Introduction

In most parts of the world, microfinance offers people excluded from formal financial services the opportunity to obtain microloans in order to generate income and engage in productive activities, often by expanding their small businesses. "Microfinance's mission is to provide basic financial services to poor people" (Consultative Group to Assist the Poor-CGAP)

The European Microfinance Network (EMN) aisbl brings together organisations primarily involved in the European Union (EU) and EFTA countries that address issues related to professional and personal microcredit, as well as business development and training to entrepreneurs. Other financial services (i.e. insurance, savings) are still underdeveloped.

According to the European Union's (EU) definition, a microloan is a loan up to EUR 25 000 (Source: REGULATION (EU) No 1296/2013).

Microfinance institutions (MFIs) disburse microloans for different purposes and, in order to identify sector trends, EMN differentiates between microloans for business and personal purpose (Source: EMN-MFC Survey Report 2014-2015):

  • a business microloan is a loan under EUR 25 000 to support the development of self-employment and microenterprises, while
  • a personal microloan is a loan under EUR 25 000 to cover a client's personal consumption needs such as rent, personal emergencies and education.

Furthermore, microcredit has a double impact: an economic impact, as it allows for the creation of income generating activities; and a social impact, as it contributes to the social inclusion and therefore to the financial inclusion of individuals. (Source: overview of the microcredit sector in the EU 2010-2011)

A tool for economic growth and social cohesion

Microfinance, and microcredit, is not only developed in Africa, Latin America or Asia but also in Europe, where it has been initiated and implemented and has long proved necessary. The fight against poverty and social exclusion is the same worldwide, though the European battle is different in terms of opportunities, challenges and history.

Introduced in Central and Eastern Europe after the fall of the Berlin Wall, microcredit today is already represented by a dynamic sector. With the formal banking sector unable to respond to emerging needs, microcredit has proved capable of filling the gap by providing transitional support for people needing to enhance their own livelihoods. In addition to the involvement of microfinance institutions (MFIs) and non-profit organisations (NPOs) in the provision of microfinance in Eastern Europe, commercial banks are increasingly interested in downscaling in order to provide microloans for the poor.

In Western Europe, the sector’s growth has been more limited, despite increasing interest in its potential. Although microfinance has some deep roots, through institutions such as the Raiffeisen Bank in Germany; lending charities in England; and the co-operative model of the “Casse ruralie” in Italy, it remains a fairly recent phenomenon in this region.

In Europe, Microfinance is mainly perceived as a tool for economic growth and social cohesion. Many small businesses and families lack access to financial services in spite of the existence of a dense and competent banking network. Financial exclusion is mainly concentrated among those suffering from poverty and social marginalisation (i.e. the elderly and ageing population, women, migrants, young people).

According to Eurostat, micro, small and medium enterprises (MSMEs) form the core of the Western European economic system: in 2010, 99.7% of active enterprises within the EU-27 were MSMEs (fewer than 250 employees), accounting for 90 million persons, among which 92% were micro-enterprises (fewer than 10 employees). Consequently, the ability of the banking system to reach and serve MSMEs is crucial to the achievement of general socio-economic improvement. Exclusion from banking services often constitutes a major obstacle to the launch of new business activities. The European Commission's communication "Adapting EU regulation to the needs of micro-enterprises" offers additional information in this regard.

The development of microfinance services, either by banks or other intermediaries, is needed to fill the gap. Granting microloans to the unemployed and marginalised can make them economically independent players able to participate more fully in a financial society. Hence, microcredit plays an important role in contributing to the Europe 2020 Strategy defined by the EU.

Main Characteristics of Microfinance in Europe

See: Overview of the microcredit sector in the EU, 2012-2013

In this new iteration of the EMN Overview survey report, covering the period 2012 to 2013, both the overall total volume and the number of microloans show growth over previous years. MFIs from the 24 European countries surveyed disbursed 387,812 microloans with a total volume 1.53 billion EUR in 2013 (2011 benchmarks: 204,080 microloans, total volume of 1.05 billion EUR). In 2013, the average loan size reached 8,507 EUR (2011: 5,135 EUR) and 79% of the total microloan value was issued for business purposes, while the remaining 21% for personal consumption (2011 benchmarks: 74% for business, 26% for personal consumption). The survey estimates that a minimum of 121,270 microenterprises and start-ups were supported by the surveyed MFIs with financial and non-financial services.

Institutional diversity in the sector remained high in 2013. Non-Banking Financial Institutions (29%) and NGOs or foundations (23%) are still the most represented institutional types.

The availability of data for employment impact, client outreach and social performance is still limited among European MFIs. However, the survey demonstrates that outreach to women and ethnic minorities has increased, at least for the organisations that provided data on target groups.

Regarding profitability, the surveyed MFIs managed to achieve a positive return on assets (2012: 6.7%, 2013: 5.6%). The surveyed institutions also managed to decrease their expenses compared to 2011, as the operating expense ratio was reduced to 18% in 2013. In combination with the positive evolution of credit at risk, this illustrates an ongoing trend of lower impairment losses and operating expenses, which might lead to an improvement of financial sustainability in the microfinance sector.

Key issues to further develop the sector include:

  • The development of stable and affordable funding patterns for microfinance providers in many countries.
  • The growth of microfinance operations invites closer scrutiny by funders and policy makers on both the EU and national level regarding MFI financial and social performance. A need for more transparency is still prevalent.
  • Increasing knowledge about the social impact of the microfinance activities in Europe in terms of jobs creation and financial inclusion.
  • The digitalisation of the European economy and society provides new business and efficiency opportunities for the microfinance sector.