COPIE 2 Access to Finance
Baseline Study
European Microfinance Network
103 Rue de Vaugirard
75006 Paris - FRANCE
Tel: +33 (0)1 42 22 0119 - Fax: +33 (0)1 4222 0644
September 30, 2009
Executive Summary
The present COPIE 2 baseline study provides background on European microfinance, examines ESF intervention to support the sector, identifies best practice and provides keys for ESF support in the future. A specific insight is provided into microfinance activities in five European countries/regions which are core members of COPIE 2. These are: Flanders/Belgium, Czech Republic, Germany, Lithuania and Spain. Information was gathered through on-site semi-standardised interviews[1].
All over Europe individuals from specific target groups who would like to set up or develop a microenterprise (with less than 10 employees) or become self-employed, such as (long-term) unemployed persons, economically inactive women, single parent households, migrants and ethnic minorities, young people, seniors or disabled persons, are reported to face increased barriers in accessing external finance. They tend to ask for small amounts of loans which are perceived as too risky by banks, have little personal capital, lack collateral and guarantees and have little or no credit history.
Microfinance tackles this issue by providing easily accessible, small loans for “non bankable” persons combined with non financial services such as business support. Microfinance is a growing but young activity in Europe, particularly in Western Europe, where most of today’s microfinance organisations have only been created since the year 2000. This contrasts with a mature, more commercially oriented, sector in Eastern Europe. Different models of microfinance provision exist: linkage banking, microfinance organisations with a specific legal status or promotional banks. The linkage banking model, especially prevalent in Western European countries, brings together a bank and a social organisation throughout the whole process of business support and credit provision; this has proven to be especially effective in reaching out to specific target groups.
EU structural funds represent a highly important support for microfinance provision. Microfinance is relatively labour intensive as it is based on firm knowledge of the borrower capacity and a close relationship with the borrower; most often it is also combined with business support. Especially in Western Europe microfinance is therefore probably never going to turn into a completely sustainable system. Under the EQUAL initiative from 2000-06, but also in the new funding period 2007-13, several microfinance providers have used and are currently using ESF funds to test new financial and non-financial products and services, build up partnerships and networks, develop training schemes and carry out studies as well as mutual learning activities; they also use these funds to cover some of their operational costs, to build guarantee funds programmes to subsidise interest rates and for loan capital. ESF financial support has proven to be of high added value for developing microcredit providers’ skills, products and services and increasing their outreach.
However, this support has not yet reached its full potential. Microfinance lies at the intersection between at least two structural funds’ scope: the European Social Fund (ESF) and the European Regional Development Fund (ERDF). Since several years, especially at EU level, microfinance is gaining growing recognition: as a cost-effective tool for social inclusion on the one hand and for regional economic growth on the other. Supporting the setting up or developing of a microbusiness costs only a fraction of unemployment or welfare benefits paid out and activates excluded people’s potential to become again active members of society. In the National Action Plans for Social Inclusion (NAPs) however, microfinance is most often not mentioned at all. If it is, it is not translated into the ESF Operational Programmes (OPs). And the ERDF OPs tend to focus on funding for SMEs. This trend is also confirmed for the countries treated in this baseline study. National and regional public policies generally tend to give priority to salaried employment rather than to self-employment and to small, medium and large enterprises rather than to microenterprises. Especially in the current crisis context, public policies specifically focus on requalification measures and training and advice for (former) employees of large enterprises rather than on establishing or developing microbusiness. It is therefore necessary to systematically integrate microfinance as a basic social and financial service into the NAPs and into the structural funds’ Operational Programmes. Moreover, microfinance, self-employment and microentrepreneurship should become a policy priority in the field of social inclusion and economic growth.
Studies about the rough potential demand for microloans still show a very large gap between actual demand and supply of microfinance all over Europe. There is still lacking access to external finance for potential microfinance target groups, which indicates on the one hand a significantly larger microfinance market, as actually served by the institutions acting in microfinance, and on the other hand an access to finance for respective target groups that is highly limited. Nevertheless, there is an extensive scope for further research, to measure and control the actual access limitations and the potential demand for microfinance. At the national level, systematic, large-scale studies about the actual financing needs of specific target groups are still lacking. Such systematic studies can be used as a basis for national microfinance policies as was the case in the Netherlands where a Microfinance Council was set up in 2005 after an extensive market study had been carried out.
The preset baseline study also shows the need for a strong self-employment status, an enabling policy and legal environment for microenterprises, self-employment and transition from unemployment to self-employment. While favourable transition schemes are reported in Germany, their absence hampers the development of microenterprises in Belgium and in Czech Republic. In these countries, establishing one’s own business means suddenly losing all benefits, even if the business has not yet become profitable. Moreover, in Belgium, only full, but not part time, self-employed activities are eligible for microfinance from the main microloan provider.
Moreover, as microfinance lies at the intersection of social inclusion and economic growth, it comes under the responsibility of different stakeholders at national and regional level. While enterprise-oriented initiatives reach «economic» Ministries, microcredit reaches «social» Ministries. To facilitate cooperation at government level an inter-ministerial committee or task force could be assigned and meet regularly to design and implement a strategy for inclusive entrepreneurship that includes microfinance. Microfinance also involves different institutions such as commercial and cooperative banks, foundations and social and business support organisations, employment agencies etc. This complicates the efficiency of microfinance delivery. At microfinance institutions and at apex and supervisory level (Ministries and regulators), there is a general lack of specific capacity about microfinance. Training on microfinance delivery systems are a necessary step to build up microfinance capacity for all stakeholders.
Also, some of the EU funded microfinance programmes presented in this study had limited impact due to complex bureaucratic procedures and lack of information on such programmes. Very demanding application procedures for taking part in a microfinance programme are especially hampering for disadvantaged target groups. Making sure that there is sufficient advice and coaching available to assist individuals from disadvantaged target groups in submitting applications would be a helpful way of facilitating access to EU-funded microloan programmes. Moreover, to raise uptake of microfinance programmes, these should be implemented in partnership with local public and private stakeholders such as regional and local authorities, financial institutions, social and business support organisations and the entrepreneurs themselves.
Five selected good practice examples of ESF supported microfinance for disadvantaged entrepreneurs are presented in this study. The main guidelines for future action are described in the conclusions/recommendations chapter.
Table
Executive Summary
State of the Art
1. Introduction
2. Microfinance in the European Union – an effective tool for inclusion
3. The European microfinance sector
3.1 Characteristics
3.2 Microlending models
4. Main challenges
5. Examples of EU funding for microfinance with a specific focus on ESF
5.1 Individual pilot actions
5.2 Capacity building
5.3Funding and guarantees
5.3.1Funding for operating costs and loan capital
5.3.2Provision of guarantees
Partner profiles
Belgium
1 Access to finance: country background
1.1 Country background and context
1.2 Legal and regulatory background for access to finance
2. Mapping of Access to finance
2.1 Available research on finance needs of particular target groups
2.2 Micro-entrepreneurship and access to finance as political priorities
2.3 Main microfinance players (national/local)
3. Use of ESF in promoting access to finance
3.1 ESF policy priorities
3.2 Existing ESF projects on access to finance and their results
3.3 Selected good practice
4. Lessons learned and policy recommendations
Czech Republic
1. Access to finance: country background
1.1 Country background and context
1.2 Legal and regulatory background for access to finance
2. Mapping of Access to finance
2.1 Available research on finance needs of particular target groups
2.2 Micro-entrepreneurship and access to finance as political priorities
2.3 Main MF players (national/local)
3. Use of ESF funds in promoting access to finance
3.1 ESF policy priorities
3.2 Existing ESF projects on access to finance and their results
3.3 Selected good practice
4. Lessons learned and policy recommendations
Germany
1. Access to finance: country background
1.1 Country background and context
1.2 Legal and regulatory background for access to finance
2. Mapping of access to finance
2.1 Available research on finance needs of particular target groups
2.2 Micro-entrepreneurship and access to finance as political priorities
2.3 Main MF players (national/local)
3. Use of ESF in promoting access to finance
3.1 ESF Policy priorities
3.2 Existing ESF projects on access to finance and their results
3.3 Selected good practice
4. Lessons learned and policy recommendations
Lithuania
1. Access to finance: country background
1.1 Country background and context
1.2 Legal and regulatory background
2. Mapping of Access to finance
2.1 Available research on finance needs of particular target groups
2.2 Micro-entrepreneurship and access to finance as political priorities
2.3 Main MF players (national/local)
3. Use of ESF funds in promoting access to finance
3.1 ESF policy priorities
3.2 Existing ESF projects on access to finance and their results
3.3 Selected good practice
4. Conclusion: lessons learned and policy recommendations
Spain
1. Access to finance- Country background and context
1.1 Country background and context
1.2 Legal and regulatory background for access to finance
2. Mapping of Access to finance
2.1 Available research on finance needs of particular target groups
2.2 Micro-entrepreneurship and access to finance as political priorities
2.3 Main MF players (national/local)
3. Use of ESF in promoting access to finance
3.1 ESF Policy priorities
3.2 Existing ESF projects on access to finance and their results
3.3 Selected good practice
4. Lessons learned and policy recommendations
Conclusions and Recommendations
BIBLIOGRAPHY
ANNEX - Interview – Questionnaire Guideline
State of the Art
1. Introduction
All over Europe self-employment and micro-entrepreneurship have proven to be a way of facilitating social and economic inclusion for individuals excluded from the labour market such as the (long-term) unemployed, economically inactive women, single parent households (mostly headed by women), migrants and ethnic minorities, youth, seniors, persons living in rural areas, individuals with disabilities, or ex-offenders. Entrepreneurs from specific target groups mention a range of factors describing their situation before they started their enterprise, such as low utilization of their qualifications, boredom and frustration or lack of options. They see entrepreneurship as a way of taking control and being their own boss, of attaining professional satisfaction, reward and better income. Entrepreneurship can thus be a way of integrating and stepping up the social ladder.
Generally, entrepreneurs from specific target groups concentrate in less competitive, work-intensive sectors with low entry barriers especially trade, personal services, construction, catering or the clothing industry. They tend to establish microenterprises or become self-employed. Self-employment means someone who is not working for an employer but finding work for oneself or having one’s own business; this can include part-time activities. Microenterprises are defined as businesses with nine or fewer employees and a total turnover of less than 2 million Euros. Microenterprises and self-employment contribute significantly to the European economy. In fact, 91.5% of enterprises in Europe are microenterprises, i.e. there are more than 21 million microenterprises in Europe[2].
However, specific target groups face increased barriers when planning to start a business. Individuals who receive unemployment or welfare benefits can be caught in what is called the “inactivity trap” – the risk of losing a minimal, but secure income by becoming entrepreneurs and the need to pay tax and social security contributions, even before their business becomes profitable. Moreover, while administrative requirements can be complicated for all entrepreneurs, they can be even more demanding for specific vulnerable groups.
Beside policy and administrative issues, access to finance is typically perceived as a major problem, if not the greatest single problem by entrepreneurs from specific vulnerable groups. The unemployed or excluded people wanting to start a small enterprise, even if asking for small amounts, rarely find bank credit. The risk of start-ups is perceived as high and the amount of work required to process a small loan is not covered by interest and bank fees. And individuals from specific target groups often have only little personal capital, little or no collateral and no loan history.
Like bank funding, other financial support schemes for start-ups are sometimes difficult to access as well, especially when they are managed by banks and require collateral. Microfinance aims to close this gap by providing access to financial services to people who are excluded from bank services.
2. Microfinance in the European Union – an effective tool for inclusion
Microfinance generally comprises a variety of financial services such as microcredit and savings, as well as other related services such as insurance, education or financial literacy. In Europe, we can more specifically talk of “microcredit” which is “the extension of very small loans (micro-loans) to entrepreneurs, to social economy enterprises, to employees who wish to become self-employed, to people working in the informal economy and to the unemployed and others living in poverty who are not considered bankable.”[3] Microcredit can be for personal purposes of people who have no access to traditional lines of credit, e.g. unexpected expenses such as health care, initial furniture, legal/funeral expenses, deposit to rent an apartment or money to pay a driver’s license or a means of transport. However, generally microcredit is intended to assist people in creating or expanding income-generating and job-creating activities or micro-enterprises, whose principal need is usually the financing of the initial investment or of the working capital.
In the European context microcredits are individual loans[4] of € 25,000 or less. Microcredit is a relatively labour intensive delivery system; it is based on intensive knowledge of the borrower capacity and a close relationship with the borrower; collateral and guarantees are less important. Microloans are therefore especially useful for target groups for whom the need to provide financial or in-kind guarantees may be difficult if not impossible. Moreover in Europe microcredit is generally linked to business support which addresses the problems entrepreneurs are facing such as dealing with a range of administrative requirements, insufficient management skills and limited knowledge of markets and marketing. These business support services (BDS) considerably increase the survival rate of businesses.
Microfinance is ideally a bridge to mainstream banking services, through its close partnerships with banks. Microcredit funds often come from banks and may be linked to the clients’ access to a bank account and a range of financial services. If the business grows, the first loan through the microcredit scheme should be a step towards subsequent credit directly from the bank. Microfinance can thus be considered a stepping-stone for financial and social inclusion.
Micro-credit has also proven its cost-effectiveness as a public policy tool, costing a fraction of equivalent passive labour market measures: the average cost of support for micro-credit schemes in Europe is reported to be under € 5,000 per job created[5]. Experience shows a survival rate of well over 60 % after two years for businesses set up thanks to micro-credit.
In purely economic terms public support for micro-credit is worthwhile even if the job created only lasts a year[6].
The European Union has acknowledged microfinance as a tool for inclusion and has played an important role in the development of microfinance since 1998. It has provided partial guarantees to cover portfolios of microloans under the growth and employment initiative (1998-2000),the multi-annual programme for the promotion of enterprise and entrepreneurship, in particular SMEs (2001-2005), and the Competitiveness and Innovation Framework Programme CIP (2003-07). In Central and Eastern Europe the European Investment Fund has partly encouraged microfinance through the Phare SME Finance Facility. The European Union has also promoted transnational exchange as well as several pilot programmes under the Community Action Programme to Combat Social Exclusion (2002-2006), and through the EQUAL initiative (2001-2006) and has contributed to the operating costs of the European Microfinance Network EMN.
Only recently the European Union has once again re-affirmed this commitment through setting up three new programmes intended to strengthen microfinance in Europe: in 2007 it established JEREMIE (Joint European Resources for Micro and Medium Enterprises) intending to improve access to finance for SMEs, including microfinance, as well as JASMINE (Joint Action to support microfinance institutions in Europe); and in 2009 the European Commission decided to set up a new Microfinance Facility under the PROGRESS programme. With a budget of € 30 million in the case of JASMINE and € 100 million for PROGRESS, these two programmes are the largest single programmes ever for promoting microcredit in the European Union. They shall provide additional financial capital for new and non-bank MFIs as well as the needed funding for technical assistance.