overview of the microcredit sector in europe 2004 … working paper n°4 overview of the microcredit...
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EMN Work ing Paper n°4
Overview of the Microcredit
Sector in Europe
2004-2005
Covering EU 15, EEA and New Member States
Tamara UnderwoodEuropean Microfinance Network
December, 2006
European Commission
® Front page photo credit : Adie
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1Acknowledgements 4
1Executive Summary 5
11. Introduction 7
12. Methodology 8
13. Sector Characteristics 10• Country Base 10• Scale 10• Growth 11• Actors 14
- Institutional Types 14- Mission 15- Microlending as a Proportion of Activity Portfolio 16- Age 17- Staff 17- Governance 18
14. Clients 19• Businesses Targeted 19• Client Targeting 19
- gender balance 21- immigrants, ethnic minorities, youth
and disabled people 22• Client Financial Inclusion 23• Marketing 24• Monitoring Programme Outcomes 25
15. Products and Services 27• Loan Terms 27• Interest Rates 27• Loan Fees 28• Guarantees 28• Loan Sizes 29• Loan Decision Making Criteria 31• Lending Methodology 31• Training and Technical Assistance 32• Other Financial Services 33
16. Operational Performance 35
17. Funding 38• Operational Costs 38• Loan Capital 38
18. Future 40• Clients 40• Financial Services 40• Growth 41
- Plans for Growth 41- Constraints to Growth 42
• Sustainability 42
19. Conclusion 45
10. Bibliography 47
11. Survey Participants 48
TABLE of CONTENTS
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EMN would like to extend its appreciation to the individuals and agencies that collaboratedin the distribution of survey questionnaires and collection of survey data in Spain, Italy,Germany and Hungary. The high response rate to this edition of the sector survey is due totheir efforts, for which EMN is grateful.
Silvia Rico Garrido - Foro Nantik Lum de MicroFinanzas, SpainMaricruz Lacalle Calderón – Foro Nantik Lum de MicroFinanzas, Spain
Valeria Pedroli – Giordano Del’Amore Foundation, Italy Paolo Vitali – Giordano Del’Amore Foundation, Italy
Brigitte Maas – DMI, GermanyChristoph Kneiding – DMI, Germany
Csaba Ivanyi-Windhoffer - Hungarian Microfinance Network
EMN would also like to thank staff of two sister networks who helped EMN gain access tomicrolending data collected in the UK, Poland and Slovakia.
Sarah McGeehan, Community Development Finance Association (cdfa), United Kingdom
Justyna Pytowska, Microfinance Center (MFC), Poland
EMN would like to thank Riccardo Aguglia of Fair Finance for assistance in collecting infor-mation on the Sviluppa Italia Programme in Italy and Emese Sztanojev of the HungarianFoundation for Enterprise Promotion (MVA) for assistance in completing the Hungarian data.
We are grateful to EMN intern Alexandre Nayme who assisted with data entry.
Tamara UnderwoodEMNDecember, 2006
This study has been made possible with the generous support of the Levi StraussFoundation and the European Commission Community Action Programme to Combat SocialExclusion 2002-2006.
© European Microfinance Network. No part of this publication may be produced in anymanner or form without prior permission from the publisher and EMN.
ACKNOWLEDGEMENTS
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This edition of the EMN microfinance sector survey presents a European microfinancesector that is young, diverse and growing steadily. The majority of EU 15 microlenders beganlending between 2000 and 2005 whilst lenders in the new member states started in the1990’s. Microlenders take varying forms related to the legal and regulatory environment intheir respective countries. Some focus on socially excluded and unemployed persons andothers on SME growth. All are united by a desire to address exclusion from mainstreamfinancial services. The success of market leaders has encouraged new entrants. New actorsand improved coverage have contributed to year on year growth in loan disbursements.Combining business support services with access to finance, microlenders are enablingincreasing numbers of entrepreneurs to start and grow their businesses.
This second sector survey covers the years 2004 and 2005 with data from 110 microfinanceactors operating in the EU 25. For the purposes of this report, the EU 25 includes EU 15 countries,Norway and Switzerland and 3 new member states with active microlending programmes:Hungary, Poland and Slovakia1.
Amongst EU 15 lenders surveyed, the number of microloans disbursed between 2004 and2005 grew by 15%. During the period 2003-2004, the growth rate was 11%2. Increasedcoverage and new market entrants are responsible for this growth. In the new member states surveyed, growth in loan volume was 4% reflecting sector maturity and competition bydownscaling banks
In Western Europe, the sector is young and diverse. The majority of actors have beenlending since 2000. Non-Governmental Organisations (NGOs), foundations, associations,credit unions, state banks, ethical banks, savings banks and credit unions disburse microloans.Most non-bank lenders have a geographic scope limited to regions or localities and disbursefewer than 100 loans a year. Nationally based lenders in France and Finland disbursed thegreatest number of microloans in the EU 15. In the new member states, NGOs, foundationsand credit unions disburse microloans. Here, microlenders have been active since the 1990’s.In the East, lenders in Poland disbursed most of the microloans reported in the region.
Microlenders surveyed in the EU 25 focus on start-up businesses and small microenterprises,those with 5 or fewer employees. Clients targeted in order of importance are financiallyexcluded individuals followed by women, unemployed persons, the self-employed andimmigrants. There is considerable overlap amongst many of these groups.
In 2005 in the EU 25, 40% of microloan clients were women. In the EU 15 sampleapproximately 6% of clients were ethnic minorities, 12% were immigrants, 12% were youth andless than 1% of microloan clients were disabled people. For the EU 25 sample as a whole,these rates drop by 2 to 5 percentage points. Women are under-represented amongstmicroloan clients when compared to their proportion in the population and when compared to microlending programmes operating in North America and in developingcountries. Definitional problems and insufficient data make it difficult to make this assessmentfor other at risk groups such as ethnic minorities, immigrants, youth and disabled persons.
The average microloan size across the EU 25 sample is 7,700 euros. In the EU 15 theaverage microloan value is 10,240 euros and in the new member states it is 3,800 euros.Lenders that focus on SME support, addressing market failure and job creation tend to lendlarger sums whilst those focusing on social inclusion tend to make smaller microloans.Average microloan values adjusted for Gross National Income (GNI) per capita show asimilar trend.
Amongst organisations providing this data, loan portfolio performance ratios haveremained steady since the last survey. The most frequently monitored ratios are repaymentrates and portfolio at risk. The average repayment rate in 2005 was 92%.
EXECUTIVE SUMMARY
1. For simplicity, when we refer to EU 15 countries in the document, we include Norway and Switzerland.2. “Overview of the Microfinance Sector in Europe”, nef, EMN Working Paper Number 1, 2005.
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The most important strategic issues for the sector are related to funding and sustainability.Funding operational costs in particular is a significant challenge for lenders. The majority,particularly in Western Europe, are highly dependent on public and private sources for bothoperational costs and loan capital. The regulatory environment regarding usury andborrowing for onward lending constrains lender efforts to cover costs and achieve scale,hence the dependence on external resources.
Whilst the environment needs to be improved, there are measures lenders can take toenhance their financial position. Lenders need to track microlending costs separately fromthe cost of training and technical assistance. Separating these costs will enable lenders towork toward operational sustainability of the loan fund and seek grant monies for businessdevelopment services. Interest rates and fee structures that cover the risks and costs oflending need to be developed.Adequate guarantee and risk mitigation strategies and closemonitoring of portfolio performance are also required. Some microlenders in the EU 15 arestarting to implement these strategies, which are already adopted widely in the newmember states.Western European microlenders need both capacity building and continuedfinancial support during the process of developing and adopting these measures.
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Microcredit came to prominence in the 1980’s as a tool to alleviate poverty in developingcountries. In Europe microcredit models are influenced by the European experience of thelate 19th century as well as developing country practice.
In Western Europe, a handful of organisations pioneered microcredit schemes in the1990’s. The majority active today began lending in the present decade, however. In thisperiod, persistent unemployment and pressure on the welfare state focused attention onmicrocredit as a tool to foster self-employment for financially and socially excluded persons.Most funds receive public sector subsidies and many microlenders focus on promoting socialand financial inclusion.
In Eastern Europe, microfinance began in the 1990’s after the economic transition fromcentrally-planned to market economies, which led to large numbers of unemployed urbanand rural workers. Microfinance institutions were created with significant donor support. Theirpurpose was to provide services to people not reached by formal financial institutions due tothe collapse of the financial sector. The priority was to create viable and sustainable financial institutions that could reach large numbers of unemployed and poor workers.
In March 2006, EMN launched its second survey3 of the microcredit sector covering activity in 2004 and 2005. The purpose of this second edition of the survey was to trackchanges in the industry, deepen the understanding of core issues such as sustainability, futuregrowth plans, funding sources, marketing, outreach and impact. The survey also aimed tomonitor the growth of savings, microinsurance and personal and consumer lending.Microlender governance is another issue the survey examined.
For the first time, the EMN survey includes data from 3 new EU member states that haveactive microcredit programmes: Hungary, Poland and Slovakia. The microcredit sectors inWestern and Eastern Europe have evolved in unique contexts and are at different stages ofdevelopment. The information from new member states is used as a point of comparison.Most interestingly, when we look at mission statements, portfolio performance andsustainability, we will see that there are two microcredit models operating in the enlargedEurope.
The information contained in this report is based on the data of 110 organisations. Out ofthis total, 89 directly disburse microloans. The remaining 21 are the social partners of 11savings banks in Spain. In Spain social organisations undertake all pre-loan support, screeningand loan packaging activities. Savings banks make final approvals and disburse the loans.EMN collected the data presented in this report via a questionnaire, pre-existing datareleased to EMN and information available in the public domain.
Three new entrants that began disbursing loans in 2006 also participated in the survey anda newly launched programme in Austria is featured. The Italian government programmeSviluppo Italia and the role of the European Savings Banks Group members is also discussed.
1. INTRODUCTION
3. The first survey is entitled “Overview of the Microfinance Sector in Western Europe,” nef, EMN Working Paper Number 1, 2005. This surveyreport is available from the EMN website.
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The last survey of the sector,undertaken by the new economics foundation (nef) on EMN’sbehalf, covered the years 2002 and 2003. Thirty-two organisations participated in that survey.The number of responses to the present survey is more than 3 times as large. This highresponse rate is due to the efforts of 7 collaborating agencies:
• Foro Nantik Lum de MicroFinanzas, Spain• Giordano Del’Amore Foundation, Italy• German Microfinance Institute (DMI), Germany• Community Development Finance Association (cdfa), UK• Microfinance Center (MFC), Poland• Hungarian Microfinance Network (HMN)• Hungarian Foundation for Enterprise Promotion (MVA)
Foro Nantik Lum de MicroFinanzas, Giordano Del’Amore Foundation and DMI translatedthe EMN questionnaire, updated EMN’s list of microfinance actors in their respectivecountries, sent out the questionnaire, followed-up with recipients, translated open endedresponses into English and submitted all questionnaires to EMN for data entry. Theseorganisations also carried out follow-up work where needed.
In the UK, cdfa, which carries out an annual survey, helped EMN obtain permission toaccess this data and forwarded all cdfa held data to EMN for analysis. EMN also developedand sent an abbreviated questionnaire to cover subjects not treated in the cdfa survey.
MFC, which covers Central and Eastern Europe, the Balkans and Central Asia carries outan annual mapping exercise. MFC assisted EMN to collect data from lenders operating inPoland and Slovakia.MFC provided contact information and requested permission to releasedata to EMN. Organisations in these countries completed an additional short questionnaire.Where needed, EMN also used publicly available data.
The Hungarian Microfinance Network assisted EMN by gathering and collating data from20 microlenders (Local Enterprise Agencies) that are part of its network. MVA, which promotes implementation of the Hungarian government’s small and medium size enterpriseprogramme, assisted EMN with additional information about the sector.
The 2004-2005 survey questionnaire, translated into French, German, Italian and Spanishretained the majority of survey questions used for the previous nef survey. In addition, nefmade a series of recommendations to EMN on survey topics that required in-depth inquiryand additional topics that merited inclusion in the present survey.The 2004-2005 edition of thequestionnaire also asked for lending data by gender, ethnicity, immigrant status, youth anddisability. Following from EMN’s 2005 studies on lending to women and immigrants, EMN willmonitor lending to these at-risk groups through its regular survey.
EMN also integrated Financial and Social Exclusion mapping questions for the EU project“From Exclusion to Inclusion through Microfinance” jointly implemented by EMN, cdfa andMFC. The results of this portion of the survey are presented in “From Exclusion to InclusionThrough Microfinance: Working Group 1 – Social and Financial Exclusion Map.”
EMN used the accepted definition of microloans as loans of 25,000 euros or less made tomicroenterprises, businesses with 9 or fewer employees. Immigrants were defined as personsborn outside of the European Union and/or not possessing EU citizenship. As reported in theEMN study on immigrant access to microlending, there is a host definitional issues related to“immigrants”and “ethnic minorities,”which make collecting accurate and comparable dataacross the region challenging4.
Not all questionnaire responses were complete. The percentage figures used in theanalysis throughout the report relate to the number of responses received for each question.Where response rates were quite low, this is indicated in the report text.
2. METHODOLOGY
4. EMN Working Paper Number 3, “Immigrant Participation in Microloan Programmes in Western Europe,” EMN Working Paper Number 3,Miriam Guzy and Tamara Underwood, 2006.
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Out of 134 organisations contacted for the survey, 109 responded representing a responserate of 81%. By country, the response rates vary. In the following countries all of theorganisations contacted completed survey questionnaires: Belgium, Finland, France,Hungary, Ireland, Norway, Portugal, Slovakia, Spain, Sweden and Switzerland. In Poland 3 outof 4 organisations contacted responded and in Italy,9 out of 11 did so.Data on a fourth Polishlender was obtained from information in the public domain. In Germany 9 organisations outof 20 completed questionnaires. Two German organisations that began lending in 2006 alsoparticipated in the survey. In the UK, 23 out of 34 organisations responded.
The breakdown of respondents by country is as follows:
In Spain, where only financial entities are allowed to lend, savings banks and their socialpartners responded to the survey questionnaire. Savings banks disburse microloans whilst thesocial entities work directly with loan clients to develop their business plans and present loanapplications. Given this delineation of roles, both types of organisations participated in thesurvey in order to access loan data as well as client profiles and information about nonfinancial services. Of the 32 Spanish respondents, 11 were savings banks and 21 were theirsocial partners. Please also note that in Hungary, all 20 Local Enterprise Authorities (LEAs)responded directly to the Hungarian Microfinance Network (HMN). HMN compiled the datainto a single questionnaire forwarded to EMN. In the UK one organisation reported on its owndata and that of another lender for which back office support is provided.
Belgium; 2Finland; 1
France; 2Germany; 9
Portugal; 1Slovakia; 2
Spain; 32
Sweden; 2Switzerland; 1
United Kingdom; 23
Poland; 3Norway; 1
Italy; 9
Ireland; 1
Hungary; 20
Graph 1: Survey Respondents by Country
➤ Country BaseGraph 1 on the previous page gives a fairly accurate view of the number of microlending
actors in each country. The greatest number of actors is found in Spain due to the particularpartnerships forged between savings banks and social organisations. The United Kingdomcomes into second place.Austria does not presently appear on the chart,but two programmeswere launched in 2005 began disbursing microloans in 2006 (see case study).
➤ ScaleIn 2005, the organisations surveyed disbursed a total of 27,000 microloans worth 210 million
euros. Microlenders operating in EU 15 countries, Norway and Switzerland5 disbursed 16,000loans worth 167 million euros.
Fifty percent of organisations disbursing microloans reported on active borrowers in 2005.In this group, there were 48,000 active borrowers at the end of 2005. Fifty percent oforganisations surveyed provided data on the total number of loans and the total value lentsince launching their programmes; 238,000 loans and 1.1 billion euros respectively.
When we look at the number of loans disbursed by country, we see the greatest coveragein Poland, France and Finland6. In Finland and France, single organisations disburse 95-100%of all microloans. Similarly, in Poland one organisation makes 80% of the loans reported(Graph 2).
The majority of organisations (75%) in the EU 25 work at a regional or local level. Twentypercent work on a national level and another 5% operate internationally and in their “home”country.
In the EU 15, where the sector is much younger than in the new member states, the majorityof organisations made fewer than 100 loans in 2005. Characteristics such as age and theweight of microlending in the organisation’s activity portfolio appear to influence these numbers.These factors will be discussed later in the report.
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3. SECTOR CHARACTERISTICS
5. For simplicity’s sake we will include Norwegian and Swiss data when we refer to the EU 15 and when we distinguish between EU 15 andcombined EU 25 data6. In Ireland, loans were disbursed in 2005, but the organisation reporting in 2004 was unable to do so for 2005.
Graph 2: Number of Loans Disbursed in 2005
Belgium; 529
Finland; 3141
France; 6110
Germany; 549
Norway; 18Italy; 105
Portugal; 153Spain; 2004Sweden; 2116
Switzerland; 14
United Kingdom; 1459
Hungary; 1177
Poland; 9724
Slovakia; 51
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The survey has captured the majority of microlending activity in the EU. However, there aresome gaps in the data. It was not possible, for example, to gather lending information fromsavings banks operating outside of Spain. In addition, detailed data was not available for thepublic administration programme, Sviluppa Italia, in Italy and the commercial bank portion ofthe Spanish public administration programme, ICO.The survey also does not cover commercialbank enterprise lending worth 25,000 euros or less for which data is not readily available.Consumer lending that is used to start or develop a business is also not captured by the survey7.
In 2006, the European Savings Bank Institute wrote a report on the role of savings banks inmicrolending. The report outlines models and provides information on specific lendingprogrammes (see case study)8. Although microloan portfolio data is not presently availablefrom its members, the institute is working on differentiating this data from overall portfoliofigures. It is hoped that this information will be available in the near future9. This data will helpcomplete our understanding of the scale of savings bank involvement in the sector.
For the Sviluppa Italia programme, only 2004 microlending data is presently available. Thisprogramme disbursed approximately 14,000 microloans in 2004, a significant number whencompared to the 16,000 disbursed by all other Western European microlenders in 2005. Thisprogramme is reportedly experiencing a steady decline in loan volume, however. Cuts totraining and technical assistance budgets appear to have had a negative impact onlending rates.
Similarly, the commercial bank portion of the ICO programme in Spain has shrunkconsiderably. In 2005, the Spanish government increased the percentage risk to be taken onby the commercial banks from 20% to 50%. Unlike the Spanish savings banks which cover thisrisk from their “social work” funds, commercial banks had much tighter Corporate SocialResponsibility budgets. The value of loans disbursed subsequently fell from 4.7 million euros in2004 to 0.5 million euros in 200510.
➤ GrowthMicrolenders surveyed are reaching greater numbers of entrepreneurs each year.
Between 2004 and 2005, there was a 15% increase in the number of loans disbursed in the EU15 member states11. This growth rate is higher than that recorded in the last survey (11%), butis based on a larger sample of lenders. Looking at the subset of lenders that participated inboth surveys we see a growth rate of 7%12. Across the EU 15 countries, lending growth rates
7. For more on commercial bank lending and consumer lending issues see, “Street UK- a Microfinance Organisation, Lessons Learned from itsFirst Three Years’ Operations, Rosalind Capisarow, 2004.8. “Microcredit in Europe: The Experience of Savings Banks,” Malcolm McDowell, European Savings Bank Group, March, 2006.9. EMN has provided the European Savings Bank Group a list of questions to help it gather microlending data from its members. This data maybe available later in 2007.10. “Microcredits Granted in Spain-A Unique Model,” Silvia Rico-Garruda , Maricruz Lacalle, Finance and the Common Good, Autumn, 2006.11. Lenders in Ireland, Italy and one in the UK that reported loan data in 2004 did not do so for 2005. Their data was removed in order tocalculate growth in number of loans.
Graph 3: Percentage of Organisations Disbursing Loans by Group in 2005-EU 15
Perc
en
tag
e o
f Org
an
isa
tion
s 45
40
35
30
25
20
15
10
5
020 or less 21 to 50 51 to 100 101 to 200 201 to 400 over 400
Number of Microloans Disbursed
28%
16%
31% 5% 9% 11%
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are highest in Spain (70%), followed by the UK (33%) and Germany (19%). In the EU 25 as awhole the growth rate was 4%, largely due to a decrease in lending in Poland discussedbelow.
The exceptional growth in the Spanish market is largely due to the unique role played bySpanish savings banks. In order to keep their status in the financial sector, savings banks mustinvest a portion of their profits in social work.As a financial tool designed to reach underservedgroups, microlending provides savings banks an opportunity to use their financial expertise toachieve their social mission. Un Sol Mon, of Caixa Catalunya, pioneered microlending in 2001and was quickly followed by others. In addition, the entire sector was given a boost when thegovernment ICO programme was launched in 2002.
The growth in the total value of loans disbursed in the EU 15 between 2004 and 2005 isapproximately 5%13. Comparing the growth in the total value of loans to the growth in thenumber of loans disbursed,we see that in the EU 15 countries, the growth in loan disbursementsis at the “small loan” end of the market. Including the data from the new member states, thegrowth rate in the total value of loans for the EU 25 is 3%14.Amongst EU 25 organisations reportingon active borrowers in both 2004 and 2005 the number of active borrowers grew by 21%.
This 3% growth in total loan value and the 4% growth in the number of loans disbursed inthe EU 25 data are primarily the result of changes in the Polish market. After rapid expansionin the 1990s, growth is levelling off in some new member states as the sector matures andformal banking institutions begin moving into this market15. In addition, in some countriesefforts are being made to reach poorer clients with smaller businesses and as a consequencesmaller loans are being disbursed in some cases.
The average loan size across the entire sample is 7,700 euros. In the EU 15 the average loanvalue is 10,240 euros and in the new member states it is 3,800 euros. Further discussion ofaverage loan values and adjustment for country income is provided in Section 5: Productsand Services.
The rate of sector growth both in terms of loans disbursed and in terms of new entrants tothe market is increasing each year. Ten percent of respondents said the number of loansdisbursed exceeded or greatly exceeded their objectives and 45% said loans disbursed mettheir objectives. Forty-six percent of respondents, however, replied that the number of loans
12. Of this subset, one lender in Ireland and another in the UK did not report their loan data for 2005. Their data was removed in order to calculate growth in number of loans.13. Ireland and Portugal did not provide data for both 2004 and 2005, their data was removed to calculate the growth in loan value.14. Again, the Ireland and Portugal data was removed.15. “Downscaling of Central European Banks, a Challenge for MFIs ?”, Allan Bussard, Integra Venture, Finance and the Common Good, Autumn,2006.
Graph 4: Growth in the Number of Loans Disbursed EU 15
Belg
ium
Finla
nd
France
Germ
any
Irela
ndIta
ly
Norway
Portu
gal
Spain
Sweden
Switz
erland
United K
ingdom
7000
6000
5000
4000
3000
2000
1000
0
2004
2005
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European Savings Banks and Microfinance
Although data is not presently available on the number of microloans disbursed byEuropean savings’ banks as a whole, it is clear that these banks play an important rolein certain countries. Moreover, the traditional mission of savings banks, to enable theadvancement of lower social and economic classes through savings and creditopportunities, is very much in line with mission of the microfinance movement.
The main business models used by the savings banks in Europe to supportmicrocredit are described as: the balance sheet-based model, the off balance sheet-based model and the agency-based model1.
In the balance sheet-based model, the microcredit activities are operated as partof the regular activities of the savings bank. Profits and losses on microlending areconsolidated within the savings banks’ regular financial statements. Some examples ofthis model include the German savings banks participating in the KfW supportedprogrammes described in Case Study 3.
Savings banks using the off balance sheet-based model do not presentmicrolending profits and losses in their consolidated accounts. This is the modelprevalent in Spain where many savings banks support microlending through theirfoundations. Caja De Granada, Caixa Galicia, Caixa Catalunya, which participated inthis survey, operate in this manner. The data presented in this survey indicate thatsavings banks in Spain are playing a leading role in the growth of microcredit in Spain2.The savings banks are combining their social imperative to invest profits in good workswith their financial skills. In collaboration with social actors that provide business supportand loan packaging, the sector grew by 70% between 2004 and 2005.
In the agency based model, microlending is based upon a relationship with anational or international financial institution such as the European Investment Fund.Here the agency defines the credit policy and assumes full risk. The savings bankimplements the credit policy but is fully responsible for all credit decisions. The agencybased model is more prevalent in new member and candidate countries. This surveydid not capture information from this type of savings bank lender.
1. “Microcredit in Europe : The Experience of Savings Banks,” European Savings Banks Group, March, 2006.2. “Microcredits Granted in Spain: a Unique Model,” Silvia Rico Garrido and Maricruz Lacalle Calderón, Finance and the CommonGood, Autumn 2006.
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fell “below” or “significantly below” their objectives. Looking by country, all except one of therespondents in the “significantly below” category are in Hungary, which reported fundingdifficulties. The next largest proportion of individual organisations that have not met theirtargets can be found in Germany where the sector is one of the youngest but is also one ofthe fastest growing. Half of the organisations falling into this second group began lending inthe period 2000 to 2005. The age of their operation appears to affect their coverage assignificant marketing and testing of lending methodologies are required at the outset.
As with the last survey, it is difficult to know how ambitious the targets set by microlenderswere initially. However, the majority of those responding that they had not met their targetsare those lenders focusing primarily on microlending. It may be that this group has moreambitious objectives and/or is more focused on monitoring achievement of lending targets.
➤ ActorsThe survey results point to a diverse sector with respect to institutional types, organisational
size and focus.
➤ Institutional Types
A variety of institutions disburses microloans in the EU. There are non-governmentalorganisations, foundations, associations, local and regional government agencies, governmentfinancial institutions, savings banks, state banks, ethical banks and credit unions. This variety isrelated to the regulatory environment in each country. For example, in Spain, Germany andFinland lending activity is restricted to banking or government agencies. In the UK, non-governmental organisations that lend have a specific legal status,“community developmentfinancial institutions”. Ninety-two percent of respondents have not-for-profit status.
To simplify the analysis, we have grouped these types into 4 categories: government,banks, non-governmental organisations (NGOs) and credit unions. The table below showsthat non-governmental organisations are the principal actors in microlending. Althoughthese figures are inflated by the Spanish NGOs, which do not disburse loans, we still see thatin all other countries except Belgium and Finland, NGOs dominate the sector.
Table 1: Meeting Lending Objectives EU 25
Meeting Objectives Percent of Respondents
actual loans greatly exceed objectives 3% actual loans exceed objectives 7% actual loans meet objectives 45% actual loans fall below objectives 19% actual loans fall along way below objectives 26%
Graph 5: Number of Microlenders by Institutional Type EU 25
BelgiumFinlandFrance
GermanyIreland
ItalyNorway
PortugalSpain
SwedenSwitzerland
United KingdomHungary
PolandSlovakia
0 5 10 15 20 25
govtbankNGOcredit union
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➤ Mission
EMN collected Mission Statements from 96 of the organisations (88%) surveyed. EMNsummarised and classified these into 8 principal categories shown on the pie chart below(Graph 6). Creating jobs and promoting employment is the primary goal of 29% of the EU 25sample.Twenty-four percent focus on financial inclusion,23% on Small and Medium Enterprisedevelopment, 10% have mission statements linking social and financial inclusion, 7% focus onsocial inclusion and 5% on women’s employment. Overall there is greater emphasis in thenew member states on job creation and SME development than in the EU 15.
When we compare mission statements against institutional type, a large proportion ofNGOs (31%) and half of government bodies concentrate on job creation and employment.Whereas banking institutions and credit unions focus on financial inclusion. A further 21% ofNGO respondents focus on financial inclusion or a combination of financial and socialinclusion.Twently-nine percent of NGOs,all of which are in Hungary, focus on SME development.Those organisations focusing on women’s employment are all NGOs.
Looking at Mission Statements and the average value of loans disbursed by microlenderssupplying data on total loans and total value of loans disbursed in 2005, we see that there isa subgroup making loans well above the average loan size (7,700 euros) for the entiresample. In this group, the majority are focused on SME growth.
To be discussed further on in the report is the comparison between average loan size andGross National Income (GNI). This calculation is used in the microfinance sector to calculate“depth of outreach,” that is the degree of relative poverty of clients being reached. Thisconcept assumes that the smaller the loan size in relation to country national income, the
Graph 6: Microlender Mission Statements5%
7%
23%
1%1%
10%24%
29%
create jobsfinancial inclusionfinancial and social inclusionaddress market failurecreate jobs, financial inclusionSME growthsocial inclusionwomen's employment
Table 2: EU 25 Mission Statements Compared to 2005 Average Loan Value
Mission Statement Ave 2005 loan value in Euros
create jobs 5,334 financial inclusion 7,422
financial and social inclusion 8,062 address market failure 18,323 create jobs, financial
inclusion 22,753 SME growth 19,583
social inclusion 6,968 women's employment 6,778
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smaller the client’s business and the poorer the client. Although the data in the above tableis not adjusted for country level income, it does suggest that lenders focused on SME growthmay be lending to better off clients and larger businesses.
➤ Microlending as a Proportion of Activity Portfolio
In addition to classifying lenders by Mission Statement, the data shows that lenders breakdown into two further groups: those for which microlending is their primary occupation andthose for which microlending is a relatively small proportion of their activity portfolio.
Sixteen percent of respondents focus solely on microlending. The remaining respondentsundertake a number of other activities which are focused on financial and employment relatedservices.For NGO respondents,92% are involved in financial and employment related activitiessuch as social enterprise lending, consumer lending, lending to businesses with more than 10employees, employment readiness training and enterprise support and technical assistance.A minority also implement cultural, educational, environmental and access to housingprogrammes. Banking organisations are involved in provision of other financial services as arecredit unions. Government bodies implement employment focused training and supportactivities.
Looking at the relative weight of microlending in this diverse activity portfolio, we see thatfor 42% of survey respondents in Western Europe, microlending represents 25% or less of theiractivity portfolio. This group is made up of NGOs (44%), banking institutions and government(56%). It is not surprising that microlending is a small portion of the activities carried out bygovernments and banks. However the finding on NGOs is instructive when we come to lookat questions such as efficiency, cost and portfolio quality monitoring and operationalsustainability. At the other end of the scale, microlending represents a significant proportionof the activity portfolio for 34% of respondents. NGOs represent 96% of this group.
To understand better the factors influencing these findings, we compared this data to theage of lending programmes and to their geographic focus.
Focusing on NGOs in the EU 15, 62% in the 75-100% category were active before 2000. Bycontrast, 85% percent in the 25% category have only been active since 2000. This findingsuggests that for NGOs in Western Europe, there may be an association between age andthe weight of microlending in the activity portfolio. Similarly banking institutions andgovernment bodies in the 25% category began microlending in the 2000-2005 period.
Graph 7: Microlending as a Portion of Activity Portfolio EU 15
Perc
en
t of R
esp
on
de
nts
% in Activity Portfolio
45
40
35
30
25
20
15
10
5
0
42%
13% 11%
34%
0-25% 25-50% 50-75% 75-100%
17
Looking at geographic scope, in the EU 15 there does not appear to be any associationbetween the weight of microlending in the activity portfolio and whether an organisationworks locally, regionally or nationally.
The distinction between lenders in the 0-25% range and those in the 75-100% range isimportant. It underscores that for half of the sector, microlending is not the main focus but isone of many strategies or tools that support wider employment and financial inclusionobjectives. Organisations in this half of the sector therefore likely conceive of themselves associal and employment development organisations rather than financial institutions.
When we include the data from Eastern Europe, we have a slightly different picture. Thereis a greater number of organisations falling into the 25-50% category (80% of respondents).Lenders in the 75-100% range are found in Poland and disburse two hundred times thenumber of microloans made in Hungary and Slovakia.
In Eastern and Central Europe and the Balkans, many more lenders conceive of themselvesas financial institutions and in the new member states this seems to be particularly the casein Poland16. This difference may explain the relative lack of available data on loan portfolioperformance in the EU 15 when compared to the new member states and the tendencyamongst EU 15 lenders to group together lending costs with those related to provision oftraining and support. The ambitions of EU 15 microlenders with respect to reaching scale,improving efficiency and portfolio performance may be modest when compared to otherregions of the world. This discussion is further developed later in the report.
➤ Age
The microlending sector in Western Europe is young. Seventy percent of organisationssurveyed have been active since 2000. Of this group, 17% began lending in 2005. An additional5 actors started their programmes in 2005, but did not disburse their first loans until 2006. Thenext largest group of lenders (13%) began in the period 1995-2000. When the new memberstates are included, there are slightly more lenders (19%) founded in the period 1995 to 2000.
➤ Staff
In addition to being young, lenders in the EU 15 have relatively few staff members. Of thelenders surveyed, 45% employ fewer than 10 full time equivalent persons in total with 25%percent employing between 1 and 5 people. Eighty percent have 5 or fewer loan officers. Inthe new member states, only 1% of lenders employ fewer than 10 persons. Eighty-four percentemploy between 25 and 50 persons.
16. “From Exclusion to Inclusion through Microfinance: Working Group 1 – Social and Financial Exclusion Map,” MFC, EMN, cdfa, forthcoming2007.
Graph 8: Year Began Lending EU 15
Perc
en
t of R
esp
on
de
nts
60
50
40
30
20
10
0
6%
1982-84 1985-89 1990-94 1995-99 2000-04 2005
5% 6%
13%
54%
17%
18
Just over half of respondents maintain more than one office site. Within this group, mosthave between 2-5 office sites. The Spanish savings banks and microlenders with nationalcoverage in Finland, France and Poland maintain more that 30 office sites.
With respect to diversity and equal opportunities, 80% of survey respondents in the EU 25provided data on the gender breakdown of their staff, which is 59% female. Only 9% oforganisations surveyed responded to the question regarding ethnic minority representationin the workforce. In this group, 6% of the work force is from an ethnic minority. For immigrants,13% of organisations responded to this question and less than 3% of their staff members areclassified as immigrants.
Forty-five percent of organisations surveyed have volunteers that assist in their programmes.This phenomenon is primarily observed in Western Europe. Volunteers tend to assist with pre-loan screening and information provision and post loan advice and support.
➤ Governance
Microlender governance is an issue that this edition of the sector survey examined for thefirst time. The vast majority of organisations surveyed provided basic information about theirBoard (90%) and 55% assessed the quality of the Board’s work. About half of respondentsprovided data on the gender breakdown of their Boards. Less than 40% did so for ethnicminorities and immigrants.
Based on these data sets, 90% percent of lenders have a Board of Directors and 54% havea General Assembly. Twenty-eight percent of Board Members are women and less than 2%and 3% respectively are ethnic minorities or immigrants. Microlenders favourably assessedtheir Boards’ leadership on mission and Board efforts to improve institutional capacity.Governance was less well viewed for its role in raising funds and ensuring accountability.
Graph 9: Microlender Governance Assessment EU 25
0 10 20 30 40 50
Percent of Respondents
60 70 80 90 100
the board helps uscarry out our mission
the board helps us to improveour institutional strength
the board ensures our accountabilityto the public and to donors
the board carries outadvocacy on our behalf
the board assists us to raise funds
19
➤ Businesses TargetedSurvey respondents were asked to identify the type of businesses they targeted.
Organisations could choose more than one response.With respect to the age of the businessestargeted, Graph 10 below shows that the vast majority focus on start-up businesses.Interestingly,a significant number also assisted businesses in the pre-start up phase by financingfeasibility studies and the like.
In terms of business size, Graph 10 shows that the majority supported businesses with 5 orfewer employees followed by businesses with between 5 and 9 staff. Several respondents alsofinance Small to Medium Sized Enterprises (SMEs) with 10 to 50 employees. These respondentsoperate exclusively in the UK and have separate lines making available loans above 25,000euros. In addition,22% percent of respondents work with unregistered informal sector businesses.In these cases lenders often assist businesses to make the transition to the formal sector.
➤ Client TargetingEurostat data indicate that groups at risk for social exclusion and poverty in the enlarged
Europe are women, single parent households (mostly headed by women) and the elderly. Inaddition, three groups are particularly vulnerable to long-term unemployment, the primarycause of social exclusion. These persons are older male and female workers, men andwomen under the age of 25, immigrants and ethnic minorities17. Eighty-two percent ofmicrolenders surveyed target one or several of these categories.
People excluded from mainstream financial services are the first most frequently identifiedtarget group.Women and the unemployed are the next most frequently cited target groups.And last are immigrants, youth, ethnic minorities and disabled people.
When we refer to people excluded from mainstream financial services we mean thosewithout access to cash transmission banking, savings, insurance, short-term consumer creditand long-term savings. People excluded from mainstream financial services may not haveaccess to one or several of the above services considered essential for participation ineconomic life in Europe18. The financially excluded live in countries where the banking sectoris not very developed as in some of the new member states following the economic crisis ofthe early 1990’s. Financially excluded can also be owners of start-up businesses, people who
4. CLIENTS
Graph 10: Types of Businesses Supported EU 25
Percent of Respondents
0 10 20 30 60 70 80 90 10040 50
start-up enterprises
existing enterprises
registered businesseswith < 5 employees
registered businesseswith 5-9 employees
entrepreneurs in the pre-start upphase-feasibility studies etc
registered businesseswith 10-50 employees
informal sector/unregistered businesses
17. “Joint Report on Social Inclusion 2004,” European Commission Directorate for Employment and Social Affairs, 2004; “Microcredit for SmallBusinesses and Business Creation: Bridging a Market Gap,” European Union, DG Enterprise, 2004.18. Peter Cartwright “Banks, Consumers and Regulation,” quoted in Financial Exclusion and Microfinance: An Overview of Issues, N. Howell,Australia, 2004.
20
Men over 40, women, and immigrants are the target of the recently launched“Escape” business development and microloan programme in Styria, Austria, initiatedand financed by the European Social Fund (ESF) and the Federal Ministry of Economicsand Labour.
The programme provides pre and post-start up business support and advice throughintensive individual and group sessions. Raiffeisen-Landesbank provides the loan capi-tal and disburses loans. The Austrian State bank guarantees 80% of the loans and theremaining risk is taken by Raiffeisen.The maximum loan size is 25,000 euros and the baseinterest rate is 5%.
The programme has adopted several innovations in order to reach its target market.It engages in intensive outreach to existing immigrant and women’s networks. Inaddition, all programme partners, regional development staff, training organisationsand bank staff, receive gender awareness and inter-culturality training.
Escape, which ends in 2007, makes use of existing structures and aims to help themimprove and adapt their services to the target market. Similarly, through the guaranteescheme, banks are encouraged to lend to clients traditionally excluded from mainstreamfinance. Operational costs are funded by EQUAL with Austrian government co-financing.
Designed over a two year period (including concept-development), the first loanswere disbursed in March 2006. To date 277 people have benefited from counselling, 86future entrepreneurs have attended training and support sessions and 38 people receivedmicrofinance counselling. One third of applicants received microloans totalling of98,000 euros.
Microfinance in Austria:Encouraging Existing Structures to Extend Microlending to At-Risk Groups
21
are unemployed and those with either no or a poor credit history. There is thus overlapbetween this group and the other risk groups referred to in the survey.
This edition of the survey also looked at urban versus rural targeting.Very few organisationsin Western Europe indicated whether they targeted rural or urban clients. Overall in WesternEurope, however, it appears that microlending is primarily an urban phenomenon. In EasternEurope there appears to be more of an emphasis on rural areas. For example, in Poland, 50%of the organisations surveyed focus on rural areas. This focus is a response to high ruralunemployment after the closure of state farms during the transition from centrally planned tomarket economies.
➤ Gender Balance
In 2005, 41% of EU 25 microloan clients were women. Although approximately half of thesurvey respondents target women, they remain under-represented in lending figures both inrelation to their proportion in the population and in relation to microlending programmeselsewhere in the world19. This lending rate is however greater than female entrepreneurshiprates in Western Europe, which are estimated to be 30%20. Female entrepreneurship rates arenot available for the new member states.
There appears to be little significant change in the proportion of women benefiting frommicroloan programmes between the present survey and the previous EMN study onmicrolending to women. The earlier study collected data for the years 2002 to 2004 andfound that 39% of microloan clients were women21.
19. Combined lending data for Central and Eastern Europe, the Balkans and the Newly Independent States suggests that 62% of microloan clientsare women, in North America 59% of clients are women and in developing countries well over 80% of clients are women. For more on this pointsee “Women and Microlending in Western Europe,” EMN Working Paper Number 2, Tamara Underwood, 2006.20. Middlesex University Business School, “Young Entrepreneurs, Women Entrepreneurs, Ethnic Minority Entrepreneurs and Co-Entrepreneurs inthe European Union and Central and Eastern Europe,” March 2000.21. “Women and Microlending in Western Europe,” EMN Working Paper Number 2, Tamara Underwood, EMN, 2006.
Graph 11: Client Specific Targeting EU 25
Percentage of Respondents0 10 20 30 40 50 60 70
people excluded frommainstream financial services
women
unemployed people
self-employedno client-specific targeting
immigrants
poor people
youth
ethnic minority
disabled people
urban population
rural population
22
As in the previous study, there are significant differences in lending rates to women acrosscountries. The greatest percentage of female loan clients is found in Slovakia followed byItaly, Spain and Norway. The lowest lending rates are found in Hungary, Germany and France.
The relative balance of lending to women and men by country is the same as in 2004,even though the sample is larger. We do see, however, that the percentage of loans disbursedto women has dropped slightly in some countries (Portugal, Germany, Spain, United Kingdom)and risen slightly in others (Belgium, Finland, Italy, Norway) when compared to the previousEMN study.
➤ Immigrants, ethnic minorities, youth, disabled people
EMN’s 2005 study of immigrant access to microlending demonstrated a host of definitionaldifferences and challenges that make analysis and comparison of data on immigrants andethnic minorities difficult22. As done for the immigrant study, for this survey EMN adopted thedefinition of immigrant as a person not born in the European Union and/or not possessing EUcitizenship. Ethnic minority refers to a group within a community which differs ethnically fromthe main population.Looking at the two definitions we see why some lenders appear to havedouble classified the same group of clients as both immigrants and ethnic minorities (seeGraph 13). With respect to youth, there are definitional differences between lender andEurostat data. The principal lender focusing on young people in Western Europe definesyouth as 14 to 30 year olds, whilst Eurostat data considers youth as those 15 to 24 years ofage. For this reason it is important to treat the data on all of these groups with caution.
In addition, in some cases very few respondents reported on disbursement to thesegroups. Twenty-eight percent of organisations directly disbursing loans reported on ethnicminority lending, 28% reported on immigrant lending, 29% on lending to youth and less than4% reported on the number of loans disbursed to disabled people. It is unclear in these instances whether a lack of data means the lender does not finance a particular clientgroup or whether the lender simply does not track this sort of information.
Graph 12: Percentage of Women and Men Clients EU 25
0
Belgium
Finland
France
Germany
Italy
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
Hungary
Poland
Slovakia
10 20 30 40 50 60 70 80 90 100
WomenMen
22. “Immigrant Participation in Microloan Programmes in Western Europe,” EMN Working Paper Number 3, Miriam Guzy and TamaraUnderwood, EMN, 2006.
23
Keeping the above discussion in mind, for those reporting this data, 4% of microloan clientsin the EU 25 are ethnic minorities, 7% are immigrants, 7% are youth and less than 1% of clientsare disabled people. Looking solely at the EU 15, these figures rise slightly to 6% for ethnicminorities, 12% for immigrants, 12% for youth and again less than 1% for disabled people23.
The definitional problems cited above mean that it is not possible to assess whetherlenders are reaching ethnic minorities and immigrants in proportion to their representation inthe EU population. In the case of youth, even though there are these differences, Eurostatdata does assist with an evaluation of coverage. According to Eurostat, as of 1997, 13.5% ofthe EU 25 population and 13% of the EU 15 population was between 15 and 24 years of age24.It appears that lenders in Western Europe are reaching youth at a slightly lower rate than theirrepresentation in the population. The EU 25 data suggest a lending rate at half of the overallrepresentation of youth in the population. Graph 13 shows that in countries such as Belgium,the UK and Slovakia, however, young people are represented well over their proportion of thepopulation25.
The European Union estimates that 10% of the EU population has a disability26. EU-widedata is not yet available on the prevalence and degree of disability and its impact onemployment possibilities.This data will be compiled as one of the activities undertaken duringthe 2007 European Year of Equal Opportunities for All.Once this data is available,microlenderswill be able to compare participation rates in their programmes to the numbers of disabledpersons able to pursue employment opportunities in their respective countries.
➤ Client Financial InclusionThis edition of the survey asked lending organisations to indicate the degree to which their
clients had access to financial services considered “necessary” for participation in economiclife in the EU. Most lenders know whether clients have access to bank accounts but have lessinformation regarding other financial services. Graph 14 shows the estimated percent ofclients that have access to these services.
Graph 13: Percent of Clients from At Risk Groups EU 25Pe
rce
nt o
f Lo
an
s D
isb
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ed
100
90
80
70
60
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30
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0
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France
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Norway
Portu
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Spain
Sweden
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United K
ingdom
Slova
kia
Ethnic MinoritiesImmigrantsYouthDisabled People
23. Data was not provided for Poland and Hungary. 2005 data was not available for Ireland.24. “Europe in Figures: Eurostat Year Book, 2005”.25. Youth entrepreneurship represents less than 1% of total entrepreneurship across the EU 15, although more than 50% of young peopleexpress an interest in starting a business. Young people are 3 times as likely to be unemployed as older people in the EU. See: “YouthEntrepreneurship: Latent Entrepreneurship, Market Failure and Enterprise Support,” F. Greene, 2005, National Council for GraduateEntrepreneurship, Policy Paper 2, UK.26. European Year of Equal Opportunities for All, 2007, see http://equality2007.europa.eu.
24
On average in the EU 25, 10% of the population is estimated to be financially excluded27.In the UK the 2002-03 Family Resources Survey found that approximately 8% of the populationdoes not have access to any sort of bank account28. According to survey respondents, 13%of microloan clients do not have access to a bank account.This rate suggests that microloanclients are only slightly more financially excluded than the overall population. However, therate may be misleading.
Microlenders in several countries disburse their loans via banks. Many work with banks toensure that accounts are opened into which funds are transferred and from which loanrepayments are made. Therefore, the process of receiving a microloan appears to facilitateaccess to this basic financial service and may be inflating the rate reported in the survey. Inorder to determine the degree to which this inclusion process is sustained, it would be usefulto investigate the number of microloan clients who have basic bank accounts prior to receivinga microloan, the number who open up accounts for the purposes of the loan and the numberwho maintain their accounts once the loan is fully re-paid.
A relatively high number of clients have insurance. In some new member states, basicsocial and health insurance is compulsory for registered business owners. Short-term consumercredit is much less common amongst microloan clients as are long-term savings. A relativelyhigh percentage of clients have mortgages. This phenomenon is observed in Spain wheresavings banks, which provide a wide variety of financial services, appear to be providingmortgages to the microloan market.
➤ MarketingThe proportion of the population that can potentially benefit from microcredit in Western
Europe is smaller than it is in developing countries. In the EU, 15% of the population is at risk ofpoverty29 and 10% is estimated to be financially excluded. In addition, clients can be moredifficult to reach. Potential microloan clients are geographically dispersed. Because of yearsof unemployment or activity in the informal economy clients also tend to be excluded frommainstream communication channels and networks. In both the EU 15 and new memberstates significant outreach and marketing is needed, but which approaches work best?
Graph 14: Financial Inclusion Rates EU 25Pe
rce
nt o
f Mic
rolo
an
Clie
nts
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%banking accounts insurance short-term
consumer creditlong-term savings mortgages
27. Carbo Valverde, S. and Lopez del Paso, R., “Exclusión financiera: un panorama”, Perspectivas del sistema financiero, n.º 84, Fundación delas Cajas de Ahorros, Madrid. 200528. Quoted in “Promoting Financial Inclusion,” HM Treasury, UK, 2004.29. “Europe in Figures: Eurostat Year Book, 2005”.
25
Lenders surveyed employ several marketing strategies often simultaneously. The largestpercentage of respondents uses referrals and word of mouth to attract loan clients. Thismethod is followed in order of importance by public relations,community outreach and massmedia advertising. Of the approaches used, referrals and word of mouth are by far the mostsuccessful. This result implies that lenders should emphasize communication with referringagencies such as business support services, employment services and community aidgroups. It appears that mass media campaigns, which are often costly, are less successful,when compared to targeted approaches that focus on the institutions in contact with likelyclients.
➤ Monitoring Programme OutcomesNinety-four percent of organisations surveyed responded to the questions on monitoring
the outcome of their activities.Of organisations surveyed,75% indicated the types of indicatorsmonitored as well as the methods used. Graph 16 shows that the most commonly monitoredindicator is jobs created and sustained. Household income changes and business profitabilityare the second most frequently monitored indicators. Qualitative indicators such as businessskills, access to services, participation in community associations and changes in self-confidence are less frequently monitored.
Graph 15: Marketing Methods EU 25
Percentage of Respondents
0 10 20 30 40 50 60 70 80 90
referrais
public relations
community outreach
mass media advertising
targeted advertising
other
Methods UsedMost Successful Methods
26
Monitoring methods used most commonly are individual client interviews, staff or loanofficer observations, information provided on loan application forms and impact surveys. Theleast used methods are focus groups.
It seems that microlenders monitor quantitative indicators that are fairly easily and costeffectively recorded. Monitoring changes in people’s lives, their access to services andinclusion in society can be more difficult and is undertaken less frequently.
Thirty percent of respondents indicated the frequency with which they monitorprogramme outcomes. Of this group, half monitor annually and 6% monitor every two orthree years. Another group (34%) monitors on a monthly, quarterly or bi-annual basis. Andsome organisations (10%) have not yet assessed the effect of their programme on client lives.
About 35% of the survey sample had information available on programme results. Themost significant and widely reported results related to numbers of jobs created and retained.Some found that even though the survival rates of businesses were high, there was littlebusiness growth and profit margins were quite small. A few organisations reported improvedprofits for about a quarter of businesses financed. Several observed improved access tofinancial services.
Many respondents reported that even with business failure, obtaining a microloan andrunning a business seems to improve clients’ overall employment prospects. Owners of failedbusinesses sometimes sell their business and continue working for the new owner or findwaged employment elsewhere.
Organisations working with immigrants observed increased self-confidence with self-employment and in some cases family reunification thanks to improved income. Similarly,survey participants working with women report gains in client self-confidence.
Graph 16: Monitoring Programme Outcomes EU 25
Percentage of Respondents
0 10 20 30 40 50 60 70 80 90 100
jobs created & sustained
household income
business profitability& changes in assets
number of business start-ups
access to mainstreambanking services
survival rates of businesses
change in clientself-confidence
entrepreneuship& business skills
business & productdiversification
access to local services
participation incommunity associations
27
Lenders offer a variety of loan packages. The packages carry varying interest rates, loanamounts, repayment periods and guarantee arrangements. These change depending uponthe goals of the lender, guarantee mechanisms in place and lender attitude towardcovering risk.
➤ Loan termsThe maximum loan repayment term offered by organisations responding to this survey
extends to 5 years and the shortest is less than 6 months. In 47% of cases, however, therepayment period offered is between 2 and 3 years. In 33% of cases it is more than 3 years.
Fifty percent of survey respondents indicated whether they offered interest only graceperiods. In this group, 91% offer grace periods of varying lengths. The mean grace period is 6months, the maximum is 24 months and the minimum is 2 months.
➤ Interest ratesMicrolenders set interest rates keeping in mind the loan amount, loan term and government
usury laws. Many also provide interest rate discounts for repeat customers. Therefore lenderswere asked to provide information on maximum and minimum interest rates.
The average maximum interest rate charged across survey respondents is 10% and theaverage minimum rate is 4%. Graph 17 shows the average maximum interest rates by country. As a reference, the Euribor rate was 3.3% and the UK Central Bank base rate was4.5% at the time of the survey in 2006.
The regulatory environment in each country strongly influences maximum interest rates.Where usury laws are in place, lenders must not charge above regulatory maximums. Theymight therefore be unable to price for risk, operating and financial costs. In the UK andPoland, however, where there are not these types of restrictions, we see higher averageinterest rates. In fact, amongst UK lenders participating in survey, the maximum interest ratecharged was 27% and the minimum 4%, demonstrating a wide range of practice when ratesare un-restricted.
5. PRODUCTS AND SERVICES
Graph 17: Average of Maximum Interest Rates by Country EU 25
25%
20%
15%
10%
5%
0%
6% 6% 6%6%
9% 9%
14%
22%
10%11%
8%
5% 5% 5% 5%
Euribor 3,3%
Belg
ium
Finla
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France
Germ
any
Irela
ndIta
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Norway
Portu
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Spain
Sweden
Switz
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United K
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Hungary
Slova
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Pola
nd
28
Interest rate charges and interest rate ceilings are an important strategic issue for thesector. In Eastern and Central Europe, the Balkans and the Newly Independent States of theformer Soviet Union,microlending interest charges are in the 20-40% range.Here, lenders worktoward charging sustainable interest rates that cover both operational and short-termfinancial costs. In this region, a number of lenders is operationally self-sustainable as a result.
As will be seen further on, in the EU 15,there are no operationally self-sustaining microlenders.Operational self-sustainability refers to the lender’s ability to cover through operatingrevenue (interest and fees) operational expenses, the cost of borrowing and loan lossprovision. Operational self-sustainability is a measure of the microlender’s ability to sustainitself over the long term. Although for many operational sustainability is a goal, there are anumber of factors working against its achievement. One of these factors is interest rateceilings.
➤ Loan FeesForty-four percent of survey participants responded to questions regarding loans fees. Of
these, loan processing and loan application fees are the most common followed by latefees. These fees in addition, to interest rate charges, are another means of coveringoperational costs and risk.
➤ GuaranteesSecuring loans through guarantee funds, collateral and peer group pressure is another risk
mitigation method and a strategic issue for the sector. Guarantee schemes are important forprotecting loan capital. Attaining the right level of guarantee is a challenge.
For providers, subsidised guarantee schemes are important. There is evidence that incountries where commercial banks participate in microloan schemes, participation hingeson sufficient subsidised guarantee funds being in place due to the perceived high risk of thisform of lending. Where guarantee fund amounts have been reduced, commercial bankinvolvement has been scaled back.
For clients, the need to provide financial or in-kind guarantees may be difficult if notimpossible and may turn away potential borrowers. This appears to be an issue of particularimportance to women and immigrant borrowers30.Alternative guarantee arrangements suchas those offered by peer lending schemes can be an attractive option.The time commitmentrequired for participating often presents another set of costs to the client, however.
In this light it may not be surprising that 42% of survey respondents make unsecured loans.If we look at the EU 15 data alone, 55% of responding organisations make unsecured loans.This means that a majority of lenders do not have a way to recover unpaid debt. Where nomeans to recover unpaid loans exist, loan funds available to future borrowers shrink unlessnew resources are injected into the fund. In an environment where interest rates and fees donot cover this risk, loan funds can be put into jeopardy.
30. For more on this point see : “Women and Microlending in Western Europe,” Tamara Underwood, EMN, 2006 and “Immigrant Participationin Microloan Programmes in Western Europe,” Miriam Guzy and Tamara Underwood, EMN, 2006.
29
For the lenders that are securing their loans, the most frequent form of security is collateralin the new member states (100% of the 20 lenders in Hungary require collateral). In the EU 25as a whole, a guarantee fund or guarantor is most common (Graph 18). In the case of theguarantee fund, some organisations require borrowers to make a financial contribution to afund that is used to cover losses. Other organisations have guarantee funds set up with acontribution or assistance from a third party such as a state, European Social Fund orEuropean Investment Fund agreement. Some organisations use both borrower contributionsand external forms of guarantee. In the case of a guarantor, someone in the borrower’sentourage accepts legal responsibility for all of or a portion of the value of the loan or loanbalance and fees at the time of default. The least common form is the peer group guarantee.This form of guarantee predominates in developing countries.
➤ Loan sizesIn Europe loans worth 25,000 euros or less are considered to be microloans. The maximum
sized loans provided by microlenders range from 58,000 euros to 3,675 euros. Loans abovethe 25,000 euros limit are offered by UK organisations supporting SMEs as well asmicroenterprises. Loans above 25,000 euros are not included in the analysis of loan size andvalue.
As already mentioned, the average loan size across the entire sample is 7,700 euros. In theEU 15 the average loan value is 10,240 euros and in the new member states it is 3,800 euros.Dividing total loans disbursed by the total value of loans disbursed by country in 200531, wesee an average loan size by country and institution type as follows:
31. Loan size data for Ireland for 2005 was not available.
Graph 18: Loan Security EU 25
Percentage of Respondents
0 5 10 15 20 25 30 35 40 45
no security is taken
personal savings tofinance part of the
business proposal
peer groupguarantee
collateral
a guarantee fundor guarantor
30
As discussed previously, by adjusting average loan size for national per capita income it ispossible to calculate a proxy indicator, “depth of outreach”. Depth of outreach is loan sizedivided by per capita Gross National Income (GNI) expressed as a percentage. This indicatoris used to assess the degree of relative poverty of clients being reached. This conceptassumes that the smaller the loan size in relation to country national income, the smaller theclient’s business and the poorer the client.
This concept has weaknesses as it is not a given that small loan sizes mean poorer clients32.It may be that there is only one supplier and clients have no choice but to accept the loanamounts on offer. Where there are several suppliers, entrepreneurs may be taking out loansfrom several sources. Nonetheless, adjusting for national per capita income assists in makinga more accurate comparison between the EU 15 and new member states.
Graph 19: Average Loan Size in 2005 by Country and Institution Type EU 25
Euro
s25000
20000
15000
10000
5000
0
govtbankNGOcredit union
Belg
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Sweden
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United K
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Pola
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Slova
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Graph 20: Depth of Outreach EU 25
Average Loan Size as a Percentage of Gross National Income Per Capita
0 50 100 150 200 250 300
BelgiumFinlandFrance
GermanyItaly
NorwayPortugal
SpainSweden
SwitzerlandUnited Kingdom
HungaryPoland
Slovakia
32. For a discussion see, Money with a Mission: Microfinance and Poverty Reduction, James Copestake, Martin Greeley, Susan Johnson, NailaKabeer, Anton Simanowitz, Volume 1, ITDG Publishing, 2005.
31
The depth of outreach calculation was done using international standards. Loan averageswere converted from euros into US dollars and World Development Indicators from the WorldBank July 2006 for Gross National Income (GNI) per capita were used33. These adjusted figuresindicate that the microloan programmes implemented in Hungary are disbursing loans atover 200% of annual GNI per capita. Compared to the rest of the sample, it appears that theHungarian programmes are lending to businesses and individuals with a very different profilefrom those in the rest of the sample. A possible explanation for this difference is that inHungary the 20 organisations surveyed focus on SME support.
In the rest of the sample, loan sizes are below annual GNI per capita. In this group,average loan values are greatest in Belgium, Finland and Sweden suggesting that largerbusinesses and better off entrepreneurs benefit from microlending. In Norway, France andPortugal by contrast, much smaller businesses appear to be targeted. These differences fit ingeneral with the discussions above on mission statements and institutional types.
➤ Loan Decision Making CriteriaLenders rely on a number of factors in deciding whether to approve and disburse a
microloan. The most frequently cited characteristics are business criteria and the content ofthe business plan followed quite closely by character. Being referred by a collaboratingagency and having one’s own resources to invest in the business are also important.
Respondents ranked the importance of different criteria in the loan decision makingprocess with 1 being the most important criteria and 3 being the least important. Table 3below shows that personal criteria and character receive the most weight in the decisionmaking process followed by business criteria and the quality of the business plan. Leastimportant is having collateral to secure the loan.
Lenders use several tools for assessing the above criteria. Tools used most frequently inorder are the analysis of the entrepreneur’s written business plan, interviews with theapplicant and cash flow analysis. Site visits come next followed by peer group memberassessments.
➤ Lending MethodologyThe vast majority of organisations surveyed disburse individual loans (80%). A very small
proportion offer individual loans followed by loans of increasing size once previous borrowingis paid in full (stepped loans). Nine lenders (10%) reported offering group loans or group loanswith stepped loans.
The preference for individual over group lending in Europe continues. Group lending is themethodology used most commonly in developing countries. Experimentation continues withthe group lending methodology in the UK, Belgium, Norway and France.This method tends tobe used with specific client groups as a means for replacing collateral and guarantees.
Table 3: Loan Decision Making Criteria
Criteria Rank personal/character 1,29
Business criteria and business plan 1,43
Referral by a collaborating agency 2,13
Existence of savings to invest in the business 2,27
Existence of guarantees or guarantors 2,35
Value of existing assets 2,40
Availability of collateral to secure the loan 2,46
33. We used the World Bank indicators calculated using the Atlas method that are comparable for all countries and commonly used in microfinancethroughout the world. GNI per capita (formerly GNP per capita) is the gross national income, converted to U.S. dollars using the World BankAtlas method, divided by the midyear population.
32
Group loans schemes also provide technical assistance and training, mutual support andnetworking. In the majority of cases, group lending focuses on immigrant and/or womenclients.
➤ Training and Technical AssistanceTraining, advice and support are elements critical to the success of new and existing
businesses. The majority of lenders surveyed provide pre- and/or post-loan training andtechnical assistance.
Seventy-five percent of responding organisations provide pre-loan business supportservices. Most organisations that do not provide this support refer clients to appropriateservice providers.
Amongst survey respondents providing pre-loan assistance, approximately half offer thissupport only if the client asks for it. Twenty-five percent make it an obligatory part of the loanpackage. Twenty-seven percent require training and support services only in certain cases.
Of those providing pre-loan business development services, the topics covered are shownbelow. General business advice and support on developing business plans are mostfrequently provided. In the ‘other’ category the type of support most commonly provided isinformal advice during loan processing. A handful of respondents provide advice on legal,tax and other fiscal matters.
About half of respondents indicated the number of clients participating in pre-loan services.As many as 29,000 individuals benefited from pre-loan business development support in 2005.About 10% of organisations providing pre-loan support charge for these services. Some ofthose charging fees add a percent on to the loan value as a contribution toward training,thus mixing training and support costing with loan pricing. None of the respondents cover thefull cost of training and support through fees. The majority rely on public and private sectorgrants and subsidies.
Seventy-five percent provide post-loan business support services to clients. Of respondentsproviding these services, 44% offer assistance only if the client specifically requests support,16% make it an obligatory part of the loan package and 33% make it obligatory in certaincases.
Graph 21: Types of Pre-Loan Business Support EU 25
Percent of Respondents
0 10 20 30 40 50 60 70 80 90
general businessadvice
business plandevelopment
business ideadevelopment
specific businessadvice
other
debt counsellingand management
33
Organisations providing post-loan business development assistance primarily offer generalbusiness advice. Business management training is available along with general marketingsupport and administrative advice.
Twenty-five percent of survey participants provided information on the number of clientsserved by post-loan business development support. This group reached about 1,800 clients in2005. Four percent of lenders providing these services charge a fee. Those who provideddetails on fees indicated that either a percentage was added to the loan or that a minimalflat fee was charged. Those charging fees cover between 1-25% of their training and supportcosts from fees. The remainder of costs as well as the costs of those not charging fees isfunded by public and private grants.
➤ Other Financial ServicesMicrofinance refers to the provision of a range of financial services that includes
microloans for enterprise development but also consumer loans, housing and educationloans, savings, insurance and transfer services. This edition of the EMN survey looked at thequestion of “other financial services” and found that a handful of microlenders are providingor are testing the market for such services. However, the sector remains dominated bymicroenteprise loans. On one hand the financial services sector is well developed. On theother, in many countries regulatory environments restrict the financial activities of non-governmental organisations.
Graph 22: Post-Loan Business Support Services EU 25
Percent of Respondents
0 10 20 30 40 50 60 70 80 90 100
general businessadvice
business managementtraining
marketing support
administrative advice
advice on tax andbenefits compliance
basic accounting
other
Graph 23: Share of Organisations Providing ‘Other’ Financial Services EU 25
money transfer services
pensions homemortgages
debtcounselling
other
Perc
en
t of O
rga
nis
atio
ns
Surv
eye
d
8
7
6
5
4
3
2
1
0consumer/
personal loanssavings
productsinsurance
govtbankNGOcredit union
34
Twenty percent of survey respondents offer “other financial services”. In Spain, the savingsbanks provide consumer and personal loans, savings products, insurance, money transferservices, home mortgages and debt counselling to microenterprise clients. In the UK, a totalof 6 NGOs in the survey sample are involved in providing these financial services. All 6 makeavailable consumer and personal loans, 1 also provides home mortgages and 2 offer debtcounselling. In the ‘other’ category these UK NGOs provide an additional array ofemployment related and financial services: back to work loans, training and educationloans,debt consolidation loans and home improvement loans. In Norway savings services areprovided and in Italy an ethical bank offers savings products and money transfer services. InGermany an organisation provides money transfer services. NGOs are not involved ininsurance although a lender in France is presently testing a microinsurance scheme.Government bodies responding to the survey are not involved offering these services.
Thirty-four percent of survey respondents said they undertook measures to assist theirmicroenterprise clients to move into the mainstream banking sector. Half of these citedproviding microcredit as a service that helped clients move into the mainstream. Othersundertook proactive steps such as helping clients to negotiate special rates with banks,helping them to open up bank accounts,helping them to clear bad debt and helping clientsto monitor and improve their credit rating.
35
The survey looked at a number of performance measures. As with the previous survey, fewrespondents provided data on the performance of their loan funds when compared to theother sections of the survey. Approximately half of organisations that directly disbursemicroloans provided information on their repayment rates, their portfolio at risk and their writeoffs. Twenty percent provided information on rescheduled loans.
This low response rate might be explained by under-developed management informationsystems which are a likely outcome of two factors: lender age and the relatively small placeof microlending in the activity portfolio of 50% of the organisations participating in the survey.
However, if this were the case, for those organisations that did provide the data, one wouldexpect to see a relationship between the age of the lending programme and the response rate.Similarly, one would expect to see a relationship between the proportion of microlending inthe organisational activity portfolio and the response rate.However,neither of these relations-hips is evident in the data set.
In general, collecting data on portfolio performance is difficult because lenders in WesternEurope have not yet adopted a standard set of performance monitoring ratios nor standardmethods for calculating each ratio. The last survey report pointed out that some respondentsreported on “numbers of loans” whilst others reported on “value of loans” when calculatingvarious performance ratios.Work on agreeing a set of ratios and calculation methods for thesector in Europe is underway. Implementation of common standards will greatly assist lendersto speak a common language and to assess their financial performance.
The first of portfolio performance measure covered in the survey was repayment rate.Repayment rate was defined as the value of amounts collected divided by the value ofamounts fallen due x 100. Fifty-two percent of respondents that disburse loans gaveinformation on their repayment rates. The average repayment rate amongst these lenderswas 89%. The lowest repayment rate was 33% for one lender. If we remove this data point wehave an average repayment rate of 92%, almost the same as in the previous survey.
This edition’s survey sample is much larger than the previous one. With this larger data set,we see a larger proportion of lenders with repayment rates in the 96-100% range and asmaller proportion in the 86-95% range (Graph 24) when compared to the previous survey. Inthe lowest range we see a greater proportion of lenders than in the previous survey.
Forty-nine percent of lending organisations surveyed provided portfolio at risk figures(Graph 25). This ratio was defined as the value of the outstanding principal balance of allmicroloans for which one or more payments of principal were over due by thirty (30) days ormore divided by the total outstanding principal balance of all loans x 100.
6. OPERATIONAL PERFORMANCE
Graph 24: Repayment Rates EU 25
31%
42%
27%
75-85%86-95%96-100%
36
The highest portfolio at risk figure was 44% and the lowest 0%. The average of respondentswas 12%, lower than the previous survey. The percentage of lenders falling into the lower riskranges has increased slightly from the previous survey and the percent in the high risk rangehas stayed the same.
Twenty percent of lending organisations gave information on rescheduled loans. Tocalculate this figure, the questionnaire instructed respondents to divide the outstandingprincipal balance of rescheduled loans during the year by the average portfolio outstandingx 100. The value of the outstanding principal balance of rescheduled loans in relation toaverage portfolio outstanding was 6% on average amongst respondents. This figure is lowerthan the figures calculated in the previous survey.
Write-offs refer to the value of loans that have been recognised as uncollectible duringthe year minus loan payments received divided by the average portfolio outstanding. Fifty-one percent of lenders surveyed supplied information regarding write-offs (Graph 26).
The highest write-off rate was 25% and several lenders reported write off rates of 0%. Someof the recent entrants to the market indicated that they had not yet declared any of theirarrears as uncollectible and written them off. The relatively high number of organisations inthe 0-3% range may therefore be a reflection of the sector’s age.
Graph 25: Percent of Portfolio at Risk EU 25
0-5%6-15%16-25%> 26%
33%
15%
30%
22%
Graph 26: Write Off Rate EU 25
0-3%4-6%7-9%> 10%
24%
49%
16%
11%
37
The questionnaire asked respondents about the time period which elapses before theyrecognise loans as uncollectible. The range was 3 months to 5 years. Several respondents donot fix a time period, but manage arrears on a case by case basis.
Fifty-five percent of lending organisations surveyed indicated whether their interest ratesand fees covered the value of their write-offs in 2005. For 45% of this group, this income doesnot cover the value of write-offs.
When asked how they fund their write-offs, some lenders rely on more than one type ofguarantee. Twenty-one percent of organisations responding to this question use theguarantee funds to which borrowers contribute to cover their losses. They also rely on grantmoney or in the case of new member states, they create loan loss reserves. Twenty-fivepercent rely on bank, government or European guarantee funds to compensate their losses.Nine percent report setting their interest rates at a level enabling them to cover their writeoffs. Fifty-nine percent of lenders reported that they experience loss of loan capital whenloans are declared uncollectible and are written off.
This last figure and the finding that 42% (55% in the EU 15) of survey respondents makeunsecured loans means that loan capital is being eroded and/or is at significant risk.Reducing write-offs through efficient arrears management systems and adequate costrecovery via interest rates, fees and collateral/guarantee arrangements are very importantfor protecting the value of loan capital and strategic for the sector.
38
Survey respondents were asked to rate the effectiveness of funding on a scale of 1 to 3with one being very effective and 3 being not effective. The average score was 1.84,meaning that most lenders are fairly satisfied with the funding relationships established andthe level of support being received. The most frequently recommended improvements wererelated to funding of guarantees and improved funding for business development services.Respondents also suggested that donors improve their understanding of the technical andsocial aspects of lending to socially and financially excluded individuals. Survey participantsalso recommended reduced bureaucracy.
Not a single lender in the EU 15 is operationally self-sustaining at present althoughsustainability is a long term goal for many. EU 15 lenders rely primarily on public and privatefunds to cover operational costs and provide loan capital. In the new member states,operational costs are covered by earned income, public subsidy and private charity funds.Some lenders are covering all of their operational costs through earned income. Loan capital is funded in order of frequency by the private sector, public sector and privatecharities.
➤ Operational CostsThe public sector in the EU 15 plays an important role in funding the operations of
microlenders. Forty-two percent of EU 15 microlenders receive between 76 to 100% of theiroperational funds from public sources. Only banking institutions in this portion of the samplecover all of their operational costs from earned income.
Two of the 26 organisations surveyed in the new member states cover 100% of theiroperational costs from earned income (fees, interest and income earned on assets). Theselenders are operationally self-sustainable. A third lender covers 50% of its operational costsfrom earned income. The balance of costs for new member state lenders is funded by eitherpublic or private sector sources.
➤ Loan CapitalIn the EU 15, the private and public sector play an important role in funding 76-100% of
microlender loan capital. Those receiving as much as 100% of their loan capital from theprivate sector are a mix of NGOs and banks/state banks. In addition, some NGOs havearrangements with commercial banks (private sector).Commercial banks provide loan fundswhilst the NGO takes on the loan management and risk. The majority of institutions receivingloan capital from the public sector are in the UK and Germany. In the UK, until 2006, thegovernment’s Phoenix Fund provided both loan capital and operational funds.
In the new member states, when the sector was young, bilateral and multilateral donorsprovided the majority of loan capital. Currently, public and private sources are important inHungary whilst primarily private and charity sector sources capitalise loan funds in Polandand Slovakia. In some cases the initial loan funds have been increased via concessionalloans from public and private sources and socially responsible investors34.
In some countries, microlenders are able to borrow for onward lending. Fifteen percent ofsurvey participants are involved in this form of financing. In this group there are 4 NGOs, 4banking institutions and 1 parastatal. Borrowing for onward lending is a means for increasingthe size of loan capital available and achieving scale. However, doing so necessitatesorganisational maturity and a significant pipeline of projects to finance. Doing so profitablyalso requires being able to create an interest rate spread that enables pricing for costs andrisk. The majority of lenders in the EU 15 make a limited number of loans and are subject tointerest rate restrictions. In the short term, this funding source is only likely to benefit sectorleaders and those operating in countries with interest rate flexibility.
7. FUNDING
34. “From Exclusion to Inclusion through Microfinance: Working Group 1 – Social and Financial Exclusion Map,” MFC, EMN, cdfa, forthcoming 2007.
39
Financing of business start-ups in Germany has traditionally been the responsibility ofbanks. In response to increasing demand for microloans and commercial bankreluctance to assume the risk, in 2000 the ‘Startgeld’ and ‘Micro Loan’ programmesbegan making loans available to medium and small sized start-ups via KfWBankengruppe, a federally owned bank.
The Micro Loan programme, tended to reach larger businesses with loans thataveraged 18,000 euros. It was complemented by a second programme in 2005. Thisprogramme, Mikro10, focuses on lending in the 5,000-10,000 euro range. In bothprogrammes, entrepreneurs apply for loans via their principal bank (‘Hausbank’), withKfW guaranteeing 80% of the loan and paying a processing fee (1,000 euros in the caseof Mikro10) to the bank in recognition of the relatively high transaction costs involvedin microlending. The KfW guarantee for the Mikro10 programme was partly backed bya guarantee from the European Investment Fund (EIF). From January-November 2006,1,293 microloans worth 20.8 million euros were disbursed via the KfW Micro Loan andMicro 10 initiatives.
In addition to this federally funded programme, there are several local and regionalinitiatives funded by private donors, foundations and local governments. Theseorganisations which focus on training, support and finance formed an association in2004, the German Microfinance Institute (DMI).
At the end of 2006, DMI and KfW joined forces in the Microfinance Fund Germany, anew initiative supported by the Federal Ministry for Economics and Technology, theFederal Ministry for Labour and Social Affairs, GLS Bank and KfW. In this scheme, DMIaccredits advisory institutions that in turn support start-ups and young businesses. Theseadvisory institutions make loan recommendations to participating banks. The advisoryinstitutions assume 20% of the liability of loans recommended for financing whilst theMicrofinance Fund assumes the remaining risk. Advisory institutions reduce banktransaction costs by providing pre-loan support and post-loan monitoring. Theguarantee and business support arrangements provide strong incentives for bank invol-vement in microlending. The future success of this model will provide important lessonsfor the European microfinance sector.
The Microfinance Fund Germany:Creating Incentives for Commercial Bank Investment in Microcredit
40
The survey asked respondents to share their future plans on a number of points.Respondents were asked to indicate the types of clients they intended to target andwhether they intended to branch out into other financial services. Microlenders also gaveinformation on their growth plans and indicated the level of operational sustainability theyhoped to attain.
➤ ClientsWith respect to target groups, we see an expected increase in focus on all at risk groups
with significantly more attention being given to rural areas than is presently the case.
➤ Financial ServicesA number of organisations hope to expand the range of financial services offered to
microenterprise clients.
Seventeen lenders (19%) presently provide one or several of the above mentionedservices. Slightly more organisations hope to do so by 2008 with consumer lending being themost commonly cited service.
8. FUTURE
Graph 27: Client Targeting Now and in 2008 EU 25
20052008
Percent of Respondents
0 10 20 30 40 50 60 70 80
rural population
urban populationno client-specific
targetingdisabled people
ethnic minoritygroups
youth
self-employed
immigrants
poor people
unemployedpeoplewomen
people excluded frommainstreams financial
services
Table 4: ‘Other’ Financial Services in 2008
Financial Services Percent Consumer/personal loans 30%
Savings products 16%
Microinsurance 7%
Money transfer services 10%
Pensions 3%
Home mortgages 7%
Debt counselling 14%
41
➤ Growth
➤ Plans for Growth
Most microlenders are small and have limited geographic reach. Although the sameorganisations did not respond to the questions on their present geographic coverage andhoped for future coverage,we see a small increase from local coverage to regional coverageexpected in the period from now to 2008 with an almost even split between organisationsplanning to work nationally, regionally or locally.
Fifty percent of organisations provided an indication of the number of active borrowersthey hope to have by 2008. Amongst the 11 organisations that provided data on activeborrowers for both 2005 and 2008, on average a 16% growth in the number of active borrowers is expected over this time period. This figure seems low. Between 2004 and 2005lenders reporting these figures experienced a growth rate of 16%. In addition, there has beengrowth in the number of actors each year. Indeed, growth in borrower numbers will dependupon improved deal flow amongst existing lenders.Growth will also depend upon the numberof new entrants and how quickly they can establish lending methodologies, attract clientsand also increase their deal flow.
Graph 28: Geographic Coverage by 2008 EU 25
34%
6%
30%
30%
internationalnationalregionallocal
42
➤ Constraints to Growth
Respondents were asked to identify constraints to growth and rank their importance from1 (most important) to 6 (least important). Lack of funds to cover operational costs is the mostsignificant and frequently identified constraint. Accessing funds to lend, institutional capacityand the regulatory environment are also constraints. EMN had anticipated that theenvironment in which lenders work would figure more prominently particularly with respect tointerest rate ceilings and borrowing for onward lending, which have an impact on costrecovery and deal flow. On the other hand, many respondents in the UK were facing acuteproblems with overhead costs at the close of 2005 due to the end of the Phoenix Fundprogramme and this issue may have therefore been at the forefront of concerns.
➤ SustainabilityAs evident from the above, operational self-sustainability remains a challenge for the
sector. Operational self-sustainability refers to the lender’s ability to cover through operatingrevenue (interest and fees) operational expenses, the cost of borrowing and loan lossprovision. Operational self-sustainability is a measure of the microlender’s ability to sustain itselfover the long term.
Forty-six percent of survey respondents identified several long term goals for sustainability.Of this group, 60% hope that by 2008 their income from interest and loan fees will cover thevalue of their write-offs (loan losses). Another 22% would like to cover both write-offs and loanprocessing costs. Eight percent plan to cover a percentage of their business developmentservices through fees.
Graph 29: Constraints to Growth Ranked by Importance EU 25
Co
nst
rain
ts: M
ost
Imp
ort
an
t (1)
to L
ea
st Im
po
rta
nt (
6)Number of Responses
0 10 20 30 40 50 60
lack of institutional capacity
lack of an appropriate legaland regulatory environment
lack of funds for lending
lack of funds to coveroperational costs
1
2
3
4
5
6
43
For the sector as a whole, but in the EU 15 in particular, the lending environment as well asmicrolender practices contribute to sustainability difficulties. For example, lenders in the EU 15have relatively high cost structures compared to institutions in new member states anddeveloping countries. High costs are largely due to office space, salary payments and welfarestate contributions, all of which are difficult to alter.
Whilst continued public and banking sector support is needed to help the sector develop,there are strategies that lenders can adopt to increase their financial independence. Forexample, many microlenders provide both pre and post-loan business development services(BDS). Only 52% of this group separates the cost of BDS from loan processing costs. Mixing loanprocessing and BDS expenditure makes it difficult to seek grant monies for training andtechnical assistance. It also hampers efforts to identify lending growth targets and interest rateand loan fees that enable the lending activity to move towards operational self-sustainability.
Graph 30: Organisational Sustainability Goals EU 25
Percent of Respondents
0 10 20 30 40 50 60 70
interest rate and loan fees coverthe value of write-offs in 2008
interest rate and fees cover thevalue of write-offs and loan
processing costs
fees charged for businessdevelopment services cover
a percent of these costs
Graph 31: Microlenders Fees EU 25
Percent of Respondents
0 10 20 30 40 50 60
loan processingfees
loan applicationfees
late payment
other
loan closingfees
44
Thirty-two percent of respondents reported that they charged fees in addition to interest.Some lenders charge several types of fees. Graph 33 above shows that the majority chargeloan processing and application fees. These fees help defray a portion of loan processingand monitoring costs. In the ‘other’ category are fees related to securing loans, which will bediscussed below.
Lenders could do more to protect their loan capital and reduce their dependency oncontinued external funding but they face certain constraints. Close to 90% of lenders do notset their interest rates to cover costs, price for risk and/or cover their write-offs. Many lendersare constrained by interest rate caps. Raising awareness regarding the need for interest rateflexibility whilst also protecting consumers is required.
Aside from interest rates, there are other strategies that lenders could adopt to helpprotect their loan funds from erosion. For example, the majority of lenders do not charge latepayment fees. Moreover, for the majority of those who do charge these fees, fee income didnot cover the value of write-offs in 2005. Identifying appropriate fees and fee amounts andapplying them consistently is important.
Approximately 42% in the EU 25 and 55% of organisations surveyed in the EU 15 makeunsecured loans. This means they do not require peer group guarantees, borrower orentourage guarantees or collateral. They also do not participate in governmental/EUguarantee schemes. In addition, only 11 organisations out of the survey sample said theycharged late fees, which can help cover loan recovery proceedings and/or losses. Six of theorganisations represented in the ‘other’ category in Graph 33, charge fees related tosecuring loans such as percentage contributions to guarantee funds, security fees andredeemable default fees. Strategies for developing guarantee funds either through clientfees or public and banking sector support are required for the majority of lenders.
45
This second EMN sector survey presents a European microfinance sector that is young,diverse and growing steadily. Over the last 4 years, the annual growth rate in the number ofmicroloans disbursed has increased as has the number of actors. Between 2004 and 2005 thenumber of loans disbursed in the EU 15 countries grew by 15% while the number of activeborrowers grew by 16%. Moreover there were 16 new entrants that began lending in 2005. Anadditional 5 institutions began activities in 2005 and disbursed their first loans in 2006. Therehas been a 5% growth in the total value lent which suggests growth at the “small loan” endof the market. In the EU 25 as a whole, the growth in loan disbursements was 4% due in partto a maturing of the market in Poland. Similarly, the growth in loan value in the EU 25 was 3%.
It is estimated that there are well over 100 actors involved in the lending process in the EU15 and over 130 actors when the new member states are included. This estimation does notinclude the savings banks outside of Spain, the public sector programme implemented inItaly and the commercial banks participating in the ICO programme in Spain. It also does notinclude commercial bank enterprise lending valued at 25,000 euros or less nor does it includeconsumer loans used for business purposes.
There is diversity in the types of organisations involved in microlending. There are banks,NGOs, government bodies, foundations, associations and credit unions. Ninety-two percentare classified as not-for-profit institutions. Lenders operate for a variety of reasons. The majority work to ensure social and economic inclusion of persons at risk of poverty and theunemployed. Others focus on job creation and some aim to stimulate growth, develop smalland medium sized enterprises and address market failure.
There is a broad range across survey participants in the number of loans disbursed andaverage loan size. Sixty-five percent of lenders in the EU 15 disbursed less than 100 loans in2005. Microloan sizes varied from 2,000 to 23,000 euros. Loan size is linked to organisationalmission statements with lenders focusing on SME growth making larger loans in relation to percapita Gross National Income (GNI) than organisations focused on social and financialinclusion.
Sixteen percent of respondents focus solely on microlending. Thirty-five percent focusprimarily on microlending whilst for 42%, lending makes up less than 25% of their activityportfolio. Actors in this second category provide a spectrum of other social, employment orbanking services. Over half of organisations involved in microlending in Western Europeprovide pre- and post-lending business development services. Microlenders focus onproviding microenterprise loans with only a handful of organisations supplying other financialservices such as consumer loans, savings, insurance, mortgages and employment relatededucational and back to work loans.
The financially excluded and start-up businesses with 5 or fewer employees are theprimary target groups. Particular at-risk groups such as women appear to be under-represented amongst loan clients. Definitional differences and inadequate data collectionmakes it difficult to monitor the participation of ethnic minorities, immigrants, youth anddisabled people in microenterprise lending programmes.
EU 15 lenders rely on public and private sources for their operational costs and acombination of public and private sources for loan capital. Several new member statelenders cover all of their operational costs through earned income. In the East loan capital isprotected through interest rates, guarantees and loan loss arrangements. Some microlendersin the new member states are expanding their loan capital through concessional lendingprogrammes.
The future of the sector is dependent upon resolving funding and regulatory constraintsand improving microlender coverage, efficiency and cost recovery strategies. Fundingoperational costs is the primary limit to sector development identified by lenders in both theWest and the East. The regulatory environment, institutional capacity and access to funds forloan capital are also significant challenges.
9. CONCLUSION
46
Concern over covering operational costs is directly linked to sustainability. At present, nota single microlender has achieved operational sustainability in Western Europe whereas anumber of the new member states lenders have done so. Although it is a long-term objective for many EU 15 lenders, structural, cost and legal environments create barriers tosustainability.
Microlenders need to develop and improve efficiency and cost recovery strategies thatinclude greater attention to deal flow, interest rates, fees, guarantee arrangements andportfolio performance. Solid funding commitments are also required to support lenders whilstthey implement measures to improve their financial position. Similarly microloan fundguarantee schemes need to be broadly available to microlenders and where relevant theirbank partners. At the same time, it will be difficult to move toward sustainability withoutchanges to the legal and regulatory environment.
47
Bussard, Allan, “Downscaling of Central European Banks, a Challenge for MFIs?” Financeand the Common Good, Autumn, 2006.
Copisarow, Rosalind, Street UK- a Microfinance Organisation, Lessons Learned from its FirstThree Years’ Operations, 2004.
Carbo Valverde, S. and Lopez del Paso, R., “Exclusión financiera: un panorama”,Perspectivas del Sistema Financiero, n.º 84, Fundación de las Cajas de Ahorros, Madrid, 2005.
Cartwright, Peter “Banks, Consumers and Regulation,” quoted in Financial Exclusion andMicrofinance: An Overview of Issues, N. Howell, Australia, 2004.
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McDowell, Malcolm, Microcredit in Europe: The Experience of Savings Banks, EuropeanSavings Bank Group, March, 2006.
Microfinance Center, European Microfinance Network, community development financeassociation, From Exclusion to Inclusion through Microfinance: Working Group 1 – Social andFinancial Exclusion Map, forthcoming 2007.
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10. BIBLIOGRAPHY
48
BelgiumCrédal
Fonds de Partcipation
FinlandFinnvera Plc
FranceAirdie
Association pour le Droit à l'Initiative Economique
GermanyArbeitsförderung Kassel Stadt GmbH
EnterBusiness GmbH / iq consult GmbH
Investitionsbank Schleswig-Holstein (IB)
L- Bank
Mikrofinanzzentrum NRW - Brechmann Management GmbH
MONEX Microfinanzierung Baden- Wurttemberg e.V
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Senator fur Arbeit, Frauen, Gesundheit, Jugend und Soziales Förderprogramm 'Starthilfefonds'
Wirtschaftsförderungsgesellschaft Paderborn mbH
HungaryHungarian Microfinance Network
IrelandFirst Step Microfinance
ItalyBanca Popolare Etica
Compagnia di San Paolo
Dieci Talenti
Fondazione Antiusura Santa Maria Del Soccorso - Onlus -
Fondazione Risorsa Donna
MAG2 Fiance
Mag Soc. Mutua per L'Autogestione
Magvenezia Soc. Cooperativa
Micro.Bo - Associazione per lo Sviluppo della Microfinanza
NorwayNettverkskreditt BA ( Network Credit Norway - NCN)
PolandFoundation for the Development of Polish Agriculture (FDPA)
Inicjatywa Mikro
Rural Development Foundation
11. SURVEY PARTICIPANTS
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PortugalAssociao Nactional de Direito Ao Credito - ANDC
SlovakiaIntegra Foundation Slovakia
Voka Slovakia
SpainAcció Solidaria Contra l'Atur
Agencia Desarrollo Local Ayuntamiento de Alcoy
Asociación Tierra Nueva/Fundación Valdocco
Ayuntamiento de Sabadell-Promicio Economica de Sabadell S.L.
Ayuntamiento de Santa Lucia de Tirajana
BBK Solidorioa Fundazioa
Caixa Galicia
Caja de Ahorros de la Inmaculada de Aragon
Caja de Ahorros de Zaragoza, Aragon y Rioja- IBERCAJA
Caja Duero (dpto. Banca Universal)
Caja de Ahorros de la Rioja
Cámara de Comercio de Girona - Chamber of Commerce
Cámara de Comercio de Peru in Spain
Colonya-Caixa de Pollenca
Consorci de Promoció Económica de Lleida
Cruz Roja Espanola
Empresa Municipal per al a la Formacio Ocupacional
Fundacion CajaGranada Desarrollo Solidario
Fundacion International de la Mujer Emprendedora - FIDEM
Fundacion Genus
Fundació Privada Trinijove
Fundació Un Sol Mon de Caixa Catalunya
Interarts
Kuxta - Caja de Ahorros de Gipuzkoa San Sebastian
MITA ONG Centro de Desarrollo de Iniciativas Empresariales
Obra Social de la Caixa - Programa de Microcreditos
Organizacion de Mujeres Empresarias y Gerenicia Activa (OMEGA)
SECOT, Seniors Esponoles para la Cooperacion Tecnica
Transformando Sociedad Cooperativa Madrid
Union de Asociaciones de Trabajadoras Autonomas y Emprendedoras
Women's World Banking - Banco Mundial de la Mujer
SwedenALMI Foretagspartner AB
Ekobanken Medlemsbank
SwitzerlandFondation ASECE - Georges Aegler
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United KingdomAston Reinvestment Trust (ART)
Black Country Reivestment Society
Blackpool Moneyline
Business in Prisons
Capitalise Business Support Ltd
Derbyloans
Developing Strathclyde
East Lancaster Moneyline
East London Small Business Centre
Fair Finance
First Enterprise Business Agency
Fredericks Foundation
GLE One London
Gloucestershire Development Loan Fund Ltd
Norfolk and Waveny Enterprise SVS
Senet Ltd
Southcoast Moneyline
Street Northeast
Suffolk Regeneration Trust
The Enterprise Fund Ltd
The Five Lamps Organisation
The Prince's Scottish Youth Business Trust
WEETU
Participating Organisations that Began Lending in 2006Mozaik Consulting Interkulturelles Bildungs-und Berqtungszentrum, Germany
Microfinanzagentur Thuringen, Germany
Fundacion Mujeres, Spain
European Microfinance Network4, boulevard Poissonnière - 75009 Paris
tel: +33 (0)1 56 03 59 68fax: +33 (0)1 56 03 59 77
web: www.european-microfinance.orge-mail: [email protected]
This project has received funding from the European Commission within the frame of the Community Action Programme to Combat Social Exclusion 2002-2006
EMN members in 2006• Belgium :
Agence AlterCredal - Crédit AlternatifFonds de ParticipationRéseau de Financement
Alternatif – RFA
• Bosnia Herzegovina:Partner Microcredit Organisation
• Croatia:DEMOS
• Finland:Finnvera
• France:AdieAfile 77AirdieCrédit Coopératif
• Germany:DMI - Deutsches Mikrofinanz
InstitutEnigma GründungszcentrumEvers & Jung
• Hungary :Fejer Entreprise AgencyThe Hungarian Microfinance
Network
• Ireland:First Step
• Italy:Forum per la Finanza SostenibileGiordano Del'Amore
FoundationMag2 FinanceForum por la finanza SostenibileMicro.BoMicrofinanza srl
• Norway:NCN - Network Credit Norway
• Poland:MFC - MicroFinance CentreRural Development Foundation
• Portugal:ANDC
• Russia:Russian Microfinance Center
• Slovakia:Integra Venture Foundation
• Spain:BBK - Bilbao Bizkaia KutxaCruz Roja EspañolaFundacion Metis
Fundacio Un Sol Mon - CaixaCatalunya
Nantik LumPignusObra Social ”la Caixa”SURTTrans-FormandoWWB - Banco Mundial
de la Mujer
• Sweden:Ekobanken Mediemsbank
• Switzerland :Fondation ASECE - Georges
Aegler
• The Netherlands:FACET bvSEON
• UK:Fair FinancenefPrince’s Scottish Youth
Business TrustStreet UKThe Enterprise FundWEETU