MAGAZINE N°1 - Evers und Jung
MAGAZINE N°1 - Evers und Jung
MAGAZINE N°1 - Evers und Jung
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Regulating microfinance<br />
UK Policy developments<br />
Regulation for MFIs in Romania<br />
Improving institutional framework for self-employed in France<br />
Immigrants and microcredit<br />
Policy measures for microfinance in Europe<br />
n°1 April 2007
Microfinance Europe » is the new<br />
bi-annual EMN magazine. It will<br />
provide clear insights into<br />
European microfinance programmes,<br />
with a specific focus on policy<br />
measures that could support the development of the<br />
sector. Its in-depth articles offer up-to-date commentary<br />
on what is happening in the different European countries,<br />
how policies are implemented and evolving and what<br />
recommendations can be made by practitioners,<br />
researchers and academics to promote microfinance<br />
and micro-enterprise developments in the European<br />
Union.<br />
For its first issue, “Microfinance Europe” gathers articles<br />
presenting the latest changes in the legislation in some<br />
European countries. A first article is a brief survey on<br />
“regulating microfinance” and public policy in some<br />
European countries. The next one presents the UK<br />
experience with an analysis of the community finance<br />
sector (a broader approach that includes microfinance).<br />
For Romania, an article analyzes the changes that<br />
occurred with the implementation of the new specific<br />
microfinance laws. In France, the work done by Adie<br />
to improve the regulatory framework for micro enterprise<br />
development and microfinance is presented at length.<br />
There is also an article presenting the results of a project<br />
lead by EMN aimed at promoting immigrant<br />
entrepreneurship. A final article summarizes the main<br />
findings of a previous research conducted by some<br />
EMN members on general policy measures to promote<br />
microfinance in Europe.<br />
INDEX<br />
Brief Survey of “Regulating Microfinance” and Public Policy in some Western European Union Countries 3<br />
Latest Policy development in the U.K for the Community Development Finance Institutions 5<br />
Microcredit in Practice: Key Lessons and Experiences in Romania 7<br />
Improving the institutional framework for self-employed workers: A necessity for microcredit operators in France 10<br />
Supportive measures for immigrant micro entrepreneurs in Europe 13<br />
Policy Measures Needed to Promote Microfinance in Europe 16<br />
Microcréditos – La rebelión de los bonsàis 20<br />
EMN would like to thank all the authors of the various articles for their contributions.<br />
The content of the articles is <strong>und</strong>er the sole responsibility of their authors.<br />
They do not necessarily reflect the views of EMN.<br />
© European Microfinance Network. This study is for personal informational purposes only. All rights reserved. No part of this<br />
publication may be used for commercial purposes, altered or published in any manner or form without prior permission from<br />
the publisher and EMN.<br />
Without the financial support of the European Commission within the framework of the Community Action Programme to<br />
Combat Social Exclusion 2002-2006, the publication of this document would not have been possible.<br />
The contents of this publication do not reflect the opinion or position of the European Commission. The sole responsibility lies<br />
with the authors and the Commission is not responsible for any use that may be made of the information contained therein.
BRIEF SURVEY OF “REGULATING<br />
MICROFINANCE” AND PUBLIC POLICY IN SOME<br />
WESTERN EUROPEAN UNION COUNTRIES<br />
Simone di Castri - PhD candidate in Law and Economics - University of Bologna<br />
In many countries, either new laws<br />
have been passed to meet<br />
microfinance demand and to<br />
address microfinance activity, or<br />
existing banking laws have been<br />
amended to include microfinance and<br />
MFIs in the regulatory framework.<br />
Nevertheless, during the 2006 Global<br />
Microcredit Summit, there was a<br />
unanimous call for regulatory actions<br />
that would allow microfinance to better<br />
serve the vast number of households in<br />
need of financial services. The<br />
Department of Economic and Social<br />
Affairs of the United Nations<br />
(UN/DESA) is also focusing particularly<br />
on the matter. Microfinance promoters,<br />
donors and practitioners are also<br />
calling for studies on the topic. In fact,<br />
even though this is already considered<br />
a f<strong>und</strong>amental issue when discussing<br />
the future of microfinance growth and<br />
effectiveness, and even though many<br />
scholars have laudably pointed out<br />
various methodologies and<br />
complications regarding regulation,<br />
there is still a lack of a systematic<br />
procedure for studying the<br />
implementation of regulation, not to<br />
mention a larger discussion of the<br />
theoretical basis of policy makers’<br />
choices.<br />
From the point of view of the<br />
production of a reliable and working<br />
reflection on microfinance regulation,<br />
the major problem is probably the<br />
difficulties in reaching legal data<br />
globally and in assessing studies on<br />
impact and outreach of microfinance<br />
programs and related best practices.<br />
Such research and study are necessary<br />
in order to compare regulatory<br />
hypotheses with the actual<br />
effectiveness of projects, as shown by<br />
their records. But homogenous and<br />
comparable information for a holistic<br />
study is currently very hard to come by,<br />
making such a study difficult at this<br />
point in time.<br />
As for European countries, it is<br />
challenging to address microfinance<br />
regulation coherently because of the<br />
coexistence of two macro markets with<br />
such significant structural differences,<br />
one composed of developed<br />
economies, the other of countries still<br />
in transition after the collapse of the<br />
Soviet block.<br />
There is a great difference between<br />
East and West in the capacities of their<br />
infrastructures. Demographically,<br />
microfinance faces two distinct<br />
components of demand: local citizens<br />
in the East, and largely migrants in the<br />
West. As a consequence, the current<br />
structure of the microfinance industry<br />
differs extraordinarily, in the typology<br />
of providers and their targets. There<br />
are also significant differences in the<br />
ways of covering operating costs,<br />
providing loan capital, or collecting<br />
capital for guarantee f<strong>und</strong>s (either<br />
through donors’ f<strong>und</strong>ing or the selfsustainability<br />
of the microfinance<br />
project). In fact, the average loan<br />
amount changes notably, as do the<br />
operating costs and interest rates<br />
charged. Finally, the entrepreneurial<br />
context also varies.<br />
All structural distinctions should be<br />
reflected in the policy intervention, in<br />
order to provide the market and its<br />
participants with the right level of legal<br />
security and to protect against failures<br />
and abuses as much as possible.<br />
Looking solely at microfinance in<br />
Western Europe, differences between<br />
countries’ markets are also<br />
remarkable. In these developed<br />
countries, however, the cause-effect<br />
relationship between facts and<br />
regulation is often reversed, the latter<br />
producing the first: market structure<br />
and size, and types and scale of<br />
microfinance providers in these<br />
countries, often reflect the regulatory<br />
framework put in place by policy<br />
makers.<br />
In France, the microfinance market<br />
is led by Adie, which is growing in<br />
scale, has reached operating<br />
efficiency, is moving toward<br />
sustainability, has a relevant role in<br />
lobbying for pro-effectiveness legal<br />
and tax amendments and is called on<br />
as an advisor on social matters by<br />
public authorities.<br />
Adie and the other MFIs have been<br />
supported by Loi 2001-420 on<br />
“Nouvelles Régulations Economiques”,<br />
which allows them to lend directly to<br />
their borrowers. This improves<br />
operational flexibility and increases<br />
the responsiveness of MFIs<br />
management. Furthermore, since<br />
2005, the “Borloo” law on social<br />
cohesion supports microcredit<br />
development and sets up a “Fonds<br />
pour la cohésion sociale” (73 million<br />
euros) to promote microcredit by<br />
guaranteeing business and consumer<br />
loans to unemployed people and lowincome<br />
households. Tax exemptions<br />
for new micro entrepreneurs are also<br />
foreseen and interest caps on loans to<br />
individuals have been removed. French<br />
lawmakers believe in microfinance and<br />
in assisting its enlargement through<br />
regulation and public policies.<br />
In Spain, the microfinance sector<br />
has grown exponentially since<br />
2001, especially by the commitment<br />
of saving banks to partnerships with<br />
social institutions.<br />
There are also two distinct public programs,<br />
one involving the government with<br />
women’s organizations, and the other,<br />
la Caixa, driven by the Instituto de<br />
Crédito Oficial (ICO) in collaboration<br />
with private financial institutions,<br />
social work institutions and the<br />
European Investment F<strong>und</strong> (EIF).<br />
Microfinance as a tool for promoting selfemployment<br />
has also been mentioned<br />
in the II National Plan on Social<br />
Inclusion.<br />
3
4<br />
A particular role in the development of<br />
the industry is played by the Entidades<br />
Sociales de Apoyo al Microcrédito<br />
(ESAM), which are various public or<br />
private entities that assist by helping<br />
financial providers and prospective<br />
clients to meet, introducing feasible<br />
projects to the banks, and mentoring<br />
people before and after they borrow.<br />
Spanish law covers three types of<br />
credit institutions: banks, credit<br />
cooperatives and savings banks, which<br />
are organized as private fo<strong>und</strong>ations<br />
and are allowed to lend. Savings banks<br />
account for close to 50 per cent of the<br />
total assets of the Spanish financial<br />
sector. A specific legal framework for<br />
microfinance does not exist yet.<br />
In Germany, Kreditwesengesetz<br />
(KWG), the German Banking Act,<br />
only allows lending by institutions<br />
with a bank status. Market entry is<br />
costly.<br />
Microcredit is provided mainly by<br />
banks linked to Gr<strong>und</strong>erzentren (nonprofit<br />
organizations that incubate<br />
business), which are accredited (and<br />
trained) by the Deutsche Mikrofinanz<br />
Institut (DMI). A microfinance<br />
investment f<strong>und</strong> of three million euros<br />
is provided by both the<br />
Gemeinschaftsbank für Leihen <strong>und</strong><br />
Schenken (GLS), a cooperative bank,<br />
and by the Federal government. The<br />
f<strong>und</strong> covers completely the banks’<br />
possible losses. The public<br />
Kreditanstalt für Wiederauf-bau (KfW)<br />
Bank is also an important actor.<br />
Even though there is no direct<br />
regulatory intervention on microfinance,<br />
the German government has given an<br />
incentive to the microfinance mission<br />
by creating a new entrepreneurial<br />
entity, the Ich-AG, which has been<br />
created to allow individual workers to<br />
step out of the informal sector. New<br />
Ich-AG entrepreneurs receive favorable<br />
tax treatment and public subsidies for<br />
three years (600 euros monthly the<br />
first year, 360 the second, and 240 the<br />
third) or until their businesses earn<br />
25,000 euros per year.<br />
In the United Kingdom, the microfinance<br />
industry is somewhat different<br />
compared to continental Europe.<br />
The British government has strongly<br />
encouraged the action of community<br />
development financial institutions<br />
(CDFIs), which are increasing their<br />
relevance in lending and investing in<br />
deprived areas and in markets<br />
<strong>und</strong>erserved by mainstream finance.<br />
CDFIs act in a more complex policy<br />
environment, with a plurality of<br />
activities, products and missions that<br />
are beyond the provision of<br />
microfinance services alone. Incentives<br />
to invest in CDFIs are supported by tax<br />
breaks. Without a ceiling on interest<br />
rates, CDFIs can structure their<br />
products looking at sustainability,<br />
people’s needs and their capacity to<br />
pay back loans.<br />
Partnerships with commercial banks<br />
are common, and the latter have<br />
special instruments for financially<br />
marginalized people thanks to<br />
Government collaboration. The Small<br />
Firms Loan Guarantee Scheme<br />
(SFLGS) enables uncollateralized<br />
small entrepreneurs with a viable<br />
business plan to borrow money. The<br />
Department of Trade and Industry<br />
provides 75% of the security to the<br />
bank, which takes the risk on the<br />
remaining 25% of the loan. As for<br />
savings, the Basic Bank Account has<br />
been designed for low-income people.<br />
British public policy clearly cares<br />
about the financial and social inclusion<br />
of marginalized people, and the<br />
regulatory framework is helpful,<br />
primarily through consumer credit<br />
legislation.<br />
In the Netherlands, the Government<br />
promotes Public-Private Partnerships<br />
(PPP) for financing MFIs.<br />
In Italy, the microfinance industry is<br />
small and molecular, fragmented<br />
into nearly a h<strong>und</strong>red various<br />
projects active on a very local scale.<br />
And yet, in Italy, 14% of households do<br />
not have access to financial services,<br />
immigration is constantly increasing,<br />
wages are low, and financial services<br />
are expensive. 7.5 million people,<br />
13,2% of the population, live below the<br />
relative poverty line. In the south,<br />
usury is still extensively practiced and<br />
working in the informal sector is<br />
widespread.<br />
Under the present Italian legal<br />
framework, lending is prohibited to<br />
non-authorized intermediaries, and<br />
requirements for entering the market<br />
are strict and costly. Banca Etica,<br />
Mutue di Auto Gestione (MAGs) and a<br />
few credit cooperatives are the only<br />
financial intermediaries with their own<br />
microcredit projects. The sector<br />
involves mainly small public and<br />
private institutions, mostly non-profit<br />
associations, which negotiate loans<br />
through a bank. The <strong>und</strong>erdevelopment<br />
of these projects increases transaction<br />
and monitoring costs. All non-bank<br />
projects are entirely subsidized.<br />
Although there is a broad demand for<br />
financial services from people who do<br />
not have access to the mainstream<br />
system and although the microfinance<br />
sector is <strong>und</strong>erdeveloped compared to<br />
many other EU countries, amendments<br />
to banking regulations that would<br />
facilitate microfinance have not yet<br />
been considered by Italian regulators.<br />
Italy is a clear example of how regulation<br />
can constrain microfinance growth if it<br />
is not tailored to actual social needs.<br />
Furthermore, there are no signs of<br />
forthcoming public policies to<br />
encourage microfinance or microentrepreneurship.<br />
This brief article does not intend<br />
to address the large number of<br />
public policy and regulatory<br />
matters on microfinance in Western<br />
European Countries, but only to offer a<br />
short overview of some aspects of<br />
several different frameworks.<br />
Many questions and hypotheses arise,<br />
and they should be subject to a<br />
consistent comparative analysis in<br />
order to design a pan-European<br />
approach to the field.<br />
The main issues to focus on are:<br />
• the role of social intermediaries and<br />
their inclusion in or exemption from<br />
mainstream banking legal requirements<br />
• the search for homogeneity in terms,<br />
evaluations and (best) practices<br />
• the valorization of governance<br />
requirements<br />
• the improvement of the role of<br />
mainstream financial intermediaries in<br />
the sector, through PPP, incentives<br />
and some coercive methods that take<br />
into account their accountability<br />
towards stakeholders and communities<br />
(as the US Community Reinvestment<br />
Act already does), and emphasizing the<br />
potential of savings banks, cooperative<br />
banks and fo<strong>und</strong>ations<br />
• the maximization of public subsidies<br />
• the capacity of European policy to<br />
spur the provision of microfinance.<br />
One may also argue that financial<br />
inclusion and economic democracy<br />
should be included in the range of
LATEST POLICY DEVELOPMENTS<br />
IN THE U.K FOR THE COMMUNITY<br />
DEVELOPMENT FINANCE INSTITUTIONS<br />
By Tess Pendl, Policy Manager, Community Development Finance Association (cdfa)<br />
Community Development Finance<br />
Institutions (CDFIs) are independent<br />
non-profit financial institutions.<br />
They provide capital and support to<br />
enable individuals and organisations to<br />
develop and create wealth in disadvantaged<br />
communities and <strong>und</strong>er-served markets.<br />
CDFIs offer services and products such<br />
as financial advice, loans and venture<br />
capital to entrepreneurs who otherwise<br />
have difficulty obtaining access to<br />
finance and related support. The cdfa<br />
is the UK trade association for CDFIs.<br />
With the UK government taking an<br />
increasing interest in social enterprise,<br />
there have been a number of recently<br />
implemented policies and policy<br />
changes which have affected and will<br />
continue to affect the CDFI sector.<br />
The life story of the Community<br />
Investment Tax Relief (CITR) has<br />
evolved considerably since its<br />
birth.<br />
This innovative f<strong>und</strong>raising tool was<br />
engendered in response to a Social<br />
Investment Task Force recommendation<br />
in their report of 2000 “Wealth Beyond<br />
Welfare”. It allows a 25% reduction<br />
over 5 years in the tax liability of any<br />
individual or business investing in a<br />
CDFI. As of September 2005, more<br />
than 20 CDFIs had registered to offer<br />
CITR to potential investors. Between<br />
2003 and September 2005 a total of £38<br />
million was raised by this mechanism.<br />
The Treasury Select Committee inquiry<br />
of 2006 fo<strong>und</strong> that the additional<br />
investment attracted by CITR is still “a<br />
very long way” from the original target<br />
set by the Social Investment Taskforce<br />
for such a scheme. The Committee<br />
asserts that it supports “the extension<br />
of the tax relief to investments made in<br />
personal lending by CDFIs and to credit<br />
unions seeking subordinated capital.”<br />
It recommends that “the Government<br />
also consider the introduction of a<br />
matched f<strong>und</strong>ing scheme to provide<br />
incentives for housing associations and<br />
other charities to invest in CDFIs.” In<br />
addition to the findings of the Select<br />
Committee, the Chancellor announced<br />
in November that the scheme will be<br />
<strong>und</strong>ergoing a review. This could be a<br />
positive development for the sector,<br />
which is making increasing use of the<br />
CITR mechanism to lever external<br />
f<strong>und</strong>ing. CDFIs are anxious that the<br />
government should retain and<br />
augment its interest in CITR, and the<br />
cdfa is involved in the latest review,<br />
which is also looking at other capital<br />
raising strategies. In examining how<br />
the sector has reacted to CITR, it is<br />
clear from CDFI feedback that there<br />
are some common experiences. These<br />
CDFIs have dealt with large projects<br />
where there may be some commercial<br />
finance (often mortgage backed), an<br />
element of grant capital but little or<br />
limited availability of revenue and/or<br />
working capital for the start up or new<br />
business activity. CITR has also<br />
assisted the transformation of more<br />
traditional charitable organisations to<br />
income generating, business-focused<br />
social enterprises. Such organisations<br />
often have a strong existing brand,<br />
f<strong>und</strong>er and client recognition, as well<br />
as a track record of delivery, but less<br />
experience of using external finance<br />
and managing income generating<br />
activities beyond public service<br />
contracts. Participating CDFIs have<br />
also been using CITR to reinforce a<br />
“belt and braces” approach, where one<br />
or more lenders or grant givers have<br />
already taken primary or secondary<br />
liens on properties and there has been<br />
no further security available to<br />
complete the project financing. The tax<br />
has proved useful where CDFIs have<br />
sought loan finance against a property<br />
of which the value is not easily liquidated,<br />
or is indeed very low. (For example<br />
commercial units on a Brownfield site,<br />
derelict sites, community facilities<br />
such as halls, sports centres etc which<br />
have limited appeal to other users or<br />
potential new owners.) There are also<br />
opportunities for co-finance (for<br />
example CDFI lender to provide 250K<br />
and then broker deal with another<br />
lender) but these often take a long time<br />
to be implemented, risking the loss of<br />
customer focus.<br />
As anticipated, the Phoenix F<strong>und</strong><br />
scaled down on 31 March 2006.<br />
The f<strong>und</strong> was set up by the<br />
Department of Trade and Industry (DTI)<br />
in 2000 to explore innovative ways of<br />
promoting business start-ups in<br />
disadvantaged areas, to develop<br />
capacity, services and profitability of<br />
existing businesses in those areas, and<br />
to provide support to marginalised<br />
groups and individuals wishing to set<br />
up their own businesses. In its lifetime,<br />
the f<strong>und</strong> supported 63 CDFIs with £42<br />
million of capital and revenue, whilst<br />
enabling 96 projects to provide<br />
business support to enterprises in<br />
disadvantaged areas and community<br />
groups. These and other CDFIs clearly<br />
stand to be affected by the diminishing<br />
activities of the F<strong>und</strong>, but have been<br />
encouraged by the allocation £11m of<br />
transition f<strong>und</strong>s for the years April<br />
2006-March 2008 to The Regional<br />
Development Agencies who now have<br />
responsibility for CDFIs in their<br />
respective geographical areas.<br />
However, there is now significant<br />
pressure on RDA ongoing budgets, so<br />
the cdfa is lobbying hard to ensure that<br />
the sector receives the necessary<br />
support. Among other things, the cdfa<br />
is examining the JEREMIE scheme as a<br />
tool to activate sources of finance for<br />
CDFIs. Despite the existence of CITR as<br />
an incentive to enhance returns,<br />
community development finance is still<br />
an immature sector with evolving<br />
assets, and faces a difficult challenge<br />
in enabling capital flows to support its<br />
activities.<br />
5
6<br />
With the publishing of the<br />
government White Paper<br />
Strong and Prosperous<br />
Communities in October 2006, the<br />
CDFI sector was able to begin to see an<br />
enhanced role in community development<br />
for its practitioners.<br />
The greater devolution of powers to<br />
local authorities as regards leading<br />
communities and bringing services<br />
together to address local needs and<br />
problems is allowing CDFIs to have<br />
more extensive input into local<br />
development. The Paper also provides<br />
for an increase in community<br />
consultation and empowerment, as<br />
well as the encouragement of stronger<br />
local partnerships, with local<br />
authorities working together. In<br />
addition, it provides for more stable<br />
f<strong>und</strong>ing for local areas and rewards for<br />
innovative solutions to local problems.<br />
As financial intermediaries, CDFIs<br />
enjoying strong links with local<br />
communities, they are accustomed to<br />
finding innovative solutions to meet<br />
local financial and social needs.<br />
In 2006, a Treasury Select<br />
Committee examined ways in<br />
which to achieve financial inclusion<br />
in the UK.<br />
Its findings were published in two<br />
reports at the end of the year and show<br />
that although some steps have been<br />
taken to overcome financial exclusion,<br />
the issue is still not accorded enough<br />
priority. This is good news for CDFIs,<br />
which have been lobbying for some<br />
considerable time for greater recognition<br />
at national and regional government<br />
level. Among other things, the reports<br />
call for special education initiatives for<br />
financial consumers, financial<br />
education in schools and the<br />
prioritising of financial inclusion at<br />
local government level. The report<br />
states that “sustained and predictable<br />
f<strong>und</strong>ing for work aimed at promoting<br />
financial inclusion is essential.” The<br />
Committee which took evidence from<br />
several practitioners, including Bernie<br />
Morgan, and Sarah McGeehan of the<br />
cdfa, fo<strong>und</strong> that third sector lenders<br />
have a vital role to play in increasing<br />
access to affordable credit and promoting<br />
financial inclusion, as well as in<br />
providing budgeting advice. It also<br />
recognised that existing f<strong>und</strong>ing for<br />
lenders is short-term in nature, and<br />
thus recommends that the<br />
Government consider how best to<br />
provide longer term f<strong>und</strong>ing, focusing<br />
on how to maximise the ability of public<br />
f<strong>und</strong>s to lever private capital. The<br />
report states that the Government<br />
must also ensure money is provided to<br />
build capacity in financially excluded<br />
areas which currently lack established<br />
third sector lenders. The Committee’s<br />
recommendations address some of the<br />
key issues affecting the future of CDFIs<br />
in the UK, which are waiting to see if<br />
the government will offer a positive<br />
reaction. The government has yet to<br />
publish its response to the report, but a<br />
favourable stance will do much to<br />
enhance a positive environment for the<br />
growth of the CDFI sector.<br />
In November 2006, the government<br />
launched its Social Enterprise<br />
Action Plan (SEAP), designed to<br />
raise awareness of what social<br />
enterprises can achieve and to<br />
encourage more people to make a<br />
difference, either by involvement or<br />
investment.<br />
Among other things, SEAP recognises<br />
that social enterprises need access to<br />
appropriate finance, in order to<br />
maximise their social impact as well as<br />
their business performances. The Plan<br />
provides for a £10 000 000 investment<br />
in social enterprises which will be<br />
distributed following government<br />
consultation with both the social<br />
enterprise and finance sectors. This is<br />
likely to be put out to tender later this<br />
year. SEAP acknowledges the<br />
existence of conceptual and cultural<br />
barriers which hinder investors from<br />
investing in social enterprises and<br />
stipulates that such barriers must be<br />
addressed. The Government will also<br />
roll out further financial awareness<br />
training for social enterprises in<br />
conjunction with the Regional<br />
Development Agencies. This news<br />
should impact positively on CDFIs,<br />
since many are both social enterprises<br />
and providers of finance to social<br />
enterprises. Greater public awareness<br />
of CDFI activities and the implementation<br />
of actions to increase their<br />
effectiveness on socio-political and<br />
financial levels will be a fillip to the<br />
developing sector.<br />
There has been further good<br />
news for CDFIs, since the<br />
Department for Work and<br />
Pensions (DWP) has launched a<br />
service for the recovery of loans called<br />
the Eligible Loan Deductions Scheme.<br />
This initiative enables lenders, provided<br />
they meet approved responsible<br />
lending criteria, to recover loans which<br />
have fallen into arrears from the<br />
borrowers’ social benefit receipts. The<br />
scheme aims to increase the supply of<br />
affordable credit for people on low<br />
incomes, including those on benefits.<br />
The offering of benefit deductions<br />
<strong>und</strong>er certain circumstances can<br />
reduce the risk of default and thus<br />
diminish the cost of lending. The<br />
Scheme will prove useful to CDFIs as a<br />
tool to diminish delinquency rates and<br />
recycle loan f<strong>und</strong>s.
MICROCREDIT IN PRACTICE:<br />
KEY LESSONS AND EXPERIENCES IN ROMANIA<br />
By Maria Doiciu - Access to Finance Component Leader, Enterprise plc Consortium, TA to Develop the SMEs Sector in Romania<br />
1. Romanian Microfinance<br />
Sector – legal framework<br />
for microfinance activities<br />
Microfinance activities in<br />
Romania started ten years<br />
ago when the first international<br />
microfinance institution (MFI),<br />
Opportunity International, launched its<br />
Microfinance for Small and Medium<br />
Enterprise Development project,<br />
Opportunity Microfinance Romania<br />
(OMRO).<br />
The average Romanian MFI has aro<strong>und</strong><br />
eight years of operational experience,<br />
greater than the six year average in<br />
Eastern Europe and Central Asia<br />
(ECA), but less than its global peers.<br />
During the years 2003-2006, the sector<br />
evolved rapidly and became more<br />
efficient and productive in achieving its<br />
mission of providing support and services<br />
to <strong>und</strong>erserved entrepreneurs.<br />
The regulatory framework is keeping<br />
up with the fast pace of change of the<br />
sector:<br />
• Government Ordinance 40 (2000)<br />
provides for licensing of non-bank<br />
credit organizations to administer<br />
public f<strong>und</strong>s<br />
• The Micro Finance Companies (MFC)<br />
Law no.240, adopted by the<br />
Romanian Parliament in July 2005,<br />
creates an enabling environment for<br />
MFIs to grow and expand their<br />
portfolio of products and support<br />
services with microcredits of up to<br />
25,000 euros<br />
• Government Ordinance 28 (January<br />
2006) regulates non-bank financial<br />
institutions (NBFI).The National<br />
Bank of Romania is the supervisory<br />
authority for all NBFIs, that is leasing<br />
companies, mortgage companies,<br />
credit unions and microfinance<br />
institutions<br />
The microfinance activity is recognized<br />
and laws support its development and<br />
commercialization. The regulatory<br />
framework is mostly liberal, for<br />
instance no limitation is set on<br />
geographical expansion or foreign<br />
investment.<br />
The activity is regulated by the National<br />
Bank which registers and licenses<br />
MFIs, which is a positive point. However,<br />
the registration and licensing process<br />
for existing and newly established MFIs<br />
is complicated, time-consuming and<br />
expensive; the accounting, auditing<br />
and reporting requirements are similar<br />
to those of banks and are hard to meet<br />
by MFIs; only credit operations are<br />
allowed, even though the capital<br />
requirement is relatively high at<br />
200,000 euros.<br />
The activity is also becoming more<br />
competitive as microfinance is also<br />
carried out by credit unions and banks.<br />
In addition to the first eight microfinance<br />
institutions established with the<br />
support of international donors,<br />
aro<strong>und</strong> 20 new microfinance companies<br />
established <strong>und</strong>er the new legal<br />
framework are in the process of<br />
registration and licensing with the<br />
National Bank of Romania.<br />
This present moment is crucial for the<br />
evolution of the sector. Some smaller<br />
MFIs might disappear and the bigger<br />
ones need to adapt to the new<br />
constraints, find f<strong>und</strong>s and keep their<br />
mission.<br />
2. Romanian Microfinance<br />
Sector - Current status,<br />
statistics<br />
The first assessment of the<br />
Romanian microfinance market<br />
(a microcredit being defined as<br />
up to 25,000 euros or USD 32,500) was<br />
completed by ShoreBank Advisory<br />
Services. The main findings of the<br />
assessment are the following:<br />
7<br />
Peer Groups<br />
All Romanian<br />
CAPA Finance, CDE, Express Finance, FAER, Integra, LAM, OMRO,<br />
ROMCOM; 20 newly established MFIs 1<br />
Size<br />
Romanian Large: Gross Loan Portfolio > $8,000,000<br />
Target: Micro and small enterprises; farmers (high- end)<br />
in 2006 CAPA Finance, CDE, Express Finance, OMRO<br />
Romanian Medium: Gross Loan Portfolio = $2,000,000 - $8,000,000.<br />
Target: Micro and individual entrepreneurs; farmers (broad)<br />
in 2006 FAER, LAM, ROMCOM<br />
Romanian Small: Gross Loan Portfolio < $2,000,000 Target: self employed,<br />
vulnerable groups : women at risk, unemployed (low-end)<br />
in 2006 Integra and aro<strong>und</strong> 20 other newly established MFIs<br />
1. In the registration process the average capital is 200,000 euros
8<br />
100%<br />
80%<br />
60%<br />
40%<br />
20%<br />
0%<br />
A reasonable estimate of the potential<br />
number of creditworthy borrowers who<br />
would want to borrow less than 25,000<br />
euros on a regular basis is approximately<br />
120,000, with an aggregate demand of<br />
about 570 million euros. The regions of<br />
the greatest concentration of these<br />
borrowers are Transylvania (37,000<br />
potential borrowers, 208 million euros)<br />
and Bucharest- Ilfov (23,000 potential<br />
borrowers, 114 million euros). The<br />
remaining demand is spread fairly<br />
evenly across the rest of the country,<br />
with the weakest demand in the South<br />
West-Oltenia region .<br />
The MFIs included in this study are<br />
organised into peer groups by size and<br />
type, thus allowing for comparisons<br />
among similar institutions. As the<br />
table below demonstrates, the industry<br />
consists primarily of small and<br />
medium-sized organizations trending<br />
towards continued growth. The year<br />
2006 allowed exceptional growth for<br />
the Romanian microfinance sector, so<br />
that at the end of the year four MFIs<br />
succeeded in graduating into the<br />
“Large” category. This trend is<br />
continuing in 2007, mainly due to the<br />
large investment of the EU-Romanian<br />
Government and the EBRD in the<br />
sector.<br />
Many commercial banks are implementing<br />
SME lending programs f<strong>und</strong>ed by the<br />
EBRD, including the Romanian<br />
Commercial Bank, Raiffeisen Bank,<br />
Transilvania Bank, Alpha Bank,<br />
Romanian Development Bank–Group<br />
Societe Generale and the Pro credit<br />
Bank. This allows them to improve the<br />
client assessment process and to<br />
downscale, serving small companies.,<br />
The Romanian MFIs are committed to<br />
fulfilling their social mission by<br />
contributing to improving the lives of<br />
<strong>und</strong>erserved entrepreneurs through<br />
52<br />
4<br />
44<br />
Romanian Microfinance Market<br />
31<br />
12<br />
57<br />
2003 2004 2005 2006 (estim)<br />
SMEs Banks MF Institutions Uncovered demand<br />
30<br />
15<br />
55<br />
the provision of credit and business<br />
development services.<br />
While members serve their clients<br />
using many different methodologies<br />
such as individual lending, group<br />
guarantee, technical assistance and<br />
training, networking etc., they believe<br />
in implementing commercial principles<br />
to achieve sustainable and efficient<br />
financial institutions. This allow them<br />
to reach a large number of clients who<br />
would otherwise not have access to<br />
affordable financial services.<br />
The investor and donor community<br />
promotes transparency and highlights<br />
financial reporting disclosure,<br />
encouraging the MFIs to adopt<br />
International Financial Reporting<br />
Standards (IAS1 on disclosure) and<br />
industry-specific standards as a bridge<br />
for reaching scale and increasing<br />
f<strong>und</strong>ing flows to the microfinance<br />
industry.<br />
113%<br />
82%<br />
25<br />
20<br />
55<br />
3. The structure of the MFI<br />
portfolio<br />
Unlike other countries where<br />
MFIs can attract savings from<br />
individuals and diversify the<br />
possibilities for f<strong>und</strong>ing of current<br />
operations, Romania’s legislation does<br />
not offer this option to MFIs. The<br />
development of the banking system<br />
and the good examples already in<br />
place of commercial loans granted to<br />
MFIs by banks, e.g. Romanian<br />
Development Bank and OMRO, including<br />
World Bank microfinance programs,<br />
EU-EBRD Program, could be the<br />
driving force for sustainable and<br />
successful development of the<br />
Romanian MFI sector.<br />
Over the last three years the large and<br />
medium-sized Romanian MFIs posted<br />
positive operational sustainability, and<br />
since 2005 positive financial selfsufficiency.<br />
This performance compares<br />
favorably with the All MFIs 3 peer<br />
average of 119%. Due to the fact that<br />
donations and grants are no longer<br />
widely available in Romania, Romanian<br />
MFIs will continue to pay attention to<br />
the profitability and sustainability<br />
indicators mentioned here.<br />
It is important to mention here that the<br />
average retention rate in the system<br />
was 70% (2005). This means that the<br />
clients are pleased with the financial<br />
services provided by MFIs and with the<br />
methodology employed to extend<br />
micro-credits.<br />
Indicator 2003 2004 2005 2006 2<br />
121%<br />
114% 106%<br />
95%<br />
2003 2004 2005<br />
Operational Self-Sufficiency<br />
Financial Self-Sufficiency<br />
Number of MF Organizations 14 14 9 29<br />
% in Countries Outreach 60% 80% 85% 90%<br />
Numbers of loans 8400 14900 20000 30000<br />
Average loan (euros) 3100 3400 5200 6000<br />
2. The contribution of the 20 newly established MFCs is estimated<br />
3. Benchmarking ECA Microfinance 2004
4. Portfolio quality indicators<br />
Romanian MFI portfolio quality<br />
indicators show an improvement<br />
since 2004.<br />
PAR 90 days decreased from 1.5% to<br />
0.9% and was lower than the ECA<br />
average of 1.1%.<br />
PAR 30 days is unusually high at 4.1%<br />
versus the ECA average of 2.3%, but<br />
this may reflect differences in the<br />
population served, the size of loans<br />
and lending methodologies. The<br />
Romanian MFI sector is currently<br />
focusing on improving portfolio quality<br />
for various reasons, especially as<br />
access to commercial f<strong>und</strong>s becomes<br />
more important. Portfolio at risk > 90<br />
days (2005) was 1.5%.<br />
5. Development perspectives<br />
The Romanian MFI sector is<br />
entering into a new stage of<br />
development.<br />
Legal, economic and financial changes<br />
will continue to reshape the opportunity<br />
landscape for MFIs individually and as<br />
a whole.<br />
While commercialisation is the<br />
strategy of almost all medium and<br />
large MFIs, there exists a number of<br />
more targeted initiatives that may take<br />
a different more focused path towards<br />
maintaining their social mission.<br />
6. Lessons learnt<br />
The importance of a clear, coherent<br />
and supportive legal framework<br />
In less than two years, the Romanian<br />
microfinance sector passed from not<br />
being regulated at all to the other<br />
extreme, overregulated, and it was<br />
learnt how important continuous<br />
lobbying is to making the stakeholders<br />
aware of the sector’s main characteristic,<br />
efficient financial services with positive<br />
social and development impact.<br />
Efficiency and self sufficiency<br />
In order to attract the f<strong>und</strong>s needed to<br />
properly serve the increased number<br />
of clients, the microfinance organisation<br />
has to become efficient, financially<br />
self-sufficient and innovative in<br />
adapting microfinance products and<br />
procedures to the specificity of the<br />
Romanian financial culture.<br />
Networking<br />
Representatives of the Romanian<br />
microfinance sector are part of the EUf<strong>und</strong>ed<br />
project named, “From<br />
Exclusion to Inclusion through<br />
Microfinance: Learning from East<br />
to West and from West to East”.<br />
The eastern MFIs are learning from<br />
their western peers how to assess the<br />
social<br />
impact of microfinance activities and<br />
how to maintain the social mission by<br />
improving and diversifying the support<br />
activities provided to the microentrepreneurs.<br />
9
IMPROVING THE INSTITUTIONAL FRAMEWORK<br />
FOR SELF-EMPLOYED WORKERS: A NECESSITY<br />
FOR MICROCREDIT OPERATORS IN FRANCE<br />
By Audrey Raabe – Programme assistant to the President – Adie (Association pour le Droit à l’Initiative Economique)<br />
10<br />
In order for self-employed workers and<br />
microcredit to develop, microcredit<br />
operators in France and in other<br />
Western European countries need to<br />
improve the institutional frameworks<br />
for business creation by the most<br />
marginalized. Adie, a French microcredit<br />
organization with 15,000 active clients<br />
has established four objectives in this<br />
field:<br />
Objective No. 1:<br />
To promote <strong>und</strong>erstanding<br />
of the significance of small<br />
businesses in France as a<br />
country in the process of<br />
de-industrialisation<br />
Self-employed workers and very<br />
small businesses are a basic<br />
component of the modern<br />
economy but French society has not<br />
yet become aware of the phenomenon.<br />
At present, 93% of enterprises in<br />
France have between zero and nine<br />
employees. This is very far removed<br />
from the traditional image associated<br />
with companies in the Paris CAC 40<br />
index.<br />
A look at the economy helps explain<br />
these figures. Self-employed work and<br />
small enterprises are far from being<br />
obsolete. On the contrary, such<br />
businesses correspond to new forms<br />
of organization in the modern economy<br />
that are a result of the evolution from<br />
an industrial economy towards a<br />
service economy and of new<br />
technologies facilitating work by small<br />
production units.<br />
However, the importance of selfemployed<br />
work is not yet sufficiently<br />
recognized in France which has only<br />
9% of self-employed workers in its<br />
workforce compared with a European<br />
Union average of 25%. Moreover, it is<br />
not an accident that the expression<br />
“self-employed work” is fo<strong>und</strong> only<br />
rarely in French law with the preferred<br />
term being “non-salaried work”, which<br />
again illustrates the predominance of<br />
salaried work in France.<br />
Adie believes that one of its roles is to<br />
promote awareness in this field<br />
Unless there is a renewed consciousness<br />
of the importance of self-employed<br />
work, the measures adopted will<br />
continue to remain inadequate.<br />
For this reason, Adie continues to rely<br />
on various methods to attract the<br />
attention of the French public authorities<br />
and community to these issues, e.g.<br />
contacts with politicians and<br />
administrators, media coverage,<br />
publication of widely disseminated<br />
studies, participation in numerous<br />
conferences, the organization of<br />
Microcredit Week 1 , etc.<br />
Adie is particularly concerned that<br />
measures in favour of salaried workers<br />
be paralleled by similar measures in<br />
favour of non-salaried workers, and<br />
similarly with respect to enterprises<br />
with and without employees. For<br />
example, a recent French law on<br />
personal service providers gave<br />
exoneration from employer contributions<br />
to businesses employing workers but<br />
failed to make similar provision for<br />
self-employed workers. Adie intends to<br />
take action seeking changes to this<br />
law. This seems even more important<br />
since personal services are a sector<br />
with great potential for development<br />
for self-employed workers. Moreover,<br />
these services are often provided in the<br />
black economy. An appropriate law in<br />
this field would enable a large number<br />
of self-employed workers to escape<br />
from the illegal work in which they<br />
often find themselves trapped.<br />
Objective 2:<br />
To shine a spotlight on<br />
self-employed work<br />
carried out in the black<br />
economy and to propose<br />
solutions<br />
Self-employed work in the black<br />
economy: An “unobserved”<br />
shadow zone.<br />
There are no statistics available for the<br />
informal sector, which is described<br />
revealingly by the OECD as “unobserved<br />
work”. It includes income-generating<br />
activities, the significance of which is<br />
clear from Adie’s experience and which<br />
are of particular interest to Adie.<br />
Black economy self-employment a<br />
result of extremely onerous social<br />
contributions<br />
These income-generating activities are<br />
self-employed activities, usually<br />
carried out by individuals, the<br />
productivity and profitability of which<br />
are too low to be covered normally as<br />
part of the social protection system,<br />
which is poorly adapted to low profit<br />
activities. In effect, self-employed<br />
workers earning small incomes are<br />
required to pay onerous contributions,<br />
which can even be higher than the<br />
profits generated by the business. This<br />
is due to the fixed contributions<br />
required to be paid during the first two<br />
years and the effect of the threshold<br />
governing the minimum payments for<br />
contributions.<br />
1. This is an annual event launched by Adie that aims to raise awareness in French society of the utility of microcredit and self-employment as a means<br />
of insertion.
As a result, many people carrying on<br />
this kind of activity fall into the trap of<br />
working in the black. This work in the<br />
informal sector is thus generally not<br />
the result of a conscious choice and,<br />
contrary to common opinion, people<br />
usually do not like to work and live in<br />
this manner. Moreover, it is prejudicial<br />
to the development of their businesses.<br />
Highlighting this situation has led to<br />
improvements in 2007 in the regulations<br />
governing social contributions<br />
Adie has directed a spotlight on the<br />
aberrations of this social contribution<br />
system, which requires entrepreneurs<br />
who earn the least to pay the most as a<br />
consequence of minimum contribution<br />
levels. These efforts have paid off. At<br />
the beginning of 2007, the government<br />
adopted a law which provides that<br />
businesses defined as micro-enterprises 2<br />
will no longer have to pay more than<br />
49% of their revenue in social contributions.<br />
Nevertheless, this new system is still<br />
limited to those businesses defined for<br />
tax purposes as micro-enterprises,<br />
which are not the only businesses that<br />
suffer from low turnover. Moreover, the<br />
micro-enterprise tax regime is not<br />
always appropriate to poorly paid<br />
activities where very low social<br />
contributions of the order of 10% are<br />
required rather than the 45% average<br />
which now prevails.<br />
Also to be noted is the fact that <strong>und</strong>er<br />
certain conditions French law provides<br />
for exoneration from social contributions<br />
during the first three years of business<br />
activity for unemployed and minimum<br />
income beneficiaries. This measure<br />
has a positive effect on exiting the<br />
informal sector and is one of a range of<br />
provisions encouraging self-employed<br />
work as a means of insertion.<br />
Objective 3:<br />
To disseminate the idea of<br />
self-employed work as a<br />
means of social insertion<br />
Instead of looking for a job, you can<br />
create one<br />
Could this be a slogan for the national<br />
employment agency (ANPE) or for<br />
Unedic, the national agency in charge<br />
of paying unemployment benefits No!<br />
Because even though these institutions<br />
have established specific programs for<br />
mentoring unemployed business<br />
creators, some in partnership with<br />
Adie, they are still not dyed-in-thewool<br />
supporters of business creation<br />
as a means of exiting unemployment.<br />
In fact, Adie has adopted this slogan for<br />
this year’s Microcredit Week in May<br />
2007. Indeed, since its inception Adie<br />
has promoted this idea of selfemployed<br />
work as a means of inclusion<br />
for unemployed and minimum income<br />
beneficiaries. This has already led to<br />
the passage of an amendment to<br />
French law in 2005 providing that<br />
action taken by a job seeker with a view<br />
to establishing a business is recognised<br />
as justification for maintaining his<br />
unemployed status and thus continuing<br />
to receive unemployment payments.<br />
Other extremely interesting measures<br />
for unemployed business creators<br />
could also be cited.<br />
35% of new entrepreneurs are<br />
unemployed, a figure explained by the<br />
range of specific measures targeting<br />
unemployed people<br />
We have already mentioned the<br />
exoneration measure for social<br />
contributions known as ACCRE (Aid for<br />
unemployed business creators and<br />
purchasers). This is a formidable tool<br />
that encourages people to exit the<br />
black economy and to start legitimate<br />
businesses. This assistance affects a<br />
quarter of all business creations, or a<br />
total of 71,000 people. Over the last two<br />
years, ACCRE has been improved as a<br />
result of repeated lobby actions by Adie<br />
to the public authorities. The number<br />
of people benefiting from ACCRE has<br />
increased and exoneration from social<br />
contributions has been extended on a<br />
decreasing scale to the second and<br />
third years. Moreover, since 2007, it is<br />
granted automatically.<br />
EDEN (Encouragement to Develop New<br />
Enterprises) is another measure that<br />
mainly targets minimum income<br />
beneficiaries and young people. It<br />
consists of a repayable advance up to<br />
an amount of 6,098 euros which must<br />
be accompanied by the obtaining of a<br />
complementary loan from another<br />
institution (bank or non-bank). It is<br />
particularly useful in the case of<br />
destitute people lacking the resources<br />
necessary for starting a business.<br />
However, Adie, which is one of the<br />
managers of EDEN on behalf of the<br />
state, wants this advance to be<br />
transformed into a grant. An Adie<br />
evaluation study has in effect shown<br />
that the impact of a grant on the<br />
sustainability of an enterprise is<br />
greater than that of a repayable<br />
advance. Moreover, the management<br />
of a repayable advance is burdensome<br />
and the final cost is nearly as expensive<br />
as a system of grants, such as those<br />
that have been developed by Adie in<br />
partnership with several local authorities.<br />
Finally, there is the opportunity to<br />
continue receiving unemployment<br />
benefits and minimum income<br />
payments which are useful in providing<br />
a safety net for persons setting out on<br />
the adventure of self-employed work.<br />
The different institutional measures in<br />
favour of business creation that have<br />
been mentioned in this article have had<br />
a considerable impact on the<br />
development of microcredit.<br />
Nevertheless, it was also necessary for<br />
Adie to obtain specific legislative<br />
changes concerning microcredit which<br />
have now enabled Adie to envisage<br />
financial sustainability as a result of<br />
the abolition of the usury rate and to be<br />
more effective since it can now borrow<br />
for onward lending.<br />
Objective 4:<br />
Towards financial services<br />
open to all<br />
Aneed to modify legislation to<br />
enable the development of<br />
microcredit<br />
The main obstacles to the development<br />
of microcredit in France have long<br />
been the ceiling on interest rates,<br />
which does not allow for the costs<br />
inherent in distributing small credit<br />
amounts to be recovered, and the<br />
monopoly by banks, which prevents<br />
non-bank institutions from borrowing<br />
money for onward lending to their<br />
clients. These provisions were valid a<br />
century ago as part of the fight against<br />
usury and to avoid risks to the financial<br />
sector. They are much less justified<br />
today given the competition that exists<br />
between the banks, the generally low<br />
interest rates, and the excellent rate of<br />
reimbursement of microcredit. This is<br />
11<br />
2. This involves simplified accounting and tax obligations for businesses which generate a turnover of less than 76,000 euros in the case of resellers and<br />
27,000 euros in the case of service providers.
12<br />
why Adie lobbied intensively against<br />
them, finally resulting in their abolition.<br />
Measure No. 1: Authorisation for nonbank<br />
microcredit institutions to borrow<br />
for onward lending to their clients<br />
Since 2001, non-profit associations<br />
have been able to be authorised to<br />
borrow from credit establishments in<br />
order to onlend to unemployed and<br />
minimum income beneficiaries.<br />
This authorisation has considerably<br />
simplified loan management for Adie.<br />
In the past, the association was dependent<br />
on bank partners for managing loans<br />
and for information on repayments.<br />
Adie now wants this authorisation to be<br />
extended to social microcredit.<br />
Measure No. 2: Elimination of the<br />
usury rate<br />
In 2005, with the support of the banks,<br />
Adie succeeded in obtaining a lifting of<br />
the ceiling on the interest rate for<br />
loans granted to individual enterprises.<br />
An evaluation report on this measure<br />
carried out by the Banque de France<br />
and published in 2006 has shown the<br />
benefits of this measure.<br />
As a result of the lifting of the interest<br />
rate for its loans, Adie now envisages<br />
achieving financial autonomy for its<br />
directly credit-linked activities.<br />
Meetings with Adie clients have<br />
confirmed that they are also conscious<br />
of the importance of a rise in the<br />
interest rate to ensure the sustainability<br />
of Adie, while their principal need is to<br />
gain access to financing even if this<br />
comes at a cost.<br />
Other measures are also necessary for<br />
the development of microcredit in<br />
France<br />
In spite of this progress, many challenges<br />
remain, particularly the obtaining of<br />
secure financing for training and<br />
counselling activities for business<br />
creators, which is indispensable for<br />
their success given the complex<br />
regulatory regime that exists. One very<br />
interesting avenue opened up in 2005<br />
following lobbying by various French<br />
networks working with business<br />
creators. On the one hand, mentoring<br />
activities for business creation became<br />
eligible to receive grants for professional<br />
training. On the other hand, professional<br />
training organisations were required to<br />
reserve a portion of their f<strong>und</strong>s for the<br />
financing of such actions.<br />
Unfortunately, only the first part of this<br />
measure still remains in France with<br />
the latter having been abolished.<br />
Conclusion:<br />
In a country where 12% of the active<br />
population survive on less than<br />
60% of average income and which<br />
has 2.7 million unemployed, there is a<br />
gradual rise in the level of awareness<br />
of the significance of self-employed<br />
work.<br />
Statistics show the value of this<br />
method of social inclusion. 50% of<br />
young people from sensitive areas in<br />
France would like to start their own<br />
business. 75% of people financed by<br />
our organization have withdrawn from<br />
social assistance measures. Moreover,<br />
the survival rate of the businesses they<br />
create are in line with the French<br />
average for individual businesses.<br />
These results are still not yet known<br />
widely enough. At Adie, we will<br />
continue to act so that the formidable<br />
potential for creativity existing in our<br />
country is better known and encouraged.
SUPPORTIVE MEASURES FOR IMMIGRANT<br />
MICRO-ENTREPRENEURS IN EUROPE 1<br />
By Miriam Guzy, former EMN training and programme manager and currently Adie project manager and by Philippe Guichandut, EMN executive director.<br />
Immigrant entrepreneurship is<br />
increasingly recognized for its<br />
potential contribution to the<br />
economy of the European Union (EU).<br />
A recent study by Caixa Catalunya 2<br />
shows the major contribution of<br />
immigration not only to EU population<br />
growth, but also to GDP. Its authors<br />
calculate that, without the<br />
demographic impact of immigration,<br />
GDP per capita in the EU-15 would<br />
have decreased by 0.23% per year<br />
between 1995 and 2005 instead of<br />
increasing by 1.79% per year. While<br />
immigrant and ethnic minority<br />
entrepreneurs show a particular<br />
dynamism in creating enterprises, they<br />
also tend to experience more severe<br />
problems than other small<br />
entrepreneurs. Access to finance, both<br />
for start-up and for growth, is typically<br />
perceived as a major problem, if not<br />
the greatest single problem by these<br />
entrepreneurs. Microlenders have<br />
removed many of the barriers<br />
characteristic of the traditional sector,<br />
by offering small loans, alternative<br />
guarantee options and flexible<br />
repayment plans. Nevertheless,<br />
immigrant micro-entrepreneurs face<br />
specific difficulties in accessing<br />
microloans and starting their<br />
businesses, such as insufficient<br />
language skills, bureaucracy, lack of<br />
access to information, limited<br />
recognition of foreign qualifications<br />
and professional experience, cultural<br />
differences… Some of these barriers<br />
could be better overcome by helping<br />
microfinance practitioners make their<br />
services more inclusive. It is clear,<br />
however, that the provision of<br />
microcredit alone does not suffice and<br />
can not be disconnected from factors<br />
related to business environment and<br />
other support services. After giving a<br />
short description of immigration<br />
entrepreneurship in six European<br />
countries, this article will analyze the<br />
needs of immigrant microentrepreneurs<br />
and suggest supportive<br />
measures for immigrant entrepreneurship.<br />
1. Differing situations and<br />
ethnic communities but<br />
overall fairly strong<br />
dynamics of immigrant<br />
entrepreneurship<br />
The countries studied (Belgium,<br />
France, Germany, Ireland,<br />
Norway, Spain) face different<br />
challenges due to historical reasons<br />
and differences in absolute and<br />
relative numbers of immigrants, as<br />
well as in the composition of<br />
immigrant communities.<br />
Germany, France, Belgium and<br />
Norway aretraditional countries of<br />
immigration, where labour migration<br />
was stopped in the early seventies.<br />
Immigration has since been mainly<br />
related to family reunion, marriage,<br />
and political reasons. Immigration was<br />
long considered to be temporary, and<br />
some of these countries have only<br />
recently acknowledged that<br />
immigrants are here to stay, and made<br />
changes in their naturalisation laws.<br />
For Spain and Ireland, traditionally<br />
countries of emigration, immigration is<br />
a new phenomenon which has<br />
accompanied their recently booming<br />
economies. Thus, the need for<br />
measures to promote integration had<br />
previously not been felt.<br />
The immigrant population is generally<br />
said to be more entrepreneurial and<br />
have a higher degree of self<br />
employment and enterprise creation,<br />
compared to the average population.<br />
This is confirmed by the data available<br />
in the few countries <strong>und</strong>er study. In<br />
France and Spain, immigrants have<br />
higher self-employment rates than the<br />
average population. In Norway, the<br />
share of businesses owned and started<br />
by people with immigrant backgro<strong>und</strong>s<br />
is amazingly high. Also in Germany,<br />
where there is still less selfemployment<br />
among immigrants than<br />
natives, the share is steadily growing,<br />
due to a high rate of immigrant startups.<br />
According to the literature, the<br />
dynamics vary from one community to<br />
another. A study of the Turkish<br />
community 3 across Europe reveals<br />
major differences between host<br />
countries, showing that business<br />
environment is very significant. Indeed,<br />
current research on entrepreneurial<br />
strategies shows how entrepreneurship<br />
emerges from the interaction of<br />
personal characteristics, group<br />
opportunities (such as social networks<br />
and community resources), and structural<br />
opportunities of the host society 4 .<br />
These structural opportunities have<br />
two major dimensions: the labour<br />
market and the political and regulatory<br />
framework.<br />
1. This article is based on the executive summary of « Nurturing immigrant entrepreneurship - a handbook for micro credit and business support »<br />
produced by EMN as part of a project f<strong>und</strong>ed by the European Commission Directorate General Justice Freedom and Security INTI « Integration of third<br />
country nationals » programme. This project “Making Strength Meet Demand” ran from June 2005 to December 2006. It was carried out by the EMN in<br />
lead partnership with six of its members: Adie (France), EVERS&JUNG (Germany), First Step (Ireland), Fonds de Participation (Belgium), Network Credit<br />
Norway (Norway) and Un Sol Mon (Spain). The detailed study and bibliography and specific country analyses can be fo<strong>und</strong> www.europeanmicrofinance.org/nos_programmes_inti_en.php<br />
2. Le Monde « Les immigrés contribuent fortement à la croissance » - 1 er septembre 2006<br />
3. Manço Altay, « Sociographie de la population d’origine turque. Quarante ans de présence en Belgique (1960-2000) – dynamiques, problématiques,<br />
perspectives ». Bruxelles, Centres de Relations Européennes (CRE), juillet 2000<br />
4. Reis Oliviera, Catarina « Understanding the diversity of Immigrant entrepreneurial strategies », Article to be included in Leo-Paul (ed.), Handbook of<br />
research on International Entrepreneurship, Edward Elgar<br />
13
14<br />
The choice of self-employment can be<br />
connected with a complex combination<br />
of factors. Being aware of these factors<br />
that result in motivations, resources<br />
and difficulties can help business<br />
support practitioners better <strong>und</strong>erstand<br />
the immigrant entrepreneur’s needs.<br />
When asked about the reasons for<br />
starting their enterprise, entrepreneurs<br />
mention a range of push factors (such<br />
as low utilisation of their qualifications,<br />
boredom, frustration or lack of<br />
options) and pull factors (for example,<br />
being able to take control, be their own<br />
boss or earn better income as an<br />
entrepreneur). Some major causes<br />
commonly identified as leading to a<br />
strong will for immigrants to start a<br />
business are:<br />
• Difficulties on the labour market:<br />
immigrants are harder hit by<br />
unemployment, and are often<br />
employed in 3D (dirty, dangerous and<br />
demanding), temporary jobs or jobs<br />
where their skills are <strong>und</strong>er-used.<br />
• The prospect of higher earning and<br />
social advancement, with the will to be<br />
independent.<br />
• A strong entrepreneurial culture, with<br />
the predominance of self-employment in<br />
their countries of origin and/or<br />
community traditions.<br />
• The possibility of mobilising ethnic<br />
resources through family and community<br />
networks, in terms of manpower,<br />
suppliers, clientele, and f<strong>und</strong>ing.<br />
• Market opportunities in the host<br />
country, such as demand for exotic products,<br />
activities linked to post-industrialisation,<br />
replacement of retiring businessowners,<br />
projects linking the country of<br />
origin with the host country…<br />
The hurdles immigrants come up<br />
against with, when wanting to start a<br />
business, give an indication of how<br />
strong their motivation must be. These<br />
hurdles include:<br />
• Restrictive legislations relative to<br />
immigrants: the permit to be selfemployed<br />
is particularly difficult to<br />
obtain in the countries of new<br />
immigration (Spain and Ireland). In<br />
other countries, access to certain<br />
professions may be denied from selfemployed<br />
immigrants, or it may<br />
require diplomas from the host<br />
country.<br />
• Administrative requirements: for all<br />
entrepreneurs, formalities and<br />
registration can be complicated, but<br />
these steps can be even more<br />
demanding for immigrants, with extra<br />
difficulties in getting foreign diplomas<br />
and skills recognized and in dealing<br />
with the paperwork.<br />
• The inactivity trap: many immigrants,<br />
who are recipients of unemployment or<br />
welfare benefits, risk losing a minimal<br />
but secure income by becoming<br />
entrepreneurs. In addition, they may<br />
have to pay tax and social security<br />
contributions even before their<br />
business becomes profitable.<br />
As a reason for difficulties on the<br />
labour market, discrimination can be<br />
seen as a strong push factor to starting<br />
a business and can result in closer<br />
community ties. At the same time, it<br />
can cause problems at many levels<br />
when starting the business: when<br />
dealing with administration, owners of<br />
business premises, suppliers, clients,<br />
banks... The combination of strong<br />
dynamics with strong limiting factors<br />
for enterprising migrants makes it no<br />
surprise if immigrants concentrate in<br />
sectors with low entry barriers in<br />
terms of qualifications and capital,<br />
such as trade, personal services,<br />
construction, catering and the clothing<br />
industry. These less competitive<br />
sectors are work intensive, and being<br />
able to rely on the family and<br />
community members is an asset.<br />
Enterprise survival rate in these<br />
sectors is lower than average, and<br />
relying on informal labour can make a<br />
difference for the business survival.<br />
Also, if the barriers of official selfemployment<br />
are too high, the activity<br />
may not be registered at all.<br />
2. Immigrant entrepreneurs<br />
need business support and<br />
access to finance<br />
In this complicated environment for<br />
business creation, a large part of<br />
the needs of immigrant microentrepreneurs<br />
are those encountered<br />
by all micro-entrepreneurs.<br />
While many entrepreneurs, and particularly<br />
immigrant entrepreneurs, start<br />
up their businesses without formal use<br />
of business support services, both<br />
advisors and immigrant entrepreneurs<br />
confirm the need for this support.<br />
However, based on interviews and<br />
focus groups,some of their views<br />
diverge on the nature of the support<br />
needed. Proper support should<br />
increase the chances of the business<br />
being a positive experience for the<br />
person as well as contributing an<br />
added value for the economy and<br />
society.<br />
Immigrant entrepreneurs face the<br />
following common problems faced by<br />
small starting businesses, although<br />
perhaps more severely 5 :<br />
• difficulties in accessing start-up<br />
finance and/or development finance on<br />
reasonable terms,<br />
• problems in dealing with a range<br />
of administrative and regulatory<br />
requirements<br />
• insufficient management skills and<br />
access to business support<br />
• limited knowledge of markets and<br />
marketing<br />
Specific issues are:<br />
• Access to information: immigrants<br />
are often unaware of existing support<br />
and may be hesitant towards institutional<br />
actors because of mistrust. They are<br />
often discouraged by the complexity of<br />
information given and the cautiousness<br />
of advisors who doubt their capacities<br />
to succeed.<br />
• Content of the support: formal<br />
business planning and administrative<br />
requirements are less prioritized by<br />
the entrepreneurs than by the<br />
business advisors. Finding clients<br />
however seems to be a particular area<br />
of interest for the entrepreneurs.<br />
• Quality of the support: focus groups<br />
with entrepreneurs highlighted the<br />
importance of an atmosphere of<br />
confidence and the need to trust the<br />
advisor. Entrepreneurs also expect<br />
complete, comprehensive information,<br />
based on experience, and concrete<br />
recommendations of actions to be<br />
taken.<br />
Cultural issues may affect the<br />
perception and prioritising of needs, as<br />
well as influence the relation between<br />
the advisor and entrepreneur, which is<br />
crucial for the whole process. Some of<br />
the important cultural issues identified<br />
by business advisors are:<br />
• Reluctance in dealing with institutions<br />
• Relation to rules<br />
• Gender relations<br />
• Relation to time and time management<br />
• The importance of spoken agreements<br />
in contrast to written and official<br />
documents<br />
Access to finance is the first priority in<br />
5. CEEDR (the Centre for Enterprise and Economic Research) « Youth Enterpreneurs, Women enterpreneurs, Ethnic Minority Enterpreneurs Co-entrepreneurs<br />
in the European Union and Central Eastern Europe », 2000
terms of entrepreneurs’ needs. Studies<br />
in several countries show that immigrant<br />
entrepreneurs have even less access to<br />
mainstream banking and public financial<br />
support schemes than natives.<br />
3. Measures for access to<br />
information, inclusive<br />
financial services and<br />
proper business support<br />
services needed to support<br />
immigrant entrepreneurship<br />
The general observation is that<br />
immigrants have less access to<br />
information for linguistic, cultural<br />
and social reasons:<br />
• they are not pro-active in their<br />
research, due to different cultural<br />
perceptions of business creation, as<br />
well as a mistrust in institutional<br />
actors,<br />
• they are less likely to go to traditional<br />
places of referral.<br />
Business support organisations<br />
therefore need to adopt pro-active<br />
strategies themselves, like:<br />
• creating information brochures and<br />
dedicated websites for immigrants<br />
themselves and organisations working<br />
with them,<br />
• being present in areas with high<br />
concentrations of immigrant population,<br />
• using community and local networks<br />
and word-of-mouth,<br />
• using immigrants’ own language.<br />
Microcredit aims to close a market gap<br />
by providing access to loans to people<br />
who are excluded from getting bank<br />
loans. The share of immigrants among<br />
micro-borrowers tends to be fairly<br />
high, with rapidly increasing numbers<br />
of loans and enquiries.<br />
• Good microlending practice as based<br />
on international microfinance<br />
experience and adapted to the<br />
European context enables to serve<br />
immigrants well, as shown by some of<br />
the older microlenders. Services<br />
should be efficient and relevant. For<br />
example, the smaller the loan, the<br />
simpler and faster the application<br />
process should be.<br />
• Microcredit is ideally a bridge to<br />
mainstream banking services, through<br />
its close partnerships with banks.<br />
Microcredit f<strong>und</strong>s often come from<br />
banks, and may be linked to the clients’<br />
access to a bank account and range of<br />
financial services. Microcredit and<br />
other business support practitioners<br />
can also play an active role in changing<br />
the banks’ perception of immigrant<br />
entrepreneurs to a positive direction.<br />
• Examples of inclusive financial<br />
schemes show the importance of interest<br />
and involvement of the organisation’s<br />
management in this issue.<br />
Business support services dealing with<br />
immigrants can be characterised by<br />
• Their general approach: some are<br />
target-specific, others prefer generic,<br />
but inclusive, services. Some provide a<br />
limited range of specific services with<br />
the aim of mainstreaming immigrants<br />
to network partner organisations,<br />
others provide a full range of services.<br />
• A special awareness on establishing<br />
good communication and building<br />
trust, by having staff with immigrant<br />
backgro<strong>und</strong>, introducing cultural<br />
mediators, using immigrants’ native<br />
language and having a positive outlook.<br />
• Delivery methods, such as making<br />
advice simple and practical, building<br />
motivation for the making of a<br />
business plan and combining upfront<br />
and follow-up support according to the<br />
entrepreneur’s profile.<br />
• Efforts for bridging to the<br />
mainstream, whether preparation and<br />
practical assistance in dealing with<br />
administration, banks and authorities,<br />
or awareness-raising within these<br />
institutions.<br />
Remove obstacles in the regulatory<br />
and legal framework, and support measures<br />
that foster self-employment.<br />
Improving the environment for all<br />
microentrepreneurs would greatly<br />
benefit immigrant entrepreneurs.<br />
These measures, which are up to<br />
policymakers, include:<br />
• Promoting entrepreneurship as a viable<br />
option for a wide range of people,<br />
• Creating welfare bridges,<br />
• Fostering microfinance, and financial<br />
bridges, through an appropriate legal<br />
framework,<br />
• F<strong>und</strong>ing and supporting microcredit<br />
providers.<br />
Recommended measures specifically<br />
related to immigrant entrepreneurs<br />
are:<br />
• Self-employment should be a right<br />
for legal residents.<br />
• The independent exercise of<br />
professional activities should be<br />
subject to the same rules for<br />
immigrants as for EU-nationals.<br />
• Statistical data on immigration and<br />
entrepreneurship should be improved.<br />
• Standard indicators for monitoring<br />
policies related to immigrant<br />
entrepreneurship need to be<br />
developed, made available and<br />
regularly updated.<br />
• Recognition of experience and<br />
qualifications should be facilitated.<br />
Implement pro-active strategies for<br />
awareness-raising and outreach<br />
Direct communication strategies:<br />
• Use information channels preferred<br />
by immigrants such as word-of-mouth<br />
and community networks,<br />
• Identify places of information where<br />
immigrants can be reached directly,<br />
• Use immigrants’ own language.<br />
Communicate with and through<br />
referral partners:<br />
• Raise awareness of immigrants’<br />
potential as entrepreneurs.<br />
Improve access to finance<br />
Access to microfinance:<br />
• Strengthen the microcredit network,<br />
• Raise awareness about immigrants<br />
as a target group among microlenders,<br />
• Adapt lending methodology.<br />
Access to mainstream finance:<br />
• Facilitate the dialogue between credit<br />
institutions and migrant entrepreneurs,<br />
• Mainstream migrants into existing<br />
public f<strong>und</strong>ing measures for microentrepreneurs.<br />
Improve non-financial business support<br />
services<br />
Cultivate staff communication skills<br />
and intercultural competence:<br />
• Personal qualities (ability to listen,<br />
empathy, patience, flexibility, acceptance<br />
of diversity),<br />
• Language skills,<br />
• Intercultural competence.<br />
Consulting methods:<br />
• Practical and simple advice,<br />
• A flexible combination of support<br />
adapted to individual needs,<br />
• Adapted business planning.<br />
Microfinance practitioners are in a<br />
privileged position and should contribute<br />
to giving a positive image of immigrant<br />
entrepreneurs. This can be done<br />
by positive communication with their<br />
wide variety of economic partners<br />
(banks, chambers of trade, business<br />
support agencies…), as well as within<br />
social and political networks (social<br />
services, training organisations...).<br />
15
POLICY MEASURES NEEDED TO PROMOTE<br />
MICROFINANCE IN EUROPE 1<br />
By Jan <strong>Evers</strong>, Stefanie Lahn - EVERS & JUNG, Research and Consulting in Financial Services<br />
16<br />
Microfinance for new or<br />
existing small companies has<br />
received growing attention<br />
over the past years.<br />
Its role in integrating poor people and<br />
people at risk of poverty into the<br />
economy and society, particularly in<br />
developing countries, is seen as one of<br />
the development success stories of the<br />
past decade. But what is its role in<br />
Western Europe<br />
Thanks to European welfare systems,<br />
benefits programmes are available and<br />
appropriately provided to the needy.<br />
However, over the last years, high<br />
unemployment rates have stretched<br />
the public purse to its limits.<br />
Nowadays within the group of welfare<br />
recipients there are often many welltrained<br />
people of prime working age<br />
who are affected by long-term<br />
unemployment and have difficulties in<br />
becoming re-integrated into the<br />
working population. They constitute a<br />
new group within Europe, which is or is<br />
becoming socially excluded and at risk<br />
of poverty. Self-employment and<br />
microentrepreneurship have been<br />
identified as ways of enabling those at<br />
risk of poverty and social exclusion to<br />
participate in the economic and<br />
political processes of society through<br />
self-employment.<br />
The Moving Island Effect<br />
Welfare recipients are often confronted<br />
with what we term the moving island<br />
effect. Once they decide to become<br />
active and want to leave their island of<br />
welfare support, they are confronted<br />
with more and more upcoming<br />
hurdles. For example, in earning the<br />
first EURO they become obliged to<br />
contribute to national health and<br />
pension schemes.<br />
In particular, those wishing to create<br />
their own employment through<br />
entrepreneurship and who have lived<br />
in social and economic exclusion,<br />
sometimes for many years, find it<br />
difficult to access finance. Thus, they<br />
are facing problems which are hard to<br />
overcome with the traditional means<br />
and options at their disposal.<br />
Microfinance, in this respect, aims to<br />
diminish these hurdles by targeting<br />
people who are regarded as nonbankable<br />
by the traditional financing<br />
sector.<br />
require the attention of governments<br />
and policy makers. In this respect,<br />
awareness has to be raised that<br />
microfinance can only perform its role<br />
properly, if the environment is right.<br />
This problem was first addressed in<br />
the study “Policy measures to promote<br />
the use of micro-credit for social inclusion,”<br />
which was a part of the<br />
Commission’s Action Programme on<br />
social exclusion. FACET, EVERS &<br />
JUNG and nef (the New Economic<br />
Fo<strong>und</strong>ation), with assistance from the<br />
European Microfinance Network and<br />
the Microfinance Center, conducted<br />
this study in 2004 for the European<br />
Commission DG Employment, Social<br />
Affairs and Equal Opportunities unit<br />
E/2. 2<br />
Building Bridges<br />
The study focused on the<br />
identification and analysis of<br />
policy measures that promote<br />
the use of microfinance and that make<br />
the environment more “selfemployment<br />
friendly.”<br />
Ideally, these measures build bridges<br />
between the social welfare, employment,<br />
enterprise and financial systems.<br />
Yet, access to financial services is not<br />
enough. There are additional barriers<br />
relating to self-employment, which<br />
Using a transnational approach, policy<br />
measures of seven Member States<br />
(Czech Republic, France, Germany,<br />
1. This article was published in the 2006 summer issue of the journal « Finance and Common Goods” from the “Observatoire de la finance”. It is<br />
published in “Microfinance Europe” with the authorization of the “Observatoire de la finance”.<br />
2. The study was completed in 2005 and is available on EMN website www.european-microfinance.org or at info@eversjung.de. However, a follow up of<br />
the study is prepared by EMN and MFC steered by a working group part of the project “From exclusion to inclusion through microfinance”. We are looking<br />
for a sustainable network of institutions completing regularly the country reports. If you want to get involved, get in touch with us.
Poland, Spain, Sweden, United Kingdom)<br />
and one accession country (Romania)<br />
were analysed and evaluated with<br />
regard to their effectiveness. The<br />
policy measures assessed were:<br />
Entrepreneurial Context, Microenterprise<br />
Policy Environment, Welfare Bridges,<br />
Legal Framework, Financial Bridges<br />
and Microfinance F<strong>und</strong>ing and<br />
Support. The findings of the survey<br />
were divided into these six key aspects<br />
and have been illustrated in a radar<br />
diagram for each country.<br />
The figure shows that there is no<br />
leading country amongst the eight.<br />
Nevertheless, there are a number of<br />
effective and promising policy measures<br />
that, with the help of microfinance,<br />
support social inclusion through selfemployment.<br />
This is the point from which political<br />
decision makers should now start to<br />
improve policy measures needed to<br />
promote microfinance in Europe. The<br />
advantage is, not everything has to be<br />
developed from scratch. Rather, there<br />
exists the possibility of learning from<br />
best practices and experiences of<br />
other European countries. Particularly<br />
with regard to high scoring areas,<br />
countries can borrow ideas from one<br />
another. Bringing all this together<br />
could be a great resource for improving<br />
the environment for self-employment<br />
and further enable European countries<br />
to develop their own European best<br />
practice model.<br />
In the following, policy measures and<br />
best practice examples are presented<br />
briefly for each key aspect surveyed.<br />
However, the full study itself gives<br />
much more detail. Here we try to<br />
explain the principle.<br />
Entrepreneurial context<br />
How entrepreneurial is the society<br />
and how much does it support its<br />
entrepreneurs<br />
Policy measures, which promote<br />
the entrepreneurial context are:<br />
- Awareness programmes promoting<br />
self-employment as a viable income<br />
generating activity<br />
- Reduction of legal, fiscal and<br />
administrative barriers related to<br />
self-employment<br />
Asociety supporting and actively<br />
encouraging entrepreneurship<br />
for all of its members is<br />
referred to as entrepreneurial.<br />
In an entrepreneurial society, selfemployment<br />
is a respectable alternative<br />
to wage employment. Further, a<br />
business failure does not automatically<br />
lead to an end of the entrepreneurial<br />
career. Rather it is considered a<br />
valuable experience for future activities.<br />
For instance, entrepreneurship training<br />
is an integral part of the school<br />
curriculum in Poland, the Czech<br />
Republic and the UK. This training<br />
promotes, at a young age, the idea that<br />
self-employment is a viable and<br />
valuable option for one’s career.<br />
Additionally, projects with “fictitious<br />
companies” promote practical<br />
entrepreneurship skills amongst<br />
young people.<br />
With respect to the fiscal environment,<br />
in France, regional authorities established<br />
a pilot program with lower VAT (value<br />
added tax) for private construction,<br />
home, and gardening services in order<br />
to encourage entrepreneurs in these<br />
sectors to make the transition from the<br />
informal to the formal sector.<br />
Policy environment for microenterprises<br />
Are there policy measures that<br />
promote self-employment in<br />
general, and for the socially<br />
excluded in particular<br />
Policy measures, which improve the<br />
policy environment for microenterprises<br />
are:<br />
- Provision of business advice<br />
through flexible internet and<br />
telephone support desks<br />
- Loan f<strong>und</strong>s run by specialised NGOs/<br />
banks focusing on microenterprises<br />
- Governments highlighting the<br />
importance of microenterprises<br />
In an ideal policy environment, a<br />
mixture of public and private<br />
initiatives promotes the creation<br />
and development of self-employment<br />
and micro-enterprises.<br />
Business support services especially<br />
developed for the needs of microenterprises<br />
are available, as are<br />
financial services which meet their<br />
demand. In many respects it is more<br />
useful for the latter to focus on<br />
motivation and capacity to repay than<br />
on more traditional means such as<br />
loan size and bank history.<br />
One example, which illustrates how<br />
policy measures supporting microenterprises<br />
can be improved, is the<br />
regional initiative FIRMENHILFE in<br />
Hamburg, Germany. It is a telephone<br />
based support desk, which provides<br />
low-level, independent and confidential<br />
advice in order to (re) activate the selfhelp<br />
ability of the micro-enterprise<br />
owner and to enable him or her to<br />
overcome or prevent financial<br />
problems.<br />
Another but different example is the<br />
French “Plan Dutreil,” which aims to<br />
reduce administrative procedures and<br />
requirements for micro-enterprises.<br />
As part of the “Plan Dutreuil” (2003)<br />
the support to micro-enterprises is<br />
streamlined. Micro-enterprises in<br />
certain sectors pay lower or are even<br />
exempted from VAT.<br />
Welfare bridge<br />
How developed is the system for<br />
taking people from unemployment<br />
to employment (including selfemployment)<br />
Policy measures, which help welfare<br />
recipients to move smoothly<br />
into self-employment are:<br />
- Income bridges<br />
- Collaboration between social welfare<br />
and employment/enterprise system<br />
- Active labour market policy<br />
Active labour market policies<br />
increasingly use incentives to<br />
encourage people into work<br />
17
18<br />
and penalise the unwilling.<br />
Preferably, these incentives should be<br />
part of a system developed to take<br />
welfare recipients smoothly from unemployment<br />
to employment, including selfemployment.<br />
These so-called welfare<br />
bridges encourage the unemployed,<br />
without forcing them to become selfemployed.<br />
Welfare bridges create a<br />
‘pull’ rather than a ‘push’ environment.<br />
This is achieved, for instance, by giving<br />
potential entrepreneurs time to test<br />
their new income generating activity<br />
before needing to declare formally<br />
their self-employment status.<br />
In this respect, the Irish system is<br />
regarded as the most advanced in<br />
Europe. It provides income support on<br />
a decreasing scale for up to four years.<br />
In case of a business failure, the<br />
person can return to the welfare<br />
system without facing any penalties or<br />
barriers. Therefore, this system allows<br />
people to test the income-earning<br />
capacity of their enterprise extensively.<br />
A similar approach has been adopted<br />
by the German Ich AG. Here income<br />
support decreases in three steps over<br />
three years. Still, the system has to be<br />
improved further since it lacks any<br />
kind of filter to prevent free rider<br />
effects and does not enable the<br />
combination with non-financial<br />
support. Thus, it is a promising<br />
approach for building bridges through<br />
transition periods.<br />
Legal framework for microfinance<br />
Is there a supportive legal framework<br />
for microfinance services<br />
Policy measures, which create<br />
favourable legal frameworks, are:<br />
- Specific legislation<br />
- Reduced capital requirements<br />
- Favourable fiscal status<br />
As regulators today consider the<br />
protection of savings as a basic<br />
right, ideally the same should<br />
be true for access to finance.<br />
Further, in addition to mainstream<br />
commercial banks, establishing alternative<br />
financial institutions, which concentrate<br />
on microfinance and access to financial<br />
services for low-income groups and<br />
excluded people, would be a great<br />
success. Introducing specific<br />
regulations for microfinance providers<br />
will foster these developments.<br />
For example, Polish and UK banking<br />
regulation is very limited. With respect<br />
to microfinance there exist no<br />
obstacles. However, usury regulations<br />
are lacking in both countries, which is<br />
problematic with regard to consumer<br />
protection. Yet, this gap could be closed<br />
with a usury law similar to the<br />
existing German one. Here, interest<br />
rates are limited to double the average<br />
interest rate in the sector (real estate,<br />
loan, etc.) or may not exceed it by more<br />
than 12 percent points.<br />
French banking regulation took a different<br />
path. It opened a special window<br />
just for microlending. Microlenders are<br />
allowed to provide the first most risky<br />
and most expensive credit to an<br />
entrepreneur. Bank services are not<br />
replaced by this credit provision, rather<br />
the contrary holds true: potential<br />
clients are prepared for bank finance.<br />
Financial bridges<br />
Are mainstream financial services<br />
available for excluded groups and<br />
self-employed<br />
Policy measures, which enhance<br />
access to mainstream financial<br />
institutions, are:<br />
- Risk sharing loan instruments<br />
(financial bridges)<br />
- tax incentives for investors (banks)<br />
- outsourcing of activities related to<br />
loan transactions<br />
Ideally a wide range of financial<br />
institutions should exist.<br />
In this ideal world, each of them is very<br />
successful in serving its target group<br />
with products specifically designed to<br />
meet its needs. In addition, financial<br />
institutions are interested in innovating<br />
and developing products and delivery<br />
systems that contribute to social<br />
inclusion, since this is supported by<br />
public authorities and the regulatory<br />
environment.<br />
In Finland, the public finance<br />
institution Finnvera finances microclients.<br />
After successful repayment<br />
and growth these clients are<br />
transferred to banks and become<br />
included in mainstream banking.<br />
Spanish saving banks developed and<br />
established units within their<br />
mainstream banks, which specialise in<br />
providing microfinance services. Caixa<br />
Catalunya for example possesses a<br />
special not-for-profit unit. Specialised<br />
loan officers are based within the<br />
general branches of the bank hence<br />
not only providing access to finance,<br />
but also providing the opportunity for a<br />
smooth transition from specialised<br />
microlending services to the mainstream.<br />
Similarly, the European Bank for<br />
Reconstruction and Development<br />
(EBRD) has provided support to the<br />
Czech Raiffeisen Bank in order to<br />
develop a product for micro-businesses.<br />
F<strong>und</strong>ing and support for microcredit<br />
providers<br />
Is microcredit supported through<br />
direct and sustained f<strong>und</strong>ing<br />
Policy measures for mixed and long<br />
term f<strong>und</strong>ing of microfinance are:<br />
- Tax benefits for investors<br />
- Promotion of risk capital instruments<br />
for microenterprises<br />
Preferably, microfinance providers<br />
cover their costs through their<br />
financial operations.<br />
This, however seems hardly achievable<br />
in Europe. On the one hand, government<br />
legislated interest rate caps at low<br />
levels hamper covering risk and loan<br />
transaction costs. On the other, the<br />
often-expressed need for further (nonrecoverable)<br />
services such as business<br />
support services for their clients<br />
makes it difficult for providers to<br />
become financially sustainable. As<br />
such, the success of microfinance<br />
providers depends and will continue to<br />
depend directly on a sustained f<strong>und</strong>ing<br />
concept. In this respect it is crucial that<br />
f<strong>und</strong>ing is secured on a long-term<br />
basis and if possible is a mix of<br />
different instruments and sources. To<br />
solve this problem, public sources and<br />
(private) grants could complement the<br />
self-generated income of microlenders.<br />
After all, the aim is to build bridges<br />
between mainstream institutions and<br />
socially excluded people. Performance<br />
ratings could help to ensure the costefficient<br />
use of f<strong>und</strong>s.<br />
For example, the Polish microlender<br />
F<strong>und</strong>usz Mikro currently serves about<br />
8,000 clients. With interest rates<br />
aro<strong>und</strong> 20 % and default rates below<br />
5% it became profitable after 3 years<br />
and sustainable after 4 years of operation.<br />
At its start, a donor grant of $ 20 million<br />
enabled F<strong>und</strong>usz Mikro to accumulate<br />
capital and receive commercial loans.<br />
Although the donor set clear goals,<br />
F<strong>und</strong>usz Mikro was free to make its<br />
own decisions regarding implementation.<br />
In Northern Ireland (UK) the microlender<br />
Aspire uses its margin of 11 percent<br />
(2004/05: interest of 18 % minus average<br />
loan loss rate of 7 %) to partly cover its<br />
transaction costs. Nevertheless it<br />
competes successfully with schemes
that provide free subsidies in the area.<br />
The French microlender Adie and the<br />
international bank BNP Paribas signed<br />
a mutual agreement and are therefore<br />
an attention-grabbing model for a<br />
private partnership in this sector. BNP<br />
Paribas re-finances the portfolio of<br />
Adie, takes over a share of risk, and<br />
pays the transaction costs in part in the<br />
form of a grant of ten percent of the<br />
amount lent. This kind of financing<br />
package promotes efficient and<br />
effective lending schemes.<br />
An Instrument for Employment and<br />
Laboratory for Future Banking<br />
Techniques<br />
For years now the focus of EU<br />
policies has been to make its<br />
economy more dynamic and inclusive.<br />
In order to continue this process<br />
successfully the EU has to address the<br />
joint issues of unemployment and<br />
inactivity. In this respect, microfinance<br />
can be a valid instrument, especially<br />
for bringing unemployed back into the<br />
employment and enterprise system by<br />
encouraging self-employment and<br />
micro-enterprise development.<br />
Yet, microfinance should not be seen<br />
as a tool only for the poor and socially<br />
excluded. Rather, the opposite holds<br />
true. Microfinance is a valuable means<br />
of financing micro-enterprises and the<br />
self-employed by developing new<br />
criteria for creditworthiness evaluations<br />
and new forms of relationship management<br />
systems to widen the scope o mainstream<br />
banking. Microfinance is in fact a<br />
laboratory for future banking techniques.<br />
Still, the question remains, why is<br />
microfinance so often connected to the<br />
target group of poor and socially<br />
excluded Maybe it is because they are<br />
the perfect barometer of success. On<br />
the one hand, they provide the<br />
possibility of measuring the success of<br />
a microfinance provider. But, on a<br />
wider scale they help to determinate<br />
how “self-employment friendly” an<br />
environment really is. If a society is<br />
able to make it possible for its poorest<br />
members and for the ones (partly)<br />
excluded from social life to become reactivated<br />
into economic, political and<br />
social processes, then anyone who is<br />
willing should be able to start his or<br />
her own business.<br />
19
MICROCREDITOS – LA REBELION<br />
DE LOS BONSAIS<br />
MICROCREDITOS – THE REBELLION OF BONSAIS<br />
20<br />
Angel Font Vidal<br />
The paradox is that the whole business<br />
of microcredit, that has been built<br />
aro<strong>und</strong>, for and with money, has<br />
nothing to do with money intimately<br />
and substantially. Its higher objective<br />
is that of helping people to develop<br />
their own potential, it is not about<br />
monetary capital but about human<br />
capital.<br />
Microcredit is merely an instrument<br />
that allows people to unleash their own<br />
dreams and it also helps the poorer<br />
and most disadvantaged to infuse their<br />
life with dignity, respect and meaning.<br />
MUHAMMAD YUNUS, Nobel Peace<br />
Prize 2006.<br />
This book illustrates from real<br />
experiences the great contribution of<br />
microcredits to poverty eradication. It<br />
makes it possible to <strong>und</strong>erstand the<br />
reasons why Muhammad Yunus and<br />
his Grameen Bank were awarded the<br />
Nobel Peace Prize for 2006, as well as<br />
to be aware of the transformation<br />
which both cooperation and welfare<br />
policies in Europe could <strong>und</strong>ergo in the<br />
near future if microfinance principles<br />
were to be implemented on a global<br />
scale.<br />
Angel Font Vidal (1965), BA in Chemistry<br />
and MBA, started his professional life<br />
in environmental engineering, although<br />
he soon joined Intermón-Oxfam where<br />
he spent eight years performing coordination<br />
functions as Deputy Director<br />
General. Since 2000 he has been the<br />
Director of F<strong>und</strong>ació Un Sol Món of<br />
Caixa Catalunya, from where he promotes<br />
projects for labour, social and housing<br />
inclusion for <strong>und</strong>erprivileged groups as<br />
well as the development of microfinance<br />
in Spain, Latin America and Africa.<br />
WWW.ICARIAEDITORIAL.COM<br />
AUTHOR Angel Font<br />
SUBJECT Economics<br />
PUBLISHER ICARIA EDITORIAL<br />
COLLECTION Más Madera, 57<br />
ISBN 84-7426-899-0<br />
PP 104<br />
PRICE 8 €<br />
European Microfinance Network<br />
4, boulevard Poissonnière - 75009 Paris<br />
tel: +33 (0)1 56 03 59 68<br />
fax: +33 (0)1 56 03 59 77<br />
web: www.european-microfinance.org<br />
e-mail: emn@european-microfinance.org<br />
This project has received f<strong>und</strong>ing from the European Commission within the frame<br />
of the Community Action Programme to Combat Social Exclusion 2002-2006