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A European initiative for A European initiative for the development of micro-the development of micro-

creditcredit

A European initiative for A European initiative for the development of micro-the development of micro-

creditcredit

Philippe DelvauxPhilippe DelvauxDirectorate General for Regional PolicyDirectorate General for Regional Policy

European CommissionEuropean Commission

26 May 200826 May 2008

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A central issue : the A central issue : the Lisbon agendaLisbon agenda

– Aims to make Europe the most competitive Aims to make Europe the most competitive and dynamic economy in the world…and dynamic economy in the world…

– Originally adopted in March 2000 (Gothenburg Originally adopted in March 2000 (Gothenburg update in 2001).update in 2001).

– Updated in 2005 : theUpdated in 2005 : the “ “growth and jobsgrowth and jobs” ” agenda.agenda.

– Two quantitative targets: employment rate of Two quantitative targets: employment rate of 70% (64.4) by 2010, R&D 3% (1.84) of 70% (64.4) by 2010, R&D 3% (1.84) of GDP…GDP…

– Since 2005, reinforced governance: detailed Since 2005, reinforced governance: detailed annual reporting; peer pressure.annual reporting; peer pressure.

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Structural Funds and Micro-creditStructural Funds and Micro-credit – The new SF regulations : Changing the cultureThe new SF regulations : Changing the culture

– Transforming grants into recyclable forms of Transforming grants into recyclable forms of assistance through financial engineering assistance through financial engineering instrumentsinstruments

– JEREMIE : A new instrument offering managing JEREMIE : A new instrument offering managing authorities responsible for the European authorities responsible for the European programmes solutions to increase the of financial programmes solutions to increase the of financial Engineering products like Venture Capital, loans, Engineering products like Venture Capital, loans, guarantees, seed capital, etc.guarantees, seed capital, etc.

– JEREMIE can be used to improve the provision of JEREMIE can be used to improve the provision of micro-credit in the European Unionmicro-credit in the European Union

– It is worth developing its full potential as regards It is worth developing its full potential as regards micro-creditmicro-credit

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Why do we need to do more Why do we need to do more in the field of micro-credit?in the field of micro-credit?

The EU still needs to create over The EU still needs to create over 20 million20 million jobs if it is to reach its own target of 70% jobs if it is to reach its own target of 70% employment rate (Lisbon Agenda).employment rate (Lisbon Agenda).

SME’s represent almost 92% of the firms in SME’s represent almost 92% of the firms in the European economy. the European economy.

Increased micro-credit supply for micro-Increased micro-credit supply for micro-business development can clearly contribute business development can clearly contribute to the growth of the European economy.to the growth of the European economy.

According to estimations, the potential According to estimations, the potential demand for micro-credit could be as high as demand for micro-credit could be as high as 700 000700 000 new micro-loans over the next few new micro-loans over the next few years or around years or around € 6 billion€ 6 billion..

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Why can’t we leave this to the Why can’t we leave this to the traditional banking sector?traditional banking sector?

Banks usually provide access to finance for existing Banks usually provide access to finance for existing micro-enterprises and traditional start-ups.micro-enterprises and traditional start-ups.

They are reluctant to deal with those who lack They are reluctant to deal with those who lack collateral, steady employment or a verifiable credit collateral, steady employment or a verifiable credit history,history, although the default rate on micro-loans is although the default rate on micro-loans is quite low. Operational costs are not proportionate to quite low. Operational costs are not proportionate to the size of the micro-loan.the size of the micro-loan.

Access to finance is therefore a real problem for those Access to finance is therefore a real problem for those who are considered non-bankable customers.who are considered non-bankable customers.

As a result, only part of the potential demand for As a result, only part of the potential demand for

micro-credit is satisfied.micro-credit is satisfied.

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Why a micro-credit initiative?Why a micro-credit initiative?

Access to finance is a key element to promote Access to finance is a key element to promote growth and jobs (Lisbon Agenda). growth and jobs (Lisbon Agenda).

Actions have already been taken at EU level and Actions have already been taken at EU level and in Member States to support of micro-credit (CIP, in Member States to support of micro-credit (CIP, EQUAL, PHARE, JEREMIE, …).EQUAL, PHARE, JEREMIE, …).

This is not sufficient to allow micro-credit to This is not sufficient to allow micro-credit to develop in Europe, as micro-credit operations develop in Europe, as micro-credit operations need to be seen in a broad support framework in need to be seen in a broad support framework in line with the principle of Subsidiarity).line with the principle of Subsidiarity).

A favourable environment is essential.A favourable environment is essential.

COM/2007/708 of 13 November 2007COM/2007/708 of 13 November 2007

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What is the purpose of the What is the purpose of the micro-credit initiative?micro-credit initiative?

To develop micro-credit in Europe.To develop micro-credit in Europe.

To promote a favourable legal, institutional and To promote a favourable legal, institutional and commercial environment for micro-credit in commercial environment for micro-credit in Europe.Europe.

To help non-bank Micro-finance Institutions To help non-bank Micro-finance Institutions improve theirimprove their lending capacity.lending capacity.

To help them grow and reach sustainability.To help them grow and reach sustainability.

To help them attract borrowers in confidence and To help them attract borrowers in confidence and raise funds on the private capital market.raise funds on the private capital market.

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In short: Two issues In short: Two issues

Promoting a more favourable legal and Promoting a more favourable legal and institutional environment for micro-credit.institutional environment for micro-credit.

Setting up, in inter-institutional partnership with Setting up, in inter-institutional partnership with the EIB-EIF (EIB group), a new European facility the EIB-EIF (EIB group), a new European facility to provide to MFIs, through a MicroFund,to provide to MFIs, through a MicroFund,

• Operational technical assistanceOperational technical assistance like like mentoring, training, information, etc. mentoring, training, information, etc.

• Flexible FundingFlexible Funding in form of equity, loans, in form of equity, loans, grants.grants.

• General support measuresGeneral support measures like a code of like a code of conduct, a quality label, etc.conduct, a quality label, etc.

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What is the Commission What is the Commission now proposing to do?now proposing to do?

As the frameworks differ from Member State to Member As the frameworks differ from Member State to Member State, the Commission proposes to help Member States State, the Commission proposes to help Member States to improve their own micro-credit environment by to improve their own micro-credit environment by indicating quantitative targets for loans and by compiling indicating quantitative targets for loans and by compiling an inventory of good regulatory practices.an inventory of good regulatory practices.

Member States are encouraged to adopt targets and to Member States are encouraged to adopt targets and to report on implementation in the framework of the annual report on implementation in the framework of the annual Lisbon cycle.Lisbon cycle.

Member States should also seek to encourage more Member States should also seek to encourage more entrepreneurship.entrepreneurship.

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MicroFund at glanceMicroFund at glance

• Target Target : non-banking MFIs close to sustainability (e.g. : new : non-banking MFIs close to sustainability (e.g. : new branches of well-established MFIs, young and more mature MFIs)branches of well-established MFIs, young and more mature MFIs)

• Initial phaseInitial phase : 10 – 15 MFIs to be funded : 10 – 15 MFIs to be funded

• AreaArea : 27 Member States : 27 Member States

• Target fund size Target fund size : EUR 40m : EUR 40m

• ProfileProfile : Fund with “equity” risk profile (Corporate Social : Fund with “equity” risk profile (Corporate Social Responsibility investment)Responsibility investment)

• Fund’s instruments for MFIsFund’s instruments for MFIs : mainly short-term to medium-term : mainly short-term to medium-term loans, equity / quasi-equity, technical assistanceloans, equity / quasi-equity, technical assistance

• InvestorsInvestors : (EU, EIB, EUROFI members, Other banks, etc..) : (EU, EIB, EUROFI members, Other banks, etc..)

• Legal FormLegal Form : Luxemburgish legal vehicle (SICAR , SIF, …) : Luxemburgish legal vehicle (SICAR , SIF, …)

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MicroFund managed by

Mentoring(Technical Assistance)

Microfinance Institutions (MFIs)

Funding(Loans, Equity/quasi equity, etc...)

EIB, Eurofi, Other Banks,Contributors, etc..

JEREMIE,ERDF, ESFDG REGIO T.A.

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A code of good conduct for MFIs to spread ethic and A code of good conduct for MFIs to spread ethic and customer-friendly best practices among MFIs.customer-friendly best practices among MFIs.

A micro-credit quality label which will be awarded under A micro-credit quality label which will be awarded under strict conditions to MFIs to guarantee their reliability, to strict conditions to MFIs to guarantee their reliability, to help them attract borrowers in confidence and to raise help them attract borrowers in confidence and to raise funds on the private capital market.funds on the private capital market.

Grants to be used as start-up “equity” to help MFIs cover Grants to be used as start-up “equity” to help MFIs cover their operational costs and become sustainable.their operational costs and become sustainable.

The need for a pilot project to gain experience in The need for a pilot project to gain experience in delivering Funds and support to non-bank MFIs.delivering Funds and support to non-bank MFIs.

Important practical elementsImportant practical elements

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Criteria :Criteria :

Good governanceGood governance Financial performanceFinancial performance Social performanceSocial performance Results compliant with business planResults compliant with business plan SustainabilitySustainability ……

A quality label for MFIs A quality label for MFIs

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Adoption of a Small Business Act at Adoption of a Small Business Act at EU-LevelEU-Level

Advice from EP and EESC on Advice from EP and EESC on micro-credit initiativemicro-credit initiative

FundraisingFundraising Launching a Pilot-projectLaunching a Pilot-project Operational implementation in 2009Operational implementation in 2009

Next stepsNext steps

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Access to finance is an essential element promote Access to finance is an essential element promote growth and jobs growth and jobs

There is an important market failure in the field of micro-There is an important market failure in the field of micro-credit in Europe.credit in Europe.

The Lisbon Agenda offers a unique opportunity to The Lisbon Agenda offers a unique opportunity to develop micro-credit in Europe (Small business Act).develop micro-credit in Europe (Small business Act).

Strong political support from EP, EU-Presidencies.Strong political support from EP, EU-Presidencies. Strong financial support from EIB-group.Strong financial support from EIB-group. Particular attention is to be paid to the mentoring issue.Particular attention is to be paid to the mentoring issue. Non-bank MFIs seem better positioned to deliver micro-Non-bank MFIs seem better positioned to deliver micro-

loans to non-bankable entrepreneurs.loans to non-bankable entrepreneurs. Sustainability, reliability and good governance of MFIs Sustainability, reliability and good governance of MFIs

are key to attract private capital.are key to attract private capital. Grants are necessary to help non-bank MFIs cover their Grants are necessary to help non-bank MFIs cover their

costs in the starting phase.costs in the starting phase. Micro-credit can be a win-win process. Good co-Micro-credit can be a win-win process. Good co-

operation is the key to success. operation is the key to success.

ConclusionsConclusions

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Who can help ?Who can help ?

Member States (improve the micro-credit environment)Member States (improve the micro-credit environment) The Commission (Cohesion Policy, JEREMIE,, The Commission (Cohesion Policy, JEREMIE,,

Guarantee window of the Competitiveness and Guarantee window of the Competitiveness and Innovation Programme, …)Innovation Programme, …)

The European Parliament (preparatory action to The European Parliament (preparatory action to reinforce the financing capability of the MFIs)reinforce the financing capability of the MFIs)

The European Investment Bank Group (financial The European Investment Bank Group (financial expertise, fund raising and leverage effect)expertise, fund raising and leverage effect)

EUROFI (Expertise, toolkit, funding, good practice)EUROFI (Expertise, toolkit, funding, good practice) Micro-finance Networks (on the ground knowledge, Micro-finance Networks (on the ground knowledge,

dissemination of information, best practices)dissemination of information, best practices) Private and public investors, retail banks (funding and Private and public investors, retail banks (funding and

expertise)expertise) DonorsDonors YouYou

An important number of stakeholdersAn important number of stakeholders

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philippe.delvaux@ec.europa.eu