European Investment Fund (EIF): EUR 180m of Loans for Microbusinesses Across Europe Under Progress Microfinance

After completing his 26-month military service, Andronikos (23) set up his own car wash business on his parent’s land. The land in Episkopi had been unused for a few years and even though he had thought of opening a carwash before, he did not have the means to buy the equipment needed. He went to the Co-operative Credit Society Kouriou to ask for a micro-loan of EUR 20 000 and weeks later was able to buy a brand new vehicle lift to get the business off the ground and is now washing around 60 cars per week. He currently employs two people and with plans to start washing larger vehicles including tourist buses, tractors and trucks, he will start looking for a new employee to handle the new vehicle lift in the next few months.

What is “micro”?

Microfinance is the provision of basic financial services to poor (low-income) people (who traditionally lack access to banking and related services) (CGAP Definition, Consultative Group to Assist the Poor).

Microcredit is defined by the European Commission as a loan or lease under EUR 25,000 to support the development of self-employment and micro-enterprises. It has a double impact: an economic impact as it allows the creation of income generating activities and a social impact as it contributes to the financial inclusion and therefore to the social inclusion of individuals.

A microenterprise is any enterprise with fewer than 10 employees and a turnover below EUR 2m (as defined in the Commission Recommendation 2003/361/EC of 6 May 2003, as amended).

Source: EIF

Andronikos is one of many micro-entrepreneurs across the European Union who had business ideas but didn’t have the cash to turn these ideas into a reality. The funding issue is not just a problem for micro-borrowers but also for microfinance providers. According to a European Microfinance Network (EMN) study, ‘the most pressing problem for the microfinance providers is the lack of access to long-term funding’. Progress Microfinance, an EU initiative launched in 2010 helps to bring a solution to this pressing problem. By working with Microfinance Intermediaries to provide support for microbusinesses, Progress Microfinance has helped to remove barriers previously preventing entrepreneurs like Andronikos from accessing finance.

EIF Took Kit for SMEs: The EIF focuses on the whole range of micro to medium-sized enterprises, starting from the pre-seed, seed-, and start-up-phase (technology transfer, business angel financing, microfinance, early stage VC) to the growth and development segment (formal VC funds, mezzanine funds, portfolio guarantees/credit enhancement).
Source: European Small Business Finance Outlook, May 2012 (EIF)

Progress Microfinance was set up in November 2010 with EUR 203 million of funding from the European Commission and the European Investment Bank. Targeting all EU-27 Member States, Progress Microfinance helps to increase access to finance for people who have lost or are at risk of losing their job or have difficulties entering or re-entering the labour market. Examples of potential micro-entrepreneurs targeted by Progress Microfinance include female entrepreneurs, young entrepreneurs, entrepreneurs belonging to a minority group, entrepreneurs with a disability and sole traders.

The European Investment Fund (EIF) acts as Management Company for the EU Microfinance Platform – European Progress Microfinance Fund, the main vehicle through which Progress Microfinance is implemented. Progress Microfinance does not provide direct financing to micro-entrepreneurs or individuals but loans of less than EUR 25,000 are provided by selected intermediaries participating in the facility.

“Microfinance has traditionally been a tool for fighting poverty in developing countries.”

Eligible intermediaries under Progress Microfinance are any public and private institutions across the EU-27 Member States that provide micro-credits and/or guarantees on micro-credits to individuals or micro-enterprises established in the EU Member States. These could include financial institutions, microfinance institutions, guarantee institutions and other institutions authorised to provide microfinance loans/guarantees. The selection of intermediaries involves looking at their financial standing and capacity, operational capabilities, non-bank status and strategic planning to reach financial sustainability.

Microfinance has traditionally been a tool for fighting poverty in developing countries. However there is a real need for microfinance resources also in the EU and Progress Microfinance aims to meet those needs. A recent EIF working paper on microfinance in Europe provided a comprehensive analysis of the market, concluding that the microfinance market is still immature and fragmented. At the same time it also highlighted its growing importance as a market segment with a potential to help to reduce unemployment while fostering financial and social inclusion. Microfinance fits hand in glove with the EU 2020 objective of targeting social inclusion. The example of Andronikos in Cyprus shows how young entrepreneurs with visions but without finance can eventually become economically self-sufficient through targeted microfinance support. Having sufficient finance to make a business work creates jobs, creates futures and creates important structures within an inclusive society.

Overall situation of European micro-firms compared to other enterprise size classes: When looking at the business climate of micro-enterprises, the EU Craft and SME barometer shows that micro-enterprises on balance estimated their overall situation substantially less favourable than small or medium sized firms in the second half of 2011.
Source: European Small Business Finance Outlook, May 2012 (EIF) – UEAPME Study Unit (2012)

Less than two years after the launch of Progress Microfinance, 20 microfinance intermediaries have entered into funding or guarantee agreements with EIF which over the next 2-3 years are expected to generate more than EUR 180 million in new micro-credits in15 countries across the European Union. The selection of intermediaries will continue until 2016 with a target to generate EUR 500 million of new micro-credits across EU-27 by 2019.

Banco di Credito Cooperativo Mediocrati (BCCM) is the 20th and most recent transaction signed under Progress Microfinance since its inception in 2010. To date, commitments of close to EUR 80 million under Progress Microfinance have been signed for microfinance providers across the EU including in Belgium, Bulgaria, Cyprus, France, Greece, Lithuania, Poland, Portugal, Romania, Spain and The Netherlands.

Financial support under Progress is often complemented by other forms of microfinance support. Through JASMINE technical assistance funding, MFIs can improve visibility and quality of services and products offered. The EIF signed a EUR 3 million senior loan agreement with ‘Mikrofond’ aiming at supporting micro-enterprises in Bulgaria and with ‘microStart’, Belgium, a micro-credit pilot programme based in the Brussels neighbourhoods most affected by unemployment. These two microfinance institutions both benefited from Progress Microfinance funding instruments and from JASMINE technical assistance.

“… commitments of close to EUR 80 million under Progress Microfinance have been signed for microfinance providers across the EU …”

In addition to Progress, EIF provides Technical Assistance to selected microfinance institutions and micro-credit providers active in the European Union to increase the quality of their internal processes. JASMINE Technical Assistance services consist of an institutional assessment or a rating exercise performed by Microfinanza Rating or Planet Rating and Capacity building in the form of tailor-made trainings to the staff and management of the selected MFI. Trainings are delivered by experts from the Microfinance Centre, a network based in Poland and active in Asia, Africa and Europe on the other hand. The trainings focus on the weaknesses observed during the assessment / rating reports.

The Technical Assistance is financed by the European Commission, Directorate General for Regional Policy and it is free of charge to the beneficiary institutions. Currently 25 non-bank micro-credit providers were selected to receive an assessment, a rating and up to twelve days of advisory support per year under JASMINE.

The JASMINE Initiative acts as a doorstep to potential funding at a second stage under EIF-managed microfinance mandates, helping non-bank microfinance institutions to scale up their operations and maximise the impact of microfinance products on micro-enterprises development and unemployment reduction within the European Union. Good examples of these synergies are Permicro in Italy, the first EIF direct equity investment into a non-bank MFI, and Qredits in The Netherlands which both signed a guarantee agreement and loan deal with the EIF.

Background information:

The EIF at a glance:

EIF’s central mission is to supportEurope’s small and medium-sized businesses (SMEs) by helping them to access finance.  EIF designs and develops venture capital and guarantees instruments which specifically target this market segment. In this role, EIF fosters EU objectives in support of innovation, research and development, entrepreneurship, growth, and employment. The EIF total net commitments to private equity funds amounted to over EUR 6bn at end 2011. With investments in over 370 funds, the EIF is a leading player in European venture due to the scale and the scope of its investments, especially in high-tech and early-stage segments. The EIF guarantees loan portfolio totalled over EUR 4.4bn in close to 220 operations at end 2011, positioning it as a major European SME guarantees actor and a leading micro-finance guarantor.