11 Joint Action to Support Micro- Finance Institutions in Europe JASMINE: Philippe Delvaux - DG REGIO, Financial Engineering “Train the trainers” European Commission seminar for managing and certifying authorities Brussels, 9 June 2009

2 2 BackgroundBackground Micro-credit initiativeMicro-credit initiative JASMINEJASMINE

3 3 SMEs are the backbone of the European Economy 23 million SMEs in Europe, representing 99% of all businesses in the EU23 million SMEs in Europe, representing 99% of all businesses in the EU SMEs provide about 2/3 of all private sector jobs in the EUSMEs provide about 2/3 of all private sector jobs in the EU SMEs are responsible for almost all net job creation in the EUSMEs are responsible for almost all net job creation in the EU SMEs are a major factor of regional, economic and social cohesionSMEs are a major factor of regional, economic and social cohesion

Informal sector (Income-generating activities) > 250 employees employees employees employees 23,2 million enterprises in EU 25 92% of enterprises in Europe are micro-enterprises (0 – 9 employees) Informal sector represents 10 to 15% of GDP Active population below the poverty line : 28 million µCµC Number of enterprises in the EU (x 1000)

5 5 Cohesion policy strongly supports the Lisbon Agenda goals of growth and jobsCohesion policy strongly supports the Lisbon Agenda goals of growth and jobs Cohesion Policy is the biggest provider of EU funds supporting Small BusinessesCohesion Policy is the biggest provider of EU funds supporting Small Businesses Total business support : € Total business support : € of which >50% is directly targeted to support for small businesses, including micro-businesses of which >50% is directly targeted to support for small businesses, including micro-businesses Small businesses are top priority of Cohesion Policy

6 6 12% / €3.2bn 65% / €17.7bn 9% / €2.5bn 14% / €3.7bn € 27 billion of support specifically dedicated to Small Businesses

7 7 JEREMIE and Micro-credit to improve access to finance for SMEs and micro-enterprises in the Member States and regions to create financial leverage using risk and loan based instruments, guarantees, etc., and their combination to help managing authorities responsible for European programmes to reach that goal JEREMIE can be used to improve the provision of micro- credit in the European Union JEREMIE: A new financial engineering instrument designed in the framework of the new regulations on Structural Funds

8 8 EC’s definition of micro-credit Max. Amount : € Number of staff 1 – 9 Max. turnover : € 2.0 Mio

9 9 Why do we need to do more for micro-credit? An important gap in the market A high potential demand for micro-credit estimated to some loans amounting to some € 6 billion Potential entrepreneurs with no collateral cannot obtain loans through traditional channels Not enough micro-credit intermediaries providing mentoring on the market

10 Why can’t this be left to the traditional banking sector only? Access to finance is a real problem for those who are considered non-bankable customers 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 Not enough micro-credit intermediaries providing mentoring on the market

11 BackgroundBackground Micro-credit initiativeMicro-credit initiative JASMINEJASMINE

12  Several actions have already been taken at EU level and in Member States to support micro-credit (CIP, ESF, EQUAL, PHARE, …), but this is not enough to allow for sustainable development of micro-credit in Europe  Micro-credit operations need to be seen in a broad support framework in line with the principle of subsidiarity  A more favourable environment is essential => COM/2007/708 of 13 November 2007 Why a micro-credit initiative?

13 What is the purpose of the micro- credit initiative?  To promote a favourable legal and institutional and environment for micro-credit in Europe  To help non-bank financial intermediaries who want to act on the micro-credit scene reach a high standard in terms of governance and lending practices  To help them raise funds on the private capital market and attract borrowers in confidence  To help them grow and reach sustainability

14 What is the Commission now proposing to do? (1) 1. Promote a more favourable legal and institutional environment for micro-credit environment for micro-credit  Invite Member States to adapt national institutional and legal frameworks as appropriate  Encourage Member States to adopt quantitative targets and to report on implementation in the framework of the annual Lisbon cycle.

15 Examples of changes to the legal and institutional environment  Development of micro-credit providers/MFIs  Relaxing interest caps for micro-credit operations  Allowing MFIs access to borrower databases and facilitating their evaluation of the risks  Reducing operating costs applying favourable tax schemes  Adapting national regulation  Ensuring single market rules are applied to micro-credit  Incorporating micro-credit into regulation and accounting standards

16 What is the Commission now proposing to do? (2)  Encourage Member States to further entrepreneurship.  Set up, in inter-institutional partnership with the European Investment Bank group, a European facility, to provide technical support and funding to non-bank micro-credit providers/MFIs

17 Background Micro-credit initiative JASMINE

18 A joint initiative of the European Commission and the EIB Group l aunched on 10 September 2008 in Nice JASMINE (Joint Action to Support Micro-finance INstitutions in Europe)  to channel various forms of technical and financial support to selected non-bank micro-credit providers/Micro-finance Institutions (MFIs)  to help MFIs improve the quality of their operations, to expand and become sustainable  to promote best practices in the field of micro-credit lending

19 Two main issues:  Providing to Micro-credit providers/MFIs Operational technical assistance for capacity building (mentoring, training, information, toolkits, etc. ) General support measures like evaluation and rating of MFIs, drafting a code of conduct, designing a quality label, etc.  Providing flexible funding to selected MFIs (equity, loans, guarantees or their combination) through a co-financing facility established in the EIF and involving EIB, European Parliament, Commission, private or public financial partners, MAs (+/- € 50 m)

20  Need for a code of good conduct for MFIs to spread ethical and customer-friendly best practices among MFIs.  Specialized rating agencies to swot the potential of MFIs by and provide assessment and rating  On the ground training by practitioners or networks of practitioners  Designing a quality label for micro-credit which will be awarded under strict conditions to MFIs to acknowledge their reliability  Provision of start-up equity to help MFIs cover their operational costs and become sustainable.  Launching a pilot project to gain experience in delivering funds and support to non-bank micro-credit providers Important practical elements

21 Purpose :  Create a business reference  Streamline practices  Provide lending security  Facilitate quality assessment and refinancing operations  Prepare for rating  … Drafting a code of good conduct for MFIs in co-operation with banking sector

22 Elements to be assessed :  Governance (e.g. 24%)  Information System and data quality (e.g. 10%)  Risk management (e.g. 10%)  Activities : Portfolio management (e.g. 20%)  Funding and liquidity (e.g. 14%)  Efficiency and profitability (e.g. 22%) Assesment/rating methodology (example)

23 Criteria :  Good governance  Financial performance  Social performance  Results compliant with business plan  Distance to sustainability  Risk management  Rating (e.g. B onwards)  … Designing a quality label for MFIs

24 JASMINE

25 A 3 pillar approach :  Technical support (capacity building)  Seed capital  Repayable funding (lending operations)  … Financing aspects

26

27 Funding at a glance Method : Co-financing Target : primarily non-banking MFIs close to sustainability (e.g. : new branches of well-established MFIs, young and more mature MFIs) Initial phase : 20 – 30 MFIs to be funded over 3 years Area : 27 Member States 3-year pilot phase funding : +/- EUR 50 m Financial instruments for MFIs : mainly short-term to medium-term loans, guarantees, equity / quasi-equity, technical assistance, non- repayable assistance, … Investors : (EU, EIB, EP, private and public banks, regions, etc..)

28  Practical set-up of JASMINE, (implementation in Q3 2009)  Start of a 3-year pilot phase to identify best practices in the field of micro-credit with selected “model” non-bank micro-credit providers to prepare scaling up of operations  Finding ways to improve the micro-credit environment in the European Union  Promotion of micro-credit through JEREMIE Holding Funds Next steps

29 Conclusions

30 Confusion / Denial 1 Anger / Blame / 2 Questions Integration / Moving on 7 Depression 4 Acceptance 6 Bargaining 3 Performance Time Period of loss Increasing stress Decreasing stress Positive growth Testing 5 The Curve of Change

31  Developing the provision of micro-credit in the EU is a challenging undertaking which understates a process of change  It is however not a single man’s job. It involves a large number of stakeholders  Is not solely a financial issue as well. It also requires appropriate and qualified intermediaries Conclusions (1/3)

32  In this respect, MFIs seem better positioned than banks to help non-bankable entrepreneurs start their business  JASMINE will seek to develop the potential of micro- credit providers and to make adequate funding available to them  JASMINE will seek to foster as much synergies as possible between the actors on the micro-credit scene Conclusions (2/3)

33  Partnership between banks and MFIs needs to be encouraged, as it can be a win-win undertaking for all.  The Lisbon Agenda, the micro-credit initiative of the Commission, the Small Business Act, the Becsey-Report and the financial crisis offer a unique framework to improve the micro-credit environment in Europe Conclusions (3/3)

34 A few stakeholders…  Member States (improve the micro-credit environment),  Regions (local development, fight against exclusion),  The Commission (Cohesion Policy, JEREMIE, JASMINE, Guarantee window of the Competitiveness and Innovation Programme, SBA, …),  The European Parliament (political action, financial support),  The European Investment Bank Group (financial expertise, fund raising and leverage effect),  Banks, Savings banks (expertise, social responsibility, funding, best practices)  Micro-finance Networks (on the ground knowledge, dissemination of information, best practices),  Private and public investors, retail banks (funding and expertise),  Rating Agencies (Evaluation, commercial rating)  Donors,  You.

35 Thank you for your attention For further Information Website: DG REGIO – Unit D3 –Financial Engineering