Microfinance and policymaker objectives are fully aligned. Both seek social betterment, improved economic engagement, social and financial inclusion, reduction of the burden on welfare systems, and positive effects on employment and employability.
To enable microfinance to have this effect across Europe, many improvements are necessary to the regulatory treatment of microfinance institutions and of self-employment more generally. Such changes are needed both at national and European level, and must be backed up by the right kind of public support programmes.
EMN, in close collaboration with the Microfinance Centre (MFC) actively participates in advocacy activities through the organisation of dialogues between policy makers and practitioners. It provides strategic information to its members on EU policy, meetings with political leaders, and represents the sector in public responses to consultations on various issues.
EMN's members have direct input into EMN's advocacy efforts through its advocacy committee. For any questions about EMN's advocacy efforts or committee, please contact Oscar Verlinden (firstname.lastname@example.org). What follows is an overview of EMN's current positions on its priority files.
1. EU definition of microfinance and microcredit.
The EU definition for microfinance sets an important precedent for the member states. Over the past decade, the EU definition has seen strong improvements to be more in line with EMN/MFC suggestions. However, there is more work to be done to reflect the essentially social and inclusive nature of microfinance, and to drive for more harmonisation of national definitions across Europe.
A full account and reasoning behind the EMN/MFC proposed definition can be found in the document below.
- insert_drive_fileEMN/MFC proposal for a revised EU definition of microfinance and microcredit 169.74 KB
2. Regulatory framework for microfinance and Capital Markets Union (CMU).
One of the main issues of the capital markets union is to unlock financing of innovation, enterprises, and especially SMEs and start-ups. In a situation where, 92% of European enterprises are microenterprises of less than 10 employees1 (many of them having no employees) and where start-ups include a growing part of unemployed, it seems important to include these “missing entrepreneurs” in the total demand of the capital market, knowing that many of them are excluded from access to banks. This is the context for development of microcredit in support of growth and employment, which is in itself a social innovation on behalf of an inclusive entrepreneurship.
- insert_drive_fileEMN-MFC Note to DG FISMA 560.87 KB
3. Regulatory framework for the creation of microenterprises and self-employment.
Member states each have their own approaches to how they empower entrepreneurship and self-employment. In some states it is a higher priority than others, and there is a lot of room for improvement across the continent, which also means the European institutions have an opportunity to lead the direction of upward convergence here.
EMN makes a number of suggestions that would be a strong starting point for improving the inclusiveness of entrepreneurship across Europe in its Note to DG GROW below. At the same time, the OECD produces a regular, thorough, report that gives country-specific policy recommendations for identifying and boosting excluded target groups.
- insert_drive_fileNote sent to DG GROW 561.5 KB
4. Pricing of microcredit.
Microcredit providers are not banks, meaning they cannot take deposits. To provide loans, they must themselves borrow this capital from banks, meaning that the interest rates for microcredit will necessarily be equal or higher than banks, despite their social mission. The only respite from this is the public support microcredit providers receive.
This upward pressure on prices has lead to misgivings and accusations of microcredit charging inappropriate interest rates. With this note, EMN explores the issue of cost and pricing in microfinance in more depth.
- insert_drive_fileNote sent to DG EMPL and ECFIN 117.73 KB
5. Pricing of EU financial instruments.
In the framework of the evaluation of the new Helenos fund for microfinance, the issue of risk assessment and pricing of EU financial instruments popped up. In the case of social purpose investment, we would argue that the risk of loss and the consequent return requirement on an equity investment should be balanced with the social impact. Indeed, of the only two equity investments in MFIs made to date, the case of microStart is an example where the social objective of the project is considered by all parties as fully achieved while, at the same time, the equity investment of the EU budget managed by EIF is financially at loss at the time of exit. The question is thus: how to assess the value of social impact versus financial return and how to factor these into the pricing and performance indicators of the project.
- insert_drive_fileEMN Policy Note on Microfinance Pricing and Cost of Funds (Jan 2019) 124.93 KB
- insert_drive_fileEMN Note on Risk assessment and pricing of EU financial instruments for MF (Mar 2017) 295.86 KB
6. Use of European Social Fund (ESF) for microfinance.
Supporting entrepreneurs setting up their own business is one of the objectives of the European Social Fund (ESF). ESF funds are made available to "managing authorities" across Europe, who set up specific regional projects with objectives that align with ESF goals, most notably increasing employment, increasing social inclusion and reducing poverty.
ESF projects support people who may otherwise not get the opportunity to attend training, obtain qualifications and get good jobs. Due to its size (10 billion a year during the period 2014-2020) and scope, the ESF has a big influence on the labour market and society at large. In some countries, around 90 % of the actual expenditure for labour market measures comes from the ESF.
Nevertheless, even when ESF have specific lining with the MF sector in Europe, MFIs are having extraordinary difficulties in order to be instrumental in channelling these funds towards the underserved. The purpose of the study ESF Market Failures for Microfinance in Europe Findings “short mapping” is to identify some of these difficulties in order to promote alternative solutions to the EU institutions. Another study is currently being finalised that identifies some more case studies of ESF-microfinance collaborations, and will be shared here when it is ready.
7. Preparation for the 2021-2027 multiannual financial framework.
The EU organises its financial support programmes in a seven-years multiannual financial framework (MFF). The previous MFF ran from 2014-2020, and comprised such programmes as the Employment and Social Innovation (EaSI) programme and the European Social Fund (ESF).
The next MFF period will run from 2021-2027, and will reorganise and extend the previous plans. Microfinance will benefit most from the programmes that will be called InvestEU (for centralised support) and ESF+ (for decentralised support).
EMN/MFC have been closely following the design and negotiation phases of this programme, and are part of the stakeholder expert group that the EC consults when planning the MFF. Presently the negotiations have almost finished, with a substantial increase in support for microfinance envisaged.
EMN will continue to engage with the EC and its implementing partners to ensure the financial instruments and subsidies are most efficiently designed.
- insert_drive_fileProposals on continued and improved EU instruments to support the European microcredit sector 331.65 KB
- insert_drive_fileConcept note on microfinance sourcing guarantee 163.59 KB
- insert_drive_fileEMN response to GECES consultation on InvestEU 253.42 KB
- insert_drive_fileEMN-MFC response to GECES Investment Guidelines consultation in August 2019 349.81 KB
- insert_drive_fileEMN-MFC response to GECES Sustainability Proofing consultation in August 2019 169.48 KB
8. Close the funding gap for the microfinance sector
Microfinance institutions do not have the resources necessary to serve the existing demand. Though the microfinance industry has been rapidly growing according to the figures of our overview survey (link), a study produced by evers & jung has suggested that the current size of the microfinance industry is still only covering a fraction of the potential demand.
Policymakers, investors and microfinance practitioners must work together to address this gap through a combination of sourcing new funds, and marketing them effectively.
1. The European Microcredit Whitepaper
The European Microcredit Whitepaper is a comprehensive 40-page introduction to the European microcredit sector. It explores its definition, its history, and key figures. It explores the social and economic impact, and sets out in which ways it achieves the policymakers' objectives, and the ways in which the EU supports microcredit. At the end, it sets out a number of policy proposals that could globally improve the framework for microcredit.
The Whitepaper can hopefully help EMN members shape their own stories, to help them demonstrate the context, value, and goals of European microfinance, and help communicate these to policymakers and other stakeholders.
The whitepaper was published in July 2019 by a working group of the Parisian business association EUROPLACE, with EMN playing an active role in the shaping and delivery of the document. The working group included members of the French Central Bank, the banking association, and several financial service providers.
- insert_drive_fileThe European Microcredit Whitepaper (2019) 1.73 MB
2. Microfinance in EU policies
EC Final Communication 2007: A European initiative for the development of micro-credit in support of growth and employment
In the beginning of the years 2000, in the EU, the microcredit sector in many Member States and regions was developing rapidly, and a number of actions were taken at Community level to reinforce the growth of the sector. However, there was clear evidence that much more can be done.
The EC elaborated this Communication, which set the basis for the different programmes and actions developed and under implementation by the EU institutions over the past decade. It proposes a European microcredit initiative focused on 4 main points:
Strand 1: Improving the legal and institutional environment in the Member States
Strand 2: Further changing the climate in favour of entrepreneurship
Strand 3: Promoting the spread of best practices
Strand 4: Providing additional financial capital for new and non-bank MFIs
European Pillar of Social Rights
The European Pillar of Social Rights is a manifesto setting out the principles of sustainable growth and the promotion of economic and social progress, as well as cohesion and convergence, while upholding the integrity of the internal market, to achieve efficient employment and social outcomes. It was agreed as a commitment made by the leaders of 27 Member States and of the European Council, the European Parliament and the European Commission in the Rome agenda, 2017.
European Pillar of Social Rights underpins all the work that the European Commission does, and particularly the work done in the social sphere by DG GROW.
For microfinance, the key is “Access to essential services: Everyone has the right to access essential services of good quality, including water, sanitation, energy, transport, financial services and digital communications. Support for access to such services shall be available for those in need.” Also, useful remarkable messages in Chapter I point 4 a. and c., Chapter II point 5 c. and Chapter III point 12
EU Social Economy Action Plan
Social Economy Europe (SEE) elaborated in 2018 a proposal for a European Action Plan for social economy with 3 objectives, 20 policy measures and 64 actions structured in seven pillars.
In 2019, the new European Commission announced its intention to develop an EU Action Plan for Social Economy, with a proposed duration of 5 years (2021-2026).
As it will be a key tool to for the different socio-economic policies of the European Union, microfinance actors should be involved. That is why EMN became member of SEE and is taking part in the ongoing meetings, consultations, and analysis of the document elaborated in 2018, to ensure that self-employment, inclusive entrepreneurship and social finance are included in the reviewed proposal.
According to the timeline, the EC the EC plans to formally publish the Action Plan for SE in 2021.
Sustainable Development Goals
The Sustainable Development Goals (SDGs) are an ambitious plan of action defining sustainable development priorities at a global level to 2030, with the aim of eradicating poverty and promoting decent lives with opportunities for all. There are 17 goals and 169 universal targets that are inter-connected, applicable to all nations and peoples, and that represent a call to action for governments, civil society and the private sector.
Microfinance, combining financial products and business development services, contributes and is an enabler to the improvement of several of the SDGs:
- SDG 8 "DECENT WORK" - Targets 3, 6, and 10. Encouraging entrepreneurship and inclusive job creation are key to ensuring everyone can contribute to the labour market with dignity. This in turn contributes to reducing extreme poverty, to growing the middle class, and to growing the economy.
- SDG 10 "REDUCE INEQUALITIES" - Targets 1, 2 and 4. Growing income inequalities require sound policies to empower lower income earners and promote the economic inclusion of all regardless of gender, ethnicity, age, disability, or religion.
- SDG 4 "QUALITY EDUCATION" - Targets 4 and 5. Teaching financial literacy at all ages contributes to eliminating gender and wealth disparities and encourages universal access to productive economic participation. Microcredit leverages support, coaching, mentorship to ensure clients have the necessary skills to succeed in business.
3. Demonstrating the social and economic impact of microfinance
In delivering assistance to microfinance, policymakers are faced with a cost-benefit judgement which is hard to quantify. The discussion often goes in a quantitative direction, as financial return is a concrete, numerical indicator of a measure's performance. However, it is very important to remind policymakers that financial returns are not the only indicator, nor is it the most important indicator for the effectiveness of a social-minded initiative such as microfinance. Policymakers must also take into account the social impact that this sector has. Promoting the benefits of microfinance can be hard if the social benefit remains intangible. Many stakeholders have set out to try to measure the intangible, secondary or holistic benefits that come from microfinance activity, and their efforts can be used as examples to show to policymakers, or on which to base your own data collection.
Impact studies examples
Qredits published its 2018 Social Annual Report demonstrating their contribution to the economy, employment and the reduction of welfare beneficiaries. It has a definite impact on the society, with 12,000 entrepreneurs financed, 25,000 jobs created, €47 million in government savings in social welfare, 87% survival rate after 3 years, 7% of customers employ partially disabled or people on welfare and 19% of companies work with volunteers. In addition, in October 2019 Qredits has developed a new loan product for social enterprises.
MicroBank 2019 Annual Report illustrates the impact on the entrepreneur and his/her family environment: 81% improved their management ability, 69% improved liquidity, for 46% income level have increased, in terms of individual well-being 97% feel capable and valuable in their daily lives, 90% find their work fulfilling and 52% integrate some form of environmental good practices. Moreover, MicroBank managed to show its impact for business consolidation (74% of entrepreneurs feel that their business has been consolidated as a result of the loan), for job creation (microcredits directly contributed to the creation of 20,174 jobs and businesses that received a microcredit directly created an average of 1.2 jobs) and for wealth generation in the area (total of 56,836 jobs in Spain were linked to the activities of the businesses funded by MicroBank and making a contribution to the GDP of €1,543 million).
PerMicro is another organisation giving a key role to the social impact of their products/services, elaborated the report measuring impact for enterprises and for families in 2018. PerMicro contribution to job creation and strengthening employment is demonstrated in the report: in average every enterprise supported by PerMicro created new job positions (60% are young people, 23% migrants, 46% women and 48% unemployed). In terms of economic-social welfare and poverty reduction, 46% of entrepreneurs improved their quality of life and 47% of entrepreneurs have an average income higher than 608€/month, 2,5% of families crossed over the poverty line and 29% of people no longer live in conditions of sever material deprivation as previously declared. Finally, the component of empowerment of women is also mentioned, 58% of customer of microcredits for families were female, the majority of them are migrants, 11% young women under 35 and half of them has more than one child.
EMN has collected more examples here.
Social Return on Investment method
If we consider that microfinance gives people opportunities to create their own employment, the calculation of the impact of microfinance should also calculate how much it saves the welfare system, and how much taxable value it generates.
Adie, together with KMPG, developed the Social return on Investment (SROI) method. The return on investment is, in short, revenue generated for society, and costs avoided by society thanks to Adie’s work. The SROI method allows us to put a number on the revenue generated and costs avoided. The result of the SROI work shows that investment in microfinance products has a positive leverage on public budgets, €1 invested in Adie’s professional microcredit programme, that is the work with entrepreneurs, generates a revenue of 2,38 EUR in 24 months of time.
microStart in Belgium did a similar exercise and identified 3 different socio-economic impacts generated: a) The savings for the Belgian government in their social benefits programs; b) The additional revenues for the Belgian treasury generated by the activities of microStart’s clients; c) Enhancement of local economies and economic inclusion of communities. For every €1 microStart grants as a loan, the government adds €1.31 to its budget.
The project seeks to provide policy makers with the evidence-based policy recommendations capable of strengthening further the role of microfinance as one of the strategic tools to obtain financial and social inclusion in the EU.
"Measuring Microfinance Impact in the EU. Policy Recommendations for Financial and Social Inclusion" is a three-year (2016-2019) research project which has been financed by the EIB Institute and supervised by the EIF. The main aim of the research project is to assess the impact of microfinance compared to that of welfare programmes, on financial and social inclusion to establish which one ensures the higher social return.
3 Working Papers have been published as a results from this MEMI project:
- "Evaluating the impact of European microfinance. The foundations"
Working Paper 2016/033 sets out what can be learned from impact evaluations in developing countries, it takes a glance to challenges of impact evaluations, strengths and weaknesses of the various impact evaluation methods available, methodological options and provides an informed ground to make methodological decisions.
- "The social return on investment (SROI) of four microfinance projects"
Working Paper 2020/065 introduces and applies - in the form of case studies - a specific methodology, SROI, to measure the impact of microfinance on financial and social inclusion
- "Measuring microfinance impact: A practitioner perspective and working methodology"
Working Paper 2020/066 complements the SROI methodology by introducing an analytical approach, which relies on indicators concerning the three dimensions, i.e. economic, social and environmental.
4. Overview of EU available funding resources
Employment and Social Innovation (EaSI) Programme
The EaSI programme is an EU financing instrument to promote a high level of quality and sustainable employment, guaranteeing adequate and decent social protection, combating social exclusion and poverty and improving working conditions (2014-2020). It has three main axes. The Microfinance and Social Entrepreneurship axis: with the objective of supporting access to microfinance and social entrepreneurship, has 3 types of instruments of funding: a) EaSI Guarantee, b) EaSI Capacity Building and c) EaSI Funded Instrument. For more information of how to apply for EaSI Guarantee and EaSI Capacity Building you can check the website of the European Investment Fund.
In addition to the financial instruments, MFIs have also the opportunity to benefit from the EaSI programme Technical Assistance. The services under TA include institutional assessments, tailored trainings, investment readiness trainings, financial or social ratings, workshops, study visits, a dedicated helpdesk and European Code of Good Conduct implementation trainings and compliance evaluation.
To benefit from EU funds under EaSI financial instruments, MFIs need to sign up or endorse the Code as a prerequisite.
According to the European Commission assessment, the EaSI programme has proven the capacity of EU-level financial instruments to deliver the objectives envisaged by the EU regulation for micro-finance and social entrepreneurship, therefore justify its continuity and need for additional firepower.
The EaSI programme will have successor programmes in the next multiannual financial framework, as part of the InvestEU programme. InvestEU will be structured in 5 thematic policy windows (pdf): 1) Sustainable Infrastructure, 2) Research, Innovation and Digitisation, 3) SMEs and 4) Social, Investment and Skills, 5) Strategic European Investment. Our focus will be in the fourth thematic window, with an estimated EU budgetary guarantee of 3,6 bn€, where the future programmes similar to the EaSI Capacity Building Investment and EaSI Microfinance and Social Enterprises Guarantees will be included.
European Social Fund (ESF)
The European Social Fund is part of the EU structural and investment funds, and represents a large part of the EU budget that is put at the service of regional "Managing Authorities". These Managing Authorities set up programmes to achieve social objectives, and occasionally work with microfinance providers to achieve such objectives.
We have prepared a practical toolbox for you to discover more about ESF in your country and to start approaching your Managing Authority:
- Consult existing Operational Programmes in your country/region
- Check out funded projects in your country
- Plan ahead for your involvement in future ESF activities:
- Get in contact with your Managing Authority to get relevant information on the preparation of Partnership Agreements in your country (e.g. how to participate in official public consultations ahead of drafting the Partnership Agreements, which body is in charge of the consultation, or what is the timing? etc.) and to create awareness of the potential of microfinance in meeting ESF goals on employment.
- Consult examples of communications addressed to national government and regional managing authorities during the preparation of Partnership Agreements and OPs 2014-2020 that can be updated in view of the next ESF programming period.
- Advocate for your Managing Authority to set up a microcredit financial instrument as promoted by fi-compass. Fi-compass also offers several days of technical assistance to managing authorities, to give them tailored training in setting up financial instruments. Make your managing authority aware that this assistance is available for them.
An analysis of the role of microfinance using European Social Fund (ESF) funding has been performed by Microfinanza srl, selecting 5 case studies study in Spain, Italy, Poland, Belgium and Bulgaria. The primary market failures identified are related to: complexity, time consuming, lack clarity on the application process, reduced availability of information, strict eligibility criteria, limited awareness of Managing Authorities, no common policy for long-term commitment or focus on specific topics and lack of cohesion around the strategy of national policies and Managing Authorities. For a deeper understanding and overview, do not hesitate to consult this report.
European Social Fund plus (ESF+)
What is next for the ESF during the future period 2021-2027? The European Social Fund Plus (ESF+). The ESF+ will allocate a total budget of €88 billion for the 7 years and will be the main financial instrument to strengthen Europe’s social dimension, by putting the principles of the European Pillar of Social Rights into practice. It will merge: European Social Fund (ESF), Youth Employment (YEI), Fund for European Aid to the Most Deprived (FEAD), EU Health programme and Employment and social innovation (EaSI) programme, the part for Technical Assistance. The implementation of the ESF+ is mostly executed by the Managing Authorities in the shape of what is called "shared management", though a small part of the budget will also be centrally managed by the European Commission (such as the future of the EaSI TA programme).
5. Improving the national regulatory frameworks
In order to create a healthy atmosphere for microfinance, it is essential that it can rely on an enabling environment for entrepreneurship and self-employment. In most jurisdictions there is still work to be done to improve the framework conditions for self-employment.
To determine which regulatory aspects of self-employment are most crucially blocking progress in your country, you can self-evaluate using the following tools:
- OECD "Better Entrepreneurship" self-assessment tool. This online self-assessment tool can be used as a starting point for dialogues with government officials, to agree on where improvements can be made in the supporting environment for entrepreneurship.
- OECD "The Missing Entrepreneurs" publication gives country-by-country policy recommendations.
- This Economist Intelligence Unit article sets out a range of influencing conditions.
EMN performed the exercise of analysing the regulatory environment for microfinance in most European countries, elaborating legislative mapping reports per country. Members can use these reports as a basis for orienting their own efforts. In addition, MFIs can also take a look to the microcredit regulation overview report for past year. This paper can be a practical tool to compare their context with that of their peers across Europe, learning from their challenges and engage in discussion with policymakers on regulatory issues.
Here is selection of good practices in advocacy at national level from EMN members. To access the Good Practices, please click on the titles below.
- insert_drive_fileAdvocacy for Microfinance in Serbia: History and Current Situation (RS) 240.5 KB
- insert_drive_fileAdie's advocacy work at national level (FR) 598.58 KB
- insert_drive_fileResponsible Finance’s Advocacy Work at the National Level (UK) 1.31 MB
- insert_drive_fileHow to educate our policy makers about microfinance: Adie (FR) 455.4 KB
- insert_drive_fileAdvocacy good practice methodology CDFA / Responsible Finance (UK) 271.67 KB
- insert_drive_fileSpanish Microfinance Association Advocacy Strategy (ES) 140.56 KB
- insert_drive_fileMicrofinance Norway (NO) 1.25 MB