Microcredit Research in the EU 15

and European Economic Area (EEA)

TAMARA UNDERWOOD, EUROPEAN MICROFINANCE NETWORK

Following Proudhon and Raiffeisens efforts in the 19th century, the microcredit
sector is again developing in Western Europe 1. Persistent unemployment and
pressure on public funds have focused attention on microcredit as a tool to foster
self-employment and thereby also promote social and financial inclusion. Whilst
research needs are similar to those in developing countries, the context in which this
new generation of microcredit programmes is implemented is very different.
Research in Western Europe has to take account of an increasingly service oriented
and technology dominated economy, the changing role of the welfare state, the
legal and bureaucratic characteristics of each country, clients who are relatively
more difficult to reach and structural and regulatory factors that make sustainability
challenging.
In its present form, the microcredit sector is young. Nevertheless, a number of
research projects have been conducted and several others are underway. The
European Microfinance Network (EMN), a network of organisations involved in
microfinance in Europe, coordinates a research group and also has its own research
function. This article uses information collected by EMN and its research group to
discuss research needs, themes and projects being implemented.
The article shows that research is at present carried out by universities, research
centres and networks of microcredit practitioners. Most projects involve applied
research and cover issues such as sector analysis, policy and regulation, efficiency,
operational performance, at risk groups and impact. It appears that there is
relatively less theoretical research taking place at present. There are, however,
applied research projects that are developing and testing analytical frameworks.

Given the specific nature of the Western European environment, thematic priorities
are and should continue to be related to reaching groups at risk of social and
economic exclusion, ensuring a supportive regulatory and policy environment and
addressing concepts of sustainability and the impact of microcredit.

Microcredit in Europe: A Young and Diverse Sector

In Western Europe, the current microcredit sector is relatively young and very
diverse. A handful of organisations pioneered microcredit in the late 1980s.
However, the majority of microlenders active today began lending between 2000
and 2005. Over this period, the annual growth rate in the number of microloans
disbursed has increased as has the number of actors. It is estimated that there are
well over 100 actors involved in the lending process in the EU 15 and European
Economic Area (EEA) countries.
1
Pierre-Joseph Proudhon created the Peoples Bank in France in 1849 which was soon liquidated but
demonstrated the importance of access to finance for capital poor workers. Friedrich-Wilhelm Raiffeisen
founded the first credit cooperative in Germany in 1864 which offered credit to rural workers at affordable
interest rates. At the time of his death his ideas had spread to Austria, Belgium, France, the Netherlands
and Switzerland. Today over 300,000 credit cooperatives claim to have been influenced by his efforts
There is diversity in the types of organisations involved in microlending. In Spain
savings banks dominate the market and work in partnership with non-governmental
organisations and foundations that provide pre- and post-loan support. In the United
Kingdom, Italy and France not-for-profit non-governmental organisations are
prominent. There are also foundations, state banks, credit cooperatives and
government entities providing microloans in Belgium, Sweden, Finland and Germany.
The type of actors involved is often related to country-specific lending regulations.
Lenders operate for a variety of reasons. These range from stimulating growth and
development of small and medium sized enterprises, to addressing market failure,
to ensuring social and economic inclusion of persons at risk of poverty. Microloans
sizes vary from Euro 2,000 to Euro 23,000. Loan sizes appear linked to the lenders
overall mission and objectives. About 30% of organisations focus primarily on
microlending. For approximately 50% of organisations, microlending represents 25%
or less of their activity portfolio. Organisations in this second category provide a
range of other social, employment or banking services. In contrast to the
minimalist approaches adopted in many developing countries, over half of
organisations involved in microlending in Western Europe provide pre- and post-
lending business development services. 2
The Western European sector has not transitioned from microcredit to microfinance
as it has in developing countries. Apart from savings banks in Spain, one lender in
Belgium and a limited number of non-governmental organisations in the United
Kingdom, few actors provide financial services other than lending for
microenterprise development. Existing financial services coverage and legal
restrictions limit the range of services that can be provided.

Research Needs
Although research needs with respect to client demand, operational performance
and impact are similar, the context in which Western European programmes are
implemented is very different from that in developing countries.
For example, research in Western Europe has to take into consideration the changing
role of the welfare state and the legal and bureaucratic specificities of each country.
Welfare programmes, taxation regimes and business registration processes
sometimes create barriers to self-employment and microenterprise. 3 Research into
the legal and regulatory environment for both microenterprises as well as
microlenders is needed to identify good practice and to promote an enabling
environment.
The proportion of the population that can benefit from microcredit is smaller than in
developing countries and can be more difficult to reach. In developing countries,
microcredit is relevant to large portions of the economically active population given
limited bank coverage and widespread poverty. By contrast, 15% of the European
Unions population is at risk of poverty and, with a highly developed financial sector,
10% of the population is estimated to be financially excluded. 4 Potential microloan
2
Overview of the Microfinance Sector 2002-2003, nef-EMN, 2004; Preliminary Results of Microfinance
Sector Survey 2004-2005, EMN, June, 2006.
3
Policy Measures for Promotion of the Use of Microcredit in Europe for Social Inclusion, Evers & Jung,
Facet, nef, EMN, MFC, 2005
4
Joint Report on Social Inclusion 2004, European Commission Directorate for Employment and Social
Affairs, 2004. Carbo Valverde S. and Lopez del Paso, R., 2005, Exclusin financiera: un panorama,
clients are geographically dispersed and are affected by years of unemployment and
economic inactivity.5 With an economy increasingly dominated by services and
technology, adapting to the new economy is a challenge for unemployed people.
Significant outreach and non-financial support is required to reach clients, increase
borrower self-confidence and to help these new entrepreneurs manage complex
regulatory environments. In this context, research should examine the profile and
capacities of the unemployed and other groups at risk of poverty and exclusion in
order to develop appropriate loan products and non-financial services as well as
marketing and outreach strategies.
Sustainability and operational performance are also significant challenges for the
sector. Structural costs and operating methods combined with legal and regulatory
restrictions on interest rates and microlender borrowing hinder sustainability.
Alternative and adapted approaches to conceiving of and measuring sustainability,
efficiency and return on investment are important as is work on interest rates and
borrowing regulations.6
For the microcredit practitioner, research needs and possibilities are vast. In simple
terms, lender needs can be divided into two categories: immediate and strategic.
Immediate needs are related to monitoring of outputs such as client numbers,
repayment rates, portfolio quality, business survival rates and client income. Much
of this information serves internal management purposes and is reported to donors.
Strategic needs include investigation of many of the themes raised above as well as
increasing interest and visibility of their programmes and addressing particular
issues identified during monitoring.
Most microlenders effectively undertake output monitoring on a regular basis.
However, the majority of lenders in Western Europe are small organisations, with
limited staff. Their research capacity is not necessarily designed to address the full
range of issues outlined above. Researchers can help microlenders undertake
strategic investigation through their knowledge of research design best practice,
research methodologies and data analysis.

Microcredit Research in the EU 15 and EEA

In January 2006, EMN began collecting information on microcredit research
conducted in the European context. Given the age of the sector, the objective was to
ensure that research results are shared as widely as possible, to identify who is
carrying out research, to look for gaps in the research and to consider future
collaborations.
To date this process has identified over 50 research projects undertaken in the EU
and EEA since 20007. Projects identified fall into six categories: sector surveys,

Perspectivas del sistema financiero, n. 84, Fundacin de las Cajas de Ahorros, Madrid, quoted in
Exercising the Right to Credit: Financial Inclusion and the Role of Savings Banks in Spain, Silvia Rico
Garrido and Maricruz Lacalle Calderon, in Finance Pour le Bien Commun, forthcoming, 2006.
5
On ne Prte (Pas) quaux Riches : La Rvolution du Microcrdit, Maria Nowak, JC Latts, 2005.
6
Preliminary Results of Microfinance Sector Survey 2004-2005, EMN, June, 2006; Un outil au service
de la croissance et de la cohsion sociale : Le dveloppement du microcrdit au sein de lUnion
Europenne, Maria Nowak, in Finance Pour le Bien Commun, forthcoming, 2006.
7
To access this list contact emn@european-microfinance.org.
research on the regulatory environment and policy, studies of at risk groups,
sustainability, impact and the role of banking institutions.
Projects are led by universities, research centres and networks of practitioners.
Researchers and practitioner networks are also collaborating on certain projects.
Individual lenders input is focused on data provision and implementation of results
and in some case research design as well. This model is working well at present
because it builds on the relative strengths of each actor and creates synergies.

Sector Surveys
The majority of studies focus on describing this quickly developing sector. Country-
level overviews have been undertaken in Germany, Spain and the United Kingdom,
member states with relatively large numbers of individual microlenders. 8 A variety of
organisations have carried out these studies from practitioner networks to
universities and research centres. Europe-wide sector surveys have also been
undertaken by research organisations and practitioner networks. 9 EMN itself is
presently undertaking its second survey of the microfinance sector in the European
Union in collaboration with several microfinance networks and research foundations.
These surveys have tracked sector size and growth trends and have identified good
practice and challenges. They have served a strategic need to increase the profile
and visibility of the sector. They have also assisted in enabling dialogue with
European Union, member states and financial sector actors.

Regulatory Environment and Policy Measures

The regulatory environment for entrepreneurs and microlenders is complex. It can
create disincentives to business start-ups and constrain efforts to develop self-
sustaining loan funds.
There have been several studies on the legal, regulatory and policy environments in
different countries within the Union. There have also been cross-regional studies
that have focused on identifying and promoting the adoption of best practices.
These studies have focused on interest rate caps, tax regimes, welfare to
employment and self-employment policies, entrepreneurship education, business
development services and funding.10 Research bodies have led these efforts and
have collaborated with practitioner networks to develop country studies.
Already this work, and the advocacy that has followed, has contributed to positive
changes in some countries. For example in France, interest rate caps have been
modified for microlenders as has the law on borrowing for onward lending. The
French government has also agreed to extend deferment periods for the payment of
social charges by some start-up microenterprises.
8
Inside Out The State of Community Development Finance, 2003, 2004, 2005, UK, CDFA; Los
Microcrditos en Espaa: Principales Magnitudes 2004, Foro Nantik Lum, 2005; Microlending in
Germany: A case study of DMI, Stefanie Lahn, 2005;
9
Microfinance in Europe, Giordano Del Amore Foundation 2004; Overview of the Microfinance Sector in
Western Europe, nef, EMN, 2005.
10
Integration of the Socially Excluded through Self-Employment and Microcredit in Europe, Maria
Nowak, Eric Mezires, ILO, 2002; Policy Measures for Promotion of the Use of Microcredit in Europe for
Social Inclusion, Evers & Jung, Facet, nef, EMN, MFC, 2005; Regulation of Microfinance In Europe, IFF,
2001.
At Risk Groups
An estimated 15% of the EU population is at risk of poverty. Groups most at risk are
women, single parent households (mostly headed by women) and the elderly.
Unemployment is a key factor in poverty risk as well as social exclusion. Three
groups are particularly vulnerable to long-term unemployment: older male and
female workers; men and women under the age of 25; immigrants and ethnic
minorities.11 Microcredit, by supporting self-employment and microenterprise
development, has an important role to play in social and economic inclusion of these
at-risk groups.
Microlenders and researchers are starting to pay attention to the profiles and
capacities as well as barriers these groups face. So far, work on under-represented
and at risk groups has focused immigrants and women. Microcredit is seen as being
well adapted to the needs of immigrants and capable of promoting integration via
self-employment. Research on immigrants has examined access to financial services
and microcredit, outlining barriers and microlender policy and practice. Women are
under-represented in terms of entrepreneurship and microlending in Western
Europe, particularly when compared to Central and Eastern Europe, North America
and developing countries. Studies on women have focused on access to microcredit,
the social, economic and empowerment impact of microcredit and the challenges
faced by women transitioning from welfare benefits to entrepreneurship. 12
The situation of youth and ethnic minorities does not appear to be receiving
research attention at present although some microlenders focus on lending to youth.
Similarly older male and female workers do not appear to be targeted.

Sustainability
Conceptual, definitional, structural and legal issues make the debate about
establishing sustainable microlending programmes very different from that in
developing countries.
Conceptually, microcredit in Western Europe is in most cases conceived as a tool for
bringing the socially excluded into the mainstream economy through
entrepreneurship. There is relatively less focus on creating viable microlenders that
meet the needs of increasingly large numbers of the population in a sustainable
manner.13 There is also debate about the meaning of sustainable. Should
sustainability mean that clients cover all costs? Or, given microlendings social
policy objectives in Western Europe, should there be long-term public-private
11
Joint Report on Social Inclusion 2004, European Commission Directorate for Employment and Social
Affairs, 2004; Microcredit for Small Businesses and Business Creation: Bridging a Market Gap,
European Union, DG Enterprise, 2004.
12
Immigrants and Financial Services: Literacy, Difficulty of Access, Needs and Solutions, The Spanish
Experience, Giordano DelAmore Foundation, 2004; Immigrants Participation in Microloan Programmes
in Western Europe, EMN, 2006; Women and Microlending in Western Europe, EMN, 2006; Women
and Microfinance: A New Path for Development in Mediterranean Countries? Fondazione Risorsa Donna,
2005; Who Benefits? The Difficulties for Women in Making the Transition from Unemployment to Self-
employment, nef, Prowess, 2003; Les Petites Activits Gnratrices de Revenus dans les Quartiers
Prcariss, Adie, 2005.
13
Developing an Approach to Assess the Performance of Microfinance in Europe: Experience from a UK
Research Study, Karl Dayson, Hao Quach, Finance Pour le Bien Commun, forthcoming, 2006.
partnerships to ensure that microcredit programmes are sustained with clients
paying only a portion of costs? 14
Structurally, microlender staff costs are high in countries where employers and
employees make significant contributions to the welfare state. In addition,
microlenders provide business development services due to weaknesses in existing
provision or to assist borrowers to navigate the complicated business registration
and tax regimes prevailing in many Western European countries. These services
have a cost and many lenders do not differentiate these costs from loan processing.
Moreover, interest rate caps in most countries mean that microlenders are unable to
price for risk and cover loan processing costs. And bars against lending for onward
borrowing limit microlender economies of scale.
At present, not a single microlender has achieved sustainability in Western Europe,
although it is a long-term objective for many lenders. Some experts wonder whether
sustainability, as it is defined in developing countries, is attainable in Western
Europe and whether subsidies of some sort are required indefinitely. Given this
scenario, research is looking at microlender efficiency, in order to enable lenders to
stream line costs and prove efficiency to public and private sector donors and
guarantors.15 Others are looking at how business development services should be
provided and the best way to ensure that these services are funded. 16 Social return
on investment is another topic receiving attention as microlenders seek to provide
information on the relative savings to state budgets of investing in microfinance as
compared to paying long term unemployment benefits. 17 And policy work is
addressing interest rate caps. In addition, the work on efficiency and social return on
investment is supporting the development and testing of analytical tools that can be
shared widely and can in future enhance both operational performance and
performance measurement.
There is a need to continue to focus research efforts in this area and to bring the
different strands of the discussion (conceptual, definitional, structural, organisational
and regulatory) together to develop a holistic view of the question.

Impact
Worldwide, microlenders and microfinance providers seem to have mastered
monitoring client numbers, repayment rates and portfolio performance. For both
theoretical and practical reasons, measuring impact on clients lives and livelihoods
has been undertaken with greater difficulty.
Information received by EMN as well as its on-going sector survey indicates that not
many formal evaluations of the quality of microlending and business development

14
First Microfinance Now BDS (Again?), Klaas Molenaar, Finance Pour le Bien Commun, forthcoming,
2006.
15
Are Community Development Finance Institutions Doing Too Much?, Karl Dayson, Presentation ISBE
Conference, November, 2005.
16
Microkredieten in Nederland, Een nog onontgonnen gebeid, kansen en uitdagingen voor banken en
starters, FACET BV for the Netherlands Ministry of Economic Affairs, 2006.
17
Social Return on Investment: Valuing What Matters, nef, 2000; WEETU Social Return on Investment
Report, WEETU, nef, forthcoming, 2006; Adie 2003 Rapport dEvaluation, Adie, France, 2004.
services are undertaken.18 In addition, of the research reports and evaluations that
EMN has identified so far, two look at the question of impact. 19
The limited research on programme quality and impact may mean that this type of
assessment is not taking place or that evaluation reports remain internal. Whilst
practitioners are good at measuring outputs, measuring programme quality and
impact is the next step and is crucial to ensuring achievement of goals,
improvement in client lives and accountability to donors. Measuring and attributing
programme impact to microlending activities, whilst challenging, can be achieved.
Impact measurement is a key area where researchers and practitioners can
collaborate in the design of practical research methods and tools.

The Role of Banking Institutions

Banking in Europe has a very long tradition. In many Western European countries
savings banks, credit unions, ethical and commercial banks play an important role in
microlending. In Spain, savings banks disburse microloans in collaboration with their
own foundations and non-governmental organisations. In Italy, ethical banks operate
through social actors. In Germany some regional and savings banks, with co-
guarantees from the European Investment Fund, are involved in microlending. In
Sweden an ethical bank has recently begun microlending. In France, commercial
banks have formed partnerships with microlenders and in the case of Frances
largest lender, make concessional loans for onward lending to microentrepreneurs.
The development of the sector in Europe can not be achieved without the
contribution of banks in terms of finance, lending techniques, coverage and scale.
There is a considerable amount of thinking and research about the role of the
banking sector as reflected in the number of research reports identified that treat
this subject.20 There are overviews of how banks and microlenders work together
and of what banks can learn from microlender techniques. There is also discussion of
how regulatory environments can induce banks to invest in or collaborate with
microlenders.
By contrast, non-formal methods of savings and credit as well as the on-going role of
pawn brokers appear to be receiving little research attention at present.

Conclusion

18
Business Advisory Service for New and Recently Established Micro Firms, Turku School of Economics
and Business Administration, Finland, 2004; Finnvera Oyj: Kansainvlinen arviointi (International
evaluation of Finnvera Oyj); Adie 2003 Rapport dEvaluation, Adie, France, 2004.
19
WEETU Social Impact Evaluation Report, WEETU, forthcoming 2006; Women and Microfinance: A
New Path for Development in Mediterranean Countries?, Fondazione Risorsa Donna, 2005; Money-go-
Round. Recycling Finance: Realising Potential, CDFA 2003.
20
Banks and Micro-lending: Support, Co-operation and Learning, Facet, IFF, 2000; Micro-credit as a
Model for Efficient Commercial Small scale Lending and its Application in Banks, Evers and Jung; 2000;
European Regulation for Socially Responsible Banks? Learning the lessons from the US American CRA,
C. Guene, E. Mayo, 2001; Banking and Social Cohesion: Alternative Responses to a Globalised Market,
C. Guene, E. Mayo, 2001. Las Entidades Sociales de Apoyo al Microcrdito: Su papel en la concesin de
microcrditos en Espaa, Foro Nantik Lum, 2005.
Research undertaken on the Western European microcredit sector falls into six
thematic areas: sector surveys, the regulatory and policy environment, at risk
groups, sustainability, programme quality and impact and the role of the banking
sector. Given the specificities of the Western European environment, thematic
priorities are and must continue to be related to reaching groups at risk of social and
economic exclusion and ensuring a supportive regulatory and policy environment.
Considerable effort is also needed to bring together the different strands of thinking
and applied work on concepts and definitions of sustainability as well as their
application in concrete terms. Impact does not appear to be receiving much
attention at present. The sector would benefit from development of theoretical
constructs and practical tools for measuring social and economic impact of its work.
Research conducted is primarily applied and is lead by researchers and microlender
practitioner networks, often working in collaboration. Practitioners participate in
research either directly or via their professional network organisations. At present
this model appears to be working well. It is building on the respective strengths of
each stakeholder and is having a practical impact in certain cases. In the case of
regulation and policy, research seems to be contributing to positive changes in the
environment for microenterprise and microlenders in some countries. Practitioners
are also using research findings on at risk groups to re-design or implement new
programme approaches and seek additional funding to do so.
Looking across Europe, however, country coverage is uneven. It should be of little
surprise that the greatest amount of research seems to be taking place in countries
with the greatest amount of microlending activity. The challenge will be to ensure
that the lessons learned are made available to organisations initiating lending in
countries with lower activity levels. Country level practitioner networks as well as
EMN have an important role to play in this respect.