1 A European initiative for the development of micro- credit Philippe Delvaux Directorate General for Regional Policy European Commission 26 May 2008

2 A central issue : the Lisbon agenda – Aims to make Europe the most competitive and dynamic economy in the world… – Originally adopted in March 2000 (Gothenburg update in 2001). – Updated in 2005 : the growth and jobs agenda. – Two quantitative targets: employment rate of 70% (64.4) by 2010, R&D 3% (1.84) of GDP… – Since 2005, reinforced governance: detailed annual reporting; peer pressure.

3 Structural Funds and Micro-credit – The new SF regulations : Changing the culture – Transforming grants into recyclable forms of assistance through financial engineering instruments – JEREMIE : A new instrument offering managing authorities responsible for the European programmes solutions to increase the of financial Engineering products like Venture Capital, loans, guarantees, seed capital, etc. – JEREMIE can be used to improve the provision of micro-credit in the European Union – It is worth developing its full potential as regards micro-credit

4 Why do we need to do more in the field of micro-credit? The EU still needs to create over 20 million jobs if it is to reach its own target of 70% employment rate (Lisbon Agenda). The EU still needs to create over 20 million jobs if it is to reach its own target of 70% employment rate (Lisbon Agenda). SMEs represent almost 92% of the firms in the European economy. SMEs represent almost 92% of the firms in the European economy. Increased micro-credit supply for micro- business development can clearly contribute to the growth of the European economy. Increased micro-credit supply for micro- business development can clearly contribute to the growth of the European economy. According to estimations, the potential demand for micro-credit could be as high as new micro-loans over the next few years or around 6 billion. According to estimations, the potential demand for micro-credit could be as high as new micro-loans over the next few years or around 6 billion.

5 Why cant we leave this to the traditional banking sector? Banks usually provide access to finance for existing micro-enterprises and traditional start-ups. Banks usually provide access to finance for existing micro-enterprises and traditional start-ups. They are reluctant to deal with those who lack collateral, steady employment or a verifiable credit history, although the default rate on micro-loans is quite low. Operational costs are not proportionate to the size of the micro-loan. They are reluctant to deal with those who lack collateral, steady employment or a verifiable credit history, although the default rate on micro-loans is quite low. Operational costs are not proportionate to the size of the micro-loan. Access to finance is therefore a real problem for those who are considered non-bankable customers. Access to finance is therefore a real problem for those who are considered non-bankable customers. As a result, only part of the potential demand for micro-credit is satisfied. As a result, only part of the potential demand for micro-credit is satisfied.

6 Why a micro-credit initiative? Access to finance is a key element to promote growth and jobs (Lisbon Agenda). Access to finance is a key element to promote growth and jobs (Lisbon Agenda). Actions have already been taken at EU level and in Member States to support of micro-credit (CIP, EQUAL, PHARE, JEREMIE, …). Actions have already been taken at EU level and in Member States to support of micro-credit (CIP, EQUAL, PHARE, JEREMIE, …). This is not sufficient to allow micro-credit to develop in Europe, as micro-credit operations need to be seen in a broad support framework in line with the principle of Subsidiarity). This is not sufficient to allow micro-credit to develop in Europe, as micro-credit operations need to be seen in a broad support framework in line with the principle of Subsidiarity). A favourable environment is essential. A favourable environment is essential. COM/2007/708 of 13 November 2007

7 What is the purpose of the micro-credit initiative? To develop micro-credit in Europe. To develop micro-credit in Europe. To promote a favourable legal, institutional and commercial environment for micro-credit in Europe. To promote a favourable legal, institutional and commercial environment for micro-credit in Europe. To help non-bank Micro-finance Institutions improve their lending capacity. To help non-bank Micro-finance Institutions improve their lending capacity. To help them grow and reach sustainability. To help them grow and reach sustainability. To help them attract borrowers in confidence and raise funds on the private capital market. To help them attract borrowers in confidence and raise funds on the private capital market.

8 In short: Two issues Promoting a more favourable legal and institutional environment for micro-credit. Promoting a more favourable legal and institutional environment for micro-credit. Setting up, in inter-institutional partnership with the EIB-EIF (EIB group), a new European facility to provide to MFIs, through a MicroFund, Setting up, in inter-institutional partnership with the EIB-EIF (EIB group), a new European facility to provide to MFIs, through a MicroFund, Operational technical assistance like mentoring, training, information, etc.Operational technical assistance like mentoring, training, information, etc. Flexible Funding in form of equity, loans, grants.Flexible Funding in form of equity, loans, grants. General support measures like a code of conduct, a quality label, etc.General support measures like a code of conduct, a quality label, etc.

9 What is the Commission now proposing to do? As the frameworks differ from Member State to Member State, the Commission proposes to help Member States to improve their own micro-credit environment by indicating quantitative targets for loans and by compiling an inventory of good regulatory practices. As the frameworks differ from Member State to Member State, the Commission proposes to help Member States to improve their own micro-credit environment by indicating quantitative targets for loans and by compiling an inventory of good regulatory practices. Member States are encouraged to adopt targets and to report on implementation in the framework of the annual Lisbon cycle. Member States are encouraged to adopt targets and to report on implementation in the framework of the annual Lisbon cycle. Member States should also seek to encourage more entrepreneurship. Member States should also seek to encourage more entrepreneurship.

10 MicroFund at glance Target : non-banking MFIs close to sustainability (e.g. : new branches of well-established MFIs, young and more mature MFIs) Target : non-banking MFIs close to sustainability (e.g. : new branches of well-established MFIs, young and more mature MFIs) Initial phase : 10 – 15 MFIs to be funded Initial phase : 10 – 15 MFIs to be funded Area : 27 Member States Area : 27 Member States Target fund size : EUR 40m Target fund size : EUR 40m Profile : Fund with equity risk profile (Corporate Social Responsibility investment) Profile : Fund with equity risk profile (Corporate Social Responsibility investment) Funds instruments for MFIs : mainly short-term to medium-term loans, equity / quasi-equity, technical assistance Funds instruments for MFIs : mainly short-term to medium-term loans, equity / quasi-equity, technical assistance Investors : (EU, EIB, EUROFI members, Other banks, etc..) Investors : (EU, EIB, EUROFI members, Other banks, etc..) Legal Form : Luxemburgish legal vehicle (SICAR, SIF, …) Legal Form : Luxemburgish legal vehicle (SICAR, SIF, …)

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12 A code of good conduct for MFIs to spread ethic and customer-friendly best practices among MFIs. A code of good conduct for MFIs to spread ethic and customer-friendly best practices among MFIs. A micro-credit quality label which will be awarded under strict conditions to MFIs to guarantee their reliability, to help them attract borrowers in confidence and to raise funds on the private capital market. A micro-credit quality label which will be awarded under strict conditions to MFIs to guarantee their reliability, to help them attract borrowers in confidence and to raise funds on the private capital market. Grants to be used as start-up equity to help MFIs cover their operational costs and become sustainable. Grants to be used as start-up equity to help MFIs cover their operational costs and become sustainable. The need for a pilot project to gain experience in delivering Funds and support to non-bank MFIs. The need for a pilot project to gain experience in delivering Funds and support to non-bank MFIs. Important practical elements

13 Criteria : Good governance Good governance Financial performance Financial performance Social performance Social performance Results compliant with business plan Results compliant with business plan Sustainability Sustainability … A quality label for MFIs

14 Adoption of a Small Business Act at EU-Level Adoption of a Small Business Act at EU-Level Advice from EP and EESC on micro-credit initiative Advice from EP and EESC on micro-credit initiative Fundraising Fundraising Launching a Pilot-project Launching a Pilot-project Operational implementation in 2009 Operational implementation in 2009 Next steps

15 Access to finance is an essential element promote growth and jobs Access to finance is an essential element promote growth and jobs There is an important market failure in the field of micro- credit in Europe. There is an important market failure in the field of micro- credit in Europe. The Lisbon Agenda offers a unique opportunity to develop micro-credit in Europe (Small business Act). The Lisbon Agenda offers a unique opportunity to develop micro-credit in Europe (Small business Act). Strong political support from EP, EU-Presidencies. Strong political support from EP, EU-Presidencies. Strong financial support from EIB-group. Strong financial support from EIB-group. Particular attention is to be paid to the mentoring issue. Particular attention is to be paid to the mentoring issue. Non-bank MFIs seem better positioned to deliver micro- loans to non-bankable entrepreneurs. Non-bank MFIs seem better positioned to deliver micro- loans to non-bankable entrepreneurs. Sustainability, reliability and good governance of MFIs are key to attract private capital. Sustainability, reliability and good governance of MFIs are key to attract private capital. Grants are necessary to help non-bank MFIs cover their costs in the starting phase. Grants are necessary to help non-bank MFIs cover their costs in the starting phase. Micro-credit can be a win-win process. Good co- operation is the key to success. Micro-credit can be a win-win process. Good co- operation is the key to success. Conclusions

16 Who can help ? Member States (improve the micro-credit environment) Member States (improve the micro-credit environment) The Commission (Cohesion Policy, JEREMIE,, Guarantee window of the Competitiveness and Innovation Programme, …) The Commission (Cohesion Policy, JEREMIE,, Guarantee window of the Competitiveness and Innovation Programme, …) The European Parliament (preparatory action to reinforce the financing capability of the MFIs) The European Parliament (preparatory action to reinforce the financing capability of the MFIs) The European Investment Bank Group (financial expertise, fund raising and leverage effect) The European Investment Bank Group (financial expertise, fund raising and leverage effect) EUROFI (Expertise, toolkit, funding, good practice) EUROFI (Expertise, toolkit, funding, good practice) Micro-finance Networks (on the ground knowledge, dissemination of information, best practices) Micro-finance Networks (on the ground knowledge, dissemination of information, best practices) Private and public investors, retail banks (funding and expertise) Private and public investors, retail banks (funding and expertise) Donors Donors You You An important number of stakeholders

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