Development of micro-credit
Micro-credit can encourage economic growth and employment in Europe in line with the Lisbon agenda. It allows micro-enterprises and those wishing to set up their own business to obtain financial support when they do not have access to traditional banking services. The European Union is presenting an initiative, comprising four strands, which seeks to encourage the development of micro-credit in Europe.
Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions of 13 November 2007 – A European initiative for the development of micro-credit in support of growth and employment [COM(2007) 708 final – Not published in the Official Journal].
In Europe, micro-credit – i.e. loans of less than € 25 000 – is aimed at micro-enterprises (enterprises employing fewer than 10 people) and disadvantaged persons (unemployed or inactive people, those receiving social assistance, immigrants, etc.) who wish to go into self-employment but do not have access to traditional banking services.
Micro-credit can promote the transition from unemployment to self-employment and offers access to finance for persons whose projects the banks refuse to finance because of insufficient collateral. It can thus play a key role in implementing the Lisbon Strategy for Growth and Jobs.
Nevertheless, even if micro-credit has been on the increase for a number of years in the Member States of the European Union (EU), much remains to be done to enable this instrument to develop its full potential.
Therefore, the EU is proposing an initiative aimed at developing the market for micro-credit. The initiative comprises four strands:
- improving the legal and institutional environment in the Member States;
- further changing the climate in favour of entrepreneurship;
- promoting the spread of best practices, particularly in relation to training;
- providing additional financial capital for micro-credit institutions.
First strand: improving the legal and institutional environment in the Member States
The institutional framework in the Member States does not always allow micro-credit to develop in a positive way. Indeed, the specific nature of micro-credit is not generally taken into account in national or Community legislation. The Commission therefore encourages the Member States to take the measures needed to create a legal, institutional and business environment which is more conducive to the development of micro-credit. With this in mind, the Commission proposes that the Member States:
- create an environment allowing the development of micro-finance institutions (MFIs) and covering all segments of the clientele. Given the number and diversity of potential clients, MFIs should have easy access to financial resources allowing them to develop micro-credit. MFIs are financed through grants and donations and, where appropriate, bank loans. They are certain to benefit from the creation of a suitable environment in which they are more visible;
- help micro-credit to become sustainable by relaxing interest caps for micro-credit operations. In the Member States where they exist, interest rates should be fixed at a fairly high level in order that lending institutions can cover their costs, while regularly evaluating the social and economic impact in order not to jeopardise the security of borrowers;
- reduce operating costs by applying favourable tax schemes. More favourable tax schemes (tax exemptions, tax reductions, grants) are important for the development of micro-credit;
- adapt national regulation and supervision to the specificity of micro-finance. If they receive deposits, MFIs are subject to Community prudential regulation and are supervised accordingly. In order not to put a brake on the supply of micro-credit and the growth of MFIs not receiving deposits from clients, the new regulations and supervision must take account of their costs and the risks which MFIs pose.
Second strand: further changing the climate in favour of entrepreneurship
In order to encourage Europe's shift towards an economy based on knowledge, services and new technologies, and to create a climate more conducive to entrepreneurship, the Commission proposes that the Member States:
- improve the institutional framework for self-employment and micro-enterprises. Equal treatment for the self-employed and wage-earners is essential. Nevertheless, a programme of publicity and awareness-raising should be set up in order that self-employment and micro-enterprises are better recognised. To this end, legal, tax and administrative barriers should be lowered (e.g. exemption from social insurance charges, simplified registration procedures, improved access to more numerous and less expensive outlets);
- increase the chances of success of new micro-enterprises through training, mentoring and business development services. The micro-enterprise environment is a complex one and demands a supply of business development services because those starting up in business do not always have all the competencies required in order to be successful. Training and mentoring are therefore needed to improve a start-up entrepreneur's chances of success.
Third strand: promoting the spread of best practices
Promoting the spread of best practices for MFIs is a key element in the initiative to encourage micro-credit. The Commission therefore proposes to set up a new body to provide technical assistance and support the development of non-bank MFIs in the Member States. This new body would have the task of:
- laying down a code of conduct for MFIs. Such a code would serve to increase confidence in MFIs and spread ethical and customer-friendly best practices among them. The quality of an MFI would thus be assessed on the basis of its social and financial performances and its business practices;
- introducing a specific "micro-credit" label to create awareness among EU citizens. This label would enable the attention of investment funds dedicated to micro-credit to be focused more on MFIs which perform well, and improve citizens' confidence in microfinance investment vehicles and steer new resources towards MFIs with the best social and financial performance;
- providing information on this initiative and handling the publicity;
- publishing brochures and organising conferences;
- providing technical manuals, guides and software designed to help MFIs adopt best practices;
- providing easier access to finance for MFIs by mobilising financial resources.
Fourth strand: providing additional financial capital for new non-bank MFIs
The Commission proposes to set up a support structure within the JEREMIE department of the EIF for the purpose of providing technical and financial support to promising non-bank MFIs. This micro-fund would have the aim of assisting MFIs to become self-sustaining and would help to increase the use of micro-credit in Europe and further develop this sector.
This initiative seeks to promote the sustainable development of micro-credit in the EU and forms part of the Lisbon Strategy for Growth and Jobs, and of the policy of encouraging entrepreneurship and economic initiative, the policy of promoting "flexicurity" and the inclusion of disadvantaged persons, and the policy of developing human capital and renewing trust-based social links.