Microfinance in Germany and Europe - Evers und Jung
Microfinance in Germany and Europe - Evers und Jung
Microfinance in Germany and Europe - Evers und Jung
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<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong>.Market Overview <strong>and</strong> Best Practice Examples.Frankfurt am Ma<strong>in</strong>, April 2007.
Published byKfW BankengruppePalmengartenstraße 5-9, 60325 Frankfurt am Ma<strong>in</strong>Phone +49 69 7431-0; Fax: +49 69 7431-2944www.kfw.deEdited byKfW Bankengruppe, Economic Research DepartementPhone +49 69 7431-4104; Fax +49 69 7431-3503AutorsPhilippe Guich<strong>and</strong>ut, <strong>Europe</strong>an <strong>Microf<strong>in</strong>ance</strong> Network (EMN), Executive Director, ParisTamara Underwood, EMN Research Manager, ParisDr. Jan <strong>Evers</strong>, Manag<strong>in</strong>g Partner, <strong>Evers</strong> & <strong>Jung</strong>, HamburgStefanie Lahn, Consultant, <strong>Evers</strong> & <strong>Jung</strong>, HamburgDr. Klaus Mark, Economist, KfW Bankengruppe, Frankfurt am Ma<strong>in</strong>Dr. Philipp Tilleßen, Economist, KfW Bankengruppe, Frankfurt am Ma<strong>in</strong>Maria Nowak, President of Adie, ParisKrzysztof Jaczewski, President of F<strong>und</strong>usz Mikro, WarsawSusanne Abel, Senior Project Manager, KfW Bankengruppe, Frankfurt am Ma<strong>in</strong>Coord<strong>in</strong>ationDr. Klaus Mark, KfW BankengruppeDr. Philipp Tilleßen, KfW BankengruppeFrankfurt am Ma<strong>in</strong>, April 2007
Table of Contents.Editorial.Part I: <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> – a SurveyMicrocredit <strong>in</strong> the <strong>Europe</strong>an Union: An Overview. 1-16<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> - Needs, Problems <strong>and</strong> Ways Forward. 17-32Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong>: An Empirical Survey of Programmes <strong>in</strong> 2006. 33-53Part II: Best Practice<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> France: The Experiences of Adie. 54-65Twelve Years’ Experience of Microf<strong>in</strong>anc<strong>in</strong>g <strong>in</strong> Pol<strong>and</strong>. 66-72<strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong>. 73-78
Editorial.The importance of microf<strong>in</strong>ance <strong>in</strong> <strong>Europe</strong> has been grow<strong>in</strong>g <strong>in</strong> recent years. <strong>Microf<strong>in</strong>ance</strong>approaches first showed their positive economic <strong>and</strong> social impact <strong>in</strong> the develop<strong>in</strong>g countries<strong>in</strong> the 70ies <strong>and</strong> 80ies. In those countries, many people from the poorer sections of thepopulation had no access to small credits or simple f<strong>in</strong>ancial services. This access was establishedby microf<strong>in</strong>ance programs enabl<strong>in</strong>g poor people to earn their own liv<strong>in</strong>g by runn<strong>in</strong>gtheir own – small – bus<strong>in</strong>esses.This pr<strong>in</strong>ciple of microf<strong>in</strong>ance – help<strong>in</strong>g people to help themselves – gets more <strong>and</strong> morerecognized by economic <strong>and</strong> social policy makers <strong>in</strong> <strong>Europe</strong>. Although <strong>in</strong> most <strong>Europe</strong>ancountries there is a highly efficient bank<strong>in</strong>g sector, many small <strong>and</strong> micro bus<strong>in</strong>esses havesizeable difficulties <strong>in</strong> obta<strong>in</strong><strong>in</strong>g loans for their <strong>in</strong>vestments. As seen by traditional f<strong>in</strong>ancial<strong>in</strong>termediaries, small scale customers often mean an unfavourable cost/<strong>in</strong>come ratio. But,f<strong>in</strong>anc<strong>in</strong>g problems that could be avoided slow down <strong>in</strong>vestments <strong>and</strong> are, therefore, an impedimentfor job creation.Furthermore, microf<strong>in</strong>ance programs <strong>in</strong> <strong>Europe</strong> are often addressed to groups with specificeconomic <strong>and</strong> social difficulties. For example, a lot of start-up entrepreneurs who were formerlyunemployed need small loans as a basis for the development <strong>and</strong> growth of their bus<strong>in</strong>esses.S<strong>in</strong>ce many of them have difficulties to demonstrate their creditworth<strong>in</strong>ess by provid<strong>in</strong>gdocumentary evidence of past economic success <strong>and</strong> rarely have assets which are usableas collaterals, banks often refuse to give f<strong>in</strong>anc<strong>in</strong>g to them. Small loans granted by microf<strong>in</strong>ance<strong>in</strong>stitutions are, therefore, crucial to give unemployed people a chance to earntheir own liv<strong>in</strong>g be<strong>in</strong>g self-employed.As <strong>in</strong> the develop<strong>in</strong>g countries, we also f<strong>in</strong>d many microf<strong>in</strong>ance approaches <strong>in</strong> <strong>Europe</strong> withdiffer<strong>in</strong>g structures <strong>and</strong> strategic approaches. Actually, they have to be diverse to take accountof the wide range of people’s liv<strong>in</strong>g situations. How to create a microf<strong>in</strong>ance programwhich efficiently solves the economic <strong>and</strong> social problems of the specific target group is animportant question for <strong>Europe</strong>an policy makers. Because the more efficient microf<strong>in</strong>anceworks, the bigger is the positive impact we can achieve with limited resources.Aga<strong>in</strong>st this backgro<strong>und</strong>, the objective of this volume is to give an overview over microf<strong>in</strong>ance<strong>in</strong>itiatives <strong>in</strong> <strong>Europe</strong> <strong>and</strong> to get some more <strong>in</strong>sights <strong>in</strong>to the function<strong>in</strong>g <strong>and</strong> the structuresof successful programs. Efficiency ga<strong>in</strong>s by mutual learn<strong>in</strong>g <strong>in</strong> <strong>Europe</strong> enable us toachieve stronger impacts.
We are happy that we could w<strong>in</strong> several <strong>Europe</strong>an partner <strong>in</strong>stitutions to create this volumeon microf<strong>in</strong>ance – ADIE (Association pour le Droit à l’Initiative Economique), The <strong>Europe</strong>an<strong>Microf<strong>in</strong>ance</strong> Network, <strong>Evers</strong> & <strong>Jung</strong> <strong>and</strong> F<strong>und</strong>usz Mikro. And, we especially want to thankthe contribut<strong>in</strong>g authors.
Microcredit <strong>in</strong> the <strong>Europe</strong>an Union: An Overview 1Microcredit <strong>in</strong> the <strong>Europe</strong>an Union: An Overview.Microcredit came to prom<strong>in</strong>ence <strong>in</strong> the 1980s as a tool to alleviate poverty <strong>in</strong> Asia, Lat<strong>in</strong>America <strong>and</strong> Africa. In Western <strong>Europe</strong>, a h<strong>and</strong>ful of organisations pioneered microcreditschemes <strong>in</strong> the 1990s. The majority active today began lend<strong>in</strong>g <strong>in</strong> the present decade,however. In this period, persistent unemployment <strong>and</strong> pressure on the welfare state focusedattention on microcredit as a tool to foster self-employment for f<strong>in</strong>ancially <strong>and</strong> sociallyexcluded persons. Most f<strong>und</strong>s receive public sector subsidies <strong>and</strong> many microlenders focuson promot<strong>in</strong>g social <strong>and</strong> f<strong>in</strong>ancial <strong>in</strong>clusion.In Eastern <strong>Europe</strong>, microf<strong>in</strong>ance began <strong>in</strong> the 1990s after the economic transition fromcentrally planned to market economies, which led to large numbers of unemployed urban<strong>and</strong> rural workers. <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong>stitutions were created with significant donor support. Theirpurpose was to provide services to people not reached by formal f<strong>in</strong>ancial <strong>in</strong>stitutions due tothe collapse of the f<strong>in</strong>ancial sector. The priority was to create viable <strong>and</strong> susta<strong>in</strong>able f<strong>in</strong>ancial<strong>in</strong>stitutions that could reach large numbers of unemployed <strong>and</strong> poor workers.This article will ma<strong>in</strong>ly focus on microcredit programmes with<strong>in</strong> the <strong>Europe</strong>an Union with theaccepted def<strong>in</strong>ition of microloans as loans of EUR 25,000 or less made to microenterprises,bus<strong>in</strong>esses with n<strong>in</strong>e or fewer employees. It is based on recent studies conducted by the<strong>Europe</strong>an <strong>Microf<strong>in</strong>ance</strong> Network (EMN) 1 , especially the “Overview of the Microcredit sector <strong>in</strong><strong>Europe</strong> 2004-2005” by Tamara Underwood <strong>and</strong> the last issue paper on “Status of<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> Western <strong>Europe</strong>: an Academic Review” by EVERS <strong>and</strong> JUNG. The first partof the article will describe sector characteristics. The second part will analyse the ma<strong>in</strong>challenges faced by the microf<strong>in</strong>ance actors <strong>and</strong> the third part, as a conclusion, looks at thepotential for future development.1 The <strong>Europe</strong>an <strong>Microf<strong>in</strong>ance</strong> Network (EMN) was created <strong>in</strong> 2003 with the mission to promotemicrof<strong>in</strong>ance as a tool to fight social <strong>and</strong> economic exclusion <strong>and</strong> to promote micro-entrepreneurship<strong>and</strong> self-employment. As of early 2007 it has 54 members from 21 countries <strong>in</strong> <strong>Europe</strong>.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 21. Characteristics of the sector <strong>in</strong> <strong>Europe</strong>.1.1 A young sector.Certa<strong>in</strong>ly one of the first characteristics of the sector is its youth. 70 % of organisationssurveyed by EMN 2 have only been active s<strong>in</strong>ce 2000. Of this group, 17 % began lend<strong>in</strong>g <strong>in</strong>2005. An additional five actors started their programmes <strong>in</strong> 2005, but did not disburse theirfirst loans until 2006. The next largest group of lenders (13 %) began <strong>in</strong> the period 1995-2000. When the new member states are <strong>in</strong>cluded, there are slightly more lenders (19 %)fo<strong>und</strong>ed <strong>in</strong> the period 1995 to 2000.6054%50Percent of respondents40302013%17%106%5%6%01982-84 1985-89 1990-94 1995-99 2000-2004 2005Figure 1: First year of lend<strong>in</strong>g activity of the microf<strong>in</strong>ance <strong>in</strong>stitutions (EU 15)The relatively young age of microlenders has consequences on scale <strong>and</strong> portfolio quality.Most actors are still <strong>in</strong> an experimental phase, develop<strong>in</strong>g <strong>and</strong> adapt<strong>in</strong>g methodologies totheir local situations <strong>and</strong> to a target group that can be more difficult to reach than <strong>in</strong>develop<strong>in</strong>g countries.2 Underwood, T. (2006), Overview of the microcredit sector <strong>in</strong> <strong>Europe</strong> 2004-2005, p 17; the surveycollected <strong>in</strong>formation from 110 microf<strong>in</strong>ance programmes <strong>in</strong> 12 <strong>Europe</strong>an countries.
Microcredit <strong>in</strong> the <strong>Europe</strong>an Union: An Overview 31.2 Diversity of actors.The second characteristic is the diversity of the actors, with different structures, missions <strong>and</strong>objectives, means <strong>and</strong> approaches. In their academic review, 3 EVERS <strong>and</strong> JUNG describefour different forms of microf<strong>in</strong>ance bus<strong>in</strong>ess models exist<strong>in</strong>g <strong>in</strong> <strong>Europe</strong>:• NGOs with a microf<strong>in</strong>ance driven approach• NGOs with a target group driven approach• Support programmes <strong>in</strong>itiated <strong>in</strong> exist<strong>in</strong>g <strong>in</strong>stitutions <strong>and</strong> development banks• Specialised units of banksNGOs with a microf<strong>in</strong>ance driven approach focus on serv<strong>in</strong>g clients with ma<strong>in</strong>ly f<strong>in</strong>ancialservices. Some of these also have a very clear social mission. Well known examples areAdie (France), ANDC (Portugal), Aspire (UK, Northern Irel<strong>and</strong>) <strong>and</strong> Street UK (UK).In the second model, NGOs serve specific target groups (women, unemployed, ethnicm<strong>in</strong>orities, microentrepreneurs, migrants, youth) with a range of services usually related toemployment. These NGOs <strong>in</strong>clude f<strong>in</strong>ancial services <strong>in</strong> their overall programme. Examples<strong>in</strong>clude <strong>in</strong>stitutions such as the microloan f<strong>und</strong> of the city of Hamburg (<strong>Germany</strong>), Weetu(UK), IQ/Enterprise (<strong>Germany</strong>), Hordal<strong>and</strong> Network Credit (Norway).The third model refers to exist<strong>in</strong>g <strong>in</strong>stitutions <strong>and</strong> development banks that have <strong>in</strong>tegratedsupport programmes for micro <strong>and</strong> small enterprises <strong>in</strong> their regular portfolio. Theseorganisations have established special microcredit w<strong>in</strong>dows. Examples are the micro <strong>and</strong>small enterprise programmes of F<strong>in</strong>nvera (F<strong>in</strong>l<strong>and</strong>), KfW Bankengruppe (<strong>Germany</strong>), BDPME-Oséo (France) <strong>and</strong> ICO (Spa<strong>in</strong>).The fourth model is the most recent. Here specialised units with<strong>in</strong> banks disburse microloansdirectly or through partner organisations. The model is prevalent <strong>in</strong> Spa<strong>in</strong>, where sav<strong>in</strong>gsbanks such as La Caixa, Caixa de Catalunya, BBK or Caja Grenada have played a lead<strong>in</strong>grole <strong>in</strong> develop<strong>in</strong>g the sector.To the above four models we should add a fifth. Whilst not active <strong>in</strong> all countries, creditunions are particularly important <strong>in</strong> Pol<strong>and</strong> <strong>and</strong> Romania <strong>and</strong> to a lesser extent <strong>in</strong> Irel<strong>and</strong> <strong>and</strong>3 <strong>Evers</strong>, J./ Lahn, S./<strong>Jung</strong>, M. (2007), Status of microf<strong>in</strong>ance <strong>in</strong> Western <strong>Europe</strong>: an academic review,p 15-20.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 4the United K<strong>in</strong>gdom. At present there is little <strong>in</strong>formation available on their microcreditactivities. Most of their lend<strong>in</strong>g is restricted to credit union members <strong>and</strong> for purposes otherthan bus<strong>in</strong>ess start-up or development.Two other types of actors could be also added here: ma<strong>in</strong>stream banks <strong>and</strong> f<strong>in</strong>ancial<strong>in</strong>stitutions that provide consumer loans used for bus<strong>in</strong>ess creation or development. Atpresent, data is not available for their loans worth EUR 25,000 or less <strong>and</strong> whether these areused for bus<strong>in</strong>ess development <strong>and</strong> creation.Accord<strong>in</strong>g to the most recent EMN survey 92 % of respondents have not-for-profit status <strong>and</strong>four out of ten are non-governmental organisations. The latter are responsible for half theloan volume <strong>in</strong> <strong>Europe</strong>. By country, NGOs dom<strong>in</strong>ate especially <strong>in</strong> France, Spa<strong>in</strong> <strong>and</strong> the UK. 4One consequence of the diversity of the actors is that the relative focus on microlend<strong>in</strong>gvaries widely from one <strong>in</strong>stitution to the next. Accord<strong>in</strong>g to the EMN survey, 16 % ofrespondents focus solely on microlend<strong>in</strong>g. The rema<strong>in</strong><strong>in</strong>g 84 % of respondents <strong>und</strong>ertake anumber of other activities which are focused on f<strong>in</strong>ancial <strong>and</strong> employment related services. 5454042%3534%Percent of respondents302520151013% 11%500-25% 25-50% 50-75% 75-100%% <strong>in</strong> Activity PortfolioFigure 2: Microlend<strong>in</strong>g as a portion of activity portfolio (EU 15)The dist<strong>in</strong>ction between lenders <strong>in</strong> the 0-25 % range <strong>and</strong> those <strong>in</strong> the 75-100 % range isimportant (see figure 2). It <strong>und</strong>erscores the fact that for half the sector microlend<strong>in</strong>g is not the4 Underwood, T. (2006), Overview of the microcredit sector <strong>in</strong> <strong>Europe</strong> 2004-2005, p 14.5 Ibid, p 16.
Microcredit <strong>in</strong> the <strong>Europe</strong>an Union: An Overview 5ma<strong>in</strong> focus but is one of many strategies or tools that supports wider employment <strong>and</strong>f<strong>in</strong>ancial <strong>in</strong>clusion objectives. Organisations <strong>in</strong> this half of the sector tend to conceive ofthemselves as social <strong>and</strong> employment development organisations rather than f<strong>in</strong>ancial<strong>in</strong>stitutions. These microlenders’ ambitions regard<strong>in</strong>g achiev<strong>in</strong>g scale <strong>and</strong> high microloanportfolio performance may differ significantly from those <strong>in</strong> the 75-100 % range.2. Steady growth serves the socially excluded, unemployed <strong>and</strong> microenterprises.Even if the sector is young, the growth <strong>in</strong> the number of microloans disbursed between 2004<strong>and</strong> 2005 was 15 % 6 . Dur<strong>in</strong>g the period 2003-2004, the growth rate was 11 %. 7 Increasedcoverage <strong>and</strong> new market entrants are responsible for this growth. In the new member statessurveyed, growth <strong>in</strong> loan volume was 4 %, reflect<strong>in</strong>g sector maturity <strong>and</strong> competition bydownscal<strong>in</strong>g banks.Most non-bank lenders have a geographic scope limited to regions or localities <strong>and</strong> disbursefewer than 100 loans a year. Nationally based lenders <strong>in</strong> France <strong>and</strong> F<strong>in</strong>l<strong>and</strong> disburse thegreatest number of microloans <strong>in</strong> the EU 15. Such growth is encourag<strong>in</strong>g, show<strong>in</strong>g thesector’s dynamism <strong>and</strong> potential.Microlenders focus on start-up bus<strong>in</strong>esses <strong>and</strong> small microenterprises, those with five orfewer employees. Clients targeted <strong>in</strong> order of importance are f<strong>in</strong>ancially excluded <strong>in</strong>dividualsfollowed by women, unemployed persons, the self-employed <strong>and</strong> immigrants. There isconsiderable overlap among many of these groups. The majority of lenders work to ensuresocial <strong>and</strong> economic <strong>in</strong>clusion of persons at risk of poverty <strong>and</strong> the unemployed. Othersfocus on job creation <strong>and</strong> some aim at stimulat<strong>in</strong>g growth, develop small <strong>and</strong> medium sizedenterprises <strong>and</strong> address market failure.Women are <strong>und</strong>er-represented amongst microloan clients when compared to their proportion<strong>in</strong> the population <strong>and</strong> to microlend<strong>in</strong>g programmes operat<strong>in</strong>g <strong>in</strong> North America <strong>and</strong> <strong>in</strong>develop<strong>in</strong>g countries. In the EMN survey, 8 <strong>in</strong> 2005 <strong>in</strong> the EU 25, 41 % of microloan clientswere women. However, this lend<strong>in</strong>g rate is greater than female entrepreneurship rates <strong>in</strong>Western <strong>Europe</strong>, which are estimated to be 30 %. 96 Ibid, p 11-12.7 nef on behalf of EMN (2005), Overview of the <strong>Microf<strong>in</strong>ance</strong> Sector <strong>in</strong> <strong>Europe</strong>.8 Underwood, T. (2006), Women <strong>and</strong> microlend<strong>in</strong>g <strong>in</strong> Western <strong>Europe</strong>.9 Middlesex University Bus<strong>in</strong>ess School (March, 2000), “Young Entrepreneurs, Women Entrepreneurs,Ethnic M<strong>in</strong>ority Entrepreneurs <strong>and</strong> Co-Entrepreneurs <strong>in</strong> the <strong>Europe</strong>an Union <strong>and</strong> Central <strong>and</strong> Eastern<strong>Europe</strong>”.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 6Regard<strong>in</strong>g immigrants <strong>and</strong> ethnic m<strong>in</strong>orities, recent work conducted by EMN <strong>and</strong> some of itsmembers 10 shows that these groups represent a significant proportion of microf<strong>in</strong>anceprogrammes’ clients <strong>and</strong> that this tool is particularly adapted to their needs. Data collection<strong>and</strong> def<strong>in</strong>itional difficulties make it difficult to assess to what extent they are be<strong>in</strong>g reached <strong>in</strong>proportion to their representation <strong>in</strong> the population, however. This challenge is the same withregard to youth <strong>and</strong> disabled persons.3. Microcredit, not yet microf<strong>in</strong>ance.In the <strong>Europe</strong>an Union, microcredit rema<strong>in</strong>s the ma<strong>in</strong> f<strong>in</strong>ancial service offered. <strong>Microf<strong>in</strong>ance</strong>,a broader concept <strong>in</strong>tegrat<strong>in</strong>g f<strong>in</strong>ancial services such as sav<strong>in</strong>gs, micro<strong>in</strong>surance ortransfers, is very limited. NGOs <strong>in</strong> the UK <strong>and</strong> sav<strong>in</strong>gs banks <strong>in</strong> Spa<strong>in</strong> are the primaryproviders of this wider spectrum of services. This is ma<strong>in</strong>ly due to the fact that, on one h<strong>and</strong>,the f<strong>in</strong>ancial services sector is well developed <strong>in</strong> the EU countries. On the other, <strong>in</strong> manycountries regulatory environments restrict the f<strong>in</strong>ancial activities of non-governmentalorganisations.The average microloan size across the EU 25 is EUR 7,700. In the EU 15 the averagemicroloan value is EUR 10,240 <strong>and</strong> <strong>in</strong> the new member states it is EUR 3,800. Lenders thatfocus on SME support, address<strong>in</strong>g market failure <strong>and</strong> job creation tend to lend larger sumswhile those focus<strong>in</strong>g on social <strong>in</strong>clusion tend to disburse smaller microloans. Averagemicroloan values adjusted for Gross National Income (GNI) per capita show a similar trend.Loans are reimbursed at the latest after five years. Most, however, must be reimbursedwith<strong>in</strong> five years of disbursement. The <strong>in</strong>terest rate varies depend<strong>in</strong>g on national regulation,but <strong>in</strong> most countries is below 10 %, with the exception of the UK <strong>and</strong> Pol<strong>and</strong>. Usury laws<strong>and</strong> related <strong>in</strong>terest rate ceil<strong>in</strong>gs limit rates <strong>in</strong> most EU 15 countries. In terms of methodology,organisations disbursed <strong>in</strong>dividual loans. Experimentation with group lend<strong>in</strong>g is carried outma<strong>in</strong>ly <strong>in</strong> France, the UK, Belgium <strong>and</strong> Norway. 11A large proportion of structures provide much more than f<strong>in</strong>ancial services. Tra<strong>in</strong><strong>in</strong>g, advice<strong>and</strong> support are elements critical to the success of new <strong>and</strong> exist<strong>in</strong>g bus<strong>in</strong>esses <strong>in</strong> the<strong>Europe</strong>an context. Accord<strong>in</strong>g to the EMN survey, 75 % of organisations surveyed provide pre10 Guzy, M./Underwood, T. (2006), Immigrant Participation <strong>in</strong> Microloan Programmes <strong>in</strong> Western<strong>Europe</strong>” <strong>and</strong> Guzy, M. (2006), Nurtur<strong>in</strong>g Immigrant Entrepreneurship: A h<strong>and</strong>book for microcredit <strong>and</strong>bus<strong>in</strong>ess support.11 Underwood, T. (2006), Overview of the microcredit sector <strong>in</strong> <strong>Europe</strong> 2004-2005, p 27-34.
Microcredit <strong>in</strong> the <strong>Europe</strong>an Union: An Overview 7<strong>and</strong> post-loan tra<strong>in</strong><strong>in</strong>g <strong>and</strong> technical assistance. Most organisations that do not provide thissupport refer clients to appropriate service providers. 124. Operational performance is difficult to assess.Even if quite important for evaluat<strong>in</strong>g microlender programmes, obta<strong>in</strong><strong>in</strong>g clear <strong>in</strong>formationon the operational performance of the actors rema<strong>in</strong>s a challenge. As for its previoussurveys, it has been difficult for EMN to collect <strong>in</strong>formation from microloan programmes ontheir repayment rates, their portfolio at risk, their write-offs or their rescheduled loans. Thismight be expla<strong>in</strong>ed by <strong>und</strong>er-developed management <strong>in</strong>formation systems which are a likelyoutcome of two factors, lender age <strong>and</strong> the relatively small place of microlend<strong>in</strong>g <strong>in</strong> theactivity portfolio of 50 % of the organisations participat<strong>in</strong>g <strong>in</strong> the EMN survey.Among organisations provid<strong>in</strong>g this data, loan portfolio performance ratios have rema<strong>in</strong>edsteady s<strong>in</strong>ce the last survey. The most frequently monitored ratios are repayment rates <strong>and</strong>portfolio at risk. The average repayment rate <strong>in</strong> 2005 was 92 % 13 <strong>and</strong> average portfolio at riskis 11 %.5. A sector requir<strong>in</strong>g subsidies for its development.The most important strategic issues for the sector are related to f<strong>und</strong><strong>in</strong>g <strong>and</strong> susta<strong>in</strong>ability.F<strong>und</strong><strong>in</strong>g operational costs, <strong>in</strong> particular, is a significant challenge for lenders. Not a s<strong>in</strong>glelender <strong>in</strong> the EU 15 is operationally self-susta<strong>in</strong><strong>in</strong>g at present although susta<strong>in</strong>ability is a longterm goal for many. EU 15 lenders rely primarily on public <strong>and</strong> private f<strong>und</strong>s to coveroperational costs. In the new member states, operational costs are covered by earned<strong>in</strong>come, public subsidy <strong>and</strong> private charity f<strong>und</strong>s. Some lenders <strong>in</strong> the EU 15 are cover<strong>in</strong>g alltheir operational costs through earned <strong>in</strong>come. These <strong>in</strong>stitutions are ma<strong>in</strong>ly banks, us<strong>in</strong>gtheir exist<strong>in</strong>g facilities. In the new member states, several organisations are evenoperationally susta<strong>in</strong>able. These lenders manage large microloan volumes <strong>and</strong> charge<strong>in</strong>terest rates that cover operational costs <strong>and</strong> risk. Loan capital is f<strong>und</strong>ed, <strong>in</strong> order offrequency, by the public sector, private sector <strong>and</strong> private charities. Access<strong>in</strong>g loan capital isless of a challenge than access<strong>in</strong>g monies to cover operational costs.12 Ibid, p 32-33.13 Ibid, p 35-37.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 86. With important contributions to social <strong>in</strong>clusion <strong>and</strong> microenterprise <strong>and</strong> selfemploymentdevelopment.Microlenders <strong>in</strong> <strong>Europe</strong> monitor jobs created <strong>and</strong> susta<strong>in</strong>ed. They also look at household<strong>in</strong>come changes <strong>and</strong> bus<strong>in</strong>ess profitability. Monitor<strong>in</strong>g changes <strong>in</strong> people’s lives, their accessto services <strong>and</strong> <strong>in</strong>clusion <strong>in</strong> society can be more difficult <strong>and</strong> is <strong>und</strong>ertaken less frequently. 14In terms of bus<strong>in</strong>ess survival rates, microcredit clients perform as well as otherentrepreneurs. Most bus<strong>in</strong>esses supported create between 1 <strong>and</strong> 1.5 jobs <strong>in</strong> their first year.Even when bus<strong>in</strong>esses fail, obta<strong>in</strong><strong>in</strong>g a microloan <strong>and</strong> runn<strong>in</strong>g a bus<strong>in</strong>ess seems to improveclients’ overall employment prospects. Owners of “failed” bus<strong>in</strong>esses sometimes sell theirbus<strong>in</strong>ess <strong>and</strong> cont<strong>in</strong>ue work<strong>in</strong>g for the new owner or f<strong>in</strong>d waged employment elsewhere.Organisations work<strong>in</strong>g with immigrants observe <strong>in</strong>creased self-confidence with selfemployment<strong>and</strong> <strong>in</strong> some cases family reunification thanks to improved <strong>in</strong>come. Similarly,lenders work<strong>in</strong>g with women report ga<strong>in</strong>s <strong>in</strong> client self-confidence. Such results confirm thesocial value added of microcredit. These results also counterbalance the lack of susta<strong>in</strong>ability<strong>and</strong> ongo<strong>in</strong>g public sector support. Each job created represents reduced benefits payments<strong>and</strong> <strong>in</strong>creased tax revenues.7. The challenges.In the <strong>Europe</strong>an Union, <strong>and</strong> especially <strong>in</strong> the EU 15, the ma<strong>in</strong> challenges faced bymicrocredit providers are improv<strong>in</strong>g outreach <strong>and</strong> operational performance, as well asreach<strong>in</strong>g a certa<strong>in</strong> “form” of susta<strong>in</strong>ability.7.1 Reach<strong>in</strong>g more clients.Even if thous<strong>and</strong>s of people have been able to create or develop microenterprises <strong>in</strong>Western <strong>Europe</strong> thanks to microcredit, the number of beneficiaries has not reached the scaleof most programmes worldwide. In the last EMN survey, <strong>in</strong> 2005 the organisations surveyeddisbursed a total of 27,000 microloans worth EUR 210 million. 15 50 % declared 48,000 activeborrowers at the end of 2005.The greatest coverage is <strong>in</strong> Pol<strong>and</strong>, France <strong>and</strong> F<strong>in</strong>l<strong>and</strong>. In F<strong>in</strong>l<strong>and</strong> <strong>and</strong> France, s<strong>in</strong>gleorganisations disburse 95-100 % of all microloans. Characteristics such as age <strong>and</strong> theweight of microlend<strong>in</strong>g <strong>in</strong> the organisation’s activity portfolio, as seen before, <strong>in</strong>fluence thesenumbers as well as the capacity of organisations to reach clients.14 Ibid, p 25-26.15 Ibid, p 10-11.
Microcredit <strong>in</strong> the <strong>Europe</strong>an Union: An Overview 9Levels of poverty <strong>and</strong> exclusion, the existence of the welfare state <strong>and</strong> extensive f<strong>in</strong>ancialservice coverage mean that the number of potential beneficiaries is unlikely to be as great asit is <strong>in</strong> Asia, Africa <strong>and</strong> Lat<strong>in</strong> America. The EMN survey has not captured all the microlend<strong>in</strong>gtak<strong>in</strong>g place <strong>in</strong> <strong>Europe</strong> 16 . Even so, the data collected suggest that less than 1 % of thepopulation of productive age received microcredit while the f<strong>in</strong>ancial exclusion rates are17 18 19estimated at 10 % of the population <strong>and</strong> 15 % are estimated to be at risk of poverty.90 % of bus<strong>in</strong>esses <strong>in</strong> the EU are microenterprises <strong>and</strong> a significant proportion is launchedwithout a bank loan. 20 Microenterprises represent about 30 % of employment <strong>and</strong> 20.5 % ofvalue added. 21 In 2005, self-employment corresponded to 16 % of total employment (19 %for males <strong>and</strong> 11 % for females). 22 In some countries, such as <strong>Germany</strong>, self-employmenthas grown from 1.4 to 2.1 million over the past ten years. The active workforce below thepoverty threshold is estimated at 28 million persons; evidence <strong>in</strong>dicates that many of themcould rise out of exclusion by creat<strong>in</strong>g their own jobs or by formalis<strong>in</strong>g an activity currently <strong>in</strong>the <strong>in</strong>formal sector.The challenge <strong>in</strong> this context is to evaluate the dem<strong>and</strong> for microcredit <strong>in</strong> <strong>Europe</strong>. There havebeen very few <strong>in</strong>-depth analyses of the potential dem<strong>and</strong> for microcredit. However, tworecent studies made <strong>in</strong>terest<strong>in</strong>g f<strong>in</strong>d<strong>in</strong>gs. In Pol<strong>and</strong> a survey carried out on low-<strong>in</strong>comehouseholds <strong>and</strong> microentrepreneurs estimated the potential dem<strong>and</strong> for microcredit ataro<strong>und</strong> two million clients, of which 14 % comprised exist<strong>in</strong>g <strong>and</strong> 86 % new enterprises. 23 In16 It was not possible, for example, to gather lend<strong>in</strong>g <strong>in</strong>formation from sav<strong>in</strong>gs banks operat<strong>in</strong>g outsideSpa<strong>in</strong>. In addition, detailed data were not available for the public adm<strong>in</strong>istration programme SviluppaItalia <strong>in</strong> Italy <strong>and</strong> the commercial bank portion of the Spanish public adm<strong>in</strong>istration programme, ICO.The survey also does not cover commercial bank enterprise lend<strong>in</strong>g worth EUR 25,000 or less forwhich data are not readily available. Consumer lend<strong>in</strong>g that is used to start or develop a bus<strong>in</strong>ess isalso not captured by the survey.17 McDowell, M. (March, 2006), Microcredit <strong>in</strong> <strong>Europe</strong>: the Experience of the Sav<strong>in</strong>gs Banks, p 7.18 “From Exclusion to Inclusion through <strong>Microf<strong>in</strong>ance</strong>: Work<strong>in</strong>g Group 1 – Social <strong>and</strong> F<strong>in</strong>ancialExclusion Map,” MFC, EMN, cdfa (2007).19 Eurostat YearBook (2005), <strong>Europe</strong> <strong>in</strong> Figures.20 Accord<strong>in</strong>g to the Agence pour la Création d’Entreprises (APCE) Observatory, 63 % of newenterprises <strong>in</strong> France start without credit.21 Eurostat 2003 for the <strong>Europe</strong> of 25.22 Eurostat (2006).23 <strong>Microf<strong>in</strong>ance</strong> Centre for Central <strong>and</strong> Eastern <strong>Europe</strong> <strong>and</strong> the NIS Countries (2006),Microenterprises, Low Income Households, Aspirations for Self-Employment <strong>and</strong> Microcredit Market <strong>in</strong>Pol<strong>and</strong>, survey conducted for the EIF as part of the preparation of JEREMIE.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 10<strong>Germany</strong> a survey showed that 65 % of microenterprises <strong>in</strong>terviewed had no bank lo<strong>and</strong>ur<strong>in</strong>g their first three years of existence <strong>and</strong> that 15 % of them needed recurrent f<strong>in</strong>anc<strong>in</strong>g. 24The practical experience of Adie <strong>in</strong> France demonstrates that offer creates dem<strong>and</strong>! With avery small number of loans made each year <strong>in</strong> the early 1990s (a few h<strong>und</strong>red), newdisbursements are grow<strong>in</strong>g by 20 % per year. Adie aims to make 9,000 loans <strong>in</strong> 2007 <strong>and</strong> tohave more than 15,000 active borrowers.The dem<strong>and</strong> environment is also critical to reach<strong>in</strong>g clients <strong>and</strong> facilitat<strong>in</strong>g the creation <strong>and</strong>development of microenterprises. In a study conducted by FACET, nef <strong>and</strong> EVERS <strong>and</strong>JUNG, with the support of EMN <strong>and</strong> MFC for the <strong>Europe</strong>an Commission DG Employment,Social Affairs <strong>and</strong> Equal Opportunities 25 three ma<strong>in</strong> obstacles were identified: theentrepreneurial context, the policy environment for microenterprises <strong>and</strong> the welfare state.The study <strong>und</strong>erl<strong>in</strong>ed the necessity of hav<strong>in</strong>g a society support<strong>in</strong>g <strong>and</strong> actively encourag<strong>in</strong>gentrepreneurship for all of its members. Self-employment should be seen as a respectablealternative to wage employment. For example, entrepreneurship tra<strong>in</strong><strong>in</strong>g as an <strong>in</strong>tegral partof the school curriculum would promote, at a young age, the idea that self-employment is aviable <strong>and</strong> valuable career option.The enterprise policy environment should promote the creation <strong>and</strong> development of selfemployment<strong>and</strong> microenterprise. Bus<strong>in</strong>ess support services especially developed for theneeds of microenterprises should be available <strong>and</strong> offer a large variety of services.Adm<strong>in</strong>istrative procedures <strong>and</strong> requirements for microenterprises should be reduced, as hasbeen the case <strong>in</strong> the UK <strong>and</strong> more recently <strong>in</strong> France.The welfare system should take welfare recipients smoothly from unemployment toemployment, <strong>in</strong>clud<strong>in</strong>g self-employment. There should be “welfare bridges” that encouragethe unemployed to become self-employed, without forc<strong>in</strong>g them to pursue that avenue.Giv<strong>in</strong>g potential entrepreneurs’ time to test their new <strong>in</strong>come generat<strong>in</strong>g activity beforeneed<strong>in</strong>g to declare formally their self-employment status <strong>and</strong> potentially loose benefits isimportant.With an improved environment facilitat<strong>in</strong>g the creation <strong>and</strong> the development ofmicroentreprises <strong>and</strong> help<strong>in</strong>g people to move from welfare benefits to self-employment, the24 GFA, Kritikos, A./Kneid<strong>in</strong>g, C./Germelmann, C.C. (2006), Is there a market for microcredit <strong>in</strong><strong>in</strong>dustrialised countries?25 FACET/nef/EVERS <strong>and</strong> JUNG (2005), Policy measures to promote the use of micro-credit for social<strong>in</strong>clusion.
Microcredit <strong>in</strong> the <strong>Europe</strong>an Union: An Overview 11dem<strong>and</strong> for microcredit should <strong>in</strong>crease significantly, giv<strong>in</strong>g microcredit providers theopportunity to achieve scale.7.2 Improv<strong>in</strong>g operational performance.Reach<strong>in</strong>g clients is not easy <strong>in</strong> the <strong>Europe</strong>an context. Organisations need to have thecapacity <strong>and</strong> resources to develop proper strategies, methodologies, appropriate f<strong>in</strong>ancialproducts <strong>and</strong> to use adequate monitor<strong>in</strong>g <strong>and</strong> evaluation tools. Microlenders also need todevelop <strong>and</strong> improve efficiency <strong>and</strong> cost recovery strategies that <strong>in</strong>clude greater attention todeal flow, <strong>in</strong>terest rates, fees, guarantee arrangements <strong>and</strong> portfolio performance.In the EU 15 <strong>in</strong> particular, microloan clients are geographically dispersed. Because of yearsof unemployment or activity <strong>in</strong> the <strong>in</strong>formal economy clients also tend to be excluded fromma<strong>in</strong>stream communication channels <strong>and</strong> networks. Tailored <strong>and</strong> significant outreach <strong>and</strong>market<strong>in</strong>g is needed.Besides reach<strong>in</strong>g clients, there is the challenge of reach<strong>in</strong>g people with the right products.Microloan clients are diverse. Their assets differ <strong>and</strong> their needs are determ<strong>in</strong>ed by thecharacteristics of the sectors <strong>in</strong> which they launch their bus<strong>in</strong>esses. The dem<strong>and</strong> study <strong>in</strong><strong>Germany</strong> demonstrated that some lenders create products without pay<strong>in</strong>g sufficient attentionto client needs <strong>and</strong> preferences. 26 Thorough market research is important but <strong>in</strong>creases theper borrower cost of lend<strong>in</strong>g.Similarly, greater attention needs to be paid to collect<strong>in</strong>g, monitor<strong>in</strong>g <strong>and</strong> us<strong>in</strong>g data onportfolio performance to improve practice. So far it has rema<strong>in</strong>ed difficult because lenders <strong>in</strong>Western <strong>Europe</strong> have not yet adopted a st<strong>and</strong>ard set of performance monitor<strong>in</strong>g ratios orst<strong>and</strong>ard methods for calculat<strong>in</strong>g each ratio. The last EMN survey report po<strong>in</strong>ted out thatsome respondents reported on “numbers of loans” while others reported on “value of loans”when calculat<strong>in</strong>g various performance ratios.Work on agree<strong>in</strong>g a set of ratios <strong>and</strong> calculation methods for the sector <strong>in</strong> <strong>Europe</strong> is <strong>und</strong>erway. A set of social <strong>and</strong> f<strong>in</strong>ancial <strong>in</strong>dicators for Western <strong>Europe</strong> has been def<strong>in</strong>ed by<strong>Europe</strong>an organisations through a jo<strong>in</strong>t project run by the MFC, EMN <strong>and</strong> the cdfa(Community Development F<strong>in</strong>ance Association – UK) <strong>and</strong> will be dissem<strong>in</strong>ated amongstpractitioners.Implementation of common st<strong>and</strong>ards will greatly assist lenders to speak a commonlanguage <strong>and</strong> to assess their f<strong>in</strong>ancial performance. L<strong>in</strong>ked to that issue is the necessity for26 GFA, Kritikos, A./Kneid<strong>in</strong>g, C./Germelmann, C.C. (2006), Is there a market for microcredit <strong>in</strong><strong>in</strong>dustrialised countries?
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 12microcredit providers to use proper <strong>and</strong> efficient Management Information Systems (MIS), <strong>in</strong>order to provide accurate data <strong>in</strong> a timely manner. Efforts need to be made at this level.Evaluation of impact – especially social impact – is extremely important. It is also directlyl<strong>in</strong>ked to achiev<strong>in</strong>g susta<strong>in</strong>ability. If microlenders can prove that it costs less to society to helpa person create his own employment than to pay welfare benefits, then it will be acceptableto partly subsidise microlend<strong>in</strong>g. Already microf<strong>in</strong>ance organisations are regularly assess<strong>in</strong>gthe cost <strong>and</strong> sav<strong>in</strong>gs of mov<strong>in</strong>g people off welfare. It should be done more systematically byall operators.The small size of most operators, l<strong>in</strong>ked to their young age <strong>and</strong> the fact that most of the timemicrof<strong>in</strong>ance is not the ma<strong>in</strong> focus of the organisation, h<strong>in</strong>der the capacity of operators todevelop their microcredit activities <strong>and</strong> to reach more clients. 27 There are clear needs forcapacity build<strong>in</strong>g. Exchange on good practices exist<strong>in</strong>g <strong>in</strong>ternationally <strong>and</strong> <strong>in</strong> the <strong>Europe</strong>anUnion with more mature <strong>in</strong>stitutions could help the sector to grow more rapidly <strong>and</strong>effectively.7.3 Reach<strong>in</strong>g susta<strong>in</strong>ability.Susta<strong>in</strong>ability seems to be the ultimate goal for most microcredit programmes. In <strong>Europe</strong> itrema<strong>in</strong>s the “impossible dream”, due to a number of factors already described.However, a more favourable environment will help microcredit providers to reach a higherlevel of susta<strong>in</strong>ability by contribut<strong>in</strong>g to improved deal flow <strong>and</strong> cost recovery <strong>and</strong> a moresecure future through <strong>in</strong>novative f<strong>und</strong><strong>in</strong>g arrangements.The Facet, EVERS <strong>and</strong> JUNG, <strong>and</strong> nef study po<strong>in</strong>ted out the need to <strong>in</strong>troduce specificregulation for microf<strong>in</strong>ance providers. Such regulation should help non-bank<strong>in</strong>g f<strong>in</strong>ancial<strong>in</strong>stitutions to provide f<strong>in</strong>ancial services for greater numbers of f<strong>in</strong>ancially excluded. Forexample, <strong>in</strong> France non-banks have recently been allowed to borrow for onward lend<strong>in</strong>g <strong>and</strong><strong>in</strong>terest rate caps have been relaxed.Long-term f<strong>und</strong><strong>in</strong>g needs to be secured with a mix of different <strong>in</strong>struments <strong>and</strong> sources.Public sources <strong>and</strong> (private) grants should compliment the self-generated <strong>in</strong>come ofmicrolenders. After all, the aim is to build bridges between ma<strong>in</strong>stream <strong>in</strong>stitutions <strong>and</strong>socially excluded people. Performance rat<strong>in</strong>gs could help to ensure the cost-efficient use off<strong>und</strong>s.27 75 % of EMN surveyed organisations work at local <strong>and</strong> regional level <strong>and</strong> 45 % employ less thanten full-time equivalent persons.
Microcredit <strong>in</strong> the <strong>Europe</strong>an Union: An Overview 13While the environment needs to be improved, there are measures lenders can also take toenhance their f<strong>in</strong>ancial position. Lenders need to track microlend<strong>in</strong>g costs separately fromthe cost of tra<strong>in</strong><strong>in</strong>g <strong>and</strong> technical assistance. Separat<strong>in</strong>g these costs will enable lenders towork toward operational susta<strong>in</strong>ability of the loan f<strong>und</strong> <strong>and</strong> seek grant monies for bus<strong>in</strong>essdevelopment services. Efforts <strong>in</strong> this ve<strong>in</strong> are currently <strong>und</strong>er way <strong>in</strong> France <strong>and</strong> the UnitedK<strong>in</strong>gdom. These should be able to demonstrate <strong>in</strong> the com<strong>in</strong>g years that it is possible tocover costs for purely f<strong>in</strong>ancial activities.Interest rates <strong>and</strong> fee structures that cover the risks <strong>and</strong> costs of lend<strong>in</strong>g need to bedeveloped. Adequate guarantee <strong>and</strong> risk mitigation strategies <strong>and</strong> close monitor<strong>in</strong>g ofportfolio performance are also required. In the UK several lenders are beg<strong>in</strong>n<strong>in</strong>g to coversignificant portions of their lend<strong>in</strong>g costs by adjust<strong>in</strong>g their <strong>in</strong>terest rates <strong>and</strong> focus<strong>in</strong>g on dealflow.The issue of guarantees is particularly <strong>in</strong>terest<strong>in</strong>g. 42 % of organisations <strong>in</strong> the EMN surveymake unsecured loans. 28 This means that the majority of lenders do not have a way torecover unpaid loans. In some cases publicly supported guarantee schemes are unavailable.In others requir<strong>in</strong>g clients to provide collateral <strong>and</strong> guarantees creates additional obstacles<strong>and</strong> discourages potential clients. Alternatives need to be fo<strong>und</strong>.8. Future development.Microcredit is a reality for thous<strong>and</strong>s of people <strong>in</strong> the <strong>Europe</strong>an Union. This reality is the fruitof the efforts of a h<strong>and</strong>ful of pioneers. Their efforts have <strong>in</strong>spired a grow<strong>in</strong>g number of actors.The steady growth <strong>in</strong> new loan disbursements, the number of new microcredit providers <strong>and</strong>the survival rate of their clients’ bus<strong>in</strong>esses have demonstrated that microcredit is aneffective <strong>in</strong>strument <strong>in</strong> Western <strong>Europe</strong>, not only for the development of microenterprises butalso for social <strong>in</strong>clusion.Foreseen changes <strong>in</strong> the <strong>Europe</strong>an economy, such as the growth of services <strong>and</strong> therecognition that self-employment <strong>and</strong> microenterprise can be a real opportunity to helppeople to move out of unemployment <strong>and</strong> have a decent life, mean that the dem<strong>and</strong> formicrocredit will keep grow<strong>in</strong>g <strong>and</strong> be more <strong>and</strong> more visible <strong>and</strong> tangible. The microcreditmarket can be considered as an emerg<strong>in</strong>g market with high potential.However, realis<strong>in</strong>g this potential will require significant changes <strong>in</strong> the regulations of thevarious <strong>Europe</strong>an Union members states. The Western <strong>Europe</strong>an environment is quitedifferent from that fo<strong>und</strong> <strong>in</strong> develop<strong>in</strong>g <strong>and</strong> transition countries. Several obstacles <strong>in</strong> welfare28 Underwood, T. (2006), Overview of the microcredit sector <strong>in</strong> <strong>Europe</strong> 2004-2005, p 28.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 14states systems, f<strong>in</strong>ancial services <strong>and</strong> bank<strong>in</strong>g regulation will have to be removed <strong>in</strong> order tocreate a favourable environment for microf<strong>in</strong>ance <strong>and</strong> microentrepreneurs.At the same time, exist<strong>in</strong>g microcredit providers need to be more proactive <strong>in</strong> <strong>und</strong>erst<strong>and</strong><strong>in</strong>gthe potential <strong>and</strong> actual dem<strong>and</strong> for microcredit. Strategies will need to be further adapted toensure that appropriate products <strong>and</strong> non-f<strong>in</strong>ancial services are available to this market.It is certa<strong>in</strong> that ma<strong>in</strong>stream banks will play a grow<strong>in</strong>g role. If they adapt their strategy <strong>and</strong> atthe same time use their significant capital resources, they will be able to <strong>in</strong>crease greatly thebase of microcredit activities. When this happens non-bank <strong>in</strong>stitutions should rema<strong>in</strong> alert toreach<strong>in</strong>g the most excluded <strong>and</strong> difficult to reach part of the market with a more sociallydriven approach.Efforts should be made to improve operational performance <strong>in</strong> order to reduce cost <strong>and</strong> bemore efficient. F<strong>und</strong><strong>in</strong>g operational costs rema<strong>in</strong>s the primary limit to sector developmentidentified by lenders <strong>in</strong> both the West <strong>and</strong> the East. The regulatory environment, <strong>in</strong>stitutionalcapacity <strong>and</strong> access to f<strong>und</strong>s for loan capital are also significant challenges.In that regard the <strong>Europe</strong>an Union <strong>and</strong> the member states can play a significant role <strong>in</strong>plac<strong>in</strong>g microcredit at the centre of their employment <strong>and</strong> social <strong>in</strong>clusion policies. Promis<strong>in</strong>gnew <strong>in</strong>itiatives will open new doors for support<strong>in</strong>g actors, regulat<strong>in</strong>g the sector <strong>and</strong> will givemore <strong>and</strong> more people the opportunity to become self-employed microentrepreneurs thanksto an <strong>in</strong>clusive f<strong>in</strong>ancial system <strong>in</strong> <strong>Europe</strong>.Authors: Philippe Guich<strong>and</strong>ut, <strong>Europe</strong>an <strong>Microf<strong>in</strong>ance</strong> Network (EMN), Executive DirectorTamara Underwood, <strong>Europe</strong>an <strong>Microf<strong>in</strong>ance</strong> Network (EMN), Research Manager
Microcredit <strong>in</strong> the <strong>Europe</strong>an Union: An Overview 15References.Copisarow, R. (2004), Street UK – a <strong>Microf<strong>in</strong>ance</strong> Organisation, Lessons Learned from itsFirst Three Years’ Operations, Birm<strong>in</strong>gham.<strong>Europe</strong>an Commission Directorate for Employment (2004), Social Affairs <strong>and</strong> EqualOpportunities, Jo<strong>in</strong>t Report on Social Inclusion, Luxembourg.<strong>Europe</strong>an Commission Directorate for Enterprise <strong>and</strong> Industry (2004), Microcredit for SmallBus<strong>in</strong>esses <strong>and</strong> Bus<strong>in</strong>ess Creation: Bridg<strong>in</strong>g a Market Gap, Luxembourg.Eurostat YearBook (2006), <strong>Europe</strong> <strong>in</strong> Figures, Luxembourg.<strong>Evers</strong>, J./Lahn, S./<strong>Jung</strong>, M. (2007), Status of microf<strong>in</strong>ance <strong>in</strong> Western <strong>Europe</strong>: An AcademicReview, Hamburg.Guzy, M./Underwood, T. (2006), Immigrant Participation <strong>in</strong> Microloan Programmes <strong>in</strong>Western <strong>Europe</strong>, EMN Work<strong>in</strong>g Paper No. 3, Paris.Guzy, M. (2006), Nurtur<strong>in</strong>g Immigrant Entrepreneurship: A h<strong>and</strong>book for microcredit <strong>and</strong>bus<strong>in</strong>ess support, Paris.Kritikos, A./Kneid<strong>in</strong>g, C./Germelmann, C.C. (2006), Is there a market for microcredit <strong>in</strong><strong>in</strong>dustrialised countries?, Discussion Paper No. 251, Frankfurt/O.McDowell, M. (March, 2006), Microcredit <strong>in</strong> <strong>Europe</strong>: The Experience of Sav<strong>in</strong>gs Banks,<strong>Europe</strong>an Sav<strong>in</strong>gs Bank Group, Brussels.<strong>Microf<strong>in</strong>ance</strong> Centre for Central <strong>and</strong> Eastern <strong>Europe</strong> <strong>and</strong> the NIS Countries (2006),Microenterprises, Low Income Households, Aspirations for Self-Employment <strong>and</strong>Microcredit Market <strong>in</strong> Pol<strong>and</strong>, survey conducted for the EIF as part of thepreparation of JEREMIE, Warsaw.Middlesex University Bus<strong>in</strong>ess School (March, 2000), Young Entrepreneurs, WomenEntrepreneurs, Ethnic M<strong>in</strong>ority Entrepreneurs <strong>and</strong> Co-Entrepreneurs <strong>in</strong> the<strong>Europe</strong>an Union <strong>and</strong> Central <strong>and</strong> Eastern <strong>Europe</strong>, London.New economics fo<strong>und</strong>ation (nef)/<strong>Europe</strong>an <strong>Microf<strong>in</strong>ance</strong> Network (EMN) (2005),. Overviewof the <strong>Microf<strong>in</strong>ance</strong> Sector <strong>in</strong> <strong>Europe</strong>, EMN Work<strong>in</strong>g Paper No. 1, Paris.Underwood, T. (2006), Women <strong>and</strong> Microlend<strong>in</strong>g <strong>in</strong> Western <strong>Europe</strong>, EMN Work<strong>in</strong>g PaperNo. 2, Paris.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 16Underwood, T. (2006), Overview of the microcredit sector <strong>in</strong> <strong>Europe</strong> 2005-2006, EMNWork<strong>in</strong>g Paper No. 4, Paris.
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> 17<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> - Needs, Problems <strong>and</strong> Ways Forward.1. Introduction.<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> comprises f<strong>und</strong><strong>in</strong>g for start-up entrepreneurs <strong>and</strong> small to mediumsizedenterprises (SMEs) not exceed<strong>in</strong>g EUR 25,000. So for one, these f<strong>in</strong>ance measuresentail relatively small amounts <strong>and</strong> for another they are carried out <strong>in</strong> connection withentrepreneurial activity. Despite an efficient bank<strong>in</strong>g sector, young <strong>and</strong> small enterprises <strong>in</strong><strong>Germany</strong> often face special problems when they need small amounts of f<strong>in</strong>ance fromexternal capital providers for their <strong>in</strong>vestment projects. Due to the adverse cost/earn<strong>in</strong>gsratio, microf<strong>in</strong>ance or microlend<strong>in</strong>g is often unprofitable for banks <strong>in</strong> <strong>Germany</strong> <strong>in</strong> the'conventional' way of do<strong>in</strong>g lend<strong>in</strong>g bus<strong>in</strong>ess.The loan amounts are too small to offset high risk <strong>and</strong> operat<strong>in</strong>g costs due to borrower groupspecifics, such as difficulties <strong>in</strong> assess<strong>in</strong>g the credit st<strong>and</strong><strong>in</strong>g of start-up or smallentrepreneurs or also high risk of default, result<strong>in</strong>g <strong>in</strong> <strong>in</strong>sufficient earn<strong>in</strong>gs. Thougheconomically viable, then, small-scale <strong>in</strong>vestment projects frequently fail to get off the gro<strong>und</strong>due to the reluctance of banks <strong>and</strong> other f<strong>in</strong>anciers <strong>in</strong> the microsegment. So it is a matter ofeconomic-policy <strong>in</strong>terest to ascerta<strong>in</strong> the size of dem<strong>and</strong> for microloans <strong>and</strong> the extent of theproblems start-up <strong>and</strong> small entrepreneurs encounter <strong>in</strong> f<strong>in</strong>anc<strong>in</strong>g their projects.Information on market size is an <strong>in</strong>itial help <strong>in</strong> answer<strong>in</strong>g the basic question of whether thereis any need at all for government programmes to assist microborrowers. It is also importantfor design<strong>in</strong>g assistance programmes or assess<strong>in</strong>g which current private bus<strong>in</strong>ess schemes<strong>in</strong> the microlend<strong>in</strong>g sector are viable enough to merit aid.First of all, the present paper makes an empirical estimate of prospective dem<strong>and</strong> <strong>in</strong> themicrof<strong>in</strong>ance sector <strong>in</strong> <strong>Germany</strong>. The KfW Start-up Monitor <strong>and</strong> the KfW SME Panel providetwo representative datasets for <strong>Germany</strong> that record the f<strong>in</strong>ancial behaviour of start-up <strong>and</strong>small SME owners. Based on the two datasets, we also analyze how many start-up <strong>and</strong>small entrepreneurs <strong>in</strong> <strong>Germany</strong> seek<strong>in</strong>g microloans have difficulties f<strong>in</strong>d<strong>in</strong>g a f<strong>in</strong>ancier fortheir <strong>in</strong>vestments. The f<strong>in</strong>d<strong>in</strong>gs show that there is a substantial dem<strong>and</strong> for microloans <strong>in</strong><strong>Germany</strong> <strong>and</strong> that some start-up <strong>and</strong> small entrepreneurs encounter difficulties rais<strong>in</strong>gf<strong>in</strong>ance.Nevertheless, microf<strong>in</strong>ance is more of a niche segment, not a mass market, as <strong>in</strong> develop<strong>in</strong>g<strong>and</strong> transition countries, for example. Among other problems <strong>in</strong>adequate quantity structureshave so far thwarted bus<strong>in</strong>ess strategies that have already been successfully implemented <strong>in</strong>consumer lend<strong>in</strong>g bus<strong>in</strong>ess, which resembles microlend<strong>in</strong>g <strong>in</strong> several ways. The strategy
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 18here has been to make 'radical' cost sav<strong>in</strong>gs by maximiz<strong>in</strong>g st<strong>and</strong>ardization <strong>and</strong> exploit<strong>in</strong>geconomies of scale.Up to now, microlend<strong>in</strong>g has not been made profitable enough <strong>in</strong> <strong>Germany</strong> to <strong>in</strong>duce privatef<strong>in</strong>ancial <strong>in</strong>termediaries to serve this bus<strong>in</strong>ess segment sufficiently <strong>in</strong> their own commercial<strong>in</strong>terest. This is why the present paper also looks <strong>in</strong> detail at the specific problems <strong>in</strong>microlend<strong>in</strong>g as seen by the credit <strong>in</strong>stitutions. Based on the various key components <strong>in</strong> loancost<strong>in</strong>g, we first briefly address the various specific problems that make for earn<strong>in</strong>gsdifficulties <strong>in</strong> microlend<strong>in</strong>g <strong>and</strong> then consider which strategies can improve efficiency atvarious po<strong>in</strong>ts <strong>and</strong> where assistance programmes could make a difference.The paper proceeds as follows: In Section 2 we assess the microf<strong>in</strong>ance needs of start-up<strong>and</strong> small SME owners <strong>in</strong> <strong>Germany</strong> based on representative empirical data. This section alsodeals with the problems enterprises with microf<strong>in</strong>ance needs face <strong>in</strong> acquir<strong>in</strong>g externalcapital providers. Section 3 <strong>und</strong>ertakes an analysis of the ma<strong>in</strong> cost components that play aspecific role <strong>in</strong> the microlend<strong>in</strong>g bus<strong>in</strong>ess of banks. In Section 4, we discuss the directionpossible strategies must take to make microf<strong>in</strong>ance bus<strong>in</strong>ess more profitable throughassistance or improvements <strong>in</strong> efficiency. Section 5 conta<strong>in</strong>s some conclud<strong>in</strong>g remarks.2. Dem<strong>and</strong> for microf<strong>in</strong>ance.2.1 Bus<strong>in</strong>ess start-ups.The analysis of the microf<strong>in</strong>ance needs of start-up entrepreneurs 1 is based on the data fromthe KfW Start-up Monitor, 2a representative telephone survey of start-up activities <strong>in</strong><strong>Germany</strong> carried out every year as of 2000. As the KfW Start-up Monitor covers a broadrange of bus<strong>in</strong>ess ideas (all of them full-time <strong>and</strong> part-time bus<strong>in</strong>ess start-ups by peopleaged 14 to 67), 3 it conveys a detailed picture of start-up activities. In particular, it polls a largenumber of attributes of the start-up entrepreneur, his enterprise <strong>and</strong> f<strong>in</strong>anc<strong>in</strong>g aspects. Wecan summarize the features of the survey mode <strong>and</strong> the ma<strong>in</strong> contents of the KfW Start-upMonitor as follows:1Start-ups may denote new firms, take-overs or active participat<strong>in</strong>g hold<strong>in</strong>gs. The KfW Start-upMonitor refers to the start-up entrepreneur as a person. The beg<strong>in</strong>n<strong>in</strong>g of self-employment need nottherefore entail fo<strong>und</strong><strong>in</strong>g a new company; it can also consist <strong>in</strong> tak<strong>in</strong>g over an exist<strong>in</strong>g enterprise oracquir<strong>in</strong>g a participat<strong>in</strong>g <strong>in</strong>terest. Active participat<strong>in</strong>g <strong>in</strong>terests designates company shares acquiredwith a view to bear<strong>in</strong>g entrepreneurial responsibility. In 2005, 69.8 % of all bus<strong>in</strong>ess start-ups entailedthe establishment of new companies (full-time or part-time employment), 6.5 % were takeovers <strong>and</strong>23.7 %, active participat<strong>in</strong>g <strong>in</strong>terests.2Cf. Spengler, H./Tilleßen, P. (2006).3In the survey carried out <strong>in</strong> 2006, whose results have not been fully evaluated <strong>and</strong> could nottherefore be dealt with <strong>in</strong> the present paper, the m<strong>in</strong>imum respondant age was raised to 18.
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> 19• The data is gathered by a market-research <strong>in</strong>stitute us<strong>in</strong>g so-called computer-assistedtelephone <strong>in</strong>terviews (CATI) solely <strong>in</strong> German.• The result<strong>in</strong>g dataset is representative for persons resident <strong>in</strong> <strong>Germany</strong> between 14 <strong>and</strong>67 years of age 4 with adequate proficiency <strong>in</strong> German <strong>and</strong> a fixed-network telephoneconnection <strong>in</strong> their household.• About 40,000 persons are questioned every year <strong>in</strong> the Start-up Monitor. 5 Each year,approx. 1,000 said they had entered self-employment as bus<strong>in</strong>ess owners or freelancers<strong>in</strong> the last 12 months.• The start-up entrepreneurs as def<strong>in</strong>ed on the basis of this <strong>in</strong>formation answer a detailedset of about 50 <strong>in</strong>dividual questions. This way, the Start-up Monitor can provide quitedetailed <strong>in</strong>formation on the course <strong>and</strong> type of start-up, number of personnel, start-upadvice, f<strong>in</strong>anc<strong>in</strong>g, the general climate for start-ups <strong>and</strong> the provenance <strong>and</strong> occupationalhistory of the start-up entrepreneurs.• For comparative analyses, <strong>in</strong>formation is also gathered from about 7,500 people whohave not started up a bus<strong>in</strong>ess on their assessment of the climate for start-ups <strong>and</strong> theirprovenance <strong>and</strong> occupational history.• Basic socio-economic attributes (e.g. age, gender, education, size of household,occupation, net household <strong>in</strong>come) are available for the complete sample of start-up <strong>and</strong>non-start-up entrepreneurs.The evaluation of the data from the KfW Start-up Monitor reveals that microf<strong>in</strong>ance plays aconsiderable role <strong>in</strong> start-ups. On the one h<strong>and</strong>, Figure 1 shows the ratio of start-upentrepreneurs with a basic need for microf<strong>in</strong>ance 6 (their own, that is, generated <strong>in</strong>side theenterprise or from the start-up entrepreneur’s private assets <strong>and</strong>/or acquired from externalcapital providers such as banks) to all start-up entrepreneurs from 2000 to 2005. On the4Or.18 s<strong>in</strong>ce the survey <strong>in</strong> 2006; see footnote above.5In 2000 <strong>and</strong> 2001 between 20,000 <strong>and</strong> 30,000 start-up entrepreneurs were questioned. Thesesurvey numbers are also sufficient to obta<strong>in</strong> representative <strong>and</strong> statistically valid analytical f<strong>in</strong>d<strong>in</strong>gs.6The data acquired <strong>in</strong> the Start-up Monitor shows that a considerable part of the start-upentrepreneurs cited f<strong>in</strong>ance requirements <strong>in</strong> connection with their project but did not acquire any f<strong>und</strong>sfrom external sources (e.g. banks or other f<strong>in</strong>ancial <strong>in</strong>termediaries), draw<strong>in</strong>g on their own sav<strong>in</strong>gs(<strong>in</strong>ternal f<strong>und</strong>s) or current cash-flow already earned. On the term ‘<strong>in</strong>ternal <strong>and</strong> external f<strong>in</strong>ance’ seealso Breuer, W. (1998), p. 7 ff. This is why a sharp dist<strong>in</strong>ction is drawn <strong>und</strong>er start-up <strong>in</strong>ducedmicrof<strong>in</strong>ance needs between 'pure' f<strong>in</strong>ance requirements, which can be met from <strong>in</strong>-company f<strong>und</strong>s orthe private assets of the start-up entrepreneur as well as from external sources, <strong>and</strong> f<strong>in</strong>ance relationswith external capital providers actually entered <strong>in</strong>to or sought.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 20other, it shows the ratio of start-up entrepreneurs who do not require f<strong>in</strong>ance (either <strong>in</strong>ternalor external) to enter self-employment.60%55%50%45%40%35%30%25%20%2000 2001 2002 2003 2004 2005Start-ups without any need for f<strong>in</strong>anc<strong>in</strong>gStart-ups which require microf<strong>in</strong>anc<strong>in</strong>g (< 25,000 EUR)Figure 1: Percentage of start-ups <strong>in</strong> need of (<strong>in</strong>ternal or external) f<strong>in</strong>ance (of up to EUR 25,000)<strong>and</strong> those with no requirements between 2000 <strong>and</strong> 2005In the period <strong>und</strong>er review, the share of start-up entrepreneurs with microf<strong>in</strong>ance needs (notexceed<strong>in</strong>g EUR 25,000) first rose from 38 % <strong>in</strong> 2000 to 58 % <strong>in</strong> 2003. Up to 2005, this figurethen decl<strong>in</strong>ed aga<strong>in</strong> slightly to 54 %. The ratio of start-up entrepreneurs requir<strong>in</strong>g no f<strong>in</strong>anceto all start-up entrepreneurs charted the opposite course between 2000 <strong>and</strong> 2005, firstdecl<strong>in</strong><strong>in</strong>g from 38 % <strong>in</strong> 2000 to 26 % <strong>in</strong> 2003 <strong>and</strong> then ris<strong>in</strong>g slightly aga<strong>in</strong> to 33 % <strong>in</strong> 2005.Because the sample of the KfW Start-up Monitor is representative, we can also obta<strong>in</strong>absolute figures on the start-ups <strong>und</strong>er review through projections. Figure 2 shows thenumber of start-ups <strong>in</strong> need of microf<strong>in</strong>ance <strong>and</strong> those <strong>in</strong> not need<strong>in</strong>g any f<strong>in</strong>anc<strong>in</strong>g.1.000.000900.000800.000700.000600.000500.000400.000300.0002000 2001 2002 2003 2004 2005Start-ups without any need for f<strong>in</strong>anc<strong>in</strong>gStart-ups which require microf<strong>in</strong>anc<strong>in</strong>g (< 25,000 EUR)Figure 2: Absolute figures on start-ups <strong>in</strong> need of (<strong>in</strong>ternal or external) f<strong>in</strong>ance (of up toEUR 25,000) <strong>and</strong> those with no requirements from 2000 to 2005
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> 21The graph for the absolute figures on start-ups with microf<strong>in</strong>ance needs <strong>and</strong> those with nonelooks slightly different from the one depict<strong>in</strong>g ratios. This is due to fluctuations <strong>in</strong> start-upfigures <strong>in</strong> <strong>Germany</strong> overall (Figure 3). Start<strong>in</strong>g from 813,000 start-ups (full-time <strong>and</strong> parttime)with <strong>in</strong>ternal or external microf<strong>in</strong>ance requirements <strong>in</strong> 2000, the number of start-upsfirst rose until 2003 to 943,000 <strong>and</strong> then fell back <strong>in</strong> the follow<strong>in</strong>g two years to about 790,000.The number of start-up entrepreneurs without (<strong>in</strong>ternal or external) f<strong>in</strong>ance requirementspeaked <strong>in</strong> 2001 at 534,000 after about 430,000 <strong>in</strong> 2000, followed by a decl<strong>in</strong>e up to 2003 toapproximately the orig<strong>in</strong>al level <strong>in</strong> 2000. F<strong>in</strong>ally <strong>in</strong> 2005, 562,000 start-up entrepreneurs didnot require f<strong>in</strong>ance.1.800.0001.600.0001.400.0001.200.0001.000.000800.000600.000400.0002000 2001 2002 2003 2004 2005Total Regular basis Sidel<strong>in</strong>e basisFigure 3: Number of start-ups <strong>in</strong> <strong>Germany</strong> overall <strong>and</strong> broken down by full-time <strong>and</strong> part-timelfrom 2000 to 2005Particularly with start-up entrepreneurs a dist<strong>in</strong>ction has to be drawn between the numberwith a f<strong>und</strong>amental need for <strong>in</strong>ternal or external f<strong>in</strong>ance <strong>and</strong> the number of those whoactually acquired f<strong>und</strong>s from external f<strong>in</strong>anciers (or also those that attempted to do this).Table 1 shows that out of 938,000 start-up entrepreneurs <strong>in</strong> 2005 who saw the need forf<strong>in</strong>ance to implement their bus<strong>in</strong>ess idea only 206,000 actually acquired external f<strong>und</strong>s.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 22Table1: Start-up entrepreneurs requir<strong>in</strong>g f<strong>in</strong>ance <strong>and</strong> who availed themselves of external f<strong>und</strong>s<strong>in</strong> 2005Number ofAs a percentage ofstart-ups overall%As a percentage ofabove group%Start-ups overall: 1,400,000 100 100Of which start-ups requir<strong>in</strong>g<strong>in</strong>ternal or external f<strong>in</strong>ance983,000 67 67Of which start-ups thatacquired external f<strong>in</strong>ance206,000 15 22Of which start-upsacquir<strong>in</strong>g external f<strong>in</strong>ance<strong>in</strong> the micro-f<strong>in</strong>ance range(< EUR 25,000)Of which start-ups withdifficulties <strong>in</strong> acquir<strong>in</strong>gmicro-f<strong>in</strong>ance132,000 9 6429,000 2 22At 732,000 (that is, 938,000 less 206,000), a very large number of start-up entrepreneursmet their entrepreneurial f<strong>in</strong>ance requirements from their own sav<strong>in</strong>gs or current cash-flow.Of the 206,000 start-up entrepreneurs who obta<strong>in</strong>ed external f<strong>und</strong>s, however, almost twothirdsor 132,000 applied for f<strong>in</strong>ance <strong>in</strong> the microlend<strong>in</strong>g range. This figure represents therealized dem<strong>and</strong> for microloans by start-up entrepreneurs or the dem<strong>and</strong> met bycorrespond<strong>in</strong>g supply, measured by the number of cases. If for the sake of simplification weassume an average loan amount <strong>in</strong> the micro range of EUR 10,000, the cases number<strong>in</strong>gabout 130,000 give us a correspond<strong>in</strong>g volume of dem<strong>and</strong> amount<strong>in</strong>g to about EUR 1.3billion. Of the start-up entrepreneurs who applied for <strong>and</strong> received f<strong>in</strong>ance <strong>in</strong> the microloanrange, the ratio of those who had difficulties is comparatively small at about 22 %. Thiscontrasts with the very large group of start-up entrepreneurs who met their microf<strong>in</strong>anceneeds solely through sav<strong>in</strong>gs or their own cash-flow (Table 2). This <strong>in</strong>dicates that the'potential' dem<strong>and</strong> for microloans, i.e. the total of met <strong>and</strong> unmet dem<strong>and</strong> for f<strong>in</strong>ancialservices, is higher. Apply<strong>in</strong>g a rather 'conservative' estimation approach, we can ascerta<strong>in</strong>the additional unmet requirements for external capital with the help of the KfW Start-upMonitor data on the number of start-up entrepreneurs who explicitly <strong>in</strong>tended to raise f<strong>und</strong>s <strong>in</strong>the microloan range but who then fo<strong>und</strong> no capital provider (cf. Table 2).
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> 23Table 2: Start-up entrepreneurs requir<strong>in</strong>g f<strong>in</strong>ance but who did not avail themselves of externalf<strong>und</strong>s <strong>in</strong> 2005Number ofAs a percentage ofstart-ups overallAs a percentage ofabove group% %Start-ups overall: 1,400,000 100 100Of which start-ups requir<strong>in</strong>g<strong>in</strong>ternal or external f<strong>in</strong>ance938,000 67 67Of which start-ups that did notacquire external f<strong>in</strong>ance732,000 52 78Of which start-ups <strong>in</strong> need of<strong>in</strong>ternal or external f<strong>in</strong>ance<strong>in</strong> the microf<strong>in</strong>ance range(< EUR 25,000)Of which start-ups thatplanned for externalf<strong>in</strong>ance, but did not receiveit659,000 47 9053,000 4 8In 2005, these numbered 50,000. In all, this gives us a potential start-up-<strong>in</strong>duced dem<strong>and</strong> for180,000 microloans (130,000 with met needs plus 50,000 with unmet needs). Premised onthe simplified assumptions on <strong>in</strong>dividual loan amounts above, this corresponds to a'maximum' volume of met <strong>and</strong> unmet dem<strong>and</strong> amount<strong>in</strong>g to about EUR 1.8 billion. We alsoneed to take the large number of start-up entrepreneurs with microf<strong>in</strong>ance needs <strong>in</strong>toaccount who did not approach an external capital provider <strong>in</strong> the first place, about 610,000.This figure results from the difference between the 660,000 or so start-up entrepreneurs <strong>in</strong>need of microf<strong>in</strong>ance who did not acquire external f<strong>und</strong>s <strong>and</strong> approx. 50,000 start-upentrepreneurs who were refused f<strong>in</strong>ance (Table 2).2.2 Established small <strong>and</strong> medium-sized enterprises (SMEs).We shall adduce the KfW SME Panel as a database for analyz<strong>in</strong>g the f<strong>in</strong>ance needs <strong>and</strong>difficulties of small to medium-sized enterprises. The KfW SME Panel provides arepresentative longitud<strong>in</strong>al dataset for all scales of SME <strong>in</strong> <strong>Germany</strong>. It therefore also allowsus to make projections for very small enterprises, which are relevant to dem<strong>and</strong> formicrof<strong>in</strong>ance <strong>in</strong>struments <strong>in</strong> <strong>Germany</strong> besides the start-up entrepreneurs. The Panel data isgathered through a repeated written survey of small to medium-sized enterprises with aturnover of up to EUR 500 million a year <strong>in</strong> <strong>Germany</strong>. By this def<strong>in</strong>ition, there was a total of3.5 million small to medium-sized enterprises <strong>in</strong> <strong>Germany</strong> <strong>in</strong> 2005. The first survey wave ofthe Panel was carried out <strong>in</strong> 2003 <strong>and</strong> has been repeated every year s<strong>in</strong>ce with the samesmall to medium-sized enterprises. Three evaluated sets of surveys are now available.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 24The salient features of data acquisition <strong>in</strong> the KfW SME Panel <strong>and</strong> the ma<strong>in</strong> contents can besummarized as follows:• All small <strong>and</strong> medium-sized enterprises <strong>in</strong> <strong>Germany</strong> make up the parent population.These <strong>in</strong>clude private enterprises <strong>in</strong> all <strong>in</strong>dustries <strong>in</strong> <strong>Germany</strong> whose annual turnoverdoes not exceed EUR 500 million.• The data is acquired via written questionnaires sent by post.• In the <strong>in</strong>itial survey <strong>in</strong> 2003, over 15,000 evaluatable completed questionnaires werereceived from the enterprises. In the 2nd wave <strong>in</strong> 2004, almost 10,700 enterprisesresponded <strong>and</strong> over 11,000 <strong>in</strong> the third wave <strong>in</strong> 2005.• The follow<strong>in</strong>g topics are addressed <strong>in</strong> the questionnaire: corporate legal structure, ownermanageror partner/shareholders, personnel <strong>and</strong> recruitment trends, competition <strong>and</strong>sales, <strong>in</strong>vestments <strong>and</strong> f<strong>in</strong>anc<strong>in</strong>g, <strong>in</strong>novations <strong>and</strong> bus<strong>in</strong>ess performance.• Break<strong>in</strong>g down the sample by type of enterprise, <strong>in</strong>dustry, scale of workforce <strong>and</strong> regionensures that representative results can be <strong>in</strong>ferred from the parent population of all smallto medium-sized enterprises <strong>in</strong> <strong>Germany</strong>.Evaluations of the KfW SME Panel show that microf<strong>in</strong>ance (up to EUR 25,000) plays quite asignificant role for bus<strong>in</strong>ess start-ups but also for small to medium-sized enterprises. In 2005,230,000 small <strong>and</strong> medium-sized enterprises said they needed external microf<strong>in</strong>ance (up toEUR 25,000) <strong>and</strong> had therefore approached credit <strong>in</strong>stitutions (Table 3). This figurecorresponds here with total met <strong>and</strong> unmet dem<strong>and</strong>, because not all SME owners whoapplied to external capital providers for f<strong>in</strong>ance of up to EUR 25,000 received the requestedamount <strong>and</strong> were able to <strong>in</strong>vest it as planned. 77In f<strong>in</strong>anc<strong>in</strong>g aspects, the KfW SME Panel covers slightly different contents than the Start-up Monitor.In the Start-up Monitor, the f<strong>in</strong>ance requirements for implement<strong>in</strong>g bus<strong>in</strong>ess ideas are those that canbe met both from <strong>in</strong>ternal <strong>and</strong> external sources <strong>and</strong> also external f<strong>und</strong>s actually acquired. The SMEPanel, <strong>in</strong> contrast, provides <strong>in</strong>formation on the need for external f<strong>und</strong>s applied for by the SME ownersfrom external f<strong>in</strong>anciers, almost solely bank loans <strong>in</strong> the micro range of up to EUR 25,000.
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> 25Table 3: Small <strong>and</strong> medium-sized enterprises <strong>in</strong> need of external f<strong>und</strong>s that approached banks<strong>and</strong> others capital providers <strong>in</strong> 2005Number ofAs a percentage ofSMEs overallAs a percentage ofabove group% %SMEs overall: 3,500,000 100 100Of which SMEs requir<strong>in</strong>g externalloan f<strong>in</strong>anceOf which SMEs requir<strong>in</strong>gexternal loan f<strong>in</strong>ance <strong>in</strong> themicrof<strong>in</strong>ance range (< EUR25,000)Of which had difficulties withloan f<strong>in</strong>ance690,000 20 20230,000 7 33110,000 3 48Of which- could <strong>in</strong>vest as planned 36,000 1 33- revised <strong>in</strong>vestments 48,000 1 44- could not <strong>in</strong>vest 25,000 1 23To ascerta<strong>in</strong> the dem<strong>and</strong> met by correspond<strong>in</strong>g f<strong>in</strong>ancial services, we must deduct from thetotal of 230,000 applications for f<strong>in</strong>ance the number of applicants who then received no f<strong>und</strong>sfrom their bank. Table 3 shows the number of requests for f<strong>in</strong>ance where problems arose,def<strong>in</strong>ed as failure <strong>in</strong> the first negotiat<strong>in</strong>g ro<strong>und</strong>. In 36,000 cases, the SME owners werenevertheless able to <strong>in</strong>vest subsequently as planned, 48,000 had to revise their <strong>in</strong>vestmentplans because they did not obta<strong>in</strong> the amount of credit requested, for example, <strong>and</strong> 25,000applications for credit failed completely. If we deduct these from the total 230,000, we obta<strong>in</strong>a ro<strong>und</strong>ed 200,000 loans that satisfied dem<strong>and</strong>.If we aga<strong>in</strong> assume a simplified average f<strong>in</strong>ance amount of EUR 10,000 as a rais<strong>in</strong>g factor,the total met <strong>and</strong> unmet dem<strong>and</strong> for the 230,000 cases comes to about EUR 2.3 billion, withthe result<strong>in</strong>g met dem<strong>and</strong> amount<strong>in</strong>g to aro<strong>und</strong> EUR 2 billion, also assum<strong>in</strong>g a simplifiedf<strong>in</strong>ance commitment of EUR 10,000 for the 48,000 SME owners who revised their <strong>in</strong>vestmentplans.2.3 Interim outcome.Overall then, based on the data from the Start-up Monitor <strong>and</strong> the SME Panel we c<strong>and</strong>educe the number of applications for microf<strong>in</strong>ance. By add<strong>in</strong>g the met needs of start-upentrepreneurs <strong>and</strong> small SME owners, we then obta<strong>in</strong> a realized dem<strong>and</strong> for microf<strong>in</strong>ance <strong>in</strong>330,000 cases <strong>in</strong> 2005. Add<strong>in</strong>g up the simplified <strong>in</strong>ferred dem<strong>and</strong>s gives us EUR 3.3 billion.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 26The aggregate potential of met <strong>and</strong> unmet dem<strong>and</strong> amounts to 410,000 cases ofmicrof<strong>in</strong>ance or EUR 4.1 billion.So compared with the size of the f<strong>in</strong>ancial services market as a whole, the total volume ofloans issued to enterprises <strong>in</strong> <strong>Germany</strong> <strong>in</strong> 2005 amount<strong>in</strong>g to about EUR 600 billion, 8microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> certa<strong>in</strong>ly does not make for a mass bus<strong>in</strong>ess segment, unlike thecase <strong>in</strong> a number of develop<strong>in</strong>g countries. Nevertheless, the dem<strong>and</strong> for microf<strong>in</strong>ance<strong>in</strong>struments <strong>and</strong> the f<strong>in</strong>anc<strong>in</strong>g difficulties of the start-up entrepreneurs <strong>and</strong> SME ownersseek<strong>in</strong>g f<strong>in</strong>ance are not a factor that economic policy can afford to ignore. At a conservativeestimate, potential dem<strong>and</strong> for microf<strong>in</strong>ance <strong>in</strong>struments, that is the sum of met <strong>and</strong> unmetdem<strong>and</strong>, comes to some 80,000 f<strong>in</strong>ance seekers or just about 25 % more than that servedby banks <strong>and</strong> other f<strong>in</strong>ancial <strong>in</strong>termediaries. Based on the projection method used here, thisamounts to an unmet dem<strong>and</strong> of EUR 0.8 billion. First, we need to take <strong>in</strong>to account herethat <strong>in</strong> addition some of the start-up entrepreneurs <strong>and</strong> SME owners had to cope withborrow<strong>in</strong>g difficulties but did then manage to f<strong>in</strong>d a capital provider for their project. Inaddition, we ascerta<strong>in</strong>ed that about 610,000 start-up entrepreneurs cited microf<strong>in</strong>ance needsto be met with <strong>in</strong>ternal or external f<strong>und</strong>s but did not attempt to borrow from banks. Asmentioned above, the dem<strong>and</strong> overhang <strong>in</strong> the microf<strong>in</strong>ance range <strong>in</strong> excess of the numberof bus<strong>in</strong>ess start-ups with rejected f<strong>in</strong>ance applications is thus a conservative estimate.3. Specific problem factors <strong>in</strong> microlend<strong>in</strong>g for banks <strong>in</strong> <strong>Germany</strong>.The ma<strong>in</strong> reasons for the f<strong>in</strong>ance difficulties faced by start-up entrepreneurs <strong>and</strong> SMEowners <strong>in</strong> need of microcredit <strong>in</strong> <strong>Germany</strong> is the adverse cost/earn<strong>in</strong>gs ratio <strong>in</strong> this bus<strong>in</strong>esssegment as estimated by the banks. In microlend<strong>in</strong>g, major h<strong>and</strong>l<strong>in</strong>g/operat<strong>in</strong>g components<strong>in</strong> credit st<strong>and</strong><strong>in</strong>g assessment <strong>and</strong> loan post-approval process<strong>in</strong>g, documentation <strong>and</strong>closure <strong>in</strong>cur high (fixed) costs for banks, which pose severe profitability problems,particularly with small f<strong>in</strong>ance amounts <strong>and</strong> smaller-scale quantity structures. 9In cost<strong>in</strong>g for lend<strong>in</strong>g bus<strong>in</strong>ess, we can dist<strong>in</strong>guish various components: h<strong>and</strong>l<strong>in</strong>g costs forloan appraisal <strong>and</strong> post-approval process<strong>in</strong>g/monitor<strong>in</strong>g, direct risk costs commensurate withexpected loss, 10 cost of capital, differentiat<strong>in</strong>g between costs of equity <strong>and</strong> debt capital. Foralmost all the cost components cited, except cost of capital, small loans for start-upentrepreneurs or SME owners are relatively unfavourable. Without countervail<strong>in</strong>g measuresto remedy these specific problems microf<strong>in</strong>ance bus<strong>in</strong>ess would therefore often only prove8Source: German B<strong>und</strong>esbank, own calculations.9Cf. on this Kreuz, C. (2006).10On this term <strong>and</strong> on questions of loan risk measurement <strong>and</strong> management, for example, seeAltman, E.I./Sa<strong>und</strong>ers, A. (1997), Hartmann-Wendels, T./Pf<strong>in</strong>gsten, A./Weber, M. (2004), p. 503, ff.
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> 27viable for banks at very high <strong>in</strong>terest rates, some over 20 %. These k<strong>in</strong>ds of <strong>in</strong>terest rate arehardly practicable <strong>in</strong> <strong>Germany</strong>. On the one h<strong>and</strong>, German law prohibits lend<strong>in</strong>g bus<strong>in</strong>essfrom charg<strong>in</strong>g very high <strong>in</strong>terest rates ('usurious' <strong>in</strong>terest) as an immoral legal transaction(§ 138 of the German Civil Code). On the other, <strong>in</strong>terest rate rises beyond a certa<strong>in</strong> thresholdare also uneconomical for the bank as they result <strong>in</strong> adverse selection <strong>and</strong> moral hazard onthe debtor side. 11This problem <strong>in</strong> the microlend<strong>in</strong>g range leads to short supply (creditration<strong>in</strong>g), which has been empirically assessed above. Shortage of credit can requireeconomic policy <strong>in</strong>terventions to enable the f<strong>in</strong>anc<strong>in</strong>g of projects that make macroeconomicsense despite the profitability problems of the banks as bus<strong>in</strong>ess cases on the micro level.Particularly, for unemployed start-up entrepreneurs who would otherwise generally have torely on public benefits, economic policymakers also need to take account of the relatedsav<strong>in</strong>gs <strong>in</strong> the social welfare budget.H<strong>and</strong>l<strong>in</strong>g costs (direct operat<strong>in</strong>g costs).Higher h<strong>and</strong>l<strong>in</strong>g costs are primarily <strong>in</strong>curred with microloans due to difficulties <strong>in</strong> assess<strong>in</strong>gfailure risk due to borrower default with sufficient precision. Inevitably with start-upentrepreneurs, there are no balance sheet histories <strong>and</strong> other comparable figures to refer tofor assess<strong>in</strong>g credit st<strong>and</strong><strong>in</strong>g. Ow<strong>in</strong>g also to the graduation of disclosure requirements toscale of enterprise <strong>in</strong> <strong>Germany</strong>, relatively little <strong>in</strong>formative company data is available forassess<strong>in</strong>g the creditworth<strong>in</strong>ess of SME owners. For these reasons, assess<strong>in</strong>g credit st<strong>and</strong><strong>in</strong>g<strong>in</strong> the microf<strong>in</strong>ance range is based more on an analysis of personal factors from the lifehistory or also 'soft' factors such as an appraisal of the management abilities or the charactertraits of the start-up or small entrepreneur. Ow<strong>in</strong>g to the narrower scope for st<strong>and</strong>ardization,these analyses often entail higher costs than credit assessments <strong>in</strong> more quantitative typerat<strong>in</strong>g procedures that draw on extensive data on balance sheet <strong>and</strong> <strong>in</strong>dicator records. Inpr<strong>in</strong>ciple, it is conceivable to develop st<strong>and</strong>ardized rat<strong>in</strong>g methods mostly adduc<strong>in</strong>g theabove-mentioned personal <strong>and</strong> 'soft' factors, where more extensive experience has beenga<strong>in</strong>ed with microloan cases. Many <strong>in</strong>stitutes, however, lack the requisite databases (numberof cases) to be able to assess risk with adequate precision, because, as mentioned <strong>in</strong> partalready, the market for microloans <strong>and</strong> similar f<strong>in</strong>ance <strong>in</strong> <strong>Germany</strong> is relatively <strong>and</strong> has asignificant but limited volume. In addition, basic organisational requirements, <strong>in</strong>clud<strong>in</strong>g theyoung M<strong>in</strong>imum Requirements on Lend<strong>in</strong>g Activities by Credit Institutions (MaK) <strong>in</strong>troduced<strong>in</strong> the course of Basel II <strong>in</strong> <strong>Germany</strong>, <strong>in</strong>cur considerable fixed costs, which have a particularlyadverse effect on yield <strong>in</strong> microlend<strong>in</strong>g due to smaller quantity structures as compared withconventional retail bus<strong>in</strong>ess, for example.11On f<strong>und</strong>amentals here see Stiglitz/Weiss (1981).
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 28Risk costs.Risk of failure due to borrower default tends to be greater <strong>in</strong> the microloan range than <strong>in</strong>wholesale bank<strong>in</strong>g bus<strong>in</strong>ess with larger enterprises or <strong>in</strong> retail (consumer) lend<strong>in</strong>g, forexample. 12 Smaller SME owners can generally draw on less equity reserves than the largerones. Start-up entrepreneurs also often lack management know-how. As a consequence,higher risk premiums need to be charged for microloans to cover the expected loss. Added tothis, start-up entrepreneurs <strong>and</strong> small SME owners often lack assets of <strong>in</strong>tr<strong>in</strong>sic value thatcould serve as collateral to reduce loss given default.Cost of capital (equity <strong>and</strong> debt).All other factors rema<strong>in</strong><strong>in</strong>g equal, if banks take a higher risk <strong>in</strong> lend<strong>in</strong>g bus<strong>in</strong>ess, this makesfor higher capital costs. This k<strong>in</strong>d of capital cost effect can always be expected when enter<strong>in</strong>gmicrolend<strong>in</strong>g bus<strong>in</strong>ess if add<strong>in</strong>g small loan risks to the lend<strong>in</strong>g portfolio causes adeterioration of the bank’s overall risk position that cannot be offset through hedg<strong>in</strong>gtransactions. Generally, capital cost effects pose less of a problem for the earn<strong>in</strong>gs position<strong>in</strong> microlend<strong>in</strong>g than direct risk costs due to credit exposure to (<strong>in</strong>dividual) borrower default<strong>and</strong> h<strong>and</strong>l<strong>in</strong>g costs. 13 First, capital cost effects are as a rule negligible consider<strong>in</strong>g the smallvolume of microlend<strong>in</strong>g bus<strong>in</strong>ess <strong>in</strong> relation to other bank assets, except for very small<strong>in</strong>stitutes. Also, microloans are not necessarily less favourable than other bank assets <strong>in</strong>terms of capital costs. First of all, the high granularity of microloan portfolios should have abeneficial effect. With negative risk correlations between <strong>in</strong>dividual microloans, between themicroloan portfolio <strong>and</strong> other asset classes, tak<strong>in</strong>g up microlend<strong>in</strong>g bus<strong>in</strong>ess could evenimprove the capital cost position for f<strong>in</strong>ancial <strong>in</strong>termediaries. As to capital costs due solely toregulations (Basel II), microloans are not a cost driver, either, because they belong to theretail segment. 14As already mentioned, capital cost effects <strong>in</strong> microloans are low compared with <strong>in</strong>dividualborrower risk <strong>and</strong> h<strong>and</strong>l<strong>in</strong>g cost effects so that possible capital cost sav<strong>in</strong>gs cannot offset theother cost problems. Altogether then, <strong>in</strong> measures for rais<strong>in</strong>g profitability <strong>in</strong> microlend<strong>in</strong>g(except for very small banks), priority should be attached to problems with direct borrowerrisk <strong>and</strong> h<strong>and</strong>l<strong>in</strong>g costs.12Cf. Kreuz, C. (2006).13Cf. Kreuz, C. (2006).14Ahrweiler, S./Börner, C.J./Rühle, J. (2007).
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> 294. Approaches to <strong>Microf<strong>in</strong>ance</strong> Market Development.One strategy to promote <strong>and</strong> develop the microf<strong>in</strong>ance market is to address the specific costproblems of microlend<strong>in</strong>g we have identified:• H<strong>and</strong>l<strong>in</strong>g/Operational costs• Borrower risk costs (expected loss)• Capital costsAs part of this paper, we shall broach some basic mechanisms for solv<strong>in</strong>g these problems.Besides this, commercial banks could be relieved of costs overall (as well as risks) <strong>in</strong>microlend<strong>in</strong>g through h<strong>and</strong>l<strong>in</strong>g cost subsidies <strong>and</strong> liability exemption. This is the approachthat the KfW Group has adopted over the last eight years with its programmes: Microloan<strong>and</strong> Start-up Money. At some po<strong>in</strong>ts, the programmes are also tailored to the specificproblems of microbus<strong>in</strong>ess actors. For example, KfW onlend<strong>in</strong>g banks receive fixed h<strong>and</strong>l<strong>in</strong>gcost subsidies regardless of the volume of credit especially to alleviate the problem of anunfavourable cost/earn<strong>in</strong>gs ratio. In addition, they are relieved of 80 % of their creditexposure. Microloan <strong>and</strong> Start-up Money will be merged <strong>in</strong>to one programme at thebeg<strong>in</strong>n<strong>in</strong>g of 2008 to address the f<strong>in</strong>ance problems <strong>in</strong> the microloan range even moreeffectively. KfW will then relieve the onlend<strong>in</strong>g banks of credit risk <strong>in</strong> full. To provide start-upentrepreneurs <strong>and</strong> small enterprises with improved facilities already, the <strong>in</strong>terest rates for theongo<strong>in</strong>g programmes were reduced at the beg<strong>in</strong>n<strong>in</strong>g of this year.A key factor for success <strong>in</strong> microlend<strong>in</strong>g bus<strong>in</strong>ess is certa<strong>in</strong>ly an efficient system for creditrisk assessment to reduce h<strong>and</strong>l<strong>in</strong>g <strong>and</strong> risk costs. Consider<strong>in</strong>g the major role of personal<strong>and</strong> 'soft' factors <strong>in</strong> assess<strong>in</strong>g the credit st<strong>and</strong><strong>in</strong>g of borrowers <strong>in</strong> the microloan range, twoapproaches could be adopted: On the one h<strong>and</strong>, based on previous experience, ast<strong>and</strong>ardized, more quantitative type of rat<strong>in</strong>g (or scor<strong>in</strong>g) system could be developed toreduce h<strong>and</strong>l<strong>in</strong>g <strong>and</strong>, provided the forecast<strong>in</strong>g quality is good enough, borrower risk costs aswell. The scope <strong>and</strong> quality of the database is crucial to the success of this approach so that<strong>in</strong> view of the short history <strong>and</strong> small size of the microlend<strong>in</strong>g market <strong>in</strong> <strong>Germany</strong> theseremedies can only be fo<strong>und</strong> <strong>in</strong> the medium to long term.On the other h<strong>and</strong>, strategies that are particularly effective <strong>in</strong> microlend<strong>in</strong>g bus<strong>in</strong>ess seek toreduce risk costs by means of a precise assessment of borrower creditworth<strong>in</strong>ess based onpersonal <strong>and</strong> soft <strong>in</strong>dicators through close <strong>in</strong>teraction (advice, support <strong>and</strong> monitor<strong>in</strong>g)between specialized microloan agencies <strong>and</strong> start-up entrepreneurs or small entrepreneurs.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 30Approaches on this basis can be successful <strong>in</strong> the short run as they can largely do withoutextensive databases. In addition to monitor<strong>in</strong>g, microloan agencies also support borrowerswith special coach<strong>in</strong>g measures. Comprehensive borrower advice is, however, personnelcost-<strong>in</strong>tensive. So these k<strong>in</strong>ds of measures can br<strong>in</strong>g about considerable sav<strong>in</strong>gs onborrower risk costs but <strong>in</strong>cur high h<strong>and</strong>l<strong>in</strong>g costs. Support measures <strong>in</strong> the microloan rangecan therefore often make sense if the advisory services can be rendered by <strong>in</strong>stitutions(supported by the government) that are specialized <strong>in</strong> this area <strong>and</strong>, <strong>in</strong> particular, alreadyexist, so as to perform certa<strong>in</strong> related social-policy tasks, for example. The <strong>Microf<strong>in</strong>ance</strong>F<strong>und</strong> <strong>Germany</strong>, which was planned <strong>and</strong> <strong>in</strong>stigated by KfW <strong>in</strong> cooperation with the FederalM<strong>in</strong>istry of Economics <strong>and</strong> Technology <strong>and</strong> the Federal M<strong>in</strong>istry of Labour <strong>and</strong> Social Affairsas well as the GLS Bank, also applies this k<strong>in</strong>d of approach of dovetail<strong>in</strong>g f<strong>in</strong>ancial <strong>and</strong>advisory services. 15 The <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> relies on cooperation between credit<strong>in</strong>stitutions which take over the job of issu<strong>in</strong>g <strong>and</strong> adm<strong>in</strong>ister<strong>in</strong>g the microloans <strong>and</strong>specialized consult<strong>in</strong>g service providers that take care of borrowers but also carry out creditst<strong>and</strong><strong>in</strong>g assessment <strong>and</strong> monitor<strong>in</strong>g. Through a special liability <strong>and</strong> fee system, the <strong>in</strong>terestsof all cooperation partners are geared to m<strong>in</strong>imis<strong>in</strong>g risk <strong>and</strong> h<strong>and</strong>l<strong>in</strong>g costs.A possible approach to reduc<strong>in</strong>g capital costs for banks engaged <strong>in</strong> microlend<strong>in</strong>g bus<strong>in</strong>esswould be securitization, for example, which enlarges the scope of credit <strong>in</strong>stitutions tomanage their lend<strong>in</strong>g portfolio. Adverse risk effects result<strong>in</strong>g from tak<strong>in</strong>g microloan risks <strong>in</strong>tothe bank portfolio are easier to mitigate through securitization <strong>and</strong> secondary market trad<strong>in</strong>gso as to reduce capital costs. These k<strong>in</strong>ds of <strong>in</strong>struments ought to be of primary <strong>in</strong>terest tovery small credit <strong>in</strong>stitutions, where the microlend<strong>in</strong>g segment is not <strong>in</strong>significant comparedwith total assets.5. Recap <strong>and</strong> conclusion.In the present paper, the dem<strong>and</strong> for microf<strong>in</strong>ance <strong>in</strong>struments <strong>in</strong> <strong>Germany</strong> was assessed onthe basis of representative datasets. <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> is usually <strong>und</strong>erstood todenote small loans <strong>and</strong> similar f<strong>in</strong>ance not exceed<strong>in</strong>g EUR 25,000 to start-up entrepreneurs<strong>and</strong> small SMEs. Besides the size of dem<strong>and</strong>, an empirical estimate was also made of thenumber of small enterprises with difficulties obta<strong>in</strong><strong>in</strong>g microloans.It emerged for 2005 that 330,000 start-up <strong>and</strong> small entrepreneurs sought <strong>and</strong> receivedmicrof<strong>in</strong>ance. This makes for a projected volume of EUR 3.3 billion. Aggregate potential met<strong>and</strong> unmet dem<strong>and</strong> amounts to 410,000 cases or EUR 4.1 billion. The segment is thus ofmore than negligible size, although measured aga<strong>in</strong>st the scale of the German f<strong>in</strong>ancial15The <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> will be dealt with <strong>in</strong> detail <strong>in</strong> a separate paper for the present collection.
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> 31services sector, it does not constitute a mass market. The difference between met <strong>and</strong>potential dem<strong>and</strong> shows that start-up entrepreneurs <strong>and</strong> small SME owners <strong>in</strong> this countryface quite substantial difficulties <strong>in</strong> obta<strong>in</strong><strong>in</strong>g f<strong>in</strong>ance for their projects.F<strong>in</strong>ally, the paper dealt with the ma<strong>in</strong> cost factors that make grant<strong>in</strong>g small loanscommercially rather unattractive for traditional f<strong>in</strong>ancial <strong>in</strong>termediaries <strong>in</strong> <strong>Germany</strong>, such asthe banks. Earn<strong>in</strong>gs problems for the banks largely result from high h<strong>and</strong>l<strong>in</strong>g costs for creditst<strong>and</strong><strong>in</strong>g assessment <strong>and</strong> monitor<strong>in</strong>g. Furthermore, microborrowers often pose high loan lossrisks, thus <strong>in</strong>curr<strong>in</strong>g high <strong>in</strong>dividual borrower risk costs. For most banks (except for very small<strong>in</strong>stitutes), capital cost effects, however, are of m<strong>in</strong>or importance when it comes toprofitability <strong>in</strong> microlend<strong>in</strong>g.In response to the earn<strong>in</strong>gs problems with <strong>in</strong>dividual cost components, we briefly discussedapproaches for rais<strong>in</strong>g efficiency or government assistance programmes to help alleviateprofitability problems <strong>and</strong> exp<strong>and</strong> bank<strong>in</strong>g services <strong>in</strong> microf<strong>in</strong>ance bus<strong>in</strong>ess <strong>in</strong> <strong>Germany</strong>.One promis<strong>in</strong>g approach certa<strong>in</strong>ly is to address cost problems <strong>in</strong> connection with creditst<strong>and</strong><strong>in</strong>g assessment <strong>and</strong> monitor<strong>in</strong>g. KfW is engaged here via the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong><strong>Germany</strong> <strong>in</strong>itiative. Besides this, it provides assistance programmes to relieve commercialbanks of overall costs for grant<strong>in</strong>g microloans. The problem of the unfavourablecosts/earn<strong>in</strong>gs ratio for the commercial banks is mitigated <strong>in</strong> particular by means of a fixedh<strong>and</strong>l<strong>in</strong>g subsidy to support the banks' engagement <strong>in</strong> the microloan range.Authors: Dr. Klaus Mark, KfW BankengruppeDr. Philipp Tilleßen, KfW Bankengruppe
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 32References.Altman, E. I./Sa<strong>und</strong>ers, A. (1997), Credit Risk Measurement: Developements over the Last20 Years, <strong>in</strong>: Journal of Bank<strong>in</strong>g & F<strong>in</strong>ance, Vol. 21, 1721-1742.Ahrweiler, S./Börner, C. J./Rühle, J. (2007), Auswirkungen von Basel II auf dieF<strong>in</strong>anzierungssituation mittelständischer Unternehmen <strong>in</strong> Deutschl<strong>and</strong>, Hofmann, G.(Editor), Basel II <strong>und</strong> MaRisk, Frankfurt a. M.Breuer, W. (1998), F<strong>in</strong>anzierungstheorie, Wiesbaden.Hartmann-Wendels, T./Pf<strong>in</strong>gsten, A./Weber, M. (2004), Bankbetriebslehre, 4th Edition,Berl<strong>in</strong>, etc.Kreuz, C. (2006), Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong>, Work<strong>in</strong>g Paper No. 41, International LaborOrganization.Reize, F. (2006), KfW-Mittelst<strong>and</strong>smonitor, Frankfurt a. M.Spengler, H./Tilleßen, P. (2006), KfW-Gründungsmonitor, Frankfurt a. M.Stiglitz, J. E./Weiss, A. (1981), Credit Ration<strong>in</strong>g <strong>in</strong> Markets with Imperfect Information, <strong>in</strong>:American Economic Review, Vol. 71, 391-410.
Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> 33Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong>: An Empirical Survey ofProgrammes <strong>in</strong> 2006.1. Introduction.Microf<strong>in</strong>anc<strong>in</strong>g is a success model of development cooperation. It refers to small f<strong>in</strong>ancialtransactions which are implemented very close to the clients, quickly <strong>and</strong> reliably throughsimplified procedures, <strong>and</strong> which support the clients <strong>in</strong> their economic <strong>in</strong>dependence. 1 Thesocial objective is be<strong>in</strong>g <strong>in</strong>creas<strong>in</strong>gly backed by a bus<strong>in</strong>ess model <strong>and</strong> developed f<strong>in</strong>ancialmethodologies. Follow<strong>in</strong>g Asia, Central <strong>and</strong> South America, now Central <strong>and</strong> Eastern <strong>Europe</strong>has become a region with high growth potentials <strong>and</strong> high returns on equity formicrof<strong>in</strong>anc<strong>in</strong>g <strong>in</strong>stitutions. In Western <strong>Europe</strong>, microf<strong>in</strong>anc<strong>in</strong>g has been develop<strong>in</strong>g over thepast ten to fifteen years <strong>and</strong> it is used primarily as an <strong>in</strong>strument for tackl<strong>in</strong>g unemployment<strong>and</strong> social marg<strong>in</strong>alisation. In consequence, microlend<strong>in</strong>g <strong>in</strong> Western <strong>Europe</strong> concentratesmore on start-ups than on growth f<strong>in</strong>anc<strong>in</strong>g. The focus is less on general f<strong>in</strong>ancial services<strong>and</strong> more on small loans to be used for sett<strong>in</strong>g up or exp<strong>and</strong><strong>in</strong>g bus<strong>in</strong>esses. The termmicrolend<strong>in</strong>g is used here to describe a loan of up to EUR 25,000. Despite the ris<strong>in</strong>g numberof loan programmes <strong>and</strong> loans disbursed <strong>in</strong> Western <strong>Europe</strong>, the dynamic fails to match thatof South-East <strong>Europe</strong>. An empirical survey by the <strong>Europe</strong>an <strong>Microf<strong>in</strong>ance</strong> Network (EMN)revealed that, of the 110 participat<strong>in</strong>g <strong>in</strong>stitutions <strong>in</strong> 2005, a total of 27,000 loans weredisbursed <strong>and</strong> a growth rate of 15 % was reported. Only a few <strong>in</strong>dividual <strong>in</strong>stitutions cancome up to the <strong>in</strong>ternational st<strong>and</strong>ards with several thous<strong>and</strong> loans per year <strong>and</strong> even these,at best, break even without so far generat<strong>in</strong>g any return on equity. 2In <strong>Germany</strong>, the past decade has seen a grow<strong>in</strong>g <strong>in</strong>terest <strong>in</strong> <strong>and</strong> practice of microlend<strong>in</strong>g. Inrecent years, a grow<strong>in</strong>g number of specialised microcredit programmes has been created forstart-ups <strong>and</strong> micro-enterprises with low capital requirements. Early <strong>in</strong> 2007, EVERS &JUNG carried out its third survey of German microcredit programme providers for KfWBankengruppe. This year 29 of the 33 programmes participated <strong>in</strong> the survey. A detailedanalysis (<strong>in</strong>clud<strong>in</strong>g <strong>in</strong>dividual profiles of each programme) has been drawn up as an expertop<strong>in</strong>ion <strong>and</strong> it will be summarised briefly here.The objective of the survey was to provide an up-to-date overview of developments <strong>in</strong> the1 Cf. Wisniwski, S. (2004), p. 1.2 A detailed description of the <strong>Europe</strong>an situation commissioned by the <strong>Europe</strong>an <strong>Microf<strong>in</strong>ance</strong>Network will be published at the EMN Conference <strong>in</strong> April 2007: <strong>Evers</strong>, J./Lahn, S./<strong>Jung</strong>, M. (2007),The Status of <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> Western <strong>Europe</strong>, Paris.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 34sector, <strong>in</strong>clud<strong>in</strong>g new providers, advances <strong>and</strong> trends. Follow<strong>in</strong>g on the surveys of2001/2002 <strong>and</strong> 2003, workshops were held aimed at position<strong>in</strong>g the sector <strong>and</strong> exchang<strong>in</strong>gmethods. Figures 1 <strong>and</strong> 2 set out the respective stages of development at the time.ChallengesSummary: Microlend<strong>in</strong>g …12345MethodologySimilar to banks or dependent on persons, hardly learn<strong>in</strong>gfrom <strong>in</strong>ternational best practiceInterest ratesAre <strong>in</strong>terest rates <strong>in</strong>appropriate?Conflict of rolesAdviser <strong>and</strong> supporter versus money-lenderPost-decision coach<strong>in</strong>g <strong>and</strong> risk managementHardly clear systems, rate of disappearance rarely establishedEconomies of scaleHigh potential to reduce unit costs1 … is more than f<strong>in</strong>anc<strong>in</strong>g.An <strong>in</strong>strument with which you can manage a company2 … is not only the f<strong>in</strong>anc<strong>in</strong>g of start-ups.Identify<strong>in</strong>g exist<strong>in</strong>g companies as the target group3 … has great potential <strong>in</strong> <strong>Germany</strong>.Use of experience, co-operations, state support/privateimplementationFigure 1: Summary of the first survey from 2001/02, discussed at the DtA-Workshop on24.10.2002 <strong>in</strong> Berl<strong>in</strong>.What has been achieved?Institutional challenges1Target groups reachedAs a rule the programmes do reach the target groups which receive noloans from credit <strong>in</strong>stitutions.1German Bank<strong>in</strong>g Act stipulationsNon-banks must cooperate with banks <strong>in</strong> grant<strong>in</strong>g loans. Regional <strong>and</strong> localauthorities solve this by disburs<strong>in</strong>g f<strong>und</strong>s as repayable grants.2 Default ratesDefault rates are partly below those of f<strong>in</strong>ancial <strong>in</strong>stitutions <strong>in</strong> this marketsegment.3 F<strong>in</strong>anc<strong>in</strong>g <strong>and</strong> advisory supportMany programmes l<strong>in</strong>k f<strong>in</strong>anc<strong>in</strong>g <strong>and</strong> advisory support <strong>in</strong> an <strong>in</strong>novativemanner.4 Support effectivenessSupport through loans is more efficient, <strong>in</strong> economic <strong>and</strong> employmentmarket terms, than through grants <strong>and</strong> subsidies (e.g. bridg<strong>in</strong>g money).2 Low number of loans per organisation• low-level st<strong>and</strong>ardisation of procedures• unfavourable relationship between total lend<strong>in</strong>gs <strong>and</strong> overhead costs• poor economies of scale3 Need for professionalisationProducts, support concepts <strong>and</strong> organisational structures <strong>and</strong> procedures;International st<strong>and</strong>ards only partly implemented4 High level of subsidisation / susta<strong>in</strong>abilityMany programmes are heavily subsidised <strong>und</strong>er time-limited projectpromotions. Customary operational <strong>and</strong> f<strong>in</strong>ancial susta<strong>in</strong>ability parametersrarely recorded <strong>and</strong> disclosed.Figure 2: Summary of the second survey from 2003, discussed at a meet<strong>in</strong>g of experts on25.3.2004 <strong>in</strong> Frankfurt/M.How microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> has evolved <strong>in</strong> practice over the years s<strong>in</strong>ce this analysis willhave to be assessed. The follow<strong>in</strong>g po<strong>in</strong>ts highlight important changes <strong>in</strong> overall conditionsdur<strong>in</strong>g this period.• The <strong>in</strong>creased participation of regional promotional banks (L<strong>and</strong>esförder<strong>in</strong>stitute) <strong>in</strong>microlend<strong>in</strong>g: The L<strong>and</strong>esförder<strong>in</strong>stitute are regional development banks <strong>and</strong> as suchpeculiar to <strong>Germany</strong>. Some offer microcredits directly (Investitionsbank SchleswigHolste<strong>in</strong>, Saarländische Investitionskreditbank), most however on-lend through pr<strong>in</strong>cipalbankers (L-Bank Baden-Württemberg, NRW-Bank <strong>and</strong> Investitionsbank Berl<strong>in</strong>).• The establishment <strong>and</strong> expansion of the German <strong>Microf<strong>in</strong>ance</strong> Institute (DMI), which nowhas 47 members <strong>and</strong> eight accredited microf<strong>in</strong>ance <strong>in</strong>stitutions: In 2004 a f<strong>und</strong><strong>in</strong>g tool
Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> 35was set up <strong>in</strong> the form of the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> to which the GLS Bank, theFederal M<strong>in</strong>istry of Economics <strong>and</strong> Technology <strong>and</strong> KfW Bankengruppe, among others,contributed.• Improved empirical <strong>in</strong>sights <strong>in</strong>to the dem<strong>and</strong> for microloans <strong>in</strong> <strong>Germany</strong>: Accord<strong>in</strong>g to theKfW-Gründungsmonitor, which monitors start-ups, almost half of all start-ups requiref<strong>und</strong><strong>in</strong>g of between 1,000 <strong>and</strong> 25,000 Euro. Even if nearly half of these <strong>in</strong> turn meet theirneeds from their own resources, the rema<strong>in</strong><strong>in</strong>g half forms the ideal target group formicrolenders. 3 In the KfW Mittelst<strong>and</strong>smonitor, which monitors small <strong>and</strong> medium sizedenterprises (SMEs), particular attention is drawn to the rise <strong>in</strong> the number of bus<strong>in</strong>esseswith low f<strong>in</strong>anc<strong>in</strong>g requirements, part-time enterprises <strong>and</strong> start-ups from unemployment. 4Kritikos et al. conclude on the basis of a survey of 213 enterprises that a substantial,albeit small (15 %), number of those surveyed would be prepared to pay <strong>in</strong>terest rates ofup to 20 % for quick, customer-friendly procedures. This group, with its dem<strong>and</strong> for smallwork<strong>in</strong>g-capital loans follow<strong>in</strong>g on the start-up stage is not reached by the bank<strong>in</strong>gsystem partly due to its bad experience <strong>and</strong>/or low expectations of banks. 5• The sharp rise <strong>in</strong> new bus<strong>in</strong>ess enterprises fo<strong>und</strong>ed by unemployed people <strong>and</strong>promoted by f<strong>und</strong><strong>in</strong>g from the German Federal Employment Agency (almost 1 millionsubsidised start-ups <strong>in</strong> the years 2003-2005), which at least <strong>in</strong> theory ought to berequir<strong>in</strong>g follow-up f<strong>und</strong><strong>in</strong>g after the start-up grant.2. Number of programmes <strong>and</strong> bus<strong>in</strong>ess-policy orientation.Compared with the 2003 (2001) <strong>in</strong>vestigation, the number of identified microlend<strong>in</strong>gprogrammes has risen from 24 (21) to 33, of which 29 participated <strong>in</strong> the survey. Certa<strong>in</strong>ly,on the basis of the def<strong>in</strong>ition criteria <strong>in</strong> the <strong>in</strong>ternational microf<strong>in</strong>anc<strong>in</strong>g literature, not all ofthese programmes would be covered by the term "microlend<strong>in</strong>g" <strong>in</strong> the narrow sense. Theirprofiles were therefore already described as "microcredit-type" programmes back <strong>in</strong> 2003. 6However, the expectations vested <strong>in</strong> the procedures, products <strong>and</strong> results by microlendershave changed over recent years. It has become clear that microlend<strong>in</strong>g <strong>in</strong> a closely regulated3 Cf. Lehnert, N. (2004), p. 19 f.4 Cf. Mittelst<strong>and</strong>smonitor (2005).5 Cf. Kritikos, A.S. et al. (2006), pp. 23-25.6 Cf. Habschick, M./<strong>Evers</strong>, J./<strong>Jung</strong>, M. (2004), p. 43.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 36environment of highly <strong>in</strong>dustrialised welfare states has a different function to fulfil. 7 Whereasthe dom<strong>in</strong>ant target group <strong>in</strong> <strong>in</strong>ternational microlend<strong>in</strong>g is represented by exist<strong>in</strong>g microenterprisesalready <strong>in</strong>tegrated <strong>in</strong>to economic life, microlend<strong>in</strong>g <strong>in</strong> <strong>Europe</strong> strongly supportsnot only, as already mentioned, start-ups <strong>and</strong> very young enterprises but also disadvantagedtarget groups excluded thereby from economic life.This strategy is clearly expressed <strong>in</strong> the term first co<strong>in</strong>ed at <strong>Europe</strong>an level <strong>in</strong> 2006 8 , namely<strong>in</strong>clusion lend<strong>in</strong>g. Inclusion lend<strong>in</strong>g targets the re-<strong>in</strong>clusion of f<strong>in</strong>ancially <strong>and</strong> sociallymarg<strong>in</strong>alised groups such as migrants <strong>and</strong> long-term unemployed persons, the so-callednon-bankables. Inclusion lend<strong>in</strong>g is dist<strong>in</strong>guished from micro-enterprise lend<strong>in</strong>g, which looksto bankables <strong>and</strong> nearly bankables as target groups, namely traditional start-ups <strong>and</strong> smallbus<strong>in</strong>esses already established on the market. Inclusion lend<strong>in</strong>g calls for dist<strong>in</strong>ctly more<strong>in</strong>tensive advisory <strong>and</strong> support services <strong>in</strong> order to atta<strong>in</strong> a high repayment ratio <strong>and</strong>economic survival rate among the borrow<strong>in</strong>g enterprises.With such target groups it becomes clear that there cannot be one s<strong>in</strong>gle ideal lend<strong>in</strong>g modelfor the microf<strong>in</strong>anc<strong>in</strong>g sector <strong>in</strong> <strong>Germany</strong>. A range of different models must be available.Given this sett<strong>in</strong>g, the follow<strong>in</strong>g table differentiates the various <strong>in</strong>itiatives accord<strong>in</strong>g to microenterpriseor <strong>in</strong>clusion lend<strong>in</strong>g schemes.7 Cf. Siewertsen, H./<strong>Evers</strong>, J. et al. (2005), Policy Measures to Promote <strong>Microf<strong>in</strong>ance</strong>,Zeist/Brussels/Hamburg.8 Budapest Conference of the EMN <strong>and</strong> MFC (June 2006).
Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> 37Table 1: Exemplary division of German microcredit programmes accord<strong>in</strong>g to type of targetagroup 9Inclusion lend<strong>in</strong>g:• KIZ Mikrof<strong>in</strong>anz, Offenbach• GÖBI-Fonds, Stadt <strong>und</strong> L<strong>and</strong>kreis Gött<strong>in</strong>gen• Gründer<strong>in</strong>nen-Consult Hannover, Hannover• Mikrof<strong>in</strong>anzfonds MaGNet, Rhe<strong>in</strong>hessischesGründernetzwerk (run), Ma<strong>in</strong>z <strong>und</strong> Rhe<strong>in</strong>hessen• Mikrof<strong>in</strong>anzierungen für MigrantInnen, MozaikConsult<strong>in</strong>g, Bielefeld• ProGES, Arbeitsförderung Kassel-Stadt GmbH,Kassel• Mikrokredit des M<strong>in</strong>isteriums für Wirtschaft, Arbeit<strong>und</strong> Tourismus, Mecklenburg-Vorpommern• GUM-Mikrof<strong>in</strong>anzierung, Bayern <strong>und</strong> Sachsen• Enterbus<strong>in</strong>ess GmbH, Berl<strong>in</strong> <strong>and</strong> Br<strong>and</strong>enburg• Projekt Enterprise, iq consult e.V., Br<strong>and</strong>enburg• Förderung der Gründung vonKle<strong>in</strong>stunternehmen durch Erwerbslose, BWA,Hamburg• Starthilfefonds, Senator für AFGJS, BremenMicro-enterprise lend<strong>in</strong>g:• München Fonds, Stadt <strong>und</strong> StadtsparkasseMünchen• Kooperationsvere<strong>in</strong>barungen mit lokalen Akteurender Wirtschaftsförderung, Sparkasse Düsseldorf,Düsseldorf• MikroDarlehen / Mikro 10, KfW• StartGeld, KfW• Berl<strong>in</strong> Start <strong>und</strong> KMU-Fonds, InvestitionsbankBerl<strong>in</strong>, Berl<strong>in</strong>• Mikrof<strong>in</strong>anzzentrum Nordrhe<strong>in</strong>-Westfalen/Niedersachsen• Startkredit <strong>und</strong> Ziel 2 – Hochschulgründerfonds,NRW.Bank• Starthilfe, L-Bank, Baden-Württemberg• Starthilfe, Investitionsbank Schleswig-Holste<strong>in</strong>• Startkapital, Saarländische InvestitionskreditbankAG, Saarl<strong>and</strong>It is noticeable that the programmes of the regional promotional banks(L<strong>and</strong>esförder<strong>in</strong>stitute) <strong>and</strong> KfW Bankengruppe concentrate on micro-enterprise lend<strong>in</strong>g. Thetarget group for <strong>in</strong>clusion lend<strong>in</strong>g, on the other h<strong>and</strong>, is not served by the regional <strong>and</strong>federal promotional banks. Here the ma<strong>in</strong> actors are start-up centres together with theauthorities <strong>and</strong> ARGEs (jo<strong>in</strong>t ventures between social services <strong>and</strong> municipal authorities).The <strong>und</strong>erly<strong>in</strong>g rationale no doubt reflects the closeness to the respective target groups <strong>and</strong>the capacity to provide subsidies. This differentiation <strong>in</strong> the market makes sense. Specificallytailored programmes, where appropriate with specialised actors <strong>and</strong> with higher subsidyrates, ought to be available for target groups with weaker creditworth<strong>in</strong>ess but whosesuccessful <strong>in</strong>dependence is nonetheless socially desirable. The regional promotional banks(L<strong>and</strong>esförder<strong>in</strong>stitute) are probably not suitable bodies for h<strong>and</strong>l<strong>in</strong>g <strong>in</strong>clusion lend<strong>in</strong>gefficiently. That at least is the conclusion reached by the Investitionsbank Berl<strong>in</strong>, which s<strong>in</strong>cethe last survey has stopped its labour-market-policy programme of <strong>in</strong>terest-free lend<strong>in</strong>g forstart-ups from unemployment. Now <strong>in</strong>stead it is offer<strong>in</strong>g a new programme, Berl<strong>in</strong>Start, <strong>in</strong>cooperation with the Bürgschaftsbank Berl<strong>in</strong>-Br<strong>and</strong>enburg. This is a microcredit programme9 The table only <strong>in</strong>cludes programmes where classification accord<strong>in</strong>g to target group seemed possible<strong>and</strong> relevant. The classification <strong>in</strong>dicates merely the target group to which the programmes tend <strong>in</strong>their loan disbursement.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 38for start-ups with markedly higher creditworth<strong>in</strong>ess. In contrast, the Sächsische Aufbaubank -Förderbank-, which did not participate <strong>in</strong> this survey, has recently launched a programmef<strong>in</strong>anced by <strong>Europe</strong>an f<strong>und</strong>s <strong>und</strong>er which <strong>in</strong>terest-free loans are granted with low creditst<strong>and</strong><strong>in</strong>g requirements of borrowers. No results are here available as yet. Figure 3 sets out amore detailed breakdown of the target groups of the programmes which participated <strong>in</strong> thecurrent survey.20181816Number of programmes14121086119423220Only start-ups Start-ups <strong>and</strong>exist<strong>in</strong>genterprisesOnly exist<strong>in</strong>genterprisesEspeciallyyoung peopleEspeciallymigrantsEspeciallyunemployedOnly womenFigure 3: Target groupsCompared with the earlier surveys, the focus has shifted. Whereas <strong>in</strong> 2003 sevenprogrammes concentrated on start-ups <strong>and</strong> exist<strong>in</strong>g enterprises <strong>and</strong> 13, almost twice asmany, concentrated only on start-ups, the present ratio is 18 to 11. However, there is so farno programme devoted exclusively to exist<strong>in</strong>g enterprises.3. Geographical coverage <strong>and</strong> <strong>in</strong>stitutional framework.Figure 3 sets out all the 29 loan programmes surveyed <strong>and</strong> shows that the great majority ofthe microloan programmes are offered at the local <strong>and</strong> regional level. The only nationwideactor <strong>in</strong> this sphere is KfW Mittelst<strong>and</strong>sbank with its two programmes StartGeld <strong>and</strong>MikroDarlehen.
Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> 39Table 2: Geographical coverage of German microcredit programmes 2006Local/regional programmes:• KIZ Mikrof<strong>in</strong>anz, Offenbach• Feuerwehrfonds, Westerwälder Initiativen u.Betriebe Netz e.V. – WIBeN e.V., Altenkirchen<strong>und</strong> Westerwald• GÖBI-Fonds, Stadt <strong>und</strong> L<strong>and</strong>kreis Gött<strong>in</strong>gen,Gött<strong>in</strong>gen• Gründerfonds der Stadt Paderborn• Gründer<strong>in</strong>nen-Consult Hannover, Hannover• Kle<strong>in</strong>kreditprogramm des L<strong>and</strong>kreises Dahme-Spreewald• Mikrof<strong>in</strong>anzfonds MaGNet, Rhe<strong>in</strong>hessischesGründernetzwerk (run), Ma<strong>in</strong>z <strong>und</strong> Rhe<strong>in</strong>hessen• Mikrof<strong>in</strong>anzierung für MigrantInnen, MozaikConsult<strong>in</strong>g, Bielefeld• München-Fonds, Stadt <strong>und</strong> StadtsparkasseMünchen• ProGES, Arbeitsförderung Kassel-Stadt GmbH,Kassel• Kooperationsvere<strong>in</strong>barungen mit lokalenAkteuren der Wirtschaftsförderung, SparkasseDüsseldorf, Düsseldorf• ELGO! Emscher-Lippe Gründungsnetzwerk,Region Emscher-LippeGoldrausch –Frauennetzwerk Berl<strong>in</strong> e.V., Berl<strong>in</strong>Länder-level programmes:• Berl<strong>in</strong> Start <strong>und</strong> KMU-Fonds, InvestitionsbankBerl<strong>in</strong>, Berl<strong>in</strong>• Mikrokredit des M<strong>in</strong>isteriums für Wirtschaft, Arbeit<strong>und</strong> Tourismus, Mecklenburg-Vorpommern• GUM-Mikrof<strong>in</strong>anzierung, Bayern <strong>und</strong> Sachsen• Enterbus<strong>in</strong>ess GmbH, Berl<strong>in</strong> <strong>und</strong> Br<strong>and</strong>enburg• Projekt Enterprise, iq consult e.V., Br<strong>and</strong>enburg• Förderung der Gründung von Kle<strong>in</strong>stunternehmendurch Erwerbslose, BWA, Hamburg• Mikrof<strong>in</strong>anzagentur Thür<strong>in</strong>gen• Mikrof<strong>in</strong>anzzentrum Nordrhe<strong>in</strong>-Westfalen/Niedersachsen• MONEX Mikrof<strong>in</strong>anzierung Baden-Württemberge.V., Baden-Württemberg• Startkredit <strong>und</strong> Ziel 2 – Hochschulgründerfonds,NRW-Bank, Nordrhe<strong>in</strong>-Westfalen• Starthilfe, L-Bank, Baden-Württemberg• Starthilfe, Investitionsbank Schleswig-Holste<strong>in</strong>• Starthilfefonds, Senator für AFGJS, Bremen• Startkapital, Saarländische InvestitionskreditbankAG, Saarl<strong>and</strong>National programmes:• MikroDarlehen / Mikro 10, KfW• StartGeld, KfWIn Table 3, the programmes are listed accord<strong>in</strong>g to their <strong>in</strong>stitutional backgro<strong>und</strong>. The mostimportant <strong>in</strong>stitutional sett<strong>in</strong>gs <strong>in</strong> <strong>Germany</strong> are promotional <strong>in</strong>stitutions (theL<strong>and</strong>esförder<strong>in</strong>stitute <strong>and</strong> KfW Bankengruppe), public sponsor<strong>in</strong>g <strong>in</strong>stitutions, <strong>and</strong> <strong>in</strong>itiativesaccredited by the DMI with a private backgro<strong>und</strong> <strong>and</strong> with comparable group strength. Thenthere are also smaller <strong>in</strong>stitutional sett<strong>in</strong>gs such as the Feuerwehrfonds (fire brigade f<strong>und</strong>)self-help <strong>in</strong>itiative <strong>in</strong> Westerwald <strong>and</strong> Goldrausch <strong>in</strong> Berl<strong>in</strong>.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 40Table 3: Institutional types of German microcredit programmes 2006/07Publicly f<strong>und</strong>ed programmes:• Mikrokredit des M<strong>in</strong>isteriums für Wirtschaft, Arbeit<strong>und</strong> Tourismus, Mecklenburg-Vorpommern• Gründerfonds der Stadt Paderborn• Kle<strong>in</strong>kreditprogramm des L<strong>and</strong>kreises Dahme-Spreewald• Förderung der Gründung von Kle<strong>in</strong>stunternehmendurch Erwerbslose, BWA, Hamburg• München-Fonds, Stadt <strong>und</strong> StadtsparkasseMünchen• ProGES, Arbeitsförderung Kassel-Stadt GmbH,Kassel• Mikrof<strong>in</strong>anzfonds MaGNet, Rhe<strong>in</strong>hessischesGründernetzwerk (run), Ma<strong>in</strong>z <strong>und</strong> Rhe<strong>in</strong>hessen• Starthilfefonds, Senator für AFGJS, BremenProgrammes accredited by the German<strong>Microf<strong>in</strong>ance</strong> Institute (DMI):• KIZ Mikrof<strong>in</strong>anz, Offenbach• Enterbus<strong>in</strong>ess GmbH, Berl<strong>in</strong> <strong>und</strong> Br<strong>and</strong>enburg• Gründer<strong>in</strong>nen-Consult Hannover, Hannover• GUM-Mikrof<strong>in</strong>anzierung, Bayern <strong>und</strong> Sachsen• Mikrof<strong>in</strong>anzzentrum Nordrhe<strong>in</strong>-Westfalen/Niedersachsen• Mikrof<strong>in</strong>anzagentur Thür<strong>in</strong>gen• MONEX Mikrof<strong>in</strong>anzierung Baden-Württemberge.V., Baden-Württemberg• Mikrof<strong>in</strong>anzierung für MigrantInnen, MozaikConsult<strong>in</strong>g, BielefeldDevelopment banks:• MikroDarlehen / Mikro 10, KfW• StartGeld, KfW• Startkredit <strong>und</strong> Ziel 2 – Hochschulgründerfonds,NRW-Bank, Nordrhe<strong>in</strong>-Westfalen• Starthilfe, L-Bank, Baden-Württemberg• Starthilfe, Investitionsbank Schleswig-Holste<strong>in</strong>• Startkapital, Saarländische InvestitionskreditbankAG, Saarl<strong>and</strong>• Berl<strong>in</strong> Start <strong>and</strong> KMU-Fonds, InvestitionsbankBerl<strong>in</strong>, Berl<strong>in</strong>Other microcredit programmes:• Feuerwehrfonds, Westerwälder Initiativen u.Betriebe Netz e.V. – WIBeN e.V., Altenkirchen <strong>and</strong>Westerwald• GÖBI-Fonds, Stadt <strong>und</strong> L<strong>and</strong>kreis Gött<strong>in</strong>gen,Gött<strong>in</strong>gen• Goldrausch – Frauennetzwerk Berl<strong>in</strong> e.V., Berl<strong>in</strong>• Projekt Enterprise, iq consult e.V., Br<strong>and</strong>enburg• ELGO! Emscher-Lippe Gründungsnetzwerk,Region Emscher-Lippe• Kooperationsvere<strong>in</strong>barungen mit lokalen Akteurender Wirtschaftsförderung, Sparkasse Düsseldorf,Düsseldorf4. Age of the programmes.Accord<strong>in</strong>g to the survey, the number of <strong>in</strong>stitutions disburs<strong>in</strong>g microcredits rose by 12between 2003 <strong>and</strong> 2006. As is clear from the follow<strong>in</strong>g diagram, most of the programmeswere not started until after 2002. Four new microlend<strong>in</strong>g programmes each went onto themarket <strong>in</strong> 2002 <strong>and</strong> 2004, with a further 8 <strong>in</strong> 2006.
Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> 418765432101982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006Number of <strong>in</strong>stitutionsFo<strong>und</strong><strong>in</strong>g yearFigure 4: Age of German microcredit programmesHalf of the new programmes created s<strong>in</strong>ce the last survey <strong>in</strong> 2003 have been set up by theregional promotional banks (L<strong>and</strong>esförder<strong>in</strong>stitute). Five programmes appear<strong>in</strong>g <strong>in</strong> the 2003survey, on the other h<strong>and</strong>, are now no longer on the market: Enigma Siebte SäuleMicrolend<strong>in</strong>g GmbH <strong>and</strong> Emscher-Lippe Kle<strong>in</strong>gründerfonds have ceased disburs<strong>in</strong>gmicroloans. Three of these five programmes, however, are be<strong>in</strong>g cont<strong>in</strong>ued <strong>in</strong> a radicallymodified form: the Investitionsbank Berl<strong>in</strong>'s labour market policy programme has beentransformed <strong>in</strong>to Berl<strong>in</strong> Start; ProfiMannheim is a member of MONEX e.V <strong>and</strong> h<strong>and</strong>les lo<strong>and</strong>isbursements through the latter; while Dresdner Exis Europa e.V. profits from themicrocredit programme of the Sächsische Aufbaubank -Förderbank-. The microcreditprogramme of the promotional bank N-Bank was launched after 2003 but was already takenfrom the market <strong>in</strong> January 2007 <strong>and</strong> is therefore not <strong>in</strong>cluded here.The discont<strong>in</strong>uation of the Enigma Siebte Säule credit programme illustrates a phenomenon:the feasibility of a credit programme l<strong>in</strong>ked with the start-up centre Enigma was exam<strong>in</strong>ed aspart of a publicly f<strong>in</strong>anced project, <strong>and</strong> its establishment was f<strong>und</strong>ed. After all thedocumentation procedures, market<strong>in</strong>g work, etc. had been completed, the first loans weredisbursed – then the f<strong>und</strong><strong>in</strong>g stopped <strong>and</strong> with it the loan disbursements. The ma<strong>in</strong> problemwas that the allocated resources for ref<strong>in</strong>anc<strong>in</strong>g the loans had to be used solely for fo<strong>und</strong>ersof new bus<strong>in</strong>esses, which had not yet formally licensed their bus<strong>in</strong>esses <strong>and</strong> which explicitlyhad to be unemployed. However, the will<strong>in</strong>gness is especially low <strong>in</strong> this target group tof<strong>in</strong>ance a start-up with a credit. In this respect Enigma Siebte Säule was confronted with a
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 42double problem: it had to reject a high number of loan applicants, where at the same time thedem<strong>and</strong> of still unemployed enterprise fo<strong>und</strong>ers was miss<strong>in</strong>g. A further problem here wasthat the resources to cover the adm<strong>in</strong>istration <strong>and</strong> advisory service costs, on the one h<strong>and</strong>,<strong>and</strong> the f<strong>und</strong><strong>in</strong>g for the loans, on the other, had to be acquired from different sources, theydid not become available at the same time, <strong>and</strong> they were geared towards different targetgroups. This further h<strong>in</strong>dered the establishment of the scheme. One source of f<strong>in</strong>anc<strong>in</strong>g formany programmes <strong>in</strong> <strong>Germany</strong> <strong>and</strong> the rest of <strong>Europe</strong> is promotional f<strong>und</strong><strong>in</strong>g through grantswhich is limited <strong>in</strong> time <strong>and</strong> has conditions attached <strong>in</strong> respect of target groups. This applies<strong>in</strong> particular to resources from EU Structural F<strong>und</strong>s <strong>and</strong> the EU EQUAL programme. Fewprojects manage to provide the follow-up f<strong>in</strong>anc<strong>in</strong>g by means of <strong>in</strong>come, own resources orfurther promotional f<strong>und</strong><strong>in</strong>g. They do not succeed <strong>in</strong> build<strong>in</strong>g up susta<strong>in</strong>able bus<strong>in</strong>essmodels. This can be due to the brief length of the promotional f<strong>und</strong><strong>in</strong>g scheme, wrongfocuses set dur<strong>in</strong>g the scheme, or <strong>in</strong>deed to the actors themselves. But it is a fact thatmassively h<strong>in</strong>ders developments <strong>in</strong> the microf<strong>in</strong>ance sector.5. Disbursement of loans: Number, terms <strong>and</strong> conditions, amount.In <strong>Germany</strong>, the microf<strong>in</strong>ance sector is still young: its programmes are on average only 6.3years old. Still, six years is certa<strong>in</strong>ly a long enough period <strong>in</strong> which to log successes <strong>in</strong> thenumber of loans granted per year <strong>and</strong> the consequent rise <strong>in</strong> earn<strong>in</strong>gs from <strong>in</strong>terest. To whatextent have the German microlenders succeeded <strong>in</strong> this?The number of loans granted dropped <strong>in</strong> the period <strong>in</strong> question from 6,335 <strong>in</strong> 2003 (4,665 <strong>in</strong>2001) to 5,983 <strong>in</strong> 2006. On average, 199 loans are disbursed per year <strong>and</strong> provider. Thestatistical spread, however, is very wide for the various programmes. The high average valueis due to the participation of KfW <strong>and</strong> the <strong>in</strong>dividual regional promotional banks(L<strong>and</strong>esförder<strong>in</strong>stitute) which make between several thous<strong>and</strong> (KfW) or several h<strong>und</strong>redcommitments each year respectively <strong>and</strong> thereby markedly push up the average lend<strong>in</strong>glevel of German microlend<strong>in</strong>g programmes. Figure 5 shows the programmes from the federal<strong>and</strong> regional promotional banks.
Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> 43Number of loans40003500300025002000150010005000KfW MikrodarlehenKfW StartgeldKfW Mikro 10Starthilfe BWStarthilfe S-H2003 2004 2005 2006Startkapital Saarl<strong>and</strong>Investitionsbank Berl<strong>in</strong>NRW BankFigure 5: Evolution of the number of loans disbursed by development banks 2003 - 2006Figure 5 reveals that the number of commitments by the Investitionsbank Berl<strong>in</strong> has stayedfairly constant while it has risen both <strong>in</strong> the Saarl<strong>and</strong> <strong>and</strong> <strong>und</strong>er the new programmesKle<strong>in</strong>kredit NRW <strong>and</strong> KfW Mikro10. The larger established programmes, namely KfW’sStartGeld <strong>and</strong> MikroDarlehen <strong>and</strong> Baden-Württemberg L-Bank's Starthilfe, <strong>in</strong> contrast,register a drop which more than counterbalances the above rises. Figure 6 looks at therema<strong>in</strong><strong>in</strong>g smaller programmes separately.350300Number of loans250200150100500KIZFeuerwehrfonds WIBeN e.V.BWA HHGÖBIGoldrauschGründerfonds PaderbornIQ consult e.V.MiM/MaGNetMONEXMünchen-FondsProGesStarthilfe BremenMozaik Consult<strong>in</strong>gMikrodarlehen MVGUMMikrof<strong>in</strong>anzzentrum NRWGründer<strong>in</strong>nen HannoverDahme-Spreewald mbHEnterbus<strong>in</strong>ess GmbHMikrof<strong>in</strong>anz Thür<strong>in</strong>genELGO!Sparkasse Düsseldorf2003 2004 2005 2006Figure 6: Evolution of the number of loans disbursed by public programmes, DMI accreditedlprogrammes <strong>and</strong> other microf<strong>in</strong>ance programmes 2003 - 2006Most of the programmes managed to push up the number of loans disbursed. Publicly
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 44f<strong>und</strong>ed programmes <strong>in</strong> Hamburg <strong>and</strong> Bremen appear to have reached a reasonably steadycommitment level with total disbursements vary<strong>in</strong>g just slightly per year. Only the microloanprogramme <strong>in</strong> Mecklenburg-Vorpommern shows a sharp drop from 2005 to 2006 – althoughthis was after a first year <strong>in</strong> the microlend<strong>in</strong>g bus<strong>in</strong>ess that outshone all the others. On thewhole, then, there was an average rise <strong>in</strong> commitments <strong>in</strong> 2004 <strong>and</strong> 2005 with a decrease <strong>in</strong>2006.Sett<strong>in</strong>g aside the programmes of KfW Bankengruppe <strong>and</strong> the regional promotional banks(L<strong>and</strong>esförder<strong>in</strong>stitute), the average credit commitments per year <strong>and</strong> provider look muchless encourag<strong>in</strong>g for the rema<strong>in</strong><strong>in</strong>g programmes. As a rule, fewer than 50 commitments aremade per provider. The average here stood at 49 <strong>in</strong> 2005 <strong>and</strong> 31 <strong>in</strong> 2006. At this low level, itis hardly possible to cut unit costs to an economically efficient level – the survey waivedquestions about a precise unit cost analysis <strong>in</strong> order not to overtax the respondents. At 65commitments, the <strong>Europe</strong>an average is also at an unsatisfactory level 10 but <strong>in</strong> <strong>Germany</strong> thepicture is even more disappo<strong>in</strong>t<strong>in</strong>g as far as the number of commitments for the programmeswhich are not managed by the regional promotional banks or the KfW are concerned.The programmes certified by the German <strong>Microf<strong>in</strong>ance</strong> Institute (DMI) largely reveal low loancommitments. Individual new members such as the Mikrof<strong>in</strong>anzzentrum NRW at least showhigh rates of <strong>in</strong>crease between 2005 <strong>and</strong> 2006. Along with the new members the DMI can<strong>in</strong>crease the number of disbursed loans from 12 <strong>in</strong> 2005 to 49 <strong>in</strong> 2006. If these growth ratescan be ma<strong>in</strong>ta<strong>in</strong>ed, the DMI could become an important <strong>in</strong>stitution regard<strong>in</strong>g its impact <strong>in</strong> twoto three years. At the present level, its impact is relatively low.Table 4: Number of loans disbursed by DMI accredited programmesDMI Microlenders 2005 2006KIZ Mikrof<strong>in</strong>anz, Offenbach 2 10Enterbus<strong>in</strong>ess GmbH, Berl<strong>in</strong> <strong>und</strong> Br<strong>and</strong>enburg 5 7Gründer<strong>in</strong>nen-Consult Hannover, Hannover - -GUM-Mikrof<strong>in</strong>anzierung, Bayern <strong>und</strong> Sachsen 3 4Mikrof<strong>in</strong>anzzentrum Nordrhe<strong>in</strong>-Westfalen/Niedersachsen 2 12Mikrof<strong>in</strong>anzagentur Thür<strong>in</strong>gen - 5MONEX Mikrof<strong>in</strong>anzierung Baden-Württemberg e.V., Baden-Württemberg - 9Mikrof<strong>in</strong>anzierung für MigrantInnen, Mozaik Consult<strong>in</strong>g, Bielefeld - 2Total 12 4910 Cf. Underwood, T. (2007), <strong>and</strong> the analysis of the results by <strong>Evers</strong>, J./Lahn, S./<strong>Jung</strong>, M. (2007) asquoted above.
Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> 45Neither of the programmes l<strong>in</strong>ked directly to a sav<strong>in</strong>gs bank, GÖBI-Fonds <strong>and</strong> thecooperation agreement of the Sparkasse Düsseldorf, are succeed<strong>in</strong>g <strong>in</strong> reflect<strong>in</strong>g the broadclient base of the sav<strong>in</strong>gs banks <strong>in</strong> the number of their commitments. The programme ELGO!set up <strong>in</strong> 2006 <strong>in</strong> the region Emscher Lippe collaborates with several sav<strong>in</strong>gs banks <strong>and</strong>shows a good start with 24 loans disbursed <strong>in</strong> the first year.The follow<strong>in</strong>g diagram shows the distribution of the programmes grouped accord<strong>in</strong>g to thenumber of disbursements.Most microlenders make very few loansNumber of programmes161412108642010 or less 11 to 50 51 to 200 over 200Number of microloans disbursedFigure 7: Number of microcredit programmes <strong>in</strong> relation to loans disbursed by microcreditaprogrammesOf the 29 programmes surveyed, 14 disbursed 10 or fewer loans <strong>in</strong> 2006, five disbursed 11to 50, four disbursed 51 to 200 <strong>and</strong> seven programmes disbursed more than 200 loans. Fiveof these seven programmes belong to the group of bus<strong>in</strong>ess promotion <strong>in</strong>stitutions.6. Loan <strong>in</strong>terest <strong>and</strong> terms.Compared with the last survey <strong>in</strong> 2003, <strong>in</strong>terest rates have risen by about 2 % to an averageof 6.64 %. Most lie between 4 % <strong>and</strong> 8 %, the highest is 10 %. The number of programmeswhich do not charge <strong>in</strong>terest has fallen from six to three. Real borrow<strong>in</strong>g costs areheightened through fees such as application, adm<strong>in</strong>istration or monitor<strong>in</strong>g charges. Twelveprogrammes stated that they charged further fees <strong>in</strong> connection with the loan disbursement.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 465[Number of programmes]105100.0%-4.0% 4.01%-6.00% 6.01%-8.00% 8.01%-10.00%Figure 8: Interest rate ranges <strong>in</strong> relation to programmesHigher <strong>in</strong>terest rates <strong>and</strong> charges improve the susta<strong>in</strong>ability of the programmes, s<strong>in</strong>ce theygenerate earn<strong>in</strong>gs which can go at least some way towards meet<strong>in</strong>g risk <strong>and</strong> h<strong>and</strong>l<strong>in</strong>g costs.In the discussion of the results of the previous surveys, it was po<strong>in</strong>ted out that <strong>in</strong>terest levelsfrom German microlenders were too low, <strong>and</strong> there was a discussion of whether market<strong>in</strong>terest rates are <strong>in</strong> contradiction to social objectives. The change <strong>in</strong> practice <strong>and</strong> <strong>in</strong>dividualfeedbacks testify to the conv<strong>in</strong>c<strong>in</strong>g force of the argument that "lend<strong>in</strong>g rates above marketrates of <strong>in</strong>terest prevent bankable borrowers from becom<strong>in</strong>g free-riders <strong>in</strong> the programmes<strong>and</strong> at the same time they enable those target groups to be reached which are particularlyworthy of support" 11 . It can further be noted that the gap between German <strong>and</strong> <strong>Europe</strong>anprogrammes, which charge an average <strong>in</strong>terest rate of 10 %, has narrowed.The reduction <strong>in</strong> loan <strong>in</strong>terest charged by lead<strong>in</strong>g promotional microlenders is a move <strong>in</strong> theopposite direction. A possible reason is an attempt to encourage start-ups. The extent towhich this succeeds rema<strong>in</strong>s to be seen. Be that as it may, the reduced <strong>in</strong>terest chargescould possibly make it more difficult for microlend<strong>in</strong>g <strong>in</strong>stitutions to have higher lend<strong>in</strong>g ratesaccepted on the market <strong>and</strong> improve their <strong>in</strong>ternal f<strong>in</strong>anc<strong>in</strong>g.When it comes to loan durations, the picture is encourag<strong>in</strong>g. Short terms are regarded asgood practice <strong>in</strong>ternationally. Although terms of up to ten years are still occasionally offered,11 Underwood, T. (2007).
Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> 47possible loan periods have become shorter, dropp<strong>in</strong>g from 62 months on average <strong>in</strong> 2003 to55 months <strong>in</strong> 2006.7. Cooperations.At the German microlenders' workshop discussions <strong>in</strong> 2002, <strong>and</strong> <strong>in</strong> the preced<strong>in</strong>g survey,microlenders registered a keen <strong>in</strong>terest <strong>in</strong> cooperat<strong>in</strong>g with bus<strong>in</strong>ess promotion <strong>in</strong>stitutions(88 %) <strong>and</strong> f<strong>in</strong>ancial <strong>in</strong>stitutions (76 %). This is <strong>in</strong>creas<strong>in</strong>gly be<strong>in</strong>g implemented. Cooperativerelationships exist <strong>in</strong> 19 of the 29 programmes, with the cooperation relat<strong>in</strong>g to <strong>in</strong>dividualprocedures <strong>in</strong> the disbursement of the loan.Under present legislation, commercial lend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> is restricted almost exclusively tof<strong>in</strong>ancial <strong>in</strong>stitutions. Cooperat<strong>in</strong>g arrangements between microf<strong>in</strong>ance providers <strong>and</strong>f<strong>in</strong>ancial <strong>in</strong>stitutions are therefore often necessary. Thus, based on Guidel<strong>in</strong>es worked out byKfW Bankengruppe with microlenders <strong>and</strong> start-up <strong>in</strong>itiatives <strong>and</strong> associations as well asbank<strong>in</strong>g federations 12 , a series of cooperative agreements have been reached betweenf<strong>in</strong>ancial <strong>in</strong>stitutions, <strong>in</strong> particular sav<strong>in</strong>gs banks, <strong>and</strong> advisory centres. SparkasseDüsseldorf, for <strong>in</strong>stance, cooperates <strong>in</strong> the microlend<strong>in</strong>g disbursement process with severallocal actors <strong>in</strong> the local bus<strong>in</strong>ess promotion sphere while the ELGO! start-up networkcooperates with several local sav<strong>in</strong>gs banks. Both cooperation schemes state that theGuidel<strong>in</strong>es were the start<strong>in</strong>g po<strong>in</strong>t for their cooperat<strong>in</strong>g processes, but that they are theexceptions among the <strong>in</strong>stitutions surveyed.A further eight <strong>in</strong>itiatives have entered <strong>in</strong>to cooperation agreements on the model developedby the DMI. Under this microcredit disbursement model, four partners (microlender, DMI,<strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> <strong>and</strong> a bank) cooperate with each other <strong>in</strong> order to disbursemicroloans. Put <strong>in</strong> simplified terms, the work <strong>in</strong>volved is h<strong>and</strong>led by the <strong>in</strong>dividual partners asfollows: The microlender attends to check<strong>in</strong>g creditworth<strong>in</strong>ess <strong>and</strong> monitor<strong>in</strong>g the microloan.The F<strong>und</strong> acquires <strong>and</strong> adm<strong>in</strong>isters the risk capital. The bank (formally) h<strong>and</strong>les the lo<strong>and</strong>isbursement. The DMI accredits the microlender <strong>and</strong> accompanies <strong>and</strong> advises the partners<strong>in</strong> matters relat<strong>in</strong>g to the disbursement of the microloan.A very far-reach<strong>in</strong>g model of division of work is exemplified by the microcredit programmeoffered by the BWA, the M<strong>in</strong>istry for the Economy <strong>and</strong> Labour, <strong>in</strong> Hamburg. The BWA hasoutsourced several procedural stages with<strong>in</strong> its microcredit programme to external serviceproviders. One service provider largely takes over the pre-selection <strong>and</strong> the appraisal of the12 Cf. KfW Bankengruppe (2005).
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 48creditworth<strong>in</strong>ess exam<strong>in</strong>ation. Another attends to post-disbursement support <strong>and</strong> monitor<strong>in</strong>gthe borrowers. Outsourc<strong>in</strong>g the tasks to specialised providers keeps costs low for the creditdisbursement process as a whole (<strong>in</strong>clud<strong>in</strong>g the externally provided services) compared withthe programmes of other microcredit actors: as regards the BWA, the program can <strong>in</strong>pr<strong>in</strong>ciple be operated <strong>and</strong> adm<strong>in</strong>istered by one person with a half-day job for about 100 loansgranted per year.Cooperation between microlenders is a model which, as we see it, is still <strong>in</strong> its <strong>in</strong>fancy. Oneopportunity for cutt<strong>in</strong>g unit costs, especially for the small German credit programmes, wouldbe a division of tasks <strong>in</strong> the form of a central back office, such as the English microlenderStreet UK presents as part of its StreetServe offer. 13 Local partners can concentrate moreclosely on market<strong>in</strong>g <strong>and</strong> thereby <strong>in</strong>crease the number of loans. This could possibly be adevelopment path for DMI, where work is already <strong>in</strong> progress on central database functions.The biggest potential for cost reductions would arise from the DMI offer<strong>in</strong>g its members ast<strong>and</strong>ard product.Accord<strong>in</strong>g to the majority of responses <strong>und</strong>er the survey, cooperation between microlenders<strong>and</strong> f<strong>in</strong>ancial <strong>in</strong>stitutions is still not function<strong>in</strong>g conv<strong>in</strong>c<strong>in</strong>gly. Reasons for this are, forexample, poor communication between the partners <strong>and</strong> the lack of commitment on the partof the pr<strong>in</strong>cipal banks. Above all, there is a call for major projects to be jo<strong>in</strong>tly f<strong>in</strong>anced, forthe cooperat<strong>in</strong>g partners to show more will<strong>in</strong>gness to share risks, to raise the number ofcredit commitments <strong>and</strong> to cut h<strong>and</strong>l<strong>in</strong>g costs. These causes require further <strong>and</strong> closer<strong>in</strong>vestigation, but the topic is of particular importance <strong>in</strong> that KfW Bankengruppe's Mikro 10product aims for just such cooperation.8. Summary <strong>and</strong> evaluation.In <strong>Germany</strong>, the number of microcredit programmes has risen from 24 to 33. This clear signof a dynamic process is not reflected <strong>in</strong> the number of loans disbursed, which isdisappo<strong>in</strong>t<strong>in</strong>gly low <strong>in</strong> practice. It makes susta<strong>in</strong>ed bus<strong>in</strong>ess development almost impossible:14 of the programmes surveyed disburse only up to 10 loans <strong>and</strong> a further five programmesdisburse up to 50.After several regional promotional banks (L<strong>and</strong>esförder<strong>in</strong>stitute) <strong>and</strong> the KfW Bankengruppelaunched their programmes, the average number of loans disbursed was 199 <strong>in</strong> 2006(although without these the average is 31). This average dist<strong>in</strong>ctly exceeds the average13 Cf. Copisarow, R. (2004), p. 40.
Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> 49figures from 110 surveyed Western <strong>Europe</strong>an microlenders. Nevertheless, this Germanapproach denotes progress only for the bankable <strong>and</strong> nearly bankable micro-enterprisetarget groups def<strong>in</strong>ed above. In the <strong>in</strong>clusion lend<strong>in</strong>g sector, which targets the <strong>in</strong>tegration ofdisadvantaged groups <strong>in</strong>to the economic process <strong>and</strong> which is a key aspect <strong>in</strong> Western<strong>Europe</strong>an microlend<strong>in</strong>g, the target group is not be<strong>in</strong>g successfully reached. There are someother elements of the programmes of the regional promotional banks (L<strong>and</strong>esförder<strong>in</strong>stitute)<strong>and</strong> KfW Bankengruppe, which could be improved: Today, elements of credit or productdesign, processes, <strong>and</strong> costumer relations have a focus on the ‘traditional’ way to start abus<strong>in</strong>ess. Credit (<strong>and</strong> market<strong>in</strong>g) policy could leave a broader room for the great variety ofthe liv<strong>in</strong>g situations <strong>and</strong> bus<strong>in</strong>ess models of microborrowers. In addition, elements of creditdesign <strong>and</strong> processes which have proven to be successful <strong>in</strong> many countries, as for examplemonthly constant rates for loan redemption <strong>and</strong> <strong>in</strong>terest or step-lend<strong>in</strong>g, could also berealized by those promotion <strong>in</strong>stitutes. Moreover, to our view, the often obligatory<strong>in</strong>volvement of pr<strong>in</strong>ciple banks lengthens application periods <strong>and</strong> <strong>in</strong>creases expenses. All tooften programmes are largely designed for start-ups <strong>and</strong> young enterprises requir<strong>in</strong>gapplication for the loan before the project gets off the gro<strong>und</strong>. Operational f<strong>und</strong><strong>in</strong>g for alreadyexist<strong>in</strong>g enterprises is available through hardly any of these programmes. The rise overrecent years <strong>in</strong> f<strong>und</strong><strong>in</strong>g dem<strong>and</strong>s from the part-time <strong>and</strong> low-budget start-up target groups –partly f<strong>in</strong>anced via own f<strong>und</strong>s or those of acqua<strong>in</strong>tances – <strong>and</strong> from start-ups fromunemployment 14 can scarcely be met with ‘traditional’ start-up loans. Here lies perhaps themost important reason for the overall decrease <strong>in</strong> disbursement numbers by KfWBankengruppe <strong>and</strong> regional promotional banks (L<strong>and</strong>esförder<strong>in</strong>stitute) <strong>in</strong> 2006. The ris<strong>in</strong>gaverage level of loans <strong>and</strong> NBank's withdrawal from offer<strong>in</strong>g microcredits <strong>in</strong>dicate that themajor bus<strong>in</strong>ess promotion <strong>in</strong>stitutions have their problems with small clients.In the <strong>in</strong>clusion lend<strong>in</strong>g sphere, a grow<strong>in</strong>g number of activities by local jo<strong>in</strong>t ventures(ARGEs) are emerg<strong>in</strong>g. The city of Kassel has had a pioneer<strong>in</strong>g role here s<strong>in</strong>ce 1997 with itssuccessfully function<strong>in</strong>g ProGES-Programm. The opportunities offered to the ARGEs <strong>in</strong> thissphere by the Social Code (SGB II) are currently be<strong>in</strong>g <strong>in</strong>tensively analysed <strong>and</strong> exploited <strong>in</strong>,for <strong>in</strong>stance, Hamburg, Frankfurt/M. <strong>and</strong> Münster.So far, the establishment of the DMI has had no effect on the number of loans disbursed byits members. In fact they have the lowest number of disbursements compared with the othergroups (exclud<strong>in</strong>g "Other microcredit programmes"). In the past three years, the <strong>in</strong>vestments14 More than one million start-ups over the past four years f<strong>und</strong>ed by the German Federal EmploymentAgency – of which some 70 % were still on the market after two years.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 50directed towards the establishment of a multiplicative model have meant that a series of newactors have jo<strong>in</strong>ed the microlend<strong>in</strong>g scene <strong>and</strong> are profit<strong>in</strong>g from the expertise of the DMInetwork – although the programmes are not so far achiev<strong>in</strong>g a satisfactory number ofborrowers, either <strong>in</strong>dividually or <strong>in</strong> total. This may be due to the complex structures required<strong>und</strong>er German bank<strong>in</strong>g law – the loans are disbursed via the GLS Bank, securitised bycapital stock <strong>and</strong> looked after by microlenders – or aga<strong>in</strong> it may be due to a suboptimal focus<strong>in</strong> the <strong>in</strong>stitution's structure. It may simply be that the model still needs more time to establish<strong>and</strong> prove itself. It will be <strong>in</strong>terest<strong>in</strong>g to see the outcome of the analysis of the type of DMImember organisations that survive <strong>in</strong> practice: those offer<strong>in</strong>g loans as a secondary l<strong>in</strong>e ofbus<strong>in</strong>ess <strong>in</strong> their start-up consultancy service or those concentrat<strong>in</strong>g on microlend<strong>in</strong>g as thesole bus<strong>in</strong>ess focus. Of <strong>in</strong>terest here is MONEX, which separated the credit bus<strong>in</strong>ess fromthe start-up context <strong>and</strong> now offers loans through its own sponsor<strong>in</strong>g organisation.Increas<strong>in</strong>g account is be<strong>in</strong>g taken of the changed or better known f<strong>und</strong><strong>in</strong>g dem<strong>and</strong>s of microenterprises:18 programmes concentrate on fo<strong>und</strong>ers <strong>and</strong> exist<strong>in</strong>g enterprises, with only 11geared solely to start-ups. The empirical results from Kritikos et al., which are still very recent<strong>and</strong> require further confirmation, po<strong>in</strong>t to challenges <strong>in</strong> the market<strong>in</strong>g sphere which can bemet through adaptations <strong>in</strong> market<strong>in</strong>g operations. 15 This may well apply equally to publiclyf<strong>und</strong>ed programmes, programmes <strong>in</strong> the DMI scheme, <strong>and</strong> programmes from the regionalpromotional banks (L<strong>and</strong>esförder<strong>in</strong>stitute) <strong>and</strong> KfW Bankengruppe. The chang<strong>in</strong>g patterns <strong>in</strong>start-up procedures call for chang<strong>in</strong>g responses not only to the level of loans required butalso <strong>in</strong> tim<strong>in</strong>g, loan terms <strong>and</strong> application targets as well as the processes.The promis<strong>in</strong>g strategy of sett<strong>in</strong>g small, flexible market<strong>in</strong>g units as <strong>in</strong>terfaces with the client,as the American microlender ACCION advocates <strong>and</strong> practises 16 , is difficult to locate on theGerman market. Mikro 10, with its attractive commission <strong>and</strong> promotion of local cooperat<strong>in</strong>gventures, is a first step <strong>in</strong> this direction. The low number of loans it has placed possibly po<strong>in</strong>tto a lack of <strong>in</strong>terest <strong>in</strong> the proposed target groups on the part of the pr<strong>in</strong>cipal banks, whichhave to be <strong>in</strong>volved, or to suboptimal support systems. 17 A conceivable next step would be to15Kritikos, A.S./Kneid<strong>in</strong>g, C./Germelmann, C.C. (2006) po<strong>in</strong>t out <strong>in</strong> the study quoted above, Is there aMarket for Micro-Lend<strong>in</strong>g <strong>in</strong> Industrialized Countries?, that there is a substantial albeit small dem<strong>and</strong>which is, however, not be<strong>in</strong>g reached due to <strong>in</strong>adequate dem<strong>and</strong> studies by the microf<strong>in</strong>anceproviders. The consequences were a mistaken target group focus <strong>and</strong> wrong lend<strong>in</strong>g products (p.24).The authors also see as the backgro<strong>und</strong> a delimitation of the target groups because of the l<strong>in</strong>k tosupport from public f<strong>und</strong>s (p.3) <strong>and</strong> an <strong>in</strong>adequate demarcation from the Alternative Bank (p.25) <strong>in</strong>respect of speed <strong>and</strong> customer friendl<strong>in</strong>ess.16 Cf. Rhyne, E./Lopez, C. (2003).17 Cf. <strong>Evers</strong>, J. (2002).
Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> 51further develop Mikro 10 <strong>in</strong>to a wholesale product analogous to easy credit <strong>in</strong> the consumersphere; it could then be disbursed locally without loan support systems. This might prove tobe an especially promis<strong>in</strong>g model for the structures specific to <strong>Germany</strong>.A look at other Western <strong>Europe</strong>an countries reveals that three models <strong>in</strong> particular haveproved to be relatively successful:• F<strong>in</strong>nvera, F<strong>in</strong>l<strong>and</strong>'s state bus<strong>in</strong>ess-promotion bank, <strong>in</strong> consultation with the commercialbanks for microloans, decided on the direct disbursement of loans <strong>and</strong> it implements thecreditworth<strong>in</strong>ess exam<strong>in</strong>ation <strong>and</strong> support <strong>in</strong> its branches <strong>in</strong> key regional locations. TheF<strong>in</strong>nish entrepreneurial base is less than one-tenth that of <strong>Germany</strong>, but F<strong>in</strong>nveraachieves 3,000 loans every year, which is quite a lot <strong>in</strong> comparison with the numbersachieved by the microf<strong>in</strong>ance programmes of the L<strong>and</strong>esfördern<strong>in</strong>stitute <strong>and</strong> the KfWBankengruppe, which work <strong>in</strong> conjunction with the pr<strong>in</strong>cipal bank<strong>in</strong>g system. The F<strong>in</strong>nishbanks, accord<strong>in</strong>g to F<strong>in</strong>nvera, agreed to the direct disbursement because, at the nextstage, F<strong>in</strong>nvera then aga<strong>in</strong> f<strong>und</strong>s the small but established clients <strong>in</strong> conjunction with thebanks. However, it has to be taken <strong>in</strong>to account that the L<strong>and</strong>esfördern<strong>in</strong>stitute as well asthe KfW grant smaller loans up to EUR 25,000 also with<strong>in</strong> their further ‘conventional’bus<strong>in</strong>ess promotion programmes which are not ‘explicitly’ focused on microcredits.• In Spa<strong>in</strong>, a series of sav<strong>in</strong>gs banks have <strong>in</strong>vested massively <strong>in</strong> microlend<strong>in</strong>g structures <strong>in</strong>the past four years <strong>and</strong> they are record<strong>in</strong>g high growth rates. Their strategies vary. LaCaixa, for <strong>in</strong>stance, is the biggest sav<strong>in</strong>gs bank <strong>and</strong> it deals with clients <strong>in</strong> its ownbranches. The third-largest sav<strong>in</strong>gs bank, Caixa Catalunya, has set up a separatefo<strong>und</strong>ation for its microcredit bus<strong>in</strong>ess, Un Sol Mon. Wholesale models, where market<strong>in</strong>g,preparation of the creditworth<strong>in</strong>ess exam<strong>in</strong>ation <strong>and</strong> follow-up support are structured <strong>in</strong>tolocal partners on a commission basis, are at a pilot stage. All the models, however, haveone th<strong>in</strong>g <strong>in</strong> common: special structures are set up – at least for the back office – whichthen <strong>in</strong>tegrate the borrowers back <strong>in</strong>to the st<strong>and</strong>ard bus<strong>in</strong>ess <strong>in</strong> the course of repayment.These examples could perhaps serve as models that might boost the number ofmicrolenders <strong>in</strong> cooperation with German sav<strong>in</strong>gs banks.• The French microlend<strong>in</strong>g organisation Adie, with more than 6,000 loans disbursed <strong>in</strong>2005, also cooperates closely with French banks, which so far have f<strong>und</strong>ed some 80% ofthe loans. Adie likewise functions as a local market<strong>in</strong>g partner. It has more than 100branches <strong>and</strong> locations <strong>in</strong> France <strong>and</strong> with its specialised know-how it h<strong>and</strong>les thecreditworth<strong>in</strong>ess exam<strong>in</strong>ation <strong>and</strong> support for <strong>in</strong>clusion lend<strong>in</strong>g <strong>and</strong> then passessuccessful clients on to its bank partners. The dynamic rise <strong>in</strong> lend<strong>in</strong>g commitments
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 52which the French microcredit organisation Adie has been demonstrat<strong>in</strong>g for years now,<strong>and</strong> which the microcredit <strong>in</strong>itiatives of the Spanish sav<strong>in</strong>gs banks have been emulat<strong>in</strong>g<strong>in</strong> the past few years, is nowhere to be seen on the German market.In conclusion it must be said that th<strong>in</strong>gs are <strong>in</strong>deed mov<strong>in</strong>g <strong>in</strong> <strong>Germany</strong>, but not sufficiently.The breakthrough <strong>in</strong> microf<strong>in</strong>anc<strong>in</strong>g is still not <strong>in</strong> sight. Yet there are clear signs of a dynamicdevelopment emerg<strong>in</strong>g. <strong>Microf<strong>in</strong>ance</strong> will only become significant if more players acceptresponsibility <strong>and</strong> really look at the dem<strong>and</strong>s of micro-entrepreneurs <strong>and</strong> -enterprises,develop <strong>and</strong> implement lean processes, <strong>and</strong> enter (aggressively) the current f<strong>in</strong>anc<strong>in</strong>gmarket <strong>in</strong> order to make microf<strong>in</strong>ance a core bus<strong>in</strong>ess.Authors: Dr. Jahn <strong>Evers</strong>, Manag<strong>in</strong>g Partner, EVERS & JUNGStefanie Lahn, Consultant, EVERS & JUNG
Status of Microlend<strong>in</strong>g <strong>in</strong> <strong>Germany</strong> 53References.Copisarow, R. (2004), Street UK – Lessons Learned – A micro-f<strong>in</strong>ance organisation from itsfirst three years’ operation, Birm<strong>in</strong>gham.<strong>Evers</strong>, J./Lahn, S./<strong>Jung</strong>, M. (2007), The Status of <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> Western <strong>Europe</strong>, Paris.<strong>Evers</strong> J. (2002), Kredite für Kle<strong>in</strong>unternehmen, Effiziente Betreuungssysteme von Banken,Frankfurt a. M.<strong>Evers</strong>, J. (2001), Microlend<strong>in</strong>g als Modell effizienter gewerblicher Kle<strong>in</strong>stkreditvergabe <strong>und</strong>se<strong>in</strong>e Anwendung für Banken, <strong>in</strong>: Fischges/Heiss/Krafczyk (Eds.), Banken derZukunft – Zukunft der Banken, Wiesbaden.Habschick, M./<strong>Evers</strong>, J./<strong>Jung</strong>, M. (2004), F<strong>in</strong>anzierung im Kle<strong>in</strong>en – Praxish<strong>and</strong>buch zurEntwicklung <strong>in</strong>novativer Mittelst<strong>and</strong>sförder<strong>in</strong>strumente, Norderstedt.KfW Bankengruppe, Institut für Mittelst<strong>and</strong>sforschung (Bonn), Rhe<strong>in</strong>isch-WestfälischesInstitut für Wirtschaftsforschung, Verb<strong>and</strong> der Vere<strong>in</strong>e Creditreform, Zentrum fürEuropäische Wirschtschaftsforschung (2005) (Eds.), Mittelst<strong>and</strong>smonitor 2005. DenAufschwung schaffen – B<strong>in</strong>nenkonjunktur <strong>und</strong> Wettbewerbsfähigkeit stärken,Frankfurt a. M.KfW Bankengruppe (Ed.) (2005), EXISTENZGRÜNDER UND JUNGE UNTERNEHMENGEMEINSAM STÄRKEN. E<strong>in</strong> Leitfaden für regionale Kooperationen zwischenKredit<strong>in</strong>stituten, Beratungs- <strong>und</strong> Wirtschaftsförderungse<strong>in</strong>richtungen, Frankfurt a. M.Kritikos, A. S./Kneid<strong>in</strong>g, C./Germelmann, C. C. (2006), Is there a Market for microlend<strong>in</strong>g <strong>in</strong><strong>in</strong>dustrialized countries? Discussion Paper No. 251, Frankfurt/O.Lehnert, N. (2004), KfW-Gründungsmonitor 2004, Frankfurt a. M.Rhyne, E./Lopez, C. (2003), The Service Company Model: A New Strategy for CommercialBanks <strong>in</strong> <strong>Microf<strong>in</strong>ance</strong>. <strong>in</strong>: Accion's InSight Series, No. 6, Boston.Siewertsen, H./<strong>Evers</strong>, J. et al. (2005), Policy Measures to Promote <strong>Microf<strong>in</strong>ance</strong>,Zeist/Brussels/Hamburg.Underwood, T. (2007), Overview of the Microcredit Sector 2004 – 2005, Paris.Wisniwski, S. (2004), Develop<strong>in</strong>g Commercially Viable <strong>Microf<strong>in</strong>ance</strong>, Frankfurt a. M.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 54<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> France: The Experiences of Adie (L’Associationpour le droit à l’Initiative Economique).1. Orig<strong>in</strong>.Adie was established <strong>in</strong> December 1988 as a non-profit association. As a director at theFrench Development Agency (AFD), by then I had already successfully transferred the modelof Bangladesh’s Grameen Bank to West Africa, <strong>and</strong> I wanted to test it <strong>in</strong> France at the timewhen the M<strong>in</strong>imum Inclusion Income program (RMI), designed to help people withoutresources re<strong>in</strong>tegrate <strong>in</strong>to the labour market, was be<strong>in</strong>g <strong>in</strong>stituted. I had proposed help<strong>in</strong>gseveral French NGOs work<strong>in</strong>g <strong>in</strong> the fight aga<strong>in</strong>st social exclusion to set up an experimentalproject. They all thought it was a good idea for develop<strong>in</strong>g countries but totally <strong>in</strong>appropriatefor an <strong>in</strong>dustrial country blessed with a particularly generous welfare state. So I created Adiewith two friends. We were all three volunteers <strong>and</strong>, like our future clients, bereft of start-upcapital. Start-up was particularly difficult because we had to f<strong>in</strong>d a m<strong>in</strong>imum of f<strong>in</strong>ance,identify our clientele (Figures 1 <strong>and</strong> 2) <strong>and</strong> develop methods adapted to the environment ofan <strong>in</strong>dustrial country.Professional diploma20%Illiterate4%Read<strong>in</strong>g <strong>and</strong> writ<strong>in</strong>g17%Baccalaureat5%Secondary school13%Vocational tra<strong>in</strong><strong>in</strong>g41%Illiterate Read<strong>in</strong>g <strong>and</strong> writ<strong>in</strong>g Vocational tra<strong>in</strong><strong>in</strong>gSecondary school Baccalaureat Professional diplomaFigure 1: Educational level of Adie’s microf<strong>in</strong>ance clientele
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> France: The Experiences of Adie 55Agriculture4% Craft8%Build<strong>in</strong>g tradeartisans11%Trade52%Services25%Agriculture Craft Build<strong>in</strong>g trade artisans Services TradeFigure 2: Distribution by pr<strong>in</strong>cipal activities of Adie’s microf<strong>in</strong>ance clienteleRegard<strong>in</strong>g f<strong>und</strong>s, we were able to ga<strong>in</strong> the support of some private fo<strong>und</strong>ations, thegovernment, <strong>and</strong> a <strong>Europe</strong>an anti-poverty programme. It was some time before we fo<strong>und</strong> ourfirst clients; neither social workers nor agencies support<strong>in</strong>g bus<strong>in</strong>ess creation believed <strong>in</strong> ourproject. We sought our first clients by post<strong>in</strong>g announcements <strong>in</strong> blocks of flats <strong>in</strong> poordistricts. Our first loans were a failure: we sought to reproduce too exactly the solidaritygroup approach <strong>in</strong> a country where the rural exodus had destroyed social solidarity. Thegroups that we set up fell apart rapidly <strong>and</strong> only a few members repaid their loans. Thesedifficult beg<strong>in</strong>n<strong>in</strong>gs were an excellent lesson for what followed.2. Objectives.While unable to adopt the Grameen Bank’s methods, we reta<strong>in</strong>ed its spirit via our activity’sthree objectives:• To f<strong>in</strong>ance disadvantaged people <strong>in</strong> creat<strong>in</strong>g <strong>and</strong> develop<strong>in</strong>g their own jobs <strong>and</strong>, possibly,jobs for others;• To provide bus<strong>in</strong>ess development services for the new enterprises to help them succeed;• To use our activity as a social laboratory to help identify the obstacles to the developmentof economic <strong>in</strong>itiative.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 563. Clients.The clientele to which we have rema<strong>in</strong>ed faithful for 19 years is that of disadvantaged peopledesir<strong>in</strong>g to create a microenterprise <strong>and</strong> lack<strong>in</strong>g access to banks. Welfare recipients accountfor 56 % of our clients, 33 % are unemployed, many of them long-term jobless, <strong>and</strong> 11 %work <strong>in</strong> low-paid jobs (Figure 3).Employees1%Work<strong>in</strong>g poor11%Other unemployed15%M<strong>in</strong>imum <strong>in</strong>come56%Long termunemployed17%M<strong>in</strong>imum <strong>in</strong>come Long term unemployed Other unemployed Employees Work<strong>in</strong>g poorFigure 3: Target population of AdieAbout 35 % are women. Over a third are foreign-born or children of immigrants; these havethe most difficulty f<strong>in</strong>d<strong>in</strong>g wage-paid employment, while their entrepreneurial culture is oftenthe most lively.An <strong>in</strong>terest<strong>in</strong>g characteristic of this clientele is that 18 % are barely literate, while 20 % havehigher education. The one group is as successful as the other, even if the enterprises occupydifferent niches.4. F<strong>in</strong>ancial products.The maximum amount of an Adie loan is EUR 5,500, with a maturity of no more than twoyears. The <strong>in</strong>terest rate is 7.2 % plus a commission of 5 %. The average loan is EUR 2,800,for an average term of 18 months. In poor districts, progressively stepp<strong>in</strong>g loans start atEUR 1,000, <strong>in</strong>creas<strong>in</strong>g each time the preced<strong>in</strong>g loan is repaid. As a general rule Adierequests multiple guarantees for half the loan amount. These guarantees, for a m<strong>in</strong>imalamount, are designed to ensure that the borrower has a good reputation <strong>and</strong> that the peoplearo<strong>und</strong> him are ready to support him <strong>in</strong> implement<strong>in</strong>g his project. In the rare cases where a
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> France: The Experiences of Adie 57microentrepreneur refuses to repay the loan, the guarantees make it possible to exercisepressure on him. In some cases (e.g. recent immigrants) guarantees are not required frompeople who have no means of obta<strong>in</strong><strong>in</strong>g them.Loans are supplemented by a m<strong>in</strong>imum amount of equity or quasi-equity:• “Loan of honour,” <strong>in</strong>terest-free <strong>and</strong> without guarantee (commission = 5 %);• In some regions, a start-up grant provided by the Regional Council to supplement Adie’sloan, often managed by the association;• Repayable advance provided through the EDEN facility, managed by Adie for thegovernment;• F<strong>in</strong>ally, for people who are hesitant about start<strong>in</strong>g their bus<strong>in</strong>ess, an equipment loan(market facilities, pick-up truck, computer equipment, etc.) which sometimes makes itpossible to test both the market <strong>and</strong> the entrepreneur’s capabilities.Two new experiments are currently <strong>und</strong>erway:• Micro-<strong>in</strong>surance, adapted to the needs of fledgl<strong>in</strong>g entrepreneurs, is be<strong>in</strong>g tested <strong>in</strong>partnership with three <strong>in</strong>surance companies;• Back-to-work microcredit, f<strong>in</strong>anc<strong>in</strong>g expenses for disadvantaged people to f<strong>in</strong>d wage-paidemployment: vehicle, motor scooter, apprenticeship, eyeglasses, etc.5. Methods.The lend<strong>in</strong>g process has evolved over time. It now consists of several phases:Contact.Given Adie’s unique <strong>and</strong> toll-free phone number, <strong>in</strong> 75 % of the cases <strong>in</strong>itial contact is madeby telephone. The call is received by a full-time loan counsellor at the regional headquarters.This <strong>in</strong>itial contact of about 15 m<strong>in</strong>utes is <strong>in</strong>tended to allow Adie to carry out the follow<strong>in</strong>gchecks.• To verify the eligibility of the caller: is his need for credit compatible with the amount thatAdie can lend him? Does it <strong>in</strong>volve creation or development of an enterprise? Insofar asbank <strong>in</strong>terest rates are lower than Adie’s, this <strong>in</strong>itial contact also allows Adie to verify theperson’s lack of access to bank credit.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 58• To verify the maturity of the project: is the c<strong>and</strong>idate ready to move rapidly, or would it bebetter for him to prepare his project with, as appropriate, support from an advisory body?• To measure certa<strong>in</strong> risk criteria: level of <strong>in</strong>debtedness, <strong>in</strong>clusion <strong>in</strong> bank default filesma<strong>in</strong>ta<strong>in</strong>ed by the Bank of France. These are not criteria for automatic rejection, but allowthe loan counsellor to ga<strong>in</strong> a first impression of the potential risk.Instruction <strong>and</strong> decision process.Follow<strong>in</strong>g this telephone contact, for eligible persons a meet<strong>in</strong>g is scheduled with a loancounsellor, who most often conducts a s<strong>in</strong>gle <strong>in</strong>terview (less often, two) to exam<strong>in</strong>e the creditapplication. At this stage the counsellor alone can decide to reject the application. Incontrast, to obta<strong>in</strong> approval, he must submit the request either to the regional director (if thescore computed by Adie’s <strong>in</strong>formation system <strong>in</strong>dicates low risk), or to a loan committee (ifthe score <strong>in</strong>dicates medium or high risk.) Dur<strong>in</strong>g these meet<strong>in</strong>gs the counsellor does notfollow a set list of questions, but rather develops the <strong>in</strong>terview so as to br<strong>in</strong>g out the<strong>in</strong>formation he is look<strong>in</strong>g for. In order to present the loan application, he will have to completea document <strong>in</strong> which he expresses his op<strong>in</strong>ion on different criteria.The criteria <strong>in</strong> question divide <strong>in</strong>to three ma<strong>in</strong> categories:• “Confidence <strong>in</strong> the person of the applicant:” the counsellor expresses his op<strong>in</strong>ion aboutthe applicant’s capabilities: his experience, his <strong>in</strong>genuity, his professional <strong>and</strong> familynetwork, etc.• “Confidence <strong>in</strong> the project:” more than exam<strong>in</strong><strong>in</strong>g the project itself <strong>in</strong> depth, the counsellorevaluates the applicant’s capacity to manage <strong>and</strong> implement it.• “Confidence <strong>in</strong> repayment:” the counsellor <strong>in</strong>dicates the elements that ensure theapplicant’s capacity <strong>and</strong> <strong>in</strong>tention to repay the loan.The loan counsellor presents the loan application either to the regional director (with<strong>in</strong> 48hours) or to the loan committee (maximum of two weeks).Back office.S<strong>in</strong>ce the amendment to the bank<strong>in</strong>g law obta<strong>in</strong>ed by Adie, the association manages <strong>and</strong>disburses its loans directly. Loan (<strong>and</strong> guarantee) contracts are signed at the offices of Adie,which can proceed to disbursement <strong>in</strong>to the client’s bank account with<strong>in</strong> 48 hours.
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> France: The Experiences of Adie 59Bus<strong>in</strong>ess development services.After a long period of unemployment <strong>and</strong> given the complexity of the environment <strong>in</strong> which tocreate enterprises, apart from f<strong>in</strong>ance, persons f<strong>in</strong>anced by Adie need appropriate advice<strong>and</strong> tra<strong>in</strong><strong>in</strong>g. Aga<strong>in</strong>, Adie provides them with these services, oriented <strong>in</strong> the first <strong>in</strong>stancetowards help with adm<strong>in</strong>istrative procedures, sett<strong>in</strong>g up of management <strong>and</strong> account<strong>in</strong>g,market<strong>in</strong>g <strong>and</strong> bank<strong>in</strong>g. Clients may benefit from coach<strong>in</strong>g but also from specialised advice<strong>in</strong> certa<strong>in</strong> areas such as, for example, legal advice. Along with <strong>in</strong>dividual advice <strong>and</strong> tra<strong>in</strong><strong>in</strong>g,they may also have access to “creator circles” which meet regularly to provide the newentrepreneurs with ongo<strong>in</strong>g tra<strong>in</strong><strong>in</strong>g <strong>and</strong> let them exchange experience. A hotl<strong>in</strong>e is currentlybe<strong>in</strong>g set up to reply to the clients’ most urgent questions. The accompany<strong>in</strong>g services areorganised with major participation by volunteers, new retirees, <strong>and</strong> active professionals fromthe bus<strong>in</strong>ess <strong>and</strong> bank<strong>in</strong>g worlds, some of whom are former Adie clients who havedeveloped their own enterprises <strong>and</strong> want to help others succeed.In conjunction with socially responsible persons or companies, Adie also tries to developdifferent services of use to the clients:Thus, Adie uses micro-computers discarded by large companies <strong>and</strong> refurbished <strong>in</strong>workshops employ<strong>in</strong>g jobless people, <strong>and</strong> sells them for EUR 90 after three-day tra<strong>in</strong><strong>in</strong>gsessions offered by Microsoft.Adie helps the new entrepreneurs exp<strong>and</strong> their networks by putt<strong>in</strong>g them <strong>in</strong> contact with theappropriate professional milieux. Thus, plumbers are put <strong>in</strong> contact with Primagaz to <strong>in</strong>stallgas tanks <strong>in</strong> rural areas, carpenters with V<strong>in</strong>ci, <strong>and</strong> those work<strong>in</strong>g <strong>in</strong> fashion or design withthe “Elle” Magaz<strong>in</strong>e Fo<strong>und</strong>ation or with other professionals.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 606. The Adie network.Currently Adie covers the entire country through a network of 119 agencies <strong>and</strong> 380 localoffices. Outside France, it is established overseas <strong>in</strong> Réunion, Mayotte, Guyana, NewCaledonia, <strong>and</strong> recently <strong>in</strong> Mart<strong>in</strong>ique. Adie’s regional offices are responsible for clientrelations, bus<strong>in</strong>ess advice <strong>and</strong> tra<strong>in</strong><strong>in</strong>g, <strong>and</strong> collection of f<strong>und</strong>s from local authorities. As forthe headquarters, it is <strong>in</strong> charge of all functions susceptible to economies of scale: methods,human resource management, tra<strong>in</strong><strong>in</strong>g, f<strong>in</strong>ancial management, account<strong>in</strong>g, back-office,computer services, etc.Figure 4: Adie networkNote: 22 regional offices; 110 branches; 380 contact po<strong>in</strong>t; 310 staff members; 1000 volunteers
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> France: The Experiences of Adie 617. F<strong>in</strong>anc<strong>in</strong>g.At this stage of its development, Adie still depends on external f<strong>in</strong>anc<strong>in</strong>g. Schematically:Loan f<strong>und</strong>s come essentially from banks, which provide Adie with l<strong>in</strong>es of credit that itredistributes to its clients. This direct control allows for greater effectiveness than the systemused at Adie’s outset, when control was duplicated by Adie <strong>and</strong> the banks, which at the timehad the sole authorisation to make loans.Risk is shared between, on the one h<strong>and</strong>, banks (30 %), <strong>and</strong> on the other h<strong>and</strong>, Adie <strong>and</strong> itsclients (70 %); Adie is counter guaranteed to 65 % by a government guarantee f<strong>und</strong> (Fondsde Garantie d’Insertion par l’Economique) <strong>and</strong> the <strong>Europe</strong>an Investment F<strong>und</strong>.The extra costs of credit <strong>and</strong> accompany<strong>in</strong>g services are f<strong>in</strong>anced by a variety of partners:the government, which is <strong>in</strong> the process of reduc<strong>in</strong>g its commitments as a result ofdecentralisation; the <strong>Europe</strong>an Social F<strong>und</strong>, which is also go<strong>in</strong>g to reduce its contribution asit gears itself to the new EU member countries; local authorities (Regions, Departments,Municipalities, etc.), whose participation has <strong>in</strong>creased <strong>in</strong> the course of the last two years;<strong>and</strong> socially responsible companies, which are likewise <strong>in</strong>creas<strong>in</strong>gly support<strong>in</strong>g Adie.8. Results.In relation to the three aforementioned objectives, the results of Adie’s activity can besummarised as follows:F<strong>in</strong>anc<strong>in</strong>g.Initiated as a piece of research, the loan programme has evolved towards an <strong>in</strong>creased<strong>in</strong>itiative <strong>in</strong> contact<strong>in</strong>g clients, <strong>in</strong> part thanks to changes <strong>in</strong> the legal framework, obta<strong>in</strong>ed byAdie. As regards methods, experience has led the Association towards a revision of thecredit cycle, stress<strong>in</strong>g risk analysis <strong>and</strong> simplification of procedures. As everywhere <strong>in</strong> theworld, microentrepreneurs <strong>in</strong> France are more attuned to the rapidity <strong>and</strong> simplicity ofprocedures giv<strong>in</strong>g them access to credit than to the costs of the credit.By the end of 2006, Adie had disbursed a total of about 44,000 loans s<strong>in</strong>ce its set-up, thenumber <strong>in</strong>creas<strong>in</strong>g regularly each year. Moreover, it has disbursed 8,766 “loans of honour.”In 2006 the number of loans disbursed rose to 7,570, <strong>and</strong> the total number of f<strong>in</strong>ancialoperations (<strong>in</strong>clud<strong>in</strong>g “loans of honour,” regional start-up grants, <strong>and</strong> repayable EDENadvances) to 15,129.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 62On 31 December 2006, loans outst<strong>and</strong><strong>in</strong>g amounted to EUR 24 million, <strong>and</strong> “loans ofhonour” to EUR 10 million. On the same date, payment arrears amounted to 6.90 % <strong>and</strong>losses to 2.97 %.Bus<strong>in</strong>ess development services.As <strong>in</strong> the case of credit, non f<strong>in</strong>ancial services have also evolved, while vary<strong>in</strong>g from oneregion to another <strong>in</strong> accordance with the number of participat<strong>in</strong>g volunteers. We are <strong>in</strong> theprocess of harmonis<strong>in</strong>g these methods, <strong>in</strong>volv<strong>in</strong>g a substantial tra<strong>in</strong><strong>in</strong>g effort for both staff<strong>and</strong> volunteers.Overall results can be summarised as follows:S<strong>in</strong>ce Adie was fo<strong>und</strong>ed, 37,000 enterprises <strong>and</strong> 45,000 jobs have been created, <strong>in</strong>clud<strong>in</strong>g6,508 enterprises <strong>and</strong> 7,802 jobs <strong>in</strong> 2006. The survival rate of enterprises is equal to thenational average: 64 % after two years. As is often the case with microenterprises, a numberdisappears <strong>and</strong> then recreates itself. In other cases, persons who have ga<strong>in</strong>ed selfconfidencef<strong>in</strong>d wage-paid employment; altogether, the rate of <strong>in</strong>clusion, namely thepercentage of people leav<strong>in</strong>g social welfare def<strong>in</strong>itively beh<strong>in</strong>d, is 75 %.Institutional reform.Adie’s greatest accomplishment is to have contributed to a change <strong>in</strong> attitude towardsdisadvantaged people. The success of people who were marg<strong>in</strong>alised <strong>and</strong> considered aburden on society, has shown that entrepreneurial capacity is with<strong>in</strong> everyone’s reach,regardless of their assets <strong>and</strong> even their educational level.The repayment rate, higher than that obta<strong>in</strong>ed by banks for bus<strong>in</strong>ess start-ups, has shownthat disadvantaged persons are good clients. This conv<strong>in</strong>c<strong>in</strong>g demonstration has allowedAdie to obta<strong>in</strong> significant improvements <strong>in</strong> the environment for microcredit <strong>and</strong>microenterprises:• As regards the legal framework for microcredit, the two pr<strong>in</strong>cipal advances have been (1)amendment of the bank<strong>in</strong>g law <strong>in</strong> 2003, allow<strong>in</strong>g associations f<strong>in</strong>anc<strong>in</strong>g <strong>and</strong> serv<strong>in</strong>gunemployed <strong>and</strong> welfare recipients to borrow <strong>in</strong> order to lend, <strong>and</strong> (2) the removal <strong>in</strong>2005 of the <strong>in</strong>terest cap on loans to <strong>in</strong>dividual enterprises.• As regards the legal framework for microenterprises, <strong>in</strong> 2005 Adie was able to ga<strong>in</strong>recognition of enterprise creation as a mean of economic <strong>in</strong>clusion, allow<strong>in</strong>g greaterequality of treatment with applicants for wage-paid employment. It was likewise able toobta<strong>in</strong> simplification of some measures, notably aid to the unemployed creat<strong>in</strong>g an
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> France: The Experiences of Adie 63enterprise (ACCRE). This assistance, <strong>in</strong>volv<strong>in</strong>g exemption from social charges, wasextended to all categories of unemployed, the period be<strong>in</strong>g lengthened to three years(with progressive reduction), for everyone with an <strong>in</strong>come below the m<strong>in</strong>imum wage level.Although still <strong>in</strong>sufficient, these provisions have significantly facilitated or will facilitate thecreation of enterprises by disadvantaged persons.800070006000750067405349 5587Number of loans50004000300028443563461820001000019291276 149285269834 91 1592783881990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Figure 5: Loans granted by Adie9. Future perspectives.The legislative changes obta<strong>in</strong>ed thanks to Adie’s actions are permitt<strong>in</strong>g <strong>in</strong> turn a substantialmodification of its organisation:Separation of the credit <strong>and</strong> accompany<strong>in</strong>g service poles.As long as coverage of lend<strong>in</strong>g costs was <strong>in</strong>conceivable due to the cap of aro<strong>und</strong> 7 % on the<strong>in</strong>terest rate on loans to <strong>in</strong>dividual enterprises, there was no good reason to separate the twofunctions. Removal of the <strong>in</strong>terest rate cap is enabl<strong>in</strong>g Adie to create an organisation basedon two specialised poles that will, of course, cont<strong>in</strong>ue to work together. This reform will beimplemented <strong>in</strong> the course of this year.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 64Pilot branches.The burden of social charges at start-up forces many self-employed persons to work outsidethe law. Its reduction should permit a significant number of <strong>in</strong>formal activities to be dulyregistered. Adie plans to establish, <strong>in</strong> the course of this year, six pilot branches <strong>in</strong> districtswhere the target population is dense, <strong>in</strong> order to test the possibility of cover<strong>in</strong>g lend<strong>in</strong>g costs,while bus<strong>in</strong>ess development services rema<strong>in</strong> subsidised.Project “Créajeunes”.In poor districts, youth unemployment can be as high as 30 %. In order to respond to asignificant dem<strong>and</strong> from young people desir<strong>in</strong>g to create microenterprises, Adie is go<strong>in</strong>g to<strong>und</strong>ertake Project “Créajeunes“ to f<strong>in</strong>ance <strong>and</strong> service a thous<strong>and</strong> of them. Apart fromst<strong>and</strong>ard f<strong>in</strong>ancial <strong>and</strong> accompany<strong>in</strong>g services, Adie will provide these young people withtargeted tra<strong>in</strong><strong>in</strong>g, coach<strong>in</strong>g <strong>and</strong> a start-up grant of EUR 2,000.Rural development project.As <strong>in</strong> the <strong>in</strong>ner city, depressed rural areas have a large number of unemployed <strong>and</strong> welfarerecipients. Start<strong>in</strong>g this year, Adie will test ways of serv<strong>in</strong>g this clientele by establish<strong>in</strong>gmobile branches. It will also seek how to help small farmers develop multiple activities <strong>and</strong>work cooperatively to process <strong>and</strong> market farm products.10. Lessons for <strong>Europe</strong>.Other <strong>Europe</strong>an countries, especially those <strong>und</strong>ertak<strong>in</strong>g microcredit programmes, can draw anumber of lessons from Adie’s experience. These <strong>in</strong>clude the follow<strong>in</strong>g:• Consider<strong>in</strong>g the relative expansion of services <strong>and</strong> new technologies, self-employmentcan only grow <strong>in</strong> importance. In countries with significant unemployment, selfemploymentcan be an <strong>in</strong>terest<strong>in</strong>g alternative to <strong>in</strong>secure wage-paid labour.• The dem<strong>and</strong> for microcredit is grow<strong>in</strong>g pari passu with supply <strong>and</strong>, at this stage, seemsvirtually limitless.• The methods <strong>and</strong> products of microcredit must be based on this dem<strong>and</strong> <strong>and</strong> cannot bedef<strong>in</strong>ed from above.• Consider<strong>in</strong>g the diversity of different segments of microcredit’s clientele, it is important tocreate a veritable cont<strong>in</strong>uum of microf<strong>in</strong>ance <strong>in</strong>stitutions: banks, credit unions, <strong>and</strong> non-
<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> France: The Experiences of Adie 65bank <strong>in</strong>stitutions. Partnerships between banks <strong>and</strong> non-bank <strong>in</strong>stitutions should beencouraged.• In most Western <strong>Europe</strong>an countries, it is difficult to implant microcredit withoutcomplement<strong>in</strong>g tra<strong>in</strong><strong>in</strong>g <strong>and</strong> management advisory services.• S<strong>in</strong>ce the <strong>in</strong>stitutional environment is poorly adapted to the development of microcredit<strong>and</strong> microenterprises, it must be improved. The examples of other countries <strong>and</strong> the<strong>in</strong>fluence of <strong>Europe</strong>an <strong>in</strong>stitutions can play an important role <strong>in</strong> national sensitisation,shorten<strong>in</strong>g the time it took to achieve this <strong>in</strong> France.• F<strong>in</strong>ally, it is important to ma<strong>in</strong>ta<strong>in</strong> a balance between the social <strong>and</strong> f<strong>in</strong>ancial performanceof microcredit. Even if this balance is difficult to atta<strong>in</strong> <strong>in</strong> present conditions <strong>in</strong> many<strong>Europe</strong>an countries, the purpose of microcredit rema<strong>in</strong>s to “create an <strong>in</strong>clusive f<strong>in</strong>ancialsector,” which means build<strong>in</strong>g susta<strong>in</strong>able credit systems from the outset by apply<strong>in</strong>g<strong>in</strong>ternational best practices.Author: Maria Nowak, President of Adie
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 66Twelve Years’ Experience of Microf<strong>in</strong>anc<strong>in</strong>g <strong>in</strong> Pol<strong>and</strong>.1. F<strong>und</strong>usz Mikro <strong>in</strong> a nutshell.F<strong>und</strong>usz Mikro, an <strong>in</strong>stitution established by the Polish-American Enterprise F<strong>und</strong> <strong>in</strong> 1994,realises the biggest programme of loans for microenterprises <strong>in</strong> Pol<strong>and</strong>. Accord<strong>in</strong>g to theresearch, the results of which were published by the Polish Association of Loan F<strong>und</strong>s,F<strong>und</strong>usz Mikro is the Polish leader <strong>in</strong> the number of loans granted (71 % of loans granted <strong>in</strong>total) <strong>and</strong> <strong>in</strong> the capital employed <strong>in</strong> companies of our clients (39 % of the capital from loanf<strong>und</strong>s comes from F<strong>und</strong>usz Mikro). In the twelfth year of the company’s operation, the valueof loans granted reached the amount of PLN 734 million (EUR 188 million). Capital ofF<strong>und</strong>usz Mikro has been used by nearly 45,000 clients, who have been granted over 95,000loans <strong>in</strong> total. Such an amount means real f<strong>in</strong>ancial resources given to the smallest SMEs,through which they can secure their position <strong>in</strong> the market, develop <strong>and</strong> – as entrepreneursdeclare – create new jobs.Loans taken from F<strong>und</strong>usz Mikro usually do not exceed a few or about a dozen thous<strong>and</strong>Polish zlotys (EUR 1,000 – 5,000). However, there are also entrepreneurs – regular clients ofF<strong>und</strong>usz Mikro – who use significantly larger amounts, reach<strong>in</strong>g as much asPLN 100,000 - 150,000 (up to EUR 38,000). What are the reasons for such divergences?The matter is actually quite simple – as simple as the procedures employed <strong>in</strong> F<strong>und</strong>uszMikro. Every client is treated <strong>in</strong>dividually throughout the entire process: from the first contact,through the loan period until its completion, or even longer. At the first meet<strong>in</strong>g, clientsdeclare their f<strong>in</strong>ancial needs specifically connected with their economic activity. They canoften already present specific ideas for their company’s development <strong>and</strong>, encouraged by anadviser, they describe their plans. If the plans need more specific <strong>and</strong> detailed formulation,advisers help to express them <strong>in</strong> writ<strong>in</strong>g. Moreover, the plans always need f<strong>in</strong>ancial <strong>and</strong> riskanalysis <strong>and</strong> advisers are always there to support the clients <strong>in</strong> this respect. In order tocorrectly assess the risk of activity, the state of stocks <strong>and</strong> fixed assets, an adviser visits theclient’s company. Clients are happy to demonstrate their bus<strong>in</strong>ess, <strong>in</strong>dicat<strong>in</strong>g certa<strong>in</strong>drawbacks <strong>and</strong> deficiencies at the same time. In the context of the obstacles they encounter<strong>in</strong> the course of runn<strong>in</strong>g their bus<strong>in</strong>ess, they present their development plans. They sharetheir ideas, formulate their goals <strong>and</strong> face challenges that enable their realisation. As a resultof such a visit, the adviser has a clear image of the bus<strong>in</strong>ess type <strong>and</strong> bus<strong>in</strong>ess needs of theclient. After def<strong>in</strong><strong>in</strong>g the purpose of the loan, the amount <strong>and</strong> maturity are specified. Theseparameters are meant to be advantageous for the client <strong>and</strong> to enable normal function<strong>in</strong>g ofthe bus<strong>in</strong>ess with a precisely calculated monthly loan <strong>in</strong>stalment. The task of approv<strong>in</strong>g the
Twelve Years’ Experience of Microf<strong>in</strong>anc<strong>in</strong>g <strong>in</strong> Pol<strong>and</strong> 67terms <strong>and</strong> conditions of the loan is performed by these employees who, because of theirparticular type of professional responsibilities, are authorised to approve such terms <strong>and</strong>conditions. After the approval, the loan agreement is signed <strong>in</strong> the branch of F<strong>und</strong>usz Mikro.Sometimes this operation requires only the presence of the client tak<strong>in</strong>g a loan, but morefrequently the loan guarantors are also <strong>in</strong>vited to the meet<strong>in</strong>g. Each of them receives onecopy of the agreement. F<strong>und</strong>usz Mikro keeps the orig<strong>in</strong>al copy of the agreement <strong>and</strong> blankpromissory notes with clauses secur<strong>in</strong>g the loan. The loan agreement document, togetherwith Appendix 2, <strong>in</strong> which the client specifies the corporate bank account number, constitutesthe entire documentation required for loan disbursement, i.e. for transferr<strong>in</strong>g the money tothe corporate bank account of the client. The money is usually transferred to the client’s bankaccount on the day follow<strong>in</strong>g the execution of the agreement.For the client’s convenience, due to seasonal activity of the company or other currentf<strong>in</strong>ancial liabilities, the term of payment of the first <strong>in</strong>stalment is arranged with<strong>in</strong> two weeksfrom the month of loan disbursement.What f<strong>in</strong>ancial products are available to the clients of F<strong>und</strong>usz Mikro? The loan offer <strong>in</strong>cludesseveral products, the most popular of which are: microloans, traditional loans, loan<strong>in</strong>vestment, as well as a start-up loan, i.e. a loan for people start<strong>in</strong>g their bus<strong>in</strong>ess activity<strong>and</strong> a quick loan.For microloans, the parameters of the product are so adjusted that entrepreneurs who do notdemonstrate their profits or declare losses can use the loan with no limitations. The value ofthe first loan usually does not exceed PLN 10,000 (EUR 2,500), but <strong>in</strong> certa<strong>in</strong> circumstances,it is possible to obta<strong>in</strong> PLN 20,000 (EUR 5,000) at the beg<strong>in</strong>n<strong>in</strong>g of cooperation. Advisers ofF<strong>und</strong>usz Mikro have to check certa<strong>in</strong> documents, <strong>in</strong>clud<strong>in</strong>g documents of registration of thecompany <strong>and</strong> documentation of settlements with the Tax Office. Clearance certificate fromthe Social Insurance Institution (ZUS) <strong>and</strong> the spouse’s consent for tak<strong>in</strong>g the loan are alsorequired. In order to ensure rational risk distribution, there is a requirement to provideguarantors, whose number depends on the loan value. A blank promissory note is issued bythe client with the aval.A traditional loan is a product for people who cannot provide loan guarantors. S<strong>in</strong>ce the risk<strong>in</strong>volved <strong>in</strong> lend<strong>in</strong>g a certa<strong>in</strong> amount of money is borne ma<strong>in</strong>ly by F<strong>und</strong>usz Mikro, the loanvalue does not exceed the level of PLN 5,000 (EUR 1,250).Loan <strong>in</strong>vestment is another matter. In this case, F<strong>und</strong>usz Mikro employs larger amounts,reach<strong>in</strong>g PLN 100,000 - 150,000 (up to EUR 38,000), while the m<strong>in</strong>imum amount offered isPLN 20,000 (EUR 5,000). There are also more options of loan <strong>in</strong>vestment collateral. Apart
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 68from the promissory note <strong>and</strong> the guarantee, transfer of ownership of fixed assets for securitypurposes, registered pledges <strong>and</strong> other legal measures are sometimes employed. Theperiod of the loan repayment is longer; repayment of the loan with<strong>in</strong> 36 months is possible.Moreover, a grace period can be granted, depend<strong>in</strong>g on the loan value – clients can typicallycount on prolong<strong>in</strong>g the term of repayment by 3-6 months.Loans for start<strong>in</strong>g bus<strong>in</strong>ess activity are very popular, although less experiencedentrepreneurs have to present their bus<strong>in</strong>ess concepts <strong>and</strong> ideas, present arguments fortheir f<strong>in</strong>anc<strong>in</strong>g needs <strong>and</strong> f<strong>in</strong>d guarantors will<strong>in</strong>g to secure their liabilities <strong>in</strong> case the bus<strong>in</strong>essis not successful.While their loan is still be<strong>in</strong>g repaid, all regular clients of F<strong>und</strong>usz Mikro can use so-calledquick loans to regulate their f<strong>in</strong>ancial liquidity or to immediately f<strong>in</strong>ance their current bus<strong>in</strong>essneeds. The amount that can be granted as a quick loan does not exceed PLN 3,000 (up toEUR 750).Currently, F<strong>und</strong>usz Mikro is exp<strong>and</strong><strong>in</strong>g its offer by seasonal products <strong>and</strong> by-productsdesigned especially for particular groups of entrepreneurs. For example, F<strong>und</strong>usz Mikro has<strong>in</strong>troduced a Christmas loan <strong>and</strong> a loan for doctors.Regular clients of F<strong>und</strong>usz Mikro are treated very specially by advisers. They have been<strong>in</strong>vited to workshop meet<strong>in</strong>gs for discussions on issues directly connected with all aspects ofentrepreneurship. They have particularly appreciated outdoor picnics, at which their familiescould have fun with music <strong>and</strong> a barbecue. Christmas even<strong>in</strong>gs, with Christmas carols <strong>and</strong>plenty of food, are a k<strong>in</strong>d of gift for most appreciated clients who have been cooperat<strong>in</strong>g withF<strong>und</strong>usz Mikro for years. All clients, both those who have just started their cooperation withF<strong>und</strong>usz Mikro <strong>and</strong> those who have been develop<strong>in</strong>g their companies ow<strong>in</strong>g to F<strong>und</strong>uszMikro f<strong>in</strong>anc<strong>in</strong>g, can use the loyalty programme <strong>and</strong> benefit from hav<strong>in</strong>g Loyalty Cards. Theyreceive <strong>in</strong>formation brochures, prepared especially for them, conta<strong>in</strong><strong>in</strong>g up-to-date<strong>in</strong>formation on account<strong>in</strong>g regulations applicable to small companies.Procedures <strong>in</strong>volved <strong>in</strong> the particular activity of F<strong>und</strong>usz Mikro are constructed <strong>in</strong> such a waythat they reduce the risk of F<strong>und</strong>usz Mikro connected with grant<strong>in</strong>g a loan. Ow<strong>in</strong>g to suchprocedures, the company has been operat<strong>in</strong>g <strong>in</strong> the Polish market for over a 12 years <strong>and</strong> iscurrently develop<strong>in</strong>g very dynamically. It is enough to mention that the <strong>in</strong>crease <strong>in</strong> thenumber of loans granted <strong>in</strong> f<strong>in</strong>ancial year 2005/2006 was almost twice that of f<strong>in</strong>ancial year2003/2004. The number of people employed as advisers has also significantly <strong>in</strong>creased <strong>in</strong>recent months. The corporate structure has been changed: new units have been established,responsible for comprehensive activities aimed at acquir<strong>in</strong>g a large number of entrepreneurs
Twelve Years’ Experience of Microf<strong>in</strong>anc<strong>in</strong>g <strong>in</strong> Pol<strong>and</strong> 69<strong>in</strong>terested <strong>in</strong> f<strong>in</strong>anc<strong>in</strong>g their bus<strong>in</strong>ess activity. In such a state of affairs, F<strong>und</strong>usz Mikrodiscerns a chance for the development of entrepreneurship <strong>in</strong> Pol<strong>and</strong>.2. Flood relief programs.Summer – Autumn 1997.After the flood devastated the south-western part of Pol<strong>and</strong> <strong>in</strong> the summer of 1997, thePolish-American Enterprise F<strong>und</strong> assigned USD 3.5 million to help small enterprises affectedby the flood <strong>and</strong> made F<strong>und</strong>usz Mikro responsible for design<strong>in</strong>g <strong>and</strong> coord<strong>in</strong>at<strong>in</strong>g the aidprogramme. It was decided that the aid would be disbursed <strong>in</strong> the form of subsidised loans.F<strong>und</strong>usz Mikro quickly prepared all the procedures <strong>and</strong> documents, def<strong>in</strong>ed fair criteria ofloan distribution <strong>and</strong> managed the entire action. The first loan agreements withentrepreneurs affected by the flood were signed on 17 November <strong>and</strong> 1,834 people receivedcapital <strong>and</strong> began to renovate their facilities, many of which had been destroyed entirely.Excellent coord<strong>in</strong>ation of the action was possible ow<strong>in</strong>g to good cooperation with selfgovernmentadm<strong>in</strong>istration authorities <strong>in</strong> Wroclaw, Opole <strong>and</strong> Klodzko, which helpedF<strong>und</strong>usz Mikro to dissem<strong>in</strong>ate <strong>in</strong>formation <strong>and</strong> to distribute application forms as well asprovid<strong>in</strong>g F<strong>und</strong>usz Mikro with office premises. F<strong>und</strong>usz Mikro also received <strong>in</strong>valuable helpfrom the media – TV stations <strong>and</strong> newspapers – through which <strong>in</strong>formation about theprogramme quickly reached all potential borrowers.Loans were to be repaid <strong>in</strong> one payment at the end of two years; 85 % of the borrowersrepaid their loans on time, <strong>and</strong> another 10 % with small delays. 95 % of the borrowersmanaged to overcome the crisis <strong>and</strong> develop their bus<strong>in</strong>esses. For most of them, loans werethe only form of help that they received after the flood.Summer 2001.The experience ga<strong>in</strong>ed dur<strong>in</strong>g the first flood relief programme was used by F<strong>und</strong>usz Mikrodur<strong>in</strong>g another flood <strong>in</strong> 2001, <strong>in</strong> Gdansk <strong>and</strong> the southern regions of Pol<strong>and</strong>. The action ofdisburs<strong>in</strong>g subsidised loans was organised <strong>in</strong> cooperation with the Polish-American FreedomFo<strong>und</strong>ation. F<strong>und</strong>usz Mikro disbursed <strong>in</strong>terest-free loans with a total value overPLN 1 million (EUR 250,000). The Polish-American Freedom Fo<strong>und</strong>ation covered theoperat<strong>in</strong>g cost of action.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 703. Small companies – big potential clients of F<strong>und</strong>usz Mikro.Jaroslaw,Jan, Zenon Labuda, Private Partnership, Electroplat<strong>in</strong>g company.The workshop of the Labuda brothers <strong>in</strong> Kedzierzyn-Kozle was destroyed by the flood of1997. They contacted F<strong>und</strong>usz Mikro for the first time then <strong>and</strong> received support from theflood relief programme. S<strong>in</strong>ce 1999, they have been regular clients <strong>and</strong> have repaid fivesubsequent loans.There are very few electroplat<strong>in</strong>g companies left <strong>in</strong> the region of Opole. The three brothersstill run the company established by their father <strong>in</strong> 1968. Although <strong>in</strong>terior design of theworkshop does not resemble a twenty-first century company, this branch of <strong>in</strong>dustry has alsomade major technological progress, requir<strong>in</strong>g <strong>in</strong>vestment <strong>and</strong> expenditure. Every metal detail<strong>und</strong>ergoes a long <strong>and</strong> complex process compris<strong>in</strong>g more than ten strictly ordered operations.Orders can be placed for electroplat<strong>in</strong>g of any metal details which need to be rustproof withz<strong>in</strong>c or nickel coat<strong>in</strong>g. Electroplated elements <strong>in</strong>clude mixers, elements of compressed air<strong>and</strong> steam <strong>in</strong>stallations, screw <strong>and</strong> parts of m<strong>in</strong><strong>in</strong>g mach<strong>in</strong>es. The company has nearly 80regular clients.Marek Oles<strong>in</strong>ski <strong>and</strong> Jerzy Pyrzynski, Private Partnership JUMAR – Confectionerymanufactur<strong>in</strong>g company.Jumar is a small company operat<strong>in</strong>g <strong>in</strong> the area of confectionery. It manufactures productsmade of dough with boil<strong>in</strong>g water: straw puffs <strong>and</strong> pea-like puff pastry. In 1993 MarekOles<strong>in</strong>ski took out a loan from the Polish-American Enterprise F<strong>und</strong> to purchase a rotaryfurnace. It was a foreign currency loan <strong>and</strong> was repaid with<strong>in</strong> two years. The <strong>in</strong>vestmentbought <strong>in</strong> a return very quickly. In September 1996, Mr Oles<strong>in</strong>ski obta<strong>in</strong>ed his first loan fromF<strong>und</strong>usz Mikro – PLN 10,000 for purchas<strong>in</strong>g a dough knead<strong>in</strong>g mach<strong>in</strong>e. So far, Mr Oles<strong>in</strong>ski<strong>and</strong> Mr Pyrzynski have repaid five loans with no delay, consequently <strong>in</strong>creas<strong>in</strong>g the quality<strong>and</strong> competitiveness of their products. The recent loans were spent on obta<strong>in</strong><strong>in</strong>g a HACCPcertificate <strong>and</strong> on further <strong>in</strong>vestments: modernisation of the pack<strong>in</strong>g room, purchas<strong>in</strong>gconta<strong>in</strong>ers <strong>and</strong> trucks for transport<strong>in</strong>g goods. The company currently employs eight people.Turnover has <strong>in</strong>creased <strong>and</strong> their regular client list is grow<strong>in</strong>g. Among these clients, there arewholesalers, Warsaw retail outlets <strong>and</strong> – most recently – large cha<strong>in</strong>s stores.
Twelve Years’ Experience of Microf<strong>in</strong>anc<strong>in</strong>g <strong>in</strong> Pol<strong>and</strong> 71Janusz Puderecki, Non-ferrous strap metal yard.Janusz Puderecki obta<strong>in</strong>ed his first, start-up loan from F<strong>und</strong>usz Mikro <strong>in</strong> March 2003. Thebus<strong>in</strong>ess idea, based on alum<strong>in</strong>ium cans, literally lay on the pavement. Before establish<strong>in</strong>ghis bus<strong>in</strong>ess, Mr Pudrecki researched the market for a year <strong>and</strong> a half. He had to learn towhom <strong>and</strong> for what price he could sell the cans that he would purchase from streetcollectors. He needed to f<strong>in</strong>d where such a scrapyard should be located <strong>and</strong> to calculate howmuch money to <strong>in</strong>vest on start-up. Due to high competition <strong>and</strong> the specific character of theclients, non-ferrous scrap metal yard is not an easy bus<strong>in</strong>ess to run. It requires knowledge ofhow to cooperate with street scrap collectors <strong>and</strong> to build a relationship based on mutualrespect.The first loan was needed for purchas<strong>in</strong>g scales for the first yard opened <strong>in</strong> the Praga districtof Warsaw, as well as for work<strong>in</strong>g capital. several months later the company had two yards.Mr Puderecki’s experience tells him that everyth<strong>in</strong>g is constantly chang<strong>in</strong>g, so he allows forthe possibility that he might change the l<strong>in</strong>e of bus<strong>in</strong>ess <strong>in</strong> the future. He expects that thereal-estate market may soon need professional managers; he has therefore recentlyreceived his BA from the Academy of Real-Estate Management.Piotr Stefaniuk & Olga Podlewska-Stefaniuk, Private Partnership Craison – Trade <strong>and</strong>production of artificial jewellery <strong>and</strong> gifts.Mr <strong>and</strong> Mrs Stefaniuk, who run a family bus<strong>in</strong>ess, have been us<strong>in</strong>g capital obta<strong>in</strong>ed fromF<strong>und</strong>usz Mikro s<strong>in</strong>ce 1997. They are currently repay<strong>in</strong>g their n<strong>in</strong>th loan. Mr Stefaniukregistered his bus<strong>in</strong>ess activity <strong>in</strong> 1992. His first company – “Bolszoj-bohema” – was adistributor of artificial jewellery. In 1993, his wife Olga established the “Craison” companyoperat<strong>in</strong>g <strong>in</strong> the same sector of the market <strong>and</strong> they have been work<strong>in</strong>g together s<strong>in</strong>ce thattime. The beg<strong>in</strong>n<strong>in</strong>g was not easy for Stefaniuks – their skills <strong>and</strong> experience <strong>in</strong> trad<strong>in</strong>g <strong>and</strong>produc<strong>in</strong>g jewellery constituted the ma<strong>in</strong> capital of the company. Runn<strong>in</strong>g such a bus<strong>in</strong>essalso required aesthetic taste as well as manual <strong>and</strong> artistic skills. The company was the first<strong>in</strong> that sector to start cooperation with the newly established megastores. Today, “Craison” isa jewellery wholesaler cooperat<strong>in</strong>g with nearly 20 stores all over the country <strong>and</strong> has its owntwo prestigious shopp<strong>in</strong>g centres <strong>in</strong> Warsaw. It is also a manufacturer of gifts. Plans for thenear future <strong>in</strong>clude establish<strong>in</strong>g a company <strong>in</strong> <strong>Germany</strong> – Mr Stefaniuk is currentlyresearch<strong>in</strong>g the market opportunities.On 18 November 2004, Mrs <strong>and</strong> Mr Stefaniuk rang the start<strong>in</strong>g bell at the Warsaw StockExchange, which officially launched the International Year of Microcredit proclaimed by theUnited Nations Development Programme.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 724. Ma<strong>in</strong> risk <strong>and</strong> problems.Accord<strong>in</strong>g to F<strong>und</strong>usz Mikro’s experiences micro-borrowers constitute the riskiest part of themarket because of:• The low level of their economic education <strong>and</strong> their lack of bus<strong>in</strong>ess experience• Poor formal documentation• Their attitude toward the State <strong>and</strong> f<strong>in</strong>ancial <strong>in</strong>stitutions• A lack of helpful examples to follow• A lack of material collateral <strong>and</strong> small amounts of loans5. Spectacular award for F<strong>und</strong>usz Mikro.To conclude we are proud to highlight that on the USAID conference “Partners <strong>in</strong> Transition:Lessons for the next decade” held <strong>in</strong> Warsaw <strong>in</strong> October 1999, First Lady Hilary Cl<strong>in</strong>ton paidtribute to F<strong>und</strong>usz Mikro for its excellent performance <strong>and</strong> for its work <strong>in</strong> promot<strong>in</strong>gentrepreneurship.6. History <strong>and</strong> results 1994 – 2007.Date of registration: December 1994First loan disbursed: February 1995Number of loans disbursed: 95,323Number of current clients: 14,000Gender breakdown:Women 44 %Men 56 %Type of bus<strong>in</strong>ess:Trade 50 %Services 42 %Production 8 %Loan purpose:Work<strong>in</strong>g capital 37 %Investments 63 %Total number of employees 150Local branches 37Total value of disbursement (<strong>in</strong> EUR) 188,785,350Total loans written off /0.37%/ 705,100Total value of repayments 169,102,320Total value of balance outst<strong>and</strong><strong>in</strong>g 19,683,030(Data as of February 2007)Author: Krzysztof Jaczewski, President of F<strong>und</strong>usz Mikro
<strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> 73<strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong>.1. Introduction.The ‘Mikrof<strong>in</strong>anzfonds Deutschl<strong>and</strong>’, or the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> ("the F<strong>und</strong>"), waslaunched <strong>in</strong> September 2006. It serves to build up <strong>and</strong> strengthen regional microf<strong>in</strong>ance<strong>in</strong>stitutions <strong>and</strong> <strong>in</strong>itiatives, which advise <strong>and</strong> accompany start-up <strong>and</strong> post start-upbus<strong>in</strong>esses, <strong>and</strong> moreover, provide them with micro loans (<strong>in</strong> a function as so-called microlenders). At present there are still gaps <strong>in</strong> the availability of micro loans <strong>in</strong> <strong>Germany</strong>. Thepurpose of the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> is to contribute to extend<strong>in</strong>g the offer of such loans <strong>and</strong>support the microf<strong>in</strong>ance <strong>in</strong>stitutions <strong>in</strong> professionalis<strong>in</strong>g their activities. At the same time theF<strong>und</strong> aims at contribut<strong>in</strong>g to a more efficient use of f<strong>und</strong><strong>in</strong>g by br<strong>in</strong>g<strong>in</strong>g advisory <strong>and</strong>f<strong>in</strong>anc<strong>in</strong>g services together. Currently start-ups can already access publicly-f<strong>und</strong>edconsult<strong>in</strong>g services <strong>in</strong> many places, e.g. <strong>in</strong> specialized start-up centres. However,subsequent to the advisory process there are very often no loans available. The F<strong>und</strong> isdesigned to help start-ups <strong>and</strong> young enterprises (up to five years from start-up) who haveconv<strong>in</strong>c<strong>in</strong>g bus<strong>in</strong>ess ideas to obta<strong>in</strong> loans of EUR 5,000, on average, with a term of abouttwo years.Basically, the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> is a guarantee f<strong>und</strong> which, for a fee, relieves theparticipat<strong>in</strong>g banks of the entire default risk result<strong>in</strong>g from their micro loan bus<strong>in</strong>ess.2. The <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong>: How it works.Entrepreneurs take their bus<strong>in</strong>ess ideas to a microf<strong>in</strong>ance <strong>in</strong>stitution. These are start-upcentres or management consultancies, which may have public or private back<strong>in</strong>g <strong>and</strong> whichhave decided to build up an additional l<strong>in</strong>e of bus<strong>in</strong>ess <strong>in</strong> the field of microf<strong>in</strong>ance. Forapproval by the F<strong>und</strong>, microf<strong>in</strong>ance <strong>in</strong>stitutions first have to pass through an accreditationprocess which ensures that all participat<strong>in</strong>g microf<strong>in</strong>ance organisations dispose of therequired expertise <strong>and</strong> conform to uniform quality st<strong>and</strong>ards. The accreditation process<strong>in</strong>volves both, a f<strong>in</strong>ancial <strong>and</strong> time wise commitment on the part of the applicants.The <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> charged the German <strong>Microf<strong>in</strong>ance</strong> Institute (DMI) withimplement<strong>in</strong>g the accreditation process for <strong>in</strong>terested microf<strong>in</strong>ance organisations. In April2004, the DMI was set up as a "Vere<strong>in</strong>", an association of organisations offer<strong>in</strong>g start-upadvisory services. Ma<strong>in</strong> purpose of the DMI is to assist fo<strong>und</strong>ers <strong>and</strong> young enterprises <strong>in</strong>obta<strong>in</strong><strong>in</strong>g f<strong>und</strong>s. At present the DMI has 54 members throughout <strong>Germany</strong>.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 74Its key functions are:a) Support<strong>in</strong>g local microf<strong>in</strong>ance <strong>in</strong>stitutions as they build up their organisation.b) Equipp<strong>in</strong>g them with the technical tools required for process<strong>in</strong>g loans.c) Arrang<strong>in</strong>g capital f<strong>und</strong><strong>in</strong>g to protect them from default risks.There are currently 11 accredited microf<strong>in</strong>ance <strong>in</strong>stitutions located <strong>in</strong> many different regions<strong>in</strong> <strong>Germany</strong>. (Further <strong>in</strong>formation on the organisations which are already accredited can befo<strong>und</strong> at www.mikrof<strong>in</strong>anz.net).The microf<strong>in</strong>ance <strong>in</strong>stitution evaluates the start-up’s bus<strong>in</strong>ess plan <strong>and</strong> may advise on itsfurther development as appropriate. In case the micro lender comes to the conclusion thatboth, entrepreneur <strong>and</strong> bus<strong>in</strong>ess concept, are likely to succeed, he forwards a loanapplication to a cooperat<strong>in</strong>g bank together with a favourable loan recommendation. The latterconta<strong>in</strong>s specific details of the loan agreement, e.g. the term of the credit etc. In pr<strong>in</strong>ciple, all<strong>in</strong>terested banks can cooperate with the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong>. If the micro lenderdoes not f<strong>in</strong>d a cooperat<strong>in</strong>g bank locally, the GLS Bank, which is also an <strong>in</strong>vestor <strong>in</strong> theF<strong>und</strong>, is will<strong>in</strong>g to take on this role.The cooperat<strong>in</strong>g bank is fully exempt from liability by the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong>. As arule, therefore, it is likely to follow the loan recommendation submitted by the microlender<strong>and</strong> disburse the loan. Before do<strong>in</strong>g so, it enters <strong>in</strong>to a st<strong>and</strong>ardised loan agreement with thestart-up or young enterprise. To comply with the provisions of bank<strong>in</strong>g legislation, the F<strong>und</strong>'sacceptance of liability towards the bank takes the form of a cash deposit. If a borrowerdefaults on a loan, the bank can immediately tap <strong>in</strong>to this deposit.The scope of the product currently provides for a maximum loan volume of EUR 10,000. As arule, the term is aro<strong>und</strong> 18 months. Amortization usually takes on the form of monthlyannuities, <strong>and</strong> there is no grace period. Loan <strong>in</strong>terest currently amounts to 10 % p.a. Thebank passes on part of its <strong>in</strong>terest <strong>in</strong>come (currently 5 % p.a.) to the F<strong>und</strong> as a fee for thelatter's acceptance of the loan liability. It also passes on the bank account data to themicrof<strong>in</strong>ance <strong>in</strong>stitution which advises the borrower.The microf<strong>in</strong>ance <strong>in</strong>stitution is particularly motivated to work well <strong>and</strong> only recommend loansfor the benefit of start-up concepts which have real prospects to succeed. The ma<strong>in</strong> reason isthat it assumes a 20 % first-loss liability on an annual basis on the portfolio of loans that itrecommends.
<strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> 75The <strong>in</strong>stitution <strong>und</strong>ertakes not only the appraisal of the bus<strong>in</strong>ess project <strong>and</strong> the issuance ofthe loan recommendation but also looks after the start-up for the entire term of the loan. Ifany difficulties arise, e. g. payment defaults, the <strong>in</strong>stitution is responsible for "crisis<strong>in</strong>tervention". It is also responsible for pursu<strong>in</strong>g damages <strong>and</strong>, if need be, the liquidation ofsecurities.As remuneration for its efforts <strong>in</strong> connection with the extension <strong>and</strong> management of the loansas well as the assumption of part of the credit risk, the F<strong>und</strong> pays the microf<strong>in</strong>ance <strong>in</strong>stitutiona fee equal to 10 % of the repayments received by the cooperat<strong>in</strong>g bank on therecommended loans. That means, <strong>in</strong> effect, that successful microlenders st<strong>and</strong> to make aprofit if their recommended loans default at a rate, which is lower than 10 %. In that casetheir fee <strong>in</strong>come is higher than their expenditure <strong>und</strong>er the first-loss liability.The microf<strong>in</strong>ance <strong>in</strong>stitution provides the DMI with regular report<strong>in</strong>g compris<strong>in</strong>g critical data(e.g. total loan volume <strong>und</strong>er management, loans with amended loan agreements <strong>and</strong> loanscarry<strong>in</strong>g particular risks). S<strong>in</strong>ce it is not <strong>in</strong>volved <strong>in</strong> the <strong>in</strong>dividual credit decision, the<strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> monitors these data closely to be able to anticipate emerg<strong>in</strong>grisks early-on <strong>and</strong> <strong>in</strong>itiate appropriate action. For <strong>in</strong>stance the microf<strong>in</strong>ance <strong>in</strong>stitution mustdraw up a plausible action plan if the share of the loan portfolio at risk (e.g. loans featur<strong>in</strong>glate repayments) exceeds 15 % of the total loan volume or its annual default rate exceeds10 %. If necessary, the F<strong>und</strong> can also stop an <strong>in</strong>dividual microlender from recommend<strong>in</strong>gfurther loans.All the rights <strong>and</strong> obligations of the cooperat<strong>in</strong>g partners concerned (<strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong><strong>Germany</strong>, DMI, the cooperat<strong>in</strong>g bank <strong>and</strong> the microlender) are def<strong>in</strong>ed <strong>in</strong> advance <strong>in</strong> acomprehensive Cooperation Agreement.The follow<strong>in</strong>g chart shows the various partners´ roles with<strong>in</strong> the <strong>Microf<strong>in</strong>ance</strong>-F<strong>und</strong> <strong>Germany</strong>scheme.
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 76<strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong>DMIRecommends cooperation withmicrof<strong>in</strong>ance <strong>in</strong>stitution<strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong><strong>Germany</strong>•qualification•accreditation•monitor<strong>in</strong>g<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong>stitution takes20% first lossRemunerationLoanrecommendationFeeInterest/amortizationBankCash deposit(100%)Loan agreement<strong>Microf<strong>in</strong>ance</strong> <strong>in</strong>stitution(e.g. start-up advisory centre)AdvisoryLoan applicationStart-up/young enterprise1Figure 1: <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong>3. Organisation <strong>and</strong> economic efficiency of the f<strong>und</strong>.The follow<strong>in</strong>g <strong>in</strong>stitutions have participated as <strong>in</strong>vestors <strong>in</strong> the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong>,each contribut<strong>in</strong>g approx. EUR 500,000: GLS Bank (together with clients/bus<strong>in</strong>ess partners),the German Federal M<strong>in</strong>istry of Economics <strong>and</strong> Technology (f<strong>und</strong>ed by the ERP SpecialF<strong>und</strong>), the German Federal M<strong>in</strong>istry for Labour <strong>and</strong> Social Affairs (f<strong>und</strong>ed by the <strong>Europe</strong>anSocial F<strong>und</strong> – ESF – resources) <strong>and</strong> KfW Bankengruppe. Thus a f<strong>und</strong> volume ofEUR 2 million is available for the pilot stage.Legally the F<strong>und</strong> is a special purpose vehicle with<strong>in</strong> GLS Bank, which manages the F<strong>und</strong>through a trust. The <strong>in</strong>vestors have appo<strong>in</strong>ted GLS Beteiligungsgesellschaft (a GLS Banksubsidiary) as trustee. The trustee adm<strong>in</strong>isters the F<strong>und</strong>'s day-to-day bus<strong>in</strong>ess accord<strong>in</strong>g tothe stipulations of the govern<strong>in</strong>g board of the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong>. All <strong>in</strong>vestors arerepresented <strong>in</strong> the F<strong>und</strong>’s Board of Governors, which takes all the f<strong>und</strong>amental decisions.These <strong>in</strong>clude decisions on the product framework for the micro loans, the <strong>in</strong>vestment ofF<strong>und</strong> assets <strong>and</strong> the core elements of the Cooperation Agreement. The tasks of the<strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> are laid down <strong>in</strong> its statutes.The F<strong>und</strong>'s economic efficiency can be shown from the follow<strong>in</strong>g:
<strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> 77As commission the F<strong>und</strong> receives from the cooperat<strong>in</strong>g bank half of its <strong>in</strong>terest <strong>in</strong>come onthe micro loans that it guarantees (i.e. 5 % p.a.). This low level of fee means that the F<strong>und</strong>needs additional support to be able to cover a) its adm<strong>in</strong>istration cost <strong>and</strong> b) the scheduledfee payments to the micro lenders (10 % of the repayments received by the cooperat<strong>in</strong>gbank) for their efforts <strong>in</strong> connection with the extension <strong>and</strong> management of the loans <strong>and</strong> theassumption of risk. However, s<strong>in</strong>ce the <strong>in</strong>vestors are waiv<strong>in</strong>g <strong>in</strong>terest on their capitalcontributions, the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> can generate the additionally required <strong>in</strong>come from<strong>in</strong>vest<strong>in</strong>g its assets. Here, an average <strong>in</strong>terest <strong>in</strong>come of 4 % p.a. on the <strong>in</strong>vestment isassumed. On the basis of the above assumptions (5 % p.a. commission for assumption ofliability <strong>and</strong> 4 % p.a. <strong>in</strong>terest <strong>in</strong>come), the volume of loans guaranteed by the F<strong>und</strong> must notbe more than about half the F<strong>und</strong>'s assets for the F<strong>und</strong> to have sufficient <strong>in</strong>come at itsdisposal to pay the micro lenders’ remuneration.S<strong>in</strong>ce the microf<strong>in</strong>ance <strong>in</strong>stitutions assume the first loss piece (up to 20 % of the volume ofthe loan portfolios they have recommended), the F<strong>und</strong>'s assets will only beg<strong>in</strong> to shr<strong>in</strong>k if thedefault rate of the loans guaranteed by the F<strong>und</strong> exceeds 20 %. What the <strong>in</strong>vestors areaim<strong>in</strong>g for is the preservation of the F<strong>und</strong>'s capital <strong>in</strong> real terms.4. Key conceptual aspects.The <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> attempts to closely l<strong>in</strong>k the functions f<strong>in</strong>anc<strong>in</strong>g <strong>and</strong> consultancysupport. This approach holds several advantages. For the start-up, it makes th<strong>in</strong>gs easierbecause it can deal with one counterpart who is constantly available with advice <strong>and</strong> canalso offer f<strong>und</strong><strong>in</strong>g. Another important po<strong>in</strong>t is that the bank is relieved not only of the entirerisk attached to the loans but also of a substantial part of the adm<strong>in</strong>istration costs. This is off<strong>und</strong>amental importance <strong>in</strong> encourag<strong>in</strong>g the banks to extend micro loans.For the offer of consultancy services, the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> relies on advisoryorganisations which are either already established or are <strong>in</strong> the process of enter<strong>in</strong>g themarket. These <strong>in</strong>stitutions participate <strong>in</strong> the advantages <strong>and</strong> risks of the microlend<strong>in</strong>gscheme through a sophisticated <strong>in</strong>centive system. The system comprises the assumption ofthe first-loss liability, a close monitor<strong>in</strong>g scheme (with risk <strong>in</strong>dicators such as portfolio-at-risk)<strong>and</strong> a remuneration arrangement. It prompts microlenders to be particularly careful <strong>in</strong>prepar<strong>in</strong>g <strong>and</strong> check<strong>in</strong>g their credit decisions <strong>and</strong> <strong>in</strong> manag<strong>in</strong>g the loan portfolio <strong>and</strong> it isgeared to rul<strong>in</strong>g out moral hazard.Resources from the <strong>Europe</strong>an Social F<strong>und</strong> (ESF) have been <strong>in</strong>vested <strong>in</strong> the <strong>Microf<strong>in</strong>ance</strong>F<strong>und</strong> <strong>Germany</strong> via the German Federal M<strong>in</strong>istry for Labour <strong>and</strong> Social Affairs. To date this is
Special Publication <strong>Microf<strong>in</strong>ance</strong> <strong>in</strong> <strong>Germany</strong> <strong>and</strong> <strong>Europe</strong> 78one of the few examples <strong>in</strong> <strong>Europe</strong> for this type of use of EU Structural F<strong>und</strong>s.. Theadvantage of such an "<strong>in</strong>novative use" of EU Structural F<strong>und</strong>s compared to grant<strong>in</strong>gsubsidies is the revolv<strong>in</strong>g nature of the ESF support. As soon as the ESF f<strong>und</strong>s are"released" from the cash deposit with the lend<strong>in</strong>g bank after the full repayment of themicroloan, they can be used once more as collateral for further microcredits. In addition, theESF f<strong>und</strong>s generate <strong>in</strong>terest <strong>in</strong>come which accrues to the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> as an additionalpromotional element. This way the effectiveness of the ESF f<strong>und</strong>s can be substantially<strong>in</strong>creased when compared to the award of grants.All <strong>in</strong> all, the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> represents an important step <strong>in</strong> the improvement <strong>and</strong>extension of the availability of microf<strong>in</strong>anc<strong>in</strong>g <strong>and</strong> the professionalisation of the microf<strong>in</strong>ancescene <strong>in</strong> <strong>Germany</strong>. This also leads, ultimately, to a more effective deployment of publicpromotional f<strong>und</strong>s. For while public support is already available <strong>in</strong> many places f<strong>und</strong><strong>in</strong>gorganisations advis<strong>in</strong>g young enterprises, the important next step, namely an appropriateoffer of debt, f<strong>in</strong>anc<strong>in</strong>g has <strong>in</strong> the past often been miss<strong>in</strong>g.5. Developments s<strong>in</strong>ce the start of the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong> <strong>Germany</strong> <strong>and</strong> prospects.As of March 2007 28 loans with a total loan volume of 200.000 EUR have been committed.Total lend<strong>in</strong>g is thus still low, but one has to keep <strong>in</strong> m<strong>in</strong>d that this was the start-up phase ofthe F<strong>und</strong>. In any event, the F<strong>und</strong>'s service has not been conceived as a "mass product". Onlythose banks <strong>and</strong> <strong>in</strong>stitutions which have a long-term strategic <strong>in</strong>terest <strong>in</strong> the microf<strong>in</strong>ancebus<strong>in</strong>ess, go<strong>in</strong>g beyond short-term profit considerations, will be considered as cooperat<strong>in</strong>gpartners. After all, the cooperat<strong>in</strong>g partners must make the one time effort to check <strong>and</strong>implement the terms of cooperation. In addition, some microf<strong>in</strong>ance <strong>in</strong>stitutions haveproblems committ<strong>in</strong>g the resources for the assumption of the 20 % first loss piece. Inpr<strong>in</strong>ciple, though, the model offers <strong>in</strong>stitutions which are or want to become active <strong>in</strong> themicrof<strong>in</strong>ance bus<strong>in</strong>ess, many advantages. Cooperat<strong>in</strong>g banks can position themselves <strong>in</strong> thismicrocredit market without exposure to new credit risks <strong>and</strong> without hav<strong>in</strong>g to fear thesubsequent expenses <strong>in</strong>herent <strong>in</strong> the lend<strong>in</strong>g bus<strong>in</strong>ess (e.g. <strong>in</strong> connection with liquidat<strong>in</strong>gsecurities) which so often discourage them. Start-up advisers can now help their clients toobta<strong>in</strong> a loan after hav<strong>in</strong>g gone through a successful advisory process, thereby tapp<strong>in</strong>g <strong>in</strong>tonew bus<strong>in</strong>ess opportunities for themselves. From 2008 onwards, the <strong>Microf<strong>in</strong>ance</strong> F<strong>und</strong><strong>Germany</strong> anticipates to achieve an annual loan volume of approximately EUR 1 millionspread over some 200 loans with an average loan value of 5,000 EUR.Author: Susanne Abel, Senior Project Manager KfW Bankengruppe