1. Introduction: From the Third World to developed
countries
1. Microcredit, an instrument developed and popularised
by the 2006 Nobel Peace Prize winner, Muhammad Yunus, is becoming
widespread in the Council of Europe member states. It consists of
a set of financial products accessible to individuals who are traditionally
excluded from the conventional banking system. Some 150 million
people around the world are now benefiting from US$ 11.69 billion
of microcredit.
2. Microcredit was originally intended to foster the development
of Third World countries. It has changed the lives of millions of
households in South Asia, Latin America and Africa, while promoting
their countries’ economic development. Indeed, microfinance has
fulfilled a vital function in those countries: it has provided financial
services to those on low incomes who lack access to formal banking.
It is certainly not a panacea that would end poverty, as is sometimes
claimed, but it has allowed many of the world’s poorest people to
develop businesses.
3. The successes of microcredit in developing countries have
persuaded some industrialised countries of the many benefits of
microfinance. It is therefore expanding as a means of helping the
poorest households. France, Germany and even the United States are
testing microcredit, which offers a real opportunity for the worst
off, through a number of measures, policies and quasi-governmental
enterprises.
4. In the European Union, microcredit involves loans under €25 000.
Such loans are entirely suited to microenterprises employing fewer
than 10 people, which account for 91% of all European businesses. Moreover,
99% of start-ups in Europe are microenterprises and one third of
these are set up by people who are unemployed. These microenterprises
are excluded from traditional bank loans for various reasons, in particular
the financial risk they involve for lenders.
5. Moreover, the economic and financial crisis affecting our
economies is highlighting some limitations of the free-market system
as it is currently organised and could give microfinance new impetus.
As Muhammad Yunus said in February 2010, “this crisis [was] an opportunity
to redesign the system”.
In his view, the opportunity
should be seized “to rethink the financial institutions, rethink
the rating agencies, [and] rethink the banks”. Various changes need
to be considered and should help offer opportunities for the individuals
hardest hit by the crisis. The promotion of microfinance in Europe
may therefore be regarded as being one of the possible changes needed
for European societies.
6. This approach is similar to the one driving international
discussions about the need to take measures to regulate the banking
and finance sector so as to avoid the same mistakes being repeated
yet again.
2. A means of overcoming socio-economic
inequalities and improving social cohesion
7. Microcredit is a critical anti-poverty tool and a
wise investment in human capital. The idea of lending money to the
most disadvantaged to help them escape from the poverty they live
in is becoming more widely accepted today, but the terms for obtaining
loans are often draconian and repayment rates are still exceptionally
high. In my view, it is therefore advisable to promote microcredit
as an alternative method of finance for disadvantaged groups so
as to offer them opportunities for social advancement.
8. Vulnerable groups such as women, the poorest households, young
people and the self-employed have been particularly hard hit by
the current economic crisis. Microcredit mechanisms could have a
positive impact on policies to support the most vulnerable members
of society.
9. In some regions of the world, microfinance is used for the
purpose of achieving greater equality between men and women. In
India, for instance, the Base for Rural Women Development (BRWD)
set up by the non-governmental organisation Intercultural Network
for Development and Peace (INDP) has enabled women to assert themselves
in society. This initiative has had a remarkable impact in terms
of their dignity and independence. I would point out here that gender
equality is one of the main principles defended by the Parliamentary
Assembly and that the member states should therefore employ any
tool which can help bring it about.
10. The same reasoning can be applied to all vulnerable groups,
whether national minorities, people with disabilities or young people
who are increasingly affected by unemployment. In this respect,
I would emphasise the potential social dimension of microcredit
if it is targeted at groups experiencing greater difficulties.
11. The use of microfinance here must be seen as supplementing
the social policies implemented in the various Council of Europe
member states. I would underline in this connection that all government
action can be made more effective by support from civil society
initiatives.
3. A tool for promoting regional development
12. For several years, the Congress of Local and Regional
Authorities of the Council of Europe has been asking the Assembly
to “resume study of member states’ regional development in the new
pan-European context”.
In the
present report, it is therefore worthwhile highlighting the significant
benefits which microcredit could offer here.
13. Two aspects need to be analysed: the issue of remote rural
areas and that of regional disparities within Council of Europe
member states. By adopting policies to promote regional development,
whether on a small or medium scale, European governments help to
bring about greater social cohesion throughout their territories,
thereby fostering their countries’ socio-political stability.
14. First of all, policies to open up rural areas economically
could be supplemented by microfinance mechanisms. In the French
region of Poitou-Charentes, for example, the “Poitou-Charentes microcredit” scheme
has enabled over 1 000 households to cope with financial difficulties
and return to employment, for instance through the purchase of cars
in remote rural areas. A relatively new initiative in Germany, “Ich
AG” (I Incorporated), has disseminated the idea that self-employment
is a viable and challenging career choice. In France, the creation
of microenterprises has been recognised as a way of integrating
the unemployed who benefit from certain exemptions from social charges
for the first three years.
15. In my view, European governments should give priority support
to microfinance institutions which gear their activity towards the
economic and social development of disadvantaged regions. A policy
of this kind could have many positive impacts, the most significant
of which would be a reduction in regional disparities in Europe. Here
the case of Poland and the difficulties affecting five of its regions
(Warmińsko-Mazurskie, Podlaskie, Lubelskie, Podkarpackie and Świętokrzyskie)
would seem to offer a good illustration.
The
purpose of the relevant operational programme is “to stimulate economic
growth and overcome stagnation, which is marginalising Eastern Poland’s
regions”.
16. The use of microfinance in regional development seems entirely
appropriate. By fostering the development of new types of activity,
microcredit could help bring about greater economic dynamism and improved
living conditions and could accordingly reduce conflicts related
to feelings of injustice between regions in individual countries.
17. In my view, this problem relating to regional disparities
should be taken seriously. The difficulties currently facing countries
like Belgium and Spain are factors in political instability and
can, at least in part, be explained by economic imbalances between
regions.
18. I therefore hope that European states will give consideration
to the opportunities for regional development which microcredit
offers and work together to improve territorial cohesion and bring
about more balanced economic development in Europe.
4. A possible lever for employment
19. In creating a range of opportunities for businesses,
microfinance is also a new tool for combating unemployment. This
is one of the reasons why the European Commission has taken up the
issue and decided to introduce a European microfinance system. In
declaring that “the Microfinance Facility … will help create new
jobs [and] will increase the supply and accessibility of microloans
so vulnerable groups find a way out of unemployment”, László Andor,
European Commissioner for Employment, Social Affairs and Inclusion,
clearly illustrated the Commission’s desire to include microcredit
in the measures to combat unemployment.
20. This possible lever for employment must be examined from several
angles. There are two different but complementary objectives here
in terms of combating unemployment. Microfinance must be used not
only to create new jobs but, above all, to preserve existing ones.
The latter objective is particularly important in the current economic
context because we must seek to limit the harmful effects of the
recession before thinking about the recovery. Moreover, smoothing
the transition between unemployment or social welfare dependence and
self-employment seems to me essential.
21. On the one hand, microcredit is a means of promoting start-ups,
which enables the individuals concerned to generate their own business
activity and income in a short period of time. That is a worthwhile alternative
to looking for paid employment, especially during an economic downturn.
On the other, microfinance can enable micro-entrepreneurs to make
productive investments which would not otherwise be possible. It
can therefore potentially enable small and medium-sized enterprises
(SMEs) expand their operations and hence create new jobs.
22. In terms of preserving existing jobs, the mechanism is simple.
By giving firms access to funds to cope with temporary difficulties,
microfinance can preserve jobs and avert bankruptcies. The idea
that microfinance could help SMEs to resist external or internal
shocks to the economy more effectively (see above) is also linked to
the preservation of jobs threatened during periods of crisis.
23. My approach here therefore ties in with the Lisbon Strategy
developed by the European Union. The strategy, which was launched
at the Lisbon European Council meeting in March 2000 and reviewed
midterm, involved taking all the necessary measures to make the
European Union “the most competitive and dynamic knowledge-based
economy in the world capable of sustainable economic growth with
more and better jobs and greater social cohesion” by 2010.
24. While I recognise that the objectives set out in the Lisbon
Strategy have not nearly been achieved, that does not make them
any less commendable or relevant. In response to the economic and
financial crisis having such a severe impact on European economies,
governments must lay the foundations for more stable and sustainable
growth so as to bring about balanced economic and social development
and reduce unemployment levels in Europe.
5. Opportunities for businesses
25. In general, the use of microfinance combined with
special administrative arrangements can help boost the economic
dynamism of young entrepreneurs who have innovative ideas but are
often lacking in financial resources. Microcredit can clearly help
make a business out of an individual’s skills and abilities.
26. Microcredit can not only support young start-ups but is also
suitable for addressing the problem of unemployment in industries
or regions in economic decline. Thus, the newly self-employed can
be offered new perspectives via the help of microcredit schemes.
27. Financing small businesses is often expensive and risky for
the commercial banks (small lending levels, inexperienced clients,
inappropriate business plans, etc.). So microfinance schemes can
serve as an initial tool that gives a first impetus for the start-ups
and it “introduces” them to the world of the commercial banks.
28. Simply providing loans is not enough to ensure a successful
microcredit programme. Entrepreneurs need further services for a
good start: advice, micro insurance, etc. Every actor in these programmes
– from the entrepreneur to the taxpayer – has a common interest:
promoting successful and viable enterprises. The complexity of the
microenterprises' environment demands a supply of business development
services and requires on the part of the starting-up entrepreneurs
various competencies which they often do not have. Training, mentoring
or coaching the new entrepreneurs are therefore essential to improve
their chances of success.
29. Fostering the creation of small and medium-sized enterprises
is a central aspect of microcredit. However, microfinance should
not be seen merely as a financing tool. It is necessary to take
account of its social dimension and the economic opportunities it
generates, in particular in terms of the development of microenterprises.
6. Possible response to the crisis
30. At a time of tentative economic recovery, the impact
of microcredit in promoting the creation of small and medium-sized
enterprises – an economic sector which maintains strong potential –
should not be overlooked. Whether in terms of support for business
operations or of start-up aid, microcredit is a tool which may be effective
in many situations.
31. In this connection, economic crises are often accompanied
by “credit crunches”, which involve increases in the interest rates
on bank loans. These credit crunches result directly from a cyclical
loss of confidence linked to the crises themselves and may lead
to a tricky situation for businesses. The use of microfinance in
this context could be a means of limiting the consequences of these
increases in the cost of borrowing. SMEs would therefore be less
severely penalised by the economic situation and could consider
continuing to invest, if only on a more limited basis, so as to
expand their operations.
32. Microcredit can also help firms experiencing temporary difficulties
avoid bankruptcy. In this respect, microcredit could, to a certain
extent, act as a safety net for the consequences of the economic
and financial crisis. Although it may be a little late for corresponding
action in relation to the current crisis, I believe that effective
measures to help businesses experiencing difficulties should be
developed on a preventive basis so as to ensure greater responsiveness
in the event of external or internal shocks affecting economic activity.
7. The need for support from international organisations
33. At international level, microfinance has gradually
progressed since the first loans were granted by Mohammed Yunus
to a group of Bangladeshi women. The United Nations declared 2005
“International Year of Microcredit” and several initiatives involving
microcredit and microfinance followed at both international and European
level.
34. The support which international organisations can provide
for microcredit can and must take different forms, depending on
the organisations’ mandates and fields of action. In my view, some
international organisations can help states through expertise and
advice, while others are able to offer them financial and practical
support.
35. Certain international organisations could therefore help improve
the operation of microcredit and increase understanding of the risks
inherent in promoting it. It is well known that the policies designed
to reduce the costs of, and barriers to, credit put in place in
many countries in recent years to maintain or increase consumption
levels hit by income inequality
have led to a sharp increase in household
and government debt which is now undermining the democratic stability
of states.
We cannot therefore launch
a major effort to promote a credit mechanism without seeking to
minimise the risks of a loss of control.
36. The importance of the advice which certain international organisations
can provide must therefore be emphasised. Their expertise in terms
of economic analysis and public policy should be turned to good
account by governments when promoting microfinance. Within their
respective spheres, the Organisation for Economic Co-operation and
Development (OECD) and the Bretton Woods institutions can help ensure
more effective and better thought-out government action.
37. Other international organisations which have the legal and/or
financial resources must also support initiatives to develop microfinance.
For instance, several projects developed under the aegis of the
European Union may serve as examples for practical action by international
organisations in the field of microfinance:
37.1. Firstly, the European Parliament instituted the Progress
microfinance instrument in December 2009. It followed the adoption
of a report on microcredit and is intended to grant loans of up
to €25 000 to European citizens wishing to develop microenterprises.
37.2. Secondly, under the auspices of the European Investment
Bank (EIB) and the European Commission, the JASMINE
project
is aimed at developing microcredit in order to promote growth and job
creation in Europe. The scheme also seeks to raise more capital
for microcredit providers and set up a new European-level facility
with staff to provide expertise and support for the development
of non-bank microfinance institutions.
37.3. Lastly, the JEREMIE project
launched
by the European Investment Fund (EIF) and the EIB seeks to address
the shortcomings of the market and improve access to finance for
micro-, small and medium-sized enterprises. This instrument also
seems to offer significant benefits in terms of reducing the interest
rates for microcredit. The aim of JEREMIE is to combine several
complementary tasks by providing equity, guarantees, loans and/or
technical assistance credits.
38. However, I am concerned by the proliferation of new mechanisms
which could cause difficulties. The system would benefit from being
unified so as to ensure greater clarity and effectiveness.
39. Development-bank type organisations such as the European Bank
for Reconstruction and Development (EBRD) and the Council of Europe
Development Bank (CEB) can also play a key role in developing microfinance.
This would appear to be entirely in line with these organisations’
objectives and the Assembly could encourage them to take corresponding
action, in particular through the recommendations and resolutions which
it regularly adopts on their activities.
40. As for the EBRD, during an exchange of views with the Committee
on Economic Affairs and Development, the Bank’s headquarters in
London on 21 January 2011, Mr Henry Russell, EBRD Director for Small
Business Finance, described the Bank’s SME and microcredit schemes
which had a significant impact on fighting poverty and boosting
job creation. In 2010, the average sub-loan size was €3 700 and
the outstanding portfolio of small business finance reached €804
million (annual business volume was about €180 million and disbursements
were €214 million). The EBRD has long supported micro and small
enterprises and small and medium-sized enterprises because they
contribute fundamentally to the Bank’s mandate of promoting market
economies.
41. The EBRD supports micro and small enterprise programmes through
financial intermediaries. These programmes enable small businesses
to access formal finance, which is often an obstacle in the Bank's countries
of operations. In addition to working with existing banks, the EBRD
helps establish microfinance banks and non-bank microfinance institutions.
Long-term sustainability of micro- and small-sized enterprises (MSE)
activities is ensured through institution building and training
on appropriate lending procedures.
42. The EBRD’s lending programmes provide individual entrepreneurs
and firms with access to otherwise scarce finance. Typically the
EBRD makes credit available to local banks (some of which are microfinance institutions
set up through the programme) which then "on-lend" funds to small
businesses. (According to the Bank’s understanding, a microenterprise
has financing needs of €6 800 or less and a small business has financing
needs of €68 000 or less.) In order for the loan funds to be used
efficiently and reach the intended clients, the EBRD organises technical
co-operation donor funds. These grants provide specialised advisors
to selected banks to train staff and set up swift lending procedures
for small business clients.
43. At present, the EBRD has micro and small enterprises lending
programmes in 19 countries (mostly countries in the early stages
of transition to market economies, now including Mongolia). The
programmes’ greatest successes are often in remote regions where
businesses have little or no access to finance. Wide regional coverage
is a key EBRD objective, including well-trained and committed personnel.
Yet, lessons learned from the crisis – as non-performing loans in
microfinance peaked – pointed to the importance of corporate governance,
in-depth risk analysis and local currency funding for small borrowers.
44. In reply to questions by members, Mr Russell explained that
the EBRD’s activities in support of small businesses in some countries
were limited because of difficulties in finding good local partners.
For instance, in Azerbaijan, the EBRD chose to set up a "greenfield"
bank, thus contributing to know-how transfer and institution-building
in the country. Losses incurred by the EBRD through microfinance
activities showed a higher level of risk involved, which also justified
higher interest rates charged on micro loans.
45. As far as the CEB is concerned, its main objective of promoting
social cohesion has led it to fund various microfinance bodies.
In 2009, for instance, it approved a new €23 million programme with
the MicroBank (Social Bank of "la Caixa") to promote job creation
and offer specific support for vulnerable groups in Spain.
46. The aim of the projects funded by the CEB is usually the social
integration of disadvantaged groups. The projects are aimed at specific
groups and the relevant micro-loans are intended to help them become
self-employed, develop existing microenterprises or overcome temporary
difficulties.
8. Taking additional measures to overcome the limitations
of microcredit
47. The question of the efficiency of microfinance is
the subject of much debate between economists, as it is difficult
to assess properly the impact of microfinance on economic development.
The issue of the relevance of policies targeted at vulnerable groups
has also been raised in some quarters. For instance, in the past
two years, Morocco, Bosnia and Herzegovina, Nicaragua, and Pakistan
have all been hit by microloan repayment crises. The Consultative
Group to Assist the Poor, a World Bank-linked group seeking to improve
financial access for the disadvantaged, blames the upheavals on
lending that devoted insufficient attention to borrowers’ ability
to repay.
48. In my view, microcredit should not in any circumstances be
seen as a miracle solution to all the problems affecting European
economies and societies. While it may help foster development and
social cohesion, it must be regarded as part of a broader and more
complex set of measures. And that all the more so as we should not
ignore the limitations of microcredit; while the microfinance movement
has improved access to credit, it has often “romanticised” the poor
as potentially creative entrepreneurs while ignoring the structural
causes of poverty in a given country.
49. I would underline the importance of the advice aspect in the
establishment of microcredit schemes, especially in connection with
support for microenterprise start-ups. The persons or businesses
seeking microfinance should have access to advisers capable of assessing
their situations and their plans so that they are directed towards
reasonable and productive solutions. It is essential to raise the
issue of a system of insurance and support in connection with the
granting of microloans.
50. A balanced approach must be taken to microfinance so that
it can really serve as a driving force in the development of micro-,
small and medium-sized enterprises. The development of an advisory
function should make it possible to guide the potential beneficiaries
of microfinance and ensure the long-term viability and efficiency
of their business plans. It should prevent the reckless granting
of micro-loans, which would only worsen the situation of those concerned
in the medium and long term. Indeed, micro-loans are very expensive and
risky instruments. To cover the possible risk, the intermediaries
usually offer the loans on high interest rates, which small businesses
are sometimes unable to bear. Therefore, in my opinion there are
no appropriate, useful and sustainable microcredit schemes without
public (state) support.
51. The question of risk management and the regulation of these
financial products must also be raised. European states should not
ignore but instead take account of the lessons of the past few years
and take steps to prevent any speculative bubbles. There are fears
in some quarters that the events which led to the subprime crisis
could recur. In my view, it is also necessary to prevent potential
abuses of microfinance that could enable some individuals to get
rich at the expense of the poor.
52. In terms of guarantees for microcredit, various approaches
have been tried out. In Bangladesh, collective or joint guarantees
have been introduced. This method of joint liability was developed
because it seemed suited to the poor sections of the population
at which microfinance is aimed. There were two main reasons:
- “the system is based on social
pressure (or the credible threat of a community sanction), which
can easily take the place of financial guarantees”;
- the borrower accordingly bears lower costs because the
establishment of the group involves a phase of interpersonal selection
and supervision of the individuals is also transferred to the group.
53. This does involve high interest rates, however. The question
which arises here is straightforward: what can be done to ensure
that microloans, which in principle are high-risk financial transactions,
are not subject to risk premiums which impact on interest rates?
54. In this respect, it is imperative to propose new ways of financial
intermediation with a view tolowering the
cost of lending and increasing the effectiveness of advisory services
that accompany microcredit. It is also an open-ended question as
to whether the microcredit institutions could accept deposits and
offer other classical banking services to the population.
55. During the committee's meeting in London, some members supported
the rapporteur’s proposal that big banks extending microcredit lines
to smaller partners should impose certain conditions on subsequent
micro-lending, in particular as regards the interest rates. Microcredit
institutions could gradually offer a broader range of services to
the population, thus responding to the real needs of their clients.
56. Moreover, well-defined modalities and structures are the key
to the good functioning and utility of microcredit bodies to society.
Efforts should be made to lower the interest rates charged by microcredit institutions.
States may therefore consider subsidising some microloans which
they deem instrumental in furthering the national development priorities.
In other words, the "social function" of microenterprises is particularly
pertinent and requires more attention from public policymakers.
9. Concluding remarks
57. Today, microcredit is certainly part of the solution
for reforming our global economic system. Changing our economic
vision and finding innovative solutions, particularly in the sphere
of the solidarity-based economy, are key issues and challenges considered
by this report on microcredit.
58. I am convinced that microcredit should be increasingly viewed
as a means of advancing socio-economic progress in society (notably
in terms of employment and socio-economic cohesion). Microfinance
also needs better regulation, but the primary focus should not concern
limiting interest rates or profits. Instead, it would be important
to reform rules to help microfinance institutions better screen
borrowers, thereby lowering costs.
59. I would recommend that the Council of Europe Development Bank
continue promoting microfinance institutions as it does at present.
It should carry forward its efforts to support bodies which employ
microcredit to foster development and social cohesion.
60. I believe there should be co-ordinated action by the private
sector, national institutions and international organisations to
ensure the consistency of the measures taken. It should be noted
here that the agreements which the Council of Europe Development
Bank has recently concluded with other international organisations, national
banks and private funds are in line with this recommendation.
61. Council of Europe member states should establish programmes
to promote microcredit which are suited to the national problems
facing them. Insofar as possible, they should seek to use microfinance
as an additional tool in broader initiatives.
62. In my view, the potential benefits of microcredit should be
assessed consistently across all decision-making levels so as to
ensure that its effectiveness is maximised. The Congress of Local
and Regional Authorities could also take part in the moves to promote
microcredit and give consideration to the possibilities which microfinance
can offer at local level – as stressed in its Resolution 263 (2008)
and Recommendation 244 (2008) on responsible consumption and solidarity-based
finance, as well as by Resolution 294 (2009) on the over indebtedness
of households: the responsibility of regions. In these texts, the
Congress called upon the local and regional authorities to promote
solidarity towards the more vulnerable – including towards persons excluded
from the conventional banking circuits – inter
alia by developing micro-loans, and microcredit generally,
through partnerships with professionals.