Danuta Hubner's Speaking points on microfinance
- Lack of access to finance is an important barrier for people who would like to become self-employed, particularly for those who are socially excluded and who often have inadequate access to financial services. These people find themselves in a paradoxical situation: to obtain a loan from banks, they have to provide collateral, which they cannot, and are thus not meeting conditions to obtain a loan.
- As a consequence, there is today an important gap between the demand and the supply of micro-credit. The potential demand for micro-credit in Europe is huge, if only the conditions for lending could be improved. Estimates are in the range of 15 and 26 million borrowers for the period 2007 – 2013.
- Micro-credit has proven to be an instrument to enhance sustainable business creation, private sector development and growth and jobs, while helping to alleviate social exclusion - a goal emphasised in the conclusions to the Spring Council, 2007 - by encouraging self-help.
- Today, some 91% of firms in Europe are micro-businesses employing less than 10 people. The sector is developing in Europe, but although there are several actions and programmes dealing with micro-credit issues at EU level (for example the Competitiveness and Innovation Programme of DG ENTR or the ESF), much remains to be done and there seems to a clear role for the Union in giving an added impulse to its development.
- Micro-credit uses a financial approach to business development and social inclusion with a view to cover costs of capital, risk and operating expenses and to ensure the sustainability of the institutions and services provided.
- Micro-credit can foster the development of micro-enterprises and self-employment in rural areas. It has the potential to facilitate the modernisation of rural areas dependent on agriculture as well as economic renewal at the local level, including in areas suffering rural desertification.
- Micro-credit helps the creation of micro-enterprises, facilitating the re-integration into employment of workers in areas, sectors territories, or labour market regions suffering the shock of serious economic disruption.
- In countries that have large ethnic minorities or receive large numbers of immigrants, micro-credit could play an important role in promoting their integration.
Contribution of cohesion policy to microfinance
The legal base is Art 44 of the new 2007-2013 ERDF regulation which has included a provision allowing Structural Funds to finance expenditure in respect of an operation comprising contributions to support financial engineering instruments (holding funds) for enterprises, primarily small and medium-sized ones. This includes venture capital funds, guarantee funds and loan funds.
The Commission has stressed the importance of improving access to finance for small SMEs in the context of cohesion policy in its Communication of July 2005 Cohesion Policy in support of growth and jobs, Community strategic guidelines 2007-2013. In particular, the Commission referred to the need to enhance support for start-ups and micro-enterprises, through technical assistance, grants, as well as non-grant instruments such as loans, equity, venture capital or guarantees, and highlights the added value of undertaking these actions in cooperation with the EIB group (European Investment Bank and European Investment Fund).
Evaluations and studies demonstrate a clear correlation between, at the one hand, access to finance and risk capital for SMEs and, on the other hand, economic growth and competitiveness. Micro-credit is entirely in line with the renewed Lisbon strategy. The Directorate General for Regional Policy is currently developing with the help of other Services of the Commission (DG ENTR, DG EMPL, …) an initiative which which would seek to improve the provision of capital, to develop mentoring services - which are an essential part of the provision of micro-credit in order to accompany micro-borrowers in establishing a business - and to reform national institutional and legal frameworks to support micro-credit more effectively.
The action plan addresses existing instruments and three strands where there is room for improvement:
- improving the legal and institutional framework in the Member States
- developing a technical assistance mentoring taskforce at European level
- increasing the availability of capital for Micro-Finance Institutions (MFIs) in the Member States
- With regard to improving the legal and institutional framework, as required actions vary from Member State to Member State, an option would be to invite Member States to modify their national Reform Programmes under the Lisbon Strategy in order to take on board those actions that are necessary to promote a more favourable environment of micro-credit which fall within the national institutional, legal and commercial frameworks. The Commission explores the possibility of adding nationally agreed targets in this regard to the annual Lisbon monitoring.
- In this respect, actions that should be given consideration on borrower side are for instance: stimulation of entrepreneurship through lowering tax and administrative barriers, such as exoneration from social insurance charges for start-ups, as well as simplified procedures for new micro-enterprises; design solutions to enable unemployed and welfare recipients to move smoothly into self-employment
- Actions that should be encouraged to support MFIs' actions are:
- relaxing interest caps would help micro-credit to become sustainable;
- make evaluation of risk easier allowing MFIs to access borrower databases;
- reduce the cost of operation applying favourable tax schemes;
- if need be, preparation of a special legislative framework, as is already the case in Romania.
- With regard to the developing a technical assistance mentoring task force at European level, a small permanent operating unit could be created, perhaps based in the EIF abnd linked to JEREMIE. The mission of this micro-credit unit would be to prepare:
- Information and publicity for Member States, regions, banks and non-bank institutions;
- guidelines for creation and management of MFIs;
- training and other assistance to develop the mentoring capacity of MFIs on the ground;
- follow-up and evaluation, etc.
- With regard to the provision of capital for micro-credit, one option is to make use of the new financial instrument, JEREMIE, that aims at improving access to finance for SMEs and micro-enterprises in the framework of the ERDF policy is intended to provide both financial support and capacity building to MFIs through ERDF objective 2 programmes.
- MFIs could benefit from this instrument where the management authority of a region for European programmes provide for it. A part of their budgetary resources, normally delivered as grants, can thus be transformed into repayable loan capital. The capital will be assigned to selected potential financial intermediaries, authorised to disperse loans on the local level, including MFIs
- JEREMIE will be operational through holding funds and financial intermediaries offering a wide range of financial products to MFIs such as venture capital, loan or guarantee funds. Commission expects this intermediary role to be assumed by the European Investment Fund (EIF) mainly, who in turn will interface directly with project promoters - MFIs in the case of micro-credit.
- The financial intermediaries involved as investment vehicles in JEREMIE will be responsible for ensuring that good investments decisions are taken and that the financial products match the needs of the end-user. The Commission also expects that banks and financial intermediaries will seize the new opportunities for investing their own capital in JEREMIE, thus providing additional resources on top of the Structural Funds.
- It is possible that the EIB will contribute to the capital for micro-finance inside or in parallel with the operations under the heading of JEREMIE.