Microcredit Research in the EU 15 and European Economic Area (EEA)

Microcredit Research in the EU 15 and European Economic Area (EEA)

TAMARA UNDERWOOD, EUROPEAN MICROFINANCE NETWORK

Following Proudhon and Raiffeisen’s efforts in the 19th century, the microcredit sector is again developing in Western Europe[1]. Persistent unemployment and pressure on public funds have focused attention on microcredit as a tool to foster self-employment and thereby also promote social and financial inclusion. Whilst research needs are similar to those in developing countries, the context in which this new generation of microcredit programmes is implemented is very different. Research in Western Europe has to take account of an increasingly service oriented and technology dominated economy, the changing role of the welfare state, the legal and bureaucratic characteristics of each country, clients who are relatively more difficult to reach and structural and regulatory factors that make sustainability challenging.

In its present form, the microcredit sector is young. Nevertheless, a number of research projects have been conducted and several others are underway. The European Microfinance Network (EMN), a network of organisations involved in microfinance in Europe, coordinates a research group and also has its own research function. This article uses information collected by EMN and its research group to discuss research needs, themes and projects being implemented.

The article shows that research is at present carried out by universities, research centres and networks of microcredit practitioners. Most projects involve applied research and cover issues such as sector analysis, policy and regulation, efficiency, operational performance, at risk groups and impact. It appears that there is relatively less theoretical research taking place at present. There are, however, ‘applied’ research projects that are developing and testing analytical frameworks.

Given the specific nature of the Western European environment, thematic priorities are and should continue to be related to reaching groups at risk of social and economic exclusion, ensuring a supportive regulatory and policy environment and addressing concepts of sustainability and the impact of microcredit.

Microcredit in Europe: A Young and Diverse Sector

In Western Europe, the current microcredit sector is relatively young and very diverse. A handful of organisations pioneered microcredit in the late 1980s. However, the majority of microlenders active today began lending between 2000 and 2005. Over this period, the annual growth rate in the number of microloans disbursed has increased as has the number of actors. It is estimated that there are well over 100 actors involved in the lending process in the EU 15 and European Economic Area (EEA) countries.

There is diversity in the types of organisations involved in microlending. In Spain savings banks dominate the market and work in partnership with non-governmental organisations and foundations that provide pre- and post-loan support. In the United Kingdom, Italy and France not-for-profit non-governmental organisations are prominent. There are also foundations, state banks, credit cooperatives and government entities providing microloans in Belgium, Sweden, Finland and Germany. The type of actors involved is often related to country-specific lending regulations.

Lenders operate for a variety of reasons. These range from stimulating growth and development of small and medium sized enterprises, to addressing market failure, to ensuring social and economic inclusion of persons at risk of poverty. Microloans sizes vary from Euro 2,000 to Euro 23,000. Loan sizes appear linked to the lenders’ overall mission and objectives. About 30% of organisations focus primarily on microlending. For approximately 50% oforganisations, microlendingrepresents 25% or less of their activity portfolio. Organisations in this second category provide a range of other social, employment or banking services. In contrast to the ‘minimalist’ approaches adopted in many developing countries, over half of organisations involved in microlending in Western Europe provide pre- and post-lending business development services.[2]

The Western European sector has not transitioned from microcredit to microfinance as it has in developing countries. Apart from savings banks in Spain, one lender in Belgium and a limited number of non-governmental organisations in the United Kingdom, few actors provide financial services other than lending for microenterprise development. Existing financial services coverage and legal restrictions limit the range of services that can be provided.

Research Needs

Although research needs with respect to client demand, operational performance and impact are similar, the context in which Western European programmes are implemented is very different from that in developing countries.

For example, research in Western Europe has to take into consideration the changing role of the welfare state and the legal and bureaucratic specificities of each country. Welfare programmes, taxation regimes and business registration processes sometimes create barriers to self-employment and microenterprise.[3]Research into the legal and regulatory environment for both microenterprises as well as microlenders is needed to identify good practice and to promote an enabling environment.

The proportion of the population that can benefit from microcredit is smaller than in developing countries and can be more difficult to reach. In developing countries, microcredit is relevant to large portions of the economically active population given limited bank coverage and widespread poverty. By contrast, 15% of the European Union’s population is at risk of poverty and, with a highly developed financial sector, 10% of the population is estimated to be financially excluded.[4]Potential microloan clients are geographically dispersed and are affected by years of unemployment and economic inactivity.[5]With an economy increasingly dominated by services and technology, adapting to the new economy is a challenge for unemployed people. Significant outreach and non-financial support is required to reach clients, increase borrower self-confidence and to help these new entrepreneurs manage complex regulatory environments. Inthis context, research should examine the profile and capacities of the unemployed and other groups at risk of poverty and exclusion in order to develop appropriate loan products and non-financial services as well as marketing and outreach strategies.

Sustainability and operational performance are also significant challenges for the sector. Structural costs and operating methods combined with legal and regulatory restrictions on interest rates and microlender borrowing hinder sustainability. Alternative and adapted approaches to conceiving of and measuring sustainability, efficiency and return on investment are important as is work on interest rates and borrowing regulations.[6]

For the microcredit practitioner, research needs and possibilities are vast. In simple terms, lender needs can be divided into two categories: immediate and strategic. Immediate needs are related to monitoring of outputs such as client numbers, repayment rates, portfolio quality, business survival rates and client income. Much of this information serves internal management purposes and is reported to donors. Strategic needs include investigation of many of the themes raised above as well as increasing interest and visibility of their programmes and addressing particular issues identified during monitoring.

Most microlenders effectively undertake output monitoring on a regular basis. However, the majority of lenders in Western Europe are small organisations, with limited staff. Their ‘research’ capacity is not necessarily designed to address the full range of issues outlined above. Researchers can help microlenders undertake strategic investigation through their knowledge of research design best practice, research methodologies and data analysis.

Microcredit Research in the EU 15 and EEA

In January 2006, EMN began collecting information on microcredit research conducted in the European context. Given the age of the sector, the objective was to ensure that research results are shared as widely as possible, to identify who is carrying out research, to look for gaps in the research and to consider future collaborations.

To date this process has identified over 50 research projects undertaken in the EU and EEA since 2000[7]. Projects identified fall into six categories: sector surveys, research on the regulatory environment and policy, studies of at risk groups, sustainability, impact and the role of banking institutions.

Projects are led by universities, research centres and networks of practitioners. Researchers and practitioner networks are also collaborating on certain projects. Individual lender’s input is focused on data provision and implementation of results and in some case research design as well. This model is working well at present because it builds on the relative strengths of each actor and creates synergies.

Sector Surveys

The majority of studies focus on describing this quickly developing sector. Country-level overviews have been undertaken in Germany, Spain and the United Kingdom, member states with relatively large numbers of individual microlenders.[8]A variety of organisations have carried out these studies from practitioner networks to universities and research centres. Europe-wide sector surveys have also been undertaken by research organisations and practitioner networks.[9]EMN itself is presently undertaking its second survey of the microfinance sector in the European Union in collaboration with several microfinance networks and research foundations.

These surveys have tracked sector size and growth trends and have identified good practice and challenges. They have served a strategic need to increase the profile and visibility of the sector. They have also assisted in enabling dialogue with European Union, member states and financial sector actors.

Regulatory Environment and Policy Measures

The regulatory environment for entrepreneurs and microlenders is complex. It can create disincentives to business start-ups and constrain efforts to develop self-sustaining loan funds.

There have been several studies on the legal, regulatory and policy environments in different countries within the Union. There have also been cross-regional studies that have focused on identifying and promoting the adoption of best practices. These studies have focused on interest rate caps, tax regimes, welfare to employment and self-employment policies, entrepreneurship education, business development services and funding.[10]Research bodies have led these efforts and have collaborated with practitioner networks to develop country studies.

Already this work, and the advocacy that has followed, has contributed to positive changes in some countries. For example in France, interest rate caps have been modified for microlenders as has the law on borrowing for onward lending. The French government has also agreed to extend deferment periods for the payment of social charges by some start-up microenterprises.

At Risk Groups

An estimated 15% of the EU population is at risk of poverty. Groups most at risk are women, single parent households (mostly headed by women) and the elderly. Unemployment is a key factor in poverty risk as well as social exclusion. Three groups are particularly vulnerable to long-term unemployment: older male and female workers; men and women under the age of 25; immigrants and ethnic minorities.[11]Microcredit, by supporting self-employment and microenterprise development, has an important role to play in social and economic inclusion of these at-risk groups.

Microlenders and researchers are starting to pay attention to the profiles and capacities as well as barriers these groups face. So far, work on under-represented and at risk groups has focused immigrants and women. Microcredit is seen as being well adapted to the needs of immigrants and capable of promoting integration via self-employment. Research on immigrants has examined access to financial services and microcredit, outlining barriers and microlender policy and practice. Women are under-represented in terms of entrepreneurship and microlending in Western Europe, particularly when compared to Central and Eastern Europe, North America and developing countries. Studies on women have focused on access to microcredit, the social, economic and empowerment impact of microcredit and the challenges faced by women transitioning from welfare benefits to entrepreneurship.[12]

The situation of youth and ethnic minorities does not appear to be receiving research attention at present although some microlenders focus on lending to youth. Similarly older male and female workers do not appear to be targeted.

Sustainability

Conceptual, definitional, structural and legal issues make the debate about establishing sustainable microlending programmes very different from that in developing countries.

Conceptually, microcredit in Western Europe is in most cases conceived as a tool for bringing the socially excluded into the mainstream economy through entrepreneurship. There is relatively less focus on creating viable microlenders that meet the needs of increasingly large numbers of the population in a sustainable manner.[13]There is also debate about the meaning of ‘sustainable’. Should sustainability mean that clients cover all costs? Or, given microlending’s social policy objectives in Western Europe, should there be long-term public-private partnerships to ensure that microcredit programmes are sustained with clients paying only a portion of costs?[14]

Structurally, microlender staff costs are high in countries where employers and employees make significant contributions to the welfare state. In addition, microlenders provide business development services due to weaknesses in existing provision or to assist borrowers to navigate the complicated business registration and tax regimes prevailing in many Western European countries. These services have a cost and many lenders do not differentiate these costs from loan processing. Moreover, interest rate caps in most countries mean that microlenders are unable to price for risk and cover loan processing costs. And bars against lending for onward borrowing limit microlender economies of scale.

At present, not a single microlender has achieved sustainability in Western Europe, although it is a long-term objective for many lenders. Some experts wonder whether sustainability, as it is defined in developing countries, is attainable in Western Europe and whether subsidies of some sort are required indefinitely. Given this scenario, research is looking at microlender efficiency, in order to enable lenders to stream line costs and prove efficiency to public and private sector donors and guarantors.[15] Others are looking at how business development services should be provided and the best way to ensure that these services are funded.[16]Social return on investment is another topic receiving attention as microlenders seek to provide information on the relative savings to state budgets of investing in microfinance as compared to paying long term unemployment benefits.[17]And policy work is addressing interest rate caps. In addition, the work on efficiency and social return on investment is supporting the development and testing of analytical tools that can be shared widely and can in future enhance both operational performance and performance measurement.

There is a need to continue to focus research efforts in this area and to bring the different strands of the discussion (conceptual, definitional, structural, organisational and regulatory) together to develop a holistic view of the question.

Impact

Worldwide, microlenders and microfinance providers seem to have mastered monitoring client numbers, repayment rates and portfolio performance. For both theoretical and practical reasons, measuring impact on clients’ lives and livelihoods has been undertaken with greater difficulty.

Information received by EMN as well as its on-going sector survey indicates that not many formal evaluations of the quality of microlending and business development services are undertaken.[18]In addition, of the research reports and evaluations that EMN has identified so far, two look at the question of impact.[19]

The limited research on programme quality and impact may mean that this type of assessment is not taking place or that evaluation reports remain internal. Whilst practitioners are good at measuring outputs, measuring programme quality and impact is the next step and is crucial to ensuring achievement of goals, improvement in client lives and accountability to donors. Measuring and attributing programme impact to microlending activities, whilst challenging, can be achieved. Impact measurement is a key area where researchers and practitioners can collaborate in the design of practical research methods and tools.

The Role of Banking Institutions

Banking in Europe has a very long tradition. In many Western European countries savings banks, credit unions, ethical and commercial banks play an important role in microlending. In Spain, savings banks disburse microloans in collaboration with their own foundations and non-governmental organisations. In Italy, ethical banks operate through social actors. In Germany some regional and savings banks, with co-guarantees from the European Investment Fund, are involved in microlending. In Sweden an ethical bank has recently begun microlending. In France, commercial banks have formed partnerships with microlenders and in the case of France’s largest lender, make concessional loans for onward lending to microentrepreneurs. The development of the sector in Europe can not be achieved without the contribution of banks in terms of finance, lending techniques, coverage and scale.

There is a considerable amount of thinking and research about the role of the banking sector as reflected in the number of research reports identified that treat this subject.[20] There are overviews of how banks and microlenders work together and of what banks can learn from microlender techniques. There is also discussion of how regulatory environments can induce banks to invest in or collaborate with microlenders.

By contrast, non-formal methods of savings and credit as well as the on-going role of pawn brokers appear to be receiving little research attention at present.

Conclusion

Research undertaken on the Western European microcredit sector falls into six thematic areas: sector surveys, the regulatory and policy environment, at risk groups, sustainability, programme quality and impact and the role of the banking sector. Given the specificities of the Western European environment, thematic priorities are and must continue to be related to reaching groups at risk of social and economic exclusion and ensuring a supportive regulatory and policy environment. Considerable effort is also needed to bring together the different strands of thinking and applied work on concepts and definitions of sustainability as well as their application in concrete terms. Impact does not appear to be receiving much attention at present. The sector would benefit from development of theoretical constructs and practical tools for measuring social and economic impact of its work.