Growing microfinance in Europe
Which model to develop micro-finance in Europe?
Introduction: If we were to start a micro-credit program in Africa, South America or Asia, reaching scale would not be that complex quite simple. Demonstration of what works has already been done. Following the micro-start guide step by step would quite certainly work at least to reach a consistent portion of poor population of an area. Success, that is to say reaching a large number of people with a strong impact and at limited cost or even on a self sufficient basis would then depend on the political/financial environment, the management of the project and its ability to listen to the clients needs. Closer to us, in Bosnia, were the best practices were implemented very seriously (studieusement), the results are impressing, some programs having reached a high level of people helped 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 programs 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:
- People mainly with an employee background and with low self employed culture yet there are also some consistent niche markets (in communities for instance)
- Dispersed demand yet demand is quite important and dense in very urban areas and communities
- Heterogeneous needs from very small informal income generating activities to start ups created totally from scratch by executives who suddenly became unemployed.
Yet, focusing on deprived people (under the poverty line for instance), targeting local areas or specific public (but probably not both) makes it possible to reach a consistent portion of poor 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?
- A very complex and highly regulated environment
- A need to register one's business and a complex process to do so
- A high level of profitability to reach (cost of leaving, social charges,...)
regulation preventing entry in some activities
Probably limits self-employment and micro finance as a result but example of France with very complex environment and outreach
- Constraints on self sufficiency:
- Dependence on public grants (which creates constraints and does not put high pressure on self sufficiency)
- Capped interest rates
- High level of costs (salaries,...)
Acts differently from one country to the other with a balance to find between France (too Providence State) and England (too help yourself)
Constraints on funds:
Whereas in developping 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, organization write proposals or answer call for tenders that were not explicitly deviced 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 succesful 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 - A 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, micro finance is often introduced from outside and therefore comes with a clear idea about what micro finance is and how to get to that state (scale, geographical and group coverage etc).
In industrialised countries, the reverse happens with most home grown micro finance, 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 lacks for micro-finance really to grow and it might soon be too late to avoid strong expectancies 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.