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Microfinance partnership among MFIs, banks, guarantee funds and national states

Publication EMN Working papers

This paper looks into the kind of collaboration that exists between microfinance institutions (MFIs), ethical banks, commercial banks, and guarantee funds in terms of microfinance, and how they can have an impact on business creation within the European Union. It shows how different national legislation can affect the practice of microcredit provision as well as the institutional background, which resulted in establishing alternative banking or non-banking models such as the Growth Funding Scheme in Hungary, the institution of ethical banks and authorized MFIs in Italy, or the trust-based partnership model in Germany.

Furthermore, the effective support of microenterprises has to originate from the combination of different attributes such as the support of innovative start-ups through legislative acts; creation of state-guaranteed national funds for enterprise support, usage of European funds (EaSI, ESIF, EFSI or COSME) as well as fiscal and monetary policy incentives for favourable (micro)loan provision or special capital requirements for commercial banks with SME loan lending.

These multi-level partnership models as well as the legislative background including relevant European regulations and directives could be seen as the first line of defence for the microfinance sector, decreasing the potential risks which form internationally against the effectiveness of microfinance, such as the potential indebtedness of the borrowers or high interest rates. In addition, those multi-level partnerships between institutions, MFIs, commercial banks on national and supranational level as well as the optimal usage of EU funds can result in a higher efficiency in the field of microfinance which can contribute to the establishment of start-ups or even family businesses and better access to finance in the initial phase of a young enterprise.

Finally, the research intends to contribute to awareness-raising among commercial banks, encouraging them to add microfinance to their lending portfolio for instance as part of their Corporate Social Responsibility, sign further guarantee agreements with the relevant European funds or enter into partnership with authorized MFIs.

The research focuses mainly on country-specific examples of different partnership and collaboration models which evolved in Italy, Germany, Austria and Hungary as different legislation and different institutional background triggered diverse microfinance models (e.g.: Growth Funding Scheme in Hungary; the institution of ethical banks and authorized microfinance institutions (MFIs) in Italy; the trust-based partnership model in Germany or collaboration between ERSTE Bank Austria and EaSI) and can be therefore used for a comparative research.