Growing microfinance in Europe
Which model is appropriate to develop and grow micro-finance in Europe?
By Arnaud Berger with Peter Ramsden
If we were to start a microcredit programme in a part of Africa, South America or Asia which had not already had a lot of microfinance approaches, reaching scale would be demanding but also straightforward. There is already a mass of experience of what works. Following the micro-start (reference) guide step by step would work at least to reach a given proportion of poor population in an area. Success, that is to say reaching a large number of people with a strong impact and reasonable cost or even on a self sustaining basis would then depend on the political/financial environment, the management of the project and its ability to listen to the clients' needs.
We could also study the results of a similar but real exercies closer to the EU this time in Bosnia. There the best practices were implemented with close attention to detail. The results are impressive. Several microfinance programmes having reached high volume of clients supported on a sustainable basis in a very short period of time. But in Western Europe, there is still a question of scale. Almost all of the programmes achieve limited results in terms of number of clients and are almost totally dependent on grants. Would it be possible to write a micro-start guide for Western Europe to change that situation?
Is the problem coming from demand? Is demand that different from one country to the other?
In developing countries, most of the economy is based on very small businesses; with as many as 35% self employed people (probably even more in Bolivia for instance). The demand is dense (at least in cities) and quite homogeneous. As a result, a universal approach and economies of scale are possible.
In industrialised countries, the demand is more complex:
- the majority of people have an employee background and self employed are small proportion in comaprison. despite this there are some important niche markets (in migrant communities for instance which have higher levels of self employment)
- Demand is geographically dispersed but can be more and dense in very urban areas
- The finance needs are very diverse because of the heterogeneity of the start-up sector itself which may range from someone with a small informal activity to business executives starting up as consultants after being made redundant (although they are not really expressing demand).
Yet, focusing on disadvantaged people - for example those below 60% of median income or targeting local areas or specific groups (but probably not both) makes it possible to reach a significant portion of disadvantaged populations. Level of activities in certain suburbs or communities in France (and maybe also figures from Fair Finance and others) – evidences of an important informal activity (one borrower out of two in Ile de France for ADIE – 80% of the public of small community organizations in London – figures from Community links?...) - attempts to measure demand by ADIE and EMN...
Is the context that different from one country to the other, claiming for different contexts?
- complexity of the highly regulated business environment in most EU Member states (except UK and Ireland)
- barriers to entry caused by the difficulty of registration processes
- the need to reach much higher levels of profitability to cover taxes, social charges, higher living costs, and the demands of the consumer society)
- the negative impacts of social welfare safety nets which can make it difficult to formalise and create 'benefit traps'
Different microfinance experiences: France and the UK
France - the growth of ADIE
Despite a very complex environment, ADIE in France has succeeded in growing to be one of the largest microfinance organisations in the EU.
More on the growth of ADIE and the difference between their model and the platforms (lack of sustainability, a local movement not a national movement
- Constraints on self sufficiency:
- Dependence on public grants (which creates constraints and does not put high pressure on self sufficiency)
- Capped interest rates (e.g. France but not UK)
- High level of costs (salaries, salary costs...)
UK - the fragmented approach
The UK took to microfinance through the encouragement of Policy Action Team 3 which focused on finance and social exclusion and the Social Investment Task Force which published its results in 2000. The major result of these labours was a whirlwind of policy activity at central and local levels and in particular the creation of the Phoenix Fund with its two major parts, a Challenge Fund to develop community development finance and a Development Fund to support innovation in business support for groups under-represented in enterprise such as women and people with disabilities and enterprise in disadvantaged areas - including inner cities, large outer estates and former coal mining areas.
These forces act differently from one country to the other with a balance to find between France (too Providential State) and England (too help yourself)
Constraints on funds
Whereas in developing countries, start-up funds come from outside with a good understanding of what MF is and a very clear focus on reaching scale, it is very fragmented in industrialised countries. Most often, organisations write proposals or answer calls for tenders that were not explicitly devised for that purpose or when it is the case where deviced with a very unclear knowledge of the basic principles of MF. They partly adapt the proposals to their activities but also very often adapt their activities to the requirement of grant providers. As a result, they are oblidge to stick to some local areas or on the contrary cover very large ones (with a requirement to cover some areas independently from where demand is - the fact that ADIE had to cover the whole territory of France to increase its funding prevented it to focus – on the contrary, it has the obligation to have premises or weekly presence in areas where it is not needed to receive money from some departement or communes). Some grants are also attached to a public (young, old, unemployed,...), obliging organisations to work only or mainly with only a part of the market (e.g. women (WEETU WWB), unemployed, young people princes trust, older people prime, migrants). Last, funds often focus on a specific stage - most frequently start up which is also the hardest market.
On the other hand, funds are only available for a period of time in developing countries and a strong focus is put on reaching self sufficiency. In industrialised countries, on the contrary, funds might be more easily available on the long run (yet often with a shift of focus to where the funds are) and therefore organizations less forced to think in terms of self sufficiency.
Need for a better understanding of MF from grant providers and dedicated funds
The main difference is probably how the best practices and common features to most successful micro-finance are applied and even agreed:
- Targeting scale
- Understanding the needs and adapting to them
- Looking for clients rather than waiting for them and building a marketing approach
- Charging an interest rate that enables the programme to target self-sufficiency
- Firm delinquency management to achieve high repayment rate (and convince banks to lend)
- Focus (one single service and product to begin with)
In developing countries, microfinance is often introduced from outside and therefore comes with a clear idea about what it is and how to get to that state (scale, geographical and group coverage etc).
In industrialised countries, the reverse happens with most home-grown microfinance, often emerging from local associations or organisations that think in terms of one neighbourhood, one city, or at most one region. These often comes with a social baggage which although good in theory makes them less ruthless in growing their MFIs. These are often organisations that have other things besides MF as their original and often primary focus (note the number of EMN members that do other things besides MF).
Yet, those would apply these practice more or less achieve the best results (Adie, Fair Finance,... others with larger loans) not only in terms of self-sufficiency but also of outreach and impact. There were yet failures such as Aspire or Street UK in attempts to set up pure microfinance but question about enough time for research and development (probably not spent enough time to assess the need for Street UK and too much pressure to reach self sufficiency quickly for Aspire).
Let us bet that the micro-start approach with technical assistance based on the best practices and funds to really pay for the start up would also work in Europe. Let us play the game with the same rule that is to say competition and funds linked with results. That might be just what is lacking for microfinance really to grow and it might soon be too late to avoid strong expectations to turn into disappointment and bitterness.
Need to believe that it is possible and make change happen.
Need to build model on flexibility and perseverance, innovating to adapt to the demand and the environment while making it change.