Micro-Credit as a tool for Entrepreneurship in Europe Philippe Delvaux European Commission Directorate General for Regional Policy You may or may not know that An important concern for Cohesion Policy is to improve access to finance for SMEs, in the Member States and the regions, and this includes micro-enterprises Why so? Simply because Cohesion policy is the biggest provider of EU funds supporting small businesses Total business support for 2007-2013 is € 55,000,000,000, thereof € 27 billion are directly targeted at SMEs, including micro-enterprises.

ERDF support to Small Businesses 12% / €3.2bn 65% / €17.7bn 9% / €2.5bn 14% / €3.7bn ERDF support to SMEs is very consistent € 27 billion

(Income-generating activities) Number of enterprises in the EU (x 1000) 9 255 1 693 21 228 Informal sector (Income-generating activities) > 250 employees 50 - 250 employees 10 - 49 employees 0 - 9 employees 23,2 million enterprises in EU 92% of enterprises in Europe are micro-enterprises (up to 9 employees) Informal sector represents 10 to 15% of GDP Active population below the poverty line : 28 million Micro-credit : Max. Amount: €25,000 0 - 9 employees Turnover: max 2 Mio Euros This pyramid shows the distribution of EU enterprises according to their size. It is worth noting that more than 92% of enterprises are very small enterprises falling within the definition of micro-enterprises Even more challenging is the large part of the informal sector in the GDP µC

Particularity of micro-credit Many issues at the same time Many parties involved Several approaches over the world A mix of funding and technical assistance Matches real needs Existing instruments However, an important gap in the market. However, there is a real microcredit paradox: Why so? Because of this (next slide)

A few reasons Different types and understanding of what is micro-credit, what it should be. Various approaches. No one-size-fits-all model. Lack of standards. Absence of collateral from part of the borrower. Administrative cost of small loan not proportionate to its amount.

Challenging Micro-credit Funds Interest rates Statistics Financial Engineering Coaching Rating agencies Revolving Funds Social Inclusion Quality label Loans µ-Finance networks Banks Training Capacity building µ-credit Self- employment MFI € Mentoring Savings Banks Seed capital Grants Bankability Employment µ-enterprise Growth and jobs Credit Unions JEREMIE Regional Policy Challenging Micro-credit Consumer protection Lisbon Strategy European Council EIB ESBG Basel II Sustainability µ-credit providers Charities Structural Funds µ-finance EIF European Social Fund Legislation PROGRESS Member States Equity Codes of Conduct Regions Guarantees Social Responsibility Win-win European Parliament 2020 Strategy Interest rate subsidy Character based lending Mezzanine finance European Commission Trust Non-bank 6 6

Challenging Micro-credit World Bank Usurary rates Communication on µC Yunus Challenge EGAF Mix Market CGAP Social benefits Development countries Leverage EPMF LuxFlag Deprived populations Women Poverty Unemployment MFI $ µ-finance funds Grameen Bank Collateral Basel III Financial Crisis EU Budget Public Banks Subsidiarity CIP Supervision Over indebtedness Challenging Micro-credit Cooperative Banks Public Banks Additionality EESC Yunus EQUAL Communication Over indebtedness Change Mindsets Lobbies Services MFC EAFRD IFRS Strategic Planning To be regrouped by Policies Instruments Principles Actors Stakeholders University Financial Inclusion Financial Regulation PHARE Awareness raising Governance Globalization Procedures Information systems Entrepreneurship Definitions Risk Management Client Relations 7 7

Challenge To take what exists into account and look at ways to increase the provision of micro-credit in the EU Build confidence in micro-credit Contribute to develop the microfinance sector Promote entrepreneurship through micro-credit Encourage networking of stakeholders You may or may not know that An important concern for Cohesion Policy is to improve access to finance for SMEs, in the Member States and the regions, and this includes micro-enterprises Why so? Simply because Cohesion policy is the biggest provider of EU funds supporting small businesses Total business support 2007-2013: € 55,000,000,000

Success factors A gap in the policy Timely proposals High EU acceptance Motivation of stakeholders Lessons learnt from the financial crisis Big Brother ‘JEREMIE’ in the background ‘JASMINE’ designed as a quality system Provision of large funding thanks to EPMF Developing the provision of micro-credit in the EU is a challenging undertaking which understates a process of change It is however not a single man’s job. It involves a large number of stakeholders Is not solely a financial issue as well. It also requires appropriate and qualified intermediaries JASMINE seeks to develop the potential of micro-credit providers and to make adequate funding available to them JASMINE seeks to foster as much synergies as possible between the actors on the micro-credit scene Partnership between banks and MFIs needs to be encouraged, as it can be a win-win undertaking for all. 9

Difficulties Existing policy tailored initiatives No usable sector specific statistics Many stakeholders involved Opposed views of interest groups Subsidiarity You may or may not know that An important concern for Cohesion Policy is to improve access to finance for SMEs, in the Member States and the regions, and this includes micro-enterprises Why so? Simply because Cohesion policy is the biggest provider of EU funds supporting small businesses Total business support 2007-2013: € 55,000,000,000 10

A Communication on micro-credit 11/2007: Micro-credit initiative (COM 2007/708) 1. Improve the legal & institutional environment 2. Further develop entrepreneurship 3. Develop Capacity Building for MFIs 4. Provide Funding for MFIs with financial standing Changes to the legal and institutional environment: Increasing the number of micro-credit providers/MFIs Relaxing interest caps for micro-credit operations Allowing MFIs access to borrower databases and facilitating their evaluation of the risks Reducing operating costs applying favourable tax schemes Adapting national regulation Ensuring single market rules are applied to micro-credit Incorporating micro-credit into regulation and accounting standards Technical Assistance: General support for the consolidation and development of non-bank micro-credit providers/MFIs in the Member States and Regions, including assessment of MFIs, training, publications, technical manuals, guides, software, information, organization of conferences and seminars, etc Funding: Equity, debt instruments, risk sharing instruments, guarantees, etc 11 11

Examples of changes to the legal and institutional environment Development of micro-credit providers/MFIs Relaxing interest caps for micro-credit operations Allowing MFIs access to borrower databases and facilitating their evaluation of the risks Reducing operating costs applying favourable tax schemes Adapting national regulation Ensuring single market rules are applied to micro-credit Incorporating micro-credit into regulation and accounting standards

A Communication on micro-credit 11/2007: Micro-credit initiative (COM 2007/708) 1. Improve the legal & institutional environment 2. Further develop entrepreneurship 4. Provide Funding for MFIs JASMINE Develop Capacity Building for MFIs Develop Capacity Building for MFIs Changes to the legal and institutional environment: Increasing the number of micro-credit providers/MFIs Relaxing interest caps for micro-credit operations Allowing MFIs access to borrower databases and facilitating their evaluation of the risks Reducing operating costs applying favourable tax schemes Adapting national regulation Ensuring single market rules are applied to micro-credit Incorporating micro-credit into regulation and accounting standards Technical Assistance: General support for the consolidation and development of non-bank micro-credit providers/MFIs in the Member States and Regions, including assessment of MFIs, training, publications, technical manuals, guides, software, information, organization of conferences and seminars, etc Funding: Equity, debt instruments, risk sharing instruments, guarantees, etc 13

JASMINE toolkit Institutional assessment and/or rating for selected MFIs Subsequent training to selected MFIs. A range of business support services available for all MFIs. A code of good conduct for MFIs to provide guidelines and advice to MFIs on raising the standard of their services and operations (Vademecum on micro-credit). JASMINE on line A quality label to be awarded to “good” MFIs. R T quality label : to help them attract borrowers in confidence and to raise funds on the private capital market.

A Communication on micro-credit 11/2007: Micro-credit initiative (COM 2007/708) 1. Improve the legal & institutional environment 2. Further develop entrepreneurship 3. Develop Capacity building for MFIs Changes to the legal and institutional environment: Increasing the number of micro-credit providers/MFIs Relaxing interest caps for micro-credit operations Allowing MFIs access to borrower databases and facilitating their evaluation of the risks Reducing operating costs applying favourable tax schemes Adapting national regulation Ensuring single market rules are applied to micro-credit Incorporating micro-credit into regulation and accounting standards Technical Assistance: General support for the consolidation and development of non-bank micro-credit providers/MFIs in the Member States and Regions, including assessment of MFIs, training, publications, technical manuals, guides, software, information, organization of conferences and seminars, etc Funding: Equity, debt instruments, risk sharing instruments, guarantees, etc EPMF 4. Provide funding for MFIs 4. Provide funding for MFIs 15 15

European Progress Microfinance Facility Part of the response to rising unemployment and social exclusion resulting from the financial crisis. To ‘offer a new chance to the unemployed and open the road to entrepreneurship for some of Europe’s most disadvantaged groups’ (Commission communication June 2009: ‘A shared commitment for employment’) quality label : to help them attract borrowers in confidence and to raise funds on the private capital market.

EPMF – Key features Micro-credit to Final Beneficiaries trough 1. Guarantees (implemented through EIF) on microcredit portfolios (€ 25 million from EU resources) 2. Debt and equity instruments by means of a Fonds Commun de Placement – Fonds d’Investissement Spécialisé (FCP-FIS) (up to + € 225 million = € 75m from EU + up to € 100m from the EIB + up to € 50m from other investors) 3. Expected total leverage: € 500 million (+ 46 000 loans)

Conclusions Improving the provision of micro-credit has the potential to develop entrepreneurship It is a complex issue involving many actors, but can be a win-win undertaking for all. Quality makes the difference Both the banking and non-banking sector have a part to play Developing the provision of micro-credit in the EU is a challenging undertaking which understates a process of change It is however not a single man’s job. It involves a large number of stakeholders Is not solely a financial issue as well. It also requires appropriate and qualified intermediaries JASMINE seeks to develop the potential of micro-credit providers and to make adequate funding available to them JASMINE seeks to foster as much synergies as possible between the actors on the micro-credit scene Partnership between banks and MFIs needs to be encouraged, as it can be a win-win undertaking for all. 18

Announcement on JASMINE Two messages: Continuation of JASMINE after 2011 Unanimous positive feedback received from actual JASMINE stakeholders Adaptation of the scheme from 2012 on to include greenfield MFIs Increased provision of business support services for MFIs (JASMINE online) Availability of a Code of Good Conduct for MFIs Help MFIs raising standards in micro-credit lending & operating practice Micro-credit stakeholders actively involved in the draft of the content Document under final revision: Final version available by end of June 2011

Challenging Micro-credit Your suggestions Thank you 20 20

Thank you for your attention DG REGIO – Unit D3 ‘Financial Engineering – Major Projects‘ regio-financial-engineering@ec.europa.eu