at 
sparking their entrepreneurial creativity 
and reinforcing it through training. The 
programme starts with a two-day brain-
storming session on ideas for rural busi-
nesses. Then, after decisions have been 
taken on which ideas to pursue, there is 
a follow-up course that concentrates on 
the preparation of a business plan. There 
is also a business plan competition, with 
prizes for the best proposals.

The second programme is aimed at semi-
subsistence and young farmers. They also 
get input and advice on their business 
plans, plus a support package covering 
five years of ongoing advisory help. This is 
not mentoring, emphasises Mr Vaivods, it 
is rather aimed at keeping the farmer on 
track and ensuring that plans are carried 
through, for example by advising on farm 
restructuring.

Banks are involved in the nRn’s training 
programmes, especially the young farm-
ers’ programme, and this helps to con-
nect rural entrepreneurs with potential 
sources of finance. It is still early days, 

but support has already been provided 
to about 400 farmers. ”The training pro-
grammes are relatively new and we are 
still in the process of increasing their ca-
pacity,” explains Mr Vaivods.

He hopes that as the scheme develops, 
other nRns might also become interest-
ed. “It is too early now to disseminate it 
to other countries,” he says, “but we have 
a very strong vision on this. We are learn-
ing by doing”.

The experience in rural Latvia under-
score the fact that demand exists for 
rural  financial  instruments  that  are 
designed to meet funding gaps in the 
development  of  rural  projects.  nRns 
can  help  to  clarify  and  highlight  the 
characteristics of such funding gaps. 
This  process  can  inform  the  design, 
implementation and evaluation of new 
RDP financial instruments. Importantly, 
nRns can also play a key role in building 
the business capacity of entrepreneurs 
in rural areas, helping them to make 
good use of RDP funds.  

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EU Rural Review N°13

Financial instruments 
under the NRN Rural 
Entrepreneurship 
Thematic Initiative

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EU Rural Review N°13

National Rural Networks (NRNs) from around Europe have joined 

forces to exchange experience and identify transferable solutions 

to facilitate improved access to financial assistance for rural 

businesses. This work is taking place within the framework of an 

NRN Thematic Initiative on Rural Entrepreneurship, which was set 

up in response to the global economic crisis. 

The  European  network  for  Rural 

Development  (EnRD)  set  up  an 
nRn Thematic Initiative on Rural 
Entrepreneurship in March 2010. During 
the early stages it was decided to cluster 
potential issues related to nRn coopera-
tion and joint action on rural entrepre-
neurship into four main themes, namely: 

1. Tools to Support Rural 
Entrepreneurship; 

2. Emerging Sectors for the Rural 
Economy; 

3. overcoming obstacles to 
Entrepreneurship; 

4. Social Aspects of Entrepreneurship. 

nRns decided that work related to the 
theme  of  ‘overcoming  obstacles  to 
Entrepreneurship’  would  concentrate 
on  investigating  how  rural  entrepre-
neurs  access  capital.  During  the  11th 
nRn meeting, in April 2011, discussions 
focused on the issues related to the lack 
of  credit  facilities  and  finance  in  rela-
tion  to  rural  development  initiatives. 
The Swedish nRn took the lead on this 

topic and formed a ‘Rural Finance Task 
Force’ (RFTF), which includes nRn mem-
bers from Latvia, Finland, Italy, Hungary, 
Germany and France. 

Four main tasks where identified for fur-
ther elaboration by the RFTF, namely: 
•	 collating examples of active financial 

engineering instruments in the EU;
•	 facilitating training on financial engi-
neering  instruments  for  rural  entre-
preneurs, the financial sector and the 
public sector; 

•	 raising awareness about the financial 
engineering potential of the EAFRD and 
also the role of other sources of fund-
ing; and

•	 agreeing a common language and a 
rating mechanism for rural investment 
proposals. 

To date, much of the RFTF’s work has fo-
cused on the collection of information 
about  how  financial  instruments  sup-
port rural enterprises in the EU. Interim 
findings identified relevant material and 
helped to clarify the current state-of-play 
and further research is underway to iden-
tify new case studies on rural financial 
instruments. 

The EnRD Contact Point also surveyed 
Managing Authorities, Paying Agencies 
and financial institutions to understand 
better the factors that influence the up-
take of financial engineering in RDPs, and 
the criteria used by banks in assessing 
the risk of projects in rural areas where 
such schemes have been activated. In 
addition, nRns contributed by sourcing 
further examples of credit schemes oper-
ating in their respective countries. All this 
information, in addition to an extensive 
literature  review,  was  synthesised  in  a 
final report14, which was presented dur-
ing the 14th nRn Meeting in Thessaloniki, 
Greece, in February 201215 

.

The EnRD also supported a seminar on, 
‘Facilitating  access  to  finance  for  rural 
micro-enterprises’,  which  was  organ-
ised  by  the  Latvian  nRn  in  Riga  (June 
2012)16. During this seminar a number 
of case studies identified by the nRns 
were presented. 

one of the case studies featured a suc-
cessful micro-credit scheme from Latvia, 
which has achieved some impressive re-
sults in assisting the development needs 
of small businesses run by women.

(14)  http://enrd.ec.europa.eu/app_templates/filedownload.cfm?id=E6109191-9B8E-3ACA-BE4F-780D87307DC1 
(15)    http://enrd.ec.europa.eu/en-rd-events-and-meetings/meetings/en/14th-nrn-meeting_en.cfm
(16)    See the Latvian NRN website for copies of the Seminar presentations and programme at  

   http://www.laukutikls.lv/citi_pasakumi/3122-veiksmigi_aizvadits_starptautisks_seminars_finansejuma_piekluves_atvieglosana_lauku_uznemumiem 

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EU Rural Review N°13

A Latvian micro-credit scheme for rural women

micro-credit schemes are a type of financial instrument, used 
in developed and developing countries for making small loans 
available to new entrepreneurs. these schemes traditionally target 
people who are excluded from mainstream financial services and 
the micro-credit option provides them with a chance to get the 
start they need. micro-credit instruments are often designed 
specifically to meet the particular needs and circumstances of a 
defined target group.

loans from micro-credit schemes are usually short-term, with 
the loan duration commonly lasting less than a year. Finance is 
provided to cover working capital, and payments can normally be 
received immediately after approval of the loan. repayments are 
commonly made on a weekly or monthly basis. amounts offered 
by micro-credit schemes are usually relatively small (below €1 000). 
Borrowers typically start with smaller loans and as they repay these 
loans they demonstrate their creditworthiness, thus becoming 
eligible for larger loans.

a micro-credit scheme using this approach has been operating 
successfully in latvia since 1998. this financial instrument provides 
loans to female entrepreneurs and is managed by the latvian rural 
women’s association. maiga krūzmētra from the scheme explains 
its background: “after our independence from the soviet union, 
people had to find new ways of earning an income and the general 
public did not have much business experience. we had business 
ideas and ambition but many people did not know how to take 
their ideas forward.”

“one of the big obstacles was people’s lack of experience in dealing 
with banks and getting loans. there was a worry that the banks were 
powerful institutions that would not want to support small-scale 
business proposals from the countryside. rural women thought it 
would be even more difficult for them to get financial help from 
a bank, so they were even less inclined to think about setting up 
their own business, despite often having some good ideas.”  

this social exclusion issue came to the attention of the nordic 
council of ministers, which was involved in supporting the Baltic 
states’ transition to a market economy. the council members were 
aware of the effectiveness of micro-credit schemes, not only for 
stimulating local economic development, but also as a tool for 
boosting the confidence of women and encouraging them to 
become more active in the development of their regions.

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Funding was awarded from the nordic council of ministers for a 
pilot micro-credit scheme, which has now grown into a network 
of over 70 micro-credit groups around rural latvia. ms krūzmētra 
explains: “we have had a lot of success with using this type of 
small-scale loan Fund, and we have helped women develop a 
wide variety of local businesses that provide jobs and services that 
are welcome in their local areas. Beneficiaries of the micro-credits 
have included younger and older people and their rural business 
projects include hairdressing, vegetable growing, herbal teas, 
tourism and sewing services, to name just a few.”

the latvian scheme works the same way as most micro-credit 
instruments. loan applicants do not need to have physical collateral 
such as property. instead the system uses a collective guarantee, 
whereby anyone who takes out a loan joins the micro-credit group 
and everyone in the group shares the risks taken by the group. this 
approach - based on solidarity - proves attractive and it means that 
members of the scheme are mutually responsible for ensuring 
that their individual loans are repaid. in some instances, borrowers 
can be asked to provide one or two personal guarantors, such as 
friends, neighbours or local community leaders.

40

 
 
 
“we find that women are more willing to think about taking a 
loan if they feel that they have the support of other women in 
the group,” remarks ms krūzmētra. “another important success 
factor for our loan Fund is the business mentoring support that 
we provide as part of the overall business development package. 
this capacity building approach has been welcomed by our clients 
who tell us that the advice we give about financial management 
and other business skills is very useful. the mentoring increases 
their confidence and helps reduce the risk of businesses failing. it 
also helps to protect the loan Fund and the members of the group 
from default risks. it is certainly part of the reason why we have 
had such a very low default rate on the micro-credits we provide.”

“in addition to money from the nordic council of ministers we have 
also received Eu funds from intErrEg to help expand the scheme. 
we now also have funds from a bank here in latvia, as well as from 
our association’s Fund for the Entrepreneurship of Rural Women in 
Latvia. the money is well used and we can see the difference it has 
made to both the business confidence of rural women and local 
economic development. more than 130 women have received 
micro-credits from our scheme, and for the majority of women 
this was their first loan.”

“we encourage our clients to take a step-by-step approach to their 
business development. a good example of what this can lead 
to is shown by gunta Čepuka, from the Bauskas district. in 2006, 
she received a loan to help set up a small farming enterprise. she 
then took out another micro-credit to help store manure from her 
livestock. the success of her food production gave her the idea and 
confidence to open a farm shop, selling products from local farmers. 
her latest loan from the scheme has helped her to build a facility 
for smoking meat, which adds value to local agricultural products.”

“in addition to added value projects like gunta’s, our micro-credit 
instrument also creates employment. Biruta mežale from cēsis 
for instance became a member of one of our micro-credit groups 
to help establish her local accountancy business. she provides 
individual accounting services to local enterprises and her business 
has now grown to employ eight people, servicing over 100 clients.”

“i am very pleased with the achievements of our micro-credit 
financial instrument and i think this sort of financial assistance could 
be useful in many other parts of Europe. it allows rural women to 
start business activities and gives them an opportunity to gain 
experience and self-confidence with the support of other group 
members. the benefits of such an approach are not always possible 
when using other financial instruments.” 

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EnRD Coordination 
Committee workshop

on-going priorities

The  EnRD  Coordination  Committee 
workshop on ‘Financial Engineering’ in 
october 2012 will focus on the activities 
of the RFTF. This large-scale workshop 
aims to bring together around 160 differ-
ent RDP stakeholders from around the EU 
to explore the issues involved in increas-
ing the uptake of financial instruments 
in future RDPs. A discussion on the new 
rules for the next programming period 
and how to better evaluate the market 
needs during the ex-ante assessment are 
some of the issues that will be tackled. 

A  number  of  ongoing  actions  by  the 
nRns and EnRD, under the RFTF, aim to 
feed into the process of designing the 
new RDPs for 2014-2020. More exchang-
es of experience on the utilisation of vari-
ous financial engineering instruments are 
foreseen as part of this process, and pro-
posals have also been made to develop 
methodological guidelines on both the 
assessment of rural financing gaps and 
the other procedures involved in oper-
ating financial instruments, which can 
assist Managing Authorities and Paying 
Agencies in running such schemes. 

nRns are being encouraged to start work-
ing closely with Managing Authorities in 
order to prepare for the introduction of 
financial engineering instruments under 
the CSF, and to provide information on 
alternative means of improving access 
to finance for rural SMEs. 

A checklist has been designed to pro-
vide a useful guide for RDP Managing 
Authorities,  intermediary  bodies  and 
other stakeholders involved in supervis-
ing the EAFRD.

Useful web links 

Locate banks, venture capital funds and other organisations in your country that provide funding through financial instruments 
on the Access2Finance website (http://www.access2finance.eu/)

The European Union’s grants website (http://ec.europa.eu/contracts_grants/grants_en.htm)

The Enterprise Europe network (http://portal.enterprise-europe-network.ec.europa.eu/)

Member organisations of the Enterprise Europe network in 50 countries (http://portal.enterprise-europe-network.ec.europa.
eu/about/branches)

Links to EAFRD Managing Authorities in the EU Member States (http://ec.europa.eu/agriculture/links-to-ministries/index_en.htm)

Locate national/regional Managing Authorities that can inform you about obtaining financing in your country or region via the 
EU Structural Funds (http://ec.europa.eu/regional_policy/manage/authority/authority_en.cfm)

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Choosing the right Financial Instrument
selecting the right type of financial instrument to help fill the rural smEs financing gap requires careful analysis and planning, and 
consideration of the following points.

•	 all proposals for financial engineering measures must be duly justified by an assessment of the level of demand and the specific 
needs of the target beneficiaries (smE and/or other organisations). analyses of financing shortfalls should be of high quality and 
include a quantified analysis of the financing gap.

•	 when approving rdps that include financial engineering measures, the European commission should verify their consistency with 

the characteristics of the financing gap and ensure that the assessment and proposed measures are in line.

•	 an appropriate level of demand is required to avoid public funds being ‘geographically scattered’ by financial instruments. 

providing access to finance with fund sizes below a certaincritical mass is very likely to be inefficient and unsustainable. this is 
because the overhead costs and the risks associated with investments or loans cannot be spread over a sufficient number of smEs. 
rdp authorities should avoid situations where the combined risk profile and the small fund size can actually put the entire fund 
portfolio at risk (because of an insufficient diversification of the risk taken by the fund).

•	 all proposals for financial engineering measures must include contractually binding minimum leverage ratios, minimum revolving 

periods17 and data for the calculation of leverage indicators.

•	 Every financial instrument requires a reliable and technically robust monitoring and evaluation (m&E) system, capable of accurately 
informing the rdp’s reporting and auditing processes. the m&E system must be able to distinguish each financial instrument and 
segregate its results or outcomes from conventional grants. the amount of money actually paid to an smEs should be transparent. 
a small number of measurable, relevant, specific and uniform m&E indicators should be agreed in advance for all financial 
instruments.

•	 arrangements for covering the management costs of financial instruments should be transparent, auditable and compliant with 

the criteria set out in the regulations.

•	 any preferential treatment for private sector contributors to a financial instrument (over the public sector contributors) must be 

carefully justified, as this may restrict the capacity to generate sufficient legacy funding for the next wave of rural smEs.

•	 working capital eligibility should be examined on a case-by-case basis, taking into account applicable state aid legislation and rules.

•	

‘Evergreen’18 revolving fund approaches should be favoured, to ensure that financial instruments have a long-term legacy. 
conditions should be set that prevent legacy funds being used for any purpose other than the original rural development 
objective of the rdp measure from which the EaFrd co-finance was sourced.

(17)   A revolving period refers to the facility provided to a borrower with a maximum aggregate amount of capital, available over a specified period of time
(18)   An Evergreen Fund is a financial instrument in which the returns that are generated on investments are automatically returned to the overall Fund budget,  

  in order to sustain a continuous supply of available capital for investments.

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Glossary of key terms used in this issue of Rural Review

Common Strategic Framework

an Eu policy framework proposing common and consistent implementation rules for Eu Funds under 
shared management.

Equity Fund

Evergreen Fund

Grant Fund

Guarantee Fund

Holding Fund

Interest Rate Subsidy scheme
Legacy resources

Loan Fund

Managing Authority

Market failure

Micro-business
Micro-credit

Risk assessment

Rural financing gap

Seed Capital

Start-up Capital

Small  and  Medium-sized 
Enterprise
Structural Funds

Venture Capital Fund

Winding up

Working capital

an instrument providing investment support to a business (existing or start-up) via the acquisition of an 
equity stake (part-ownership).

an Evergreen Fund is a financial instrument in which the returns that are generated on investments are 
automatically returned to the overall fund budget, in order to sustain a continuous supply of available 
capital for investments.

a form of financial assistance to a beneficiary that does not need to be repaid (other than for contractual 
infringement reasons).

an instrument providing investment support to a business via guarantees. a guarantee is a commitment by 
a third party, called the guarantor, to pay the debt of a borrower when the latter cannot pay it. the guarantor 
is liable to cover any shortfall or default on the borrower's debt under the terms and conditions as stipulated 
in the agreement between the guarantor, the lender and/or the borrower.

Fund set up to invest in one or more financial instruments. holding funds can be considered to be beneficiaries 
of Eu support.

interest rate subsidies are a means of supporting the payment of interest rates on loans.

capital resources and gains, and other earnings or yields attributable to support from the Eu Funds to 
financial instruments.

an instrument providing investment support to a business via a loan. a loan is a type of debt. in a loan, 
the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is 
obligated to pay back an equal amount of money to the lender at a later time. typically, the money is paid 
back in regular instalments, or partial repayments; in an annuity, each instalment is the same amount. a loan 
is generally provided at a cost, referred to as interest on the debt.

a managing authority is designated by the member state as the body responsible for the management of 
an Eu co-funded programme, such as a rural development programme. it may be a public or private body.

an economic situation where the quantity of a product demanded by consumers does not match the 
quantity supplied by suppliers. this is caused by various factors, which prevent supply meeting demand. 

Businesses with less than 10 employees and an annual turnover under €2 million.

small loans, usually up to €25,000, granted either by institutions specialising in microcredit or by other 
financial intermediaries. in the context of this publication, the purpose of the micro-credit needs to be 
related to economic activity.

risk assessment is a step in a risk management procedure and relates to the determination of the quantitative 
or qualitative value of the credit risk (‘valuation’). this exercise is specifically (but not only) relevant for the 
issuing of guarantees. Quantitative credit risk assessment requires the estimation and calculation of risk 
(including ‘expected loss’ and ‘unexpected loss’): the magnitude of the potential loss and the probability 
that the loss will occur. 

the gap that exists between the availability of financial support for rural business and the support they 
need for their development. 

seed capital is financing provided to study, assess and develop an initial business concept. the seed phase 
precedes the start-up phase. the two phases together are often called the early stage.

start-up capital is provided to enterprises for product development and initial marketing. Enterprises may be 
in the process of being set up or may already exist but have yet to sell their product or service commercially.

Businesses with between 10-250 employees and an annual turnover of between €2 million and €50 million.

instruments of Eu cohesion policy, aimed at reducing regional disparities. include the European regional 
development Fund and the European social Fund.

an instrument providing investment support to a business via venture capital (vc). vc is a type of private 
equity support, normally used to fund an early-stage (seed and start-up) or expanding business. higher risks 
are associated with early stage businesses so to offset this the vc Fund will generally seek a higher-than-
average return on investment.

a process that entails selling all the assets of a Fund, paying off creditors, distributing any remaining assets 
to the principals, and then dissolving the fund. Essentially, ‘winding up’ is to be understood as ‘liquidation’.

working capital relates to the liquid assets an enterprise has available to build its business, but is also a 
measure of its efficiency and financial health. working capital can be positive or negative, depending on 
how much short-term debt the company is carrying. a negative working capital means that a company 
currently is unable to meet its short-term liabilities with cash, accounts receivable, and inventory. working 
capital is calculated as: current assets minus current liabilities.

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