MICROCREDIT AND ECONOMIC DEVELOPMENT: ENTREPRENEURSHIP OR SELF-EMPLOYMENT? Joana Vieira dos Reis Robalo Master of Science in Business Administration Supervisor: Prof. Doutora Sofia Santos, Auxiliar Professor., ISCTE Business School, Departament of Marketing, Operations and General Management January 2015
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MICROCREDIT AND ECONOMIC DEVELOPMENT:
ENTREPRENEURSHIP OR SELF-EMPLOYMENT?
Joana Vieira dos Reis Robalo
Master of Science in Business Administration
Supervisor:
Prof. Doutora Sofia Santos, Auxiliar Professor., ISCTE Business School, Departament of
Marketing, Operations and General Management
January 2015
Microcredit and Economic Development: Entrepreneurship or Self-employment?
II
Microcredit and Economic Development: Entrepreneurship or Self-employment?
III
Abstract
The present thesis aims to answer the central research question “Can microcredit be
considered as an entrepreneurial activity capable of creating innovative and value-added
businesses rather than a self-employment movement with few effects on economic
development?”. Considering the quantitative method, three hypothesis have been tested:
H1) The majority of microcredit applicants are unemployed individuals; H2) Microcredit
applicants tend to apply the money in businesses with innovative features and H3) Micro
entrepreneurs create only their own job and not for others. Regarding the qualitative
approach, two sub questions have been placed: SQ1) In what conditions and why do
people apply to microcredit programs and SQ2) In what sectors do the microcredit
applicants invest?
Although microcredit and microfinance industry is young in Europe and there is still a
long path to cover, the research conducted showed that microcredit is a promising sector
that is growing and evolving rapidly. If in previous years microcredit and microfinance
projects were mostly strict to promote self-employment through traditional activities,
nowadays this reality is changing and the type of business created is increasingly adopting
value-added features.
This research concludes that although microcredit does not nurture highly innovative
businesses, it can in fact be considered as an entrepreneurial activity capable of creating
value-added businesses that can have a role on job creation as well as in lessening of
social exclusion, positively affecting economic development.
Key words: Microcredit; Microfinance; Entrepreneurship; Economic Development
JEL Classification System: G210, O190
Microcredit and Economic Development: Entrepreneurship or Self-employment?
IV
Resumo
A presente tese tem como objectivo responder à questão “Pode o microcrédito ser
considerado como uma actividade empreendedora capaz de criar negócios inovadores e
de valor acrescentado em vez de um movimento de auto-emprego com poucos efeitos no
desenvolvimento económico?”. Considerando o método quantitativo, três hipóteses
foram testadas: H1) A maioria dos candidatos ao microcrédito são desempregados; H2)
Os candidatos ao microcrédito tendem a aplicar o dinheiro em negócios com
características pouco inovadoras e H3) Os microempreendedores criam apenas o seu
próprio posto de trabalho e não para outros. Relativamente ao método qualitativo, duas
sub-questões foram colocadas: SQ1) Em que condições e porque é que as pessoas
recorrem ao microcrédito? e SQ2) Em que sectores é que os candidatos ao microcrédito
investem?
Apesar da indústria do microcrédito e da microfinança ser relativamente recente na
Europa, a pesquisa conduzida mostrou que o microcrédito é um sector promissor que tem
vindo a evoluir rapidamente. Se anteriormente os projectos de microcrédito e a
microfinança eram quase restritos à promoção do auto-emprego através de criação de
actividades tradicionais, hoje em dia esta realidade está a mudar.
Esta pesquisa conclui que, apesar do microcrédito não fomentar negócios altamente
tecnológicos, pode de facto ser considerado uma activade empreendedora capaz de criar
negócios com valor acrescentado que podem desempenhar um papel na criação de
emprego bem como na diminuição da exclusão social, afectando positivamente o
desenvolvimento económico.
Palavras chave: Microcrédito; Microfinança; Empreendedorismo; Desenvolvimento
Económico
Classificações do JEL: G210, O190
Microcredit and Economic Development: Entrepreneurship or Self-employment?
V
Acknowledgements
“No duty is more urgent than that of returning thanks”
— James Allen
The development and conclusion of this thesis would not be possible without the support,
accessibility and contribution of some people. Sofia Santos - my supervisor, Ana
Mendonça and Sara Silva from ANDC, Amílcar Martins and António Curto from
CASES, António Oliveira from BES, Joana Lopes from AUDAX and lastly - but
defintely not the least, Tânia Sousa from Millennium BCP. To them, I would like to
express my deep gratitude and appreciation for their involvement.
At the same time, the encouragement and inspiration given by my family and friends
throughout this period was essential to the culmination of this thesis. Having them
accompanying the steps of this journey was of an incredible value and for that I am
grateful.
Thank you.
Microcredit and Economic Development: Entrepreneurship or Self-employment?
VI
Contents
Abstract ........................................................................................................................... III
Resumo ............................................................................................................................. V
Acknowledgements .......................................................................................................... V
I. List of Tables ........................................................................................................ VIII
II. List of Figures ....................................................................................................... VIII
III. List of acronyms ................................................................................................ VIII
Microcredit and Economic Development: Entrepreneurship or Self-employment?
13
and sharing good practices and also collecting statistical data. In 1989, the Commission
adopted a Communication on “Business in Social Economy Sector” and since then
several projects and activities have been done to promote the sector. In 2000 was founded
the Social Economy Europe, an EU representative institution for social economy. It aims
to “promote the social and economic input of the social economy enterprises and
organisations, to promote the role and values of social economy actors in Europe and to
reinforce the political and legal recognition of the social economy and of cooperatives,
mutual societies, associations and foundations at EU level5.” Also, as SME, social
economy enterprises benefit as well from Community programs, such as the
Competitiveness and Innovation Programme6 and other funds specially targeted to
regional development and research programmes.
Following these programmes, the European Commission settled the Entrepreneurship
Action Plan 2020, which aims to foster Europe’s entrepreneurial activity and boost
economic development. In the same ambit, the European Commission also took part in
the European Microfinance Network, promoting microcredit and microfinance across
Europe.
2.6 Entrepreneurship Action Plan 2020 and European Microfinance Network
As Congregado (2010) mentions, entrepreneurship and self-employment can contribute
to reduce unemployment by two channels: through the direct effect of an individual who
is unemployed becoming self-employed and through the indirect effect of an eventual
extra job creation by entrepreneurs in running enterprises that require outside job.
In the current economic crisis, problems related to the low rates of company’s creation
and company’s growth are a reality in Europe. According to the Flash Eurobarometer 354
(2012), 19% of EU respondents have started a business or taken over one and 4% is
planning to start one. This means that 77% of the respondents have never started a
business, taken over one nor intend to. In this line, 58% of the EU respondents say they
would prefer to work as an employee rather than being self-employed and more than a
5 http://www.socialeconomy.eu.org/spip.php?rubrique11, accessed 07/12/2013 6 CIP is a legal basis for all Community action relating to competitiveness and innovation. It covers
entrepreneurship, SME policy, industrial competitiveness, innovation, ICT development and use,
environmental technologies and intelligent energy.
Microcredit and Economic Development: Entrepreneurship or Self-employment?
14
fifth of EU respondents do not see self-employment as a feasible alternative. Regarding
the motives, the most appointed are the lack of capital or financial resources (21%), the
current economic climate (12%), the lack of skills to be self-employed (8%), the lack of
a business idea (7%), the difficulty in reconciling self-employment with family
commitments (6%) and finally the risk of failure and its consequences (5%).
Despite this scenario, new enterprises have been seen as a crucial ingredient in creating a
job-rich recovery in Europe, therefore it is necessary to empower Europe's entrepreneurs
and stimulate them to be more adaptable, creative and to have greater impact in a
globalised competition. As it was stated before, entrepreneurship can be motivated by
factors such as the taxation policy, industrial policy, sources of finance, availability of
investment and market opportunities, among others. Following this reasoning, in order to
bring Europe to the desired levels of employment and foster economic development, the
European Commission is creating a series of measures that aim to boost investment and
promote entrepreneurship, reinvigorating Europe’s entrepreneurs and pushing
entrepreneurial activity. These measures are defined on the Entrepreneurship Action Plan
2020 – Reigniting the Entrepreneurial Spirit in Europe and intend to “restore confidence,
creating the best possible environment for entrepreneurs by putting them at the heart of
business policy and practice, revolutionising the culture of entrepreneurship”. Thus, this
plan is based on three action pillars7 that intend to set out the foundations for future
growth and competitiveness. According to the European Commission, the plan is a
“blueprint for decisive action to unleash Europe's entrepreneurial potential, to remove
existing obstacles and to revolutionise the culture of entrepreneurship in Europe”. The
main changes that will happen in this panorama will be the inclusion of entrepreneurial
education and experience in school’s curricula, a reduction of the time and bureaucracy
necessary to start up a business, obtain the necessary licenses and permits and complete
bankruptcy procedures, and finally the creation of a mentoring, advice and support
program for potential entrepreneurs.
As it was said before, the lack of proper sources of financing translates one of the main
restraints to entrepreneurship in Europe. In order to surpass this strain and improve the
7 The action pillars of the Entrepreneurship Action Plan 2020 are: 1 – Entrepreneurial education and training
to support growth and business creation; 2 – Create an environment where entrepreneurs can flourish and
grow and 3 – Role models and reaching out to specific groups.
Microcredit and Economic Development: Entrepreneurship or Self-employment?
15
access to finance, the European Commission also plays an important role in the EMN
(European Microfinance Network), a non-profit association that aims to promote
microfinance, self-employment and microenterprises development, improving the
regulatory framework at European Union and Member State levels. The EMN was
launched in 2003 to bring together microfinance practitioners and people involved in
microfinance activities all over Europe and it had 22 members. Nowadays it has 87 active
members and partners located in 22 European countries. These members and partners are
practitioners, researchers and financial institutions. EMN has become a major actor in the
microfinance field in Western Europe and the creation of this network has proved to be
an essential step in the promotion of microfinance in the European Union, assisting the
fight against unemployment and social exclusion through the development of micro,
small and medium-sized enterprises.
2.7 Micro, Small and Medium-Sized Enterprises
According to Günter Verheugen (2005), the definition of Micro, Small and Medium-
Sized Enterprises (SME) represents a major step towards an improved business
environment for SME and aims to promote entrepreneurship, investments and growth.
The European Commission (EU recommendation 2003/361) defines SME according to
the number of employees and to either the turnover or the balance sheet total. The
distinction is made through the following parameters8:
Or
Company category Employees Turnover Balance sheet total
Medium-sized < 250 ≤ € 50 m ≤ € 43 m
Small < 50 ≤ € 10 m ≤ € 10 m
Micro < 10 ≤ € 2 m ≤ € 2 m
Table 1 - Categorization of SME
Source: European Commission, 2003
To Verheugen, SME are the “engine of the European economy and are an essential
source of jobs, create entrepreneurial spirit and innovation in the EU and are thus crucial
8 These values apply only to the figures of individual firms. Firms that are within a group may need to
include employee/turnover/balance sheet data from that grouping too.
Microcredit and Economic Development: Entrepreneurship or Self-employment?
16
for fostering competiveness and employment9”. As Figure 4 illustrates, SME’s in EU25
represent almost 99% of all enterprises, providing around 75 million jobs (SME User
Guide, 2012). According to the European Commission (2011)10, microenterprises
represent 91% of the total enterprises in EU25, and the average company has five
workers. Despite the micro size of these companies, microenterprises account for 53% of
all jobs in EU25, having an enormous importance to European economy. One third of
these start-ups are launched by people who are unemployed (Relatório de Execução do
Instrumento de Microfinanciamento Progress, 201311).
Figure 4 - Weight of the categories enterprises in EU25
Source: European Commission, 2011
According to the European Commission (2011), microenterprises face particular
problems due to their small size and limited resources, such as finding the finance to get
the business going. To the European Investment Fund, the ability of a financial system to
reach such small entities is crucial for the achievement of general socio-economic
improvement. Microcredit and microfinance practices can be seen as a mechanism to
reach such small entities.
2.8 Microcredit and microfinance
Apart from self-employment and entrepreneurship, a concept that is becoming more and
more explored is microcredit. According to the Consultative Group to Assist the Poor
(CGAP), microfinance is the “provision of basic financial services to poor (low income)
people, who traditionally lack access to banking and related services12”. To the European
9 http://ec.europa.eu/enterprise/policies/sme/files/sme_definition/sme_user_guide_en.pdf, accessed at
enterprises/index_en.htm, accessed at 09/12/2013 11 ec.europa.eu/social/BlobServlet?docId=12682&langId=pt, , accessed at 09/12/2013 12 http://www.cgap.org/about/faq/what-microfinance, accessed at 08/12/2013
86% 88% 90% 92% 94% 96% 98% 100%
Micro SME Big
Microcredit and Economic Development: Entrepreneurship or Self-employment?
17
Commission (2009), the meaning of microcredit sets apart from the poverty idea implied
by CGAP and is defined as a loan under 25.000 euros given to support the development
of self-employment and microenterprise that has both economic and social impacts. At
an economic level, it aims to create activities that generate income, creating jobs and
developing microenterprises and regions, and at a social level it ambitions to reduce social
exclusion and also the financial inclusion of individuals. Besides microcredit, another
important and broader notion is microfinance, defined by the United Nations
Environment Program (UNEP) as referring to “loans, savings, insurance, transfer
services, microcredit loans and other financial products targeted at low-income
clients13”. These concepts differ from commercial banking since they relate to small loan
sizes, quick and easy access, non-traditional credit worthiness evaluation, and alternative
collateral requirements.
The first documented experience related to microcredit goes back to 1846, when, in the
south of Germany, the local farmers became tied to loan sharks after a rigorous winter.
As a solution, the German Mayor Raiffensem created the Bread Association, in which he
gave flour to the farmers so that they could make bread, being able to pay their debts with
the profit obtained from their sales. Since then, many other isolated actions similar to
microcredit have been done worldwide, but the stepping-stone to the development and
diffusion of microcredit was set by Muhammad Yunus in 1976. Like Raiffensem in
Germany, Yunus in Bangladesh noticed that several people were asking credit to the loan
sharks in order to run their own businesses, and despite the high interest rates charged,
they were able to pay their debts. Yunus started then to lend his own money to some
people who wanted to develop productive activities, and after numerous success cases,
he founded in 1983 the first microcredit institution – the Grameen Bank. His work led
him to the Nobel Peace Prize in 2006 in the field of Humanitarian Work, recognizing his
efforts to create economic and social development from below14.
With the success in Bangladesh, microcredit quickly expanded to other parts of the world,
especially to third world countries, being appointed as a popular tool for economic and
social development (Eunice, 2011).
13 http://capacity4dev.ec.europa.eu/unep/topic/microfinance, accessed at 08/12/2013 14 http://www.nobelprize.org/nobel_prizes/peace/laureates/2006/yunus-facts.html
Microcredit and Economic Development: Entrepreneurship or Self-employment?
18
Although “it was long thought that microfinance was limited to developing countries”
(Guichandut, 2006:55), microcredit has been more recently extending to developed
countries, namely in the European Union. While in developing countries the aim of
microcredit is to reduce poverty, promote self-employment and improve the
empowerment of socially excluded persons, in industrialized countries the goal is firstly
encouraging self-employment and entrepreneurship (Brana, 2011).
2.8.1 Microfinance in Europe
According to the European Investment Fund (2012), microfinance is long recognised by
European policy-makers as an instrument that not only boosts entrepreneurship and
competitiveness, but also promotes social inclusion. However, considering the legal and
political environments, the development of the European microfinance sector is still at an
early phase regarding its scale and broader impact, and faces a continuing gap between
supply and demand, as it will be explained in the next section – Microfinance Industry.
Considering the Progress Microfinance15 Report (2010), microfinance’s targets
individuals who lost their job or are at risk of losing it, individuals facing difficulties
entering the labour market, people at risk of social exclusion as well as vulnerable people
with difficulties accessing the credit market. It also targets microenterprises, especially
those in the social economy sector which employ individuals on the previous situations.
As in developing countries, microfinance in Europe started with social purposes.
However, unlike developing countries, microfinance in Europe has not moved forward to
a more professionalized business approach. The European Microfinance Network (2007)
presents some assumptions to explain why European microfinance schemes have not
managed to overcome obstacles and reach financial sustainability, namely the fact that
micro entrepreneurs have more options to finance their projects compared to
entrepreneurs in developing countries and financial markets are well developed, with
banks reaching the majority of the population. Nevertheless, over the past years, the
European Commission has been promoting several actions in order to support
microfinance (EIF, 2012/13), namely:
15 The European Progress Microfinance Facility is an initiative in which the European Commission and the
European Investment Bank have made available EUR 205 million of funding to microfinance services.
Microcredit and Economic Development: Entrepreneurship or Self-employment?
19
Risk protection to financial institutions, namely banks, guarantee institutions and
counter-guarantee institutions, for new micro-credit portfolios, under the Growth
and Employment Initiative (2000), the Multi-Annual Programme for the promotion
of enterprise and entrepreneurship (2005) and the Competitiveness and Innovation
Framework Programme (2013), all managed by the EIF;
The Joint European Resources for Micro and Medium Enterprises (“JEREMIE”)
scheme, managed by the EIF on behalf of the European Union (2007-2013), aiming
to improve the access to finance, including micro-credit using European Structural
Funds;
The European initiative for the development of microcredit in support of growth
and employment (2007), a broader EU policy move to use public funds to contribute
to the development and long-term sustainability of the sector.
Despite the growing importance given to microfinance, there are still several criticisms
pointed out to it, namely the fact that most of its institutions are dependent on subsidies
and are unable to operate profitably enough to cover its costs (Christen & Rosenberg,
2000). In fact, according to the Deutsche Bank (2007), only 2% of all the MFIs worldwide
are financially sustainable, and in the most cases, these are bigger, established, regulated
and relatively well-known MFIs.
Also, to Banerjee and Newman (1993), production organized within a firm is often more
efficient that production organized across small autonomous individuals, due to
economies of scale and specialization effects and to Matsuyama (2007), microcredit
improves micro-borrowers access to capital and technology, but does not seem to allow
them to reach optimal capital scale and technology levels.
Finally, there are authors such as Ahlin (2011) who defend that microfinance may rely on
poor economies to survive, in the sense that microcredit may need a vibrant informal
economy, a situation that tends to grow rarer as a country develops. Besley and Coate
(1995) also believed that microcredit is at best an anti-poverty tool and not a stepping-
stone to broader development.
Microcredit and Economic Development: Entrepreneurship or Self-employment?
20
As one can see, there are different opinions regarding microcredit and microfinance and
its practical impacts: while some believe microcredit and microfinance can represent a
possible answer to foster economic development in Europe, others doubt is outcomes,
especially considering the European panorama.
2.9 Summary
This section focused on the important concepts and existing ideas regarding microcredit
and entrepreneurship and intended to set a basis for further research. The main ideas to
retain are the following:
The high levels of unemployment in Europe are a barrier to the economic
development and to economic growth. According to Schumpeter (1911), economic
development is supported by technological innovation, by the credit for new
investments and by the entrepreneur. Throughout time there have been several
definitions of entrepreneur and most of them repeat some attributes such as the fact
of being risk-taker, innovator and creator of economic value. Self-employment sets
apart from entrepreneurship due to the fact that most of the self-employed people
do not create innovative businesses.
Connecting unemployment with self-employment and entrepreneurship comes
from Oxenfeldt (1943) and was later developed by Mandelman (2009), who
defends that the nature of self-employment can have two perspectives, and both
unemployed and experienced workers have probabilities to become self-employed.
Regarding the casual relation between self-employment and entrepreneurship with
unemployment, authors such as Blau (1987), Evans (1989) and Jovanovic (1989)
defined the “refugee effect” and the “entrepreneurial effect”, which have an
opposite causal link between entrepreneurship and employment. Although several
authors defend the positive effects of entrepreneurship and self-employment,
authors such as Thurik (2008), Carree (2008) and Millán & Román (2010) doubt
its practical outcomes.
Despite these negative ideas, the European Commission strongly believes that
entrepreneurship and self-employment are crucial for an European recovery and
therefore is trying to promote them, namely trough the creation of the
Microcredit and Economic Development: Entrepreneurship or Self-employment?
21
Entrepreneurship Action Plan 2020 and the European Microfinance Network. By
doing so, the expansion of microcredit in Europe is being promoted. According to
the European Commission (2009), microcredit is a loan under 25.000 euros given
to support the development of self-employment and microenterprises. Regardless of
the growing importance given to microfinance, authors such as Besley & Coate
(1995), Christen & Rosenberg, (2000), Matsuyama (2007) and Ahlin (2011) point
out several criticisms to it.
Although there are some authors that have studied the impacts of entrepreneurship and
self-employment on the employment level, the literature fails in making the direct
connection between microcredit and unemployment. The major topics of the Literature
Review are briefly schematized in the next page and the following sections will explore
the mentioned gap between microcredit and unemployment.
Microcredit and Economic Development: Entrepreneurship or Self-employment?
22
2. Literature Review’s Conceptual Framework
The unemployed are more
likely to become self-
employed. vs
Experienced and best-
salaried workers are more
likely to start their own
business.
Nature Casual Relation Practical Outcomes
Entrepreneurship Action Plan 2020 and European Microfinance Network
Development of measures that promote entrepreneurship and fight unemployment
Mandelman (2009)
Blau (1987)
Evans & Jovanovic (1989)
Refugee effect
Entrepreneurial effect
Does not necessarily
stimulate economic growth;
Temporary effects;
Does not automatically
imply human development.
Unemployment Self-employment
Thurik (2008) Carree et al. (2008)
Millán & Román (2010)
Risk-Taker
Innovator
Creator of Economic Value
Theory of Economic Development
Schumpeter (1911)
High levels of unemployment in Europe
Economic development and growth
Technological
Innovation
Credit for new
investments
Entrepreneurship
Self-employment No Value Added Features
Baumol (2008) & Shane (2009)
Effects on Unemployment
VS Motivations
Tushman & Anderson (1986), Eckhardt (2003)
Economic
Psychological
Social
Expansion of microcredit and
microfinance in Europe
Social Entrepreneurship and Social Economy
Microcredit and Economic Development: Entrepreneurship or Self-employment?
23
“This is not charity. This is business: business with a social
objective, which is to help people get out of poverty”
—Muhammad Yunus
“This is not charity. This is business: business with a social
objective, which is to help people get out of poverty”
—Muhammad Yunus
Microcredit and Economic Development: Entrepreneurship or Self-employment?
24
3. Microfinance Industry
The microfinance industry is now quite diverse in terms of organizational types, with
Microfinance Institutions (MFIs) organized as Non-Governmental Organizations
(NGOs), banks, credit cooperatives and nonbank financial institutions (Hartarska, 2005).
The majority of the MFIs start as NGOs and finance their business via donations and/or
public money, and over time, they develop to formal financial institutions and regulated
entities.
According to the European Microfinance Network, the estimations are that exist 10.000
microfinance institutions worldwide, and among these, 2.000 report to the Microfinance
Information Exchange (MIX). The MIX is a non-profit organization that provides
performance information on microfinance institutions, funders, networks and service
providers dedicated to serving the financial sector needs for low-income clients. MIX
accomplishes its mission through a variety of platforms, being the most important the Mix
Market, in which instant access to financial and social performance of the MFIs is
provided. Considering data from the EIF, in 2008 the microfinance institutions that
reported to the MIX had 70 million borrowers and an equivalent number of savers. In
Asia, Africa, Latin America and Middle East, the majority of the clientele are women,
accounting for 98 percent of borrowers, while in the Eastern Europe and Central Asia,
women represent 47 percent of the borrowers. The evolution of the borrowings can be
seen in the following graphics:
Figure 5 - Evolution of the microcredit borrowings
Source: MixMarket, 2013
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
2009 2010 2011 2012
Borrowings
Africa East Asia and the Pacific
Eastern Europe and Central Asia Latin America and the Caribbean
Middle East and North Africa South Asia
Microcredit and Economic Development: Entrepreneurship or Self-employment?
25
Figure 6 - Evolution of the average loan per borrower in USD
Source: MixMarket, 2013
4.1 Microfinance in Europe
The microfinance industry is young in Europe and represents a growing sector with a
considerable potential (EMN, 2013). Despite its early life, the microfinance industry is
quite heterogeneous in terms of organizational types, due to the disparity of the legal and
institutional frameworks in the member states and the diversity of microcredit providers.
Credit organizations can be divided into two groups, based on the importance given to
microfinance services: those whose primary activity is granting microcredit accounts for
35% of all the participants, while the remaining organizations process microfinance as a
side activity. As a consequence, lending practices in microcredit vary considerably
depending on the type of institution providing micro loans, its legal setup, the
environment in which it operates and its own ability to apply sound and efficient
management procedures. Microfinance institutions in Europe are organized as showed in
the following graphic:
0
2000
4000
6000
8000
10000
2009 2010 2011 2012 2013
Average loan per borrower (USD)
Africa East Asia and the Pacific
Eastern Europe and Central Asia Latin America and the Caribbean
Middle East and North Africa South Asia
Microcredit and Economic Development: Entrepreneurship or Self-employment?
26
Figure 7 - Microfinance Institutions in Europe
Source: European Investment Fund, 2010
According to the EIF (2010), in the EU-15, MFIs are mostly characterised by having
“small size, very low or inexistence of profitability, very limited access to external sources
of funding, social lending activity mainly targeting disadvantaged groups,
unstandardized operational procedures16”. Also, as it was stated in the previous chapter,
many microfinance institutions heavily depend on subsidies to cover its costs.
Microfinance in Europe presents a dichotomy between Western and Central/Eastern
Europe namely in terms of intermediary profile, target beneficiaries and loan size (EIF,
2012). In Western European countries, microfinance has a strong focus on social
inclusion and therefore pays limited attention to profitability, while in Eastern Europe
there is a large presence of commercial intermediaries. The global microcredit demand in
the European Union reaches the 700.000 new loans, with a global value of 6.296 million
euros, and an average loan of 9000 euros.
In 2005, Europe had the following institutions providing microfinance services:
16 http://www.eif.org/news_centre/publications/EIF_WP_2009_001_Microfinance.pdf, accessed at
08/12/2013
28%
26%17%
28%
NGO Foundations Public Institutions Banks, Saving Banks and other Credit Institutions
Microcredit and Economic Development: Entrepreneurship or Self-employment?
27
Figure 8 - Microfinance Institutions in Europe
Source : EMN, 2005
As it was stated before, microfinance is a young and heterogeneous sector in Europe,
especially with regards to the diversity of institutional models, lending approaches and
regulatory frameworks (EMN, 2013). As lending practices vary significantly, the
European Commission identified as an important element to promote best practices in the
sector the development of a European Code of Good Conduct for Microcredit Provision.
This code intends to set a high bar for microfinance operations in Europe in line with
international policies and worldwide development of the sector and aims to benefit the
microfinance sector at large, including its funders, investors, customers, owners,
regulators and partner organizations. The code is divided into five sections: customer and
investor relations, governance, reporting standards, management information and risk
management, and its adoption is purely voluntary and is not expected to disrupt any
legislative requirements in any of the EU member countries (EMN, 2013).
Microcredit and Economic Development: Entrepreneurship or Self-employment?
28
The European Commission have been developing plenty of programmes in the field of
microfinance and microcredit, namely CIP, EPPA, JASMINE, JEREMIE and EPMF
(EMN, 2013):
The Competitiveness and Innovation Framework Programme (CIP) has several
schemes to facilitate access to loans and equity finance for SME where market
gaps have been identified. They cover different needs depending on the stage of
development of the small and medium sized enterprises;
The European Parliament Preparatory Action (EPPA) aims to foster the
development of microcredit in Europe on a sustainable basis, complementing
other European Investment Fund and European Commission’s initiatives in the
microfinance sector;
The Joint Action to Support Microfinance Institutions (JASMINE) was a pilot
initiative launched in 2008 by the European Commission, Directorate General for
Regional Policy, the European Investment Bank Group and the European
Parliament, helping non-bank microfinance institutions to scale up their
operations and maximise the impact of microfinance products on microenterprises
development and unemployment reduction within the European Union;
JEREMIE is a joint initiative developed by the European Commission in co-
operation with the European Investment Bank Group and other financial
institutions in order to make cohesion policy more efficient and sustainable.
JEREMIE offers EU Member States the opportunity to use part of their EU
Structural Funds to finance small and medium-sized enterprises by means of
equity, loans or guarantees, through a revolving Holding Fund acting as an
umbrella fund;
The European Progress Microfinance Facility (EPMF) provides covered
guarantees partially casing portfolios of micro-credits or of guarantees on micro-
credits to selected intermediaries authorised to provide microfinance instruments.
Despite the support from the European Commission in recent years to the microfinance
sector through these programmes, there is still a need to invest in capacity building and
refinancing of MFI’s in Europe, allowing them to improve their institutional capacities
and providing them with access to sustainable funding sources (EMN, 2013). In fact, as
it was mentioned by several European Institutions’ representatives in the 11th EMN
Microcredit and Economic Development: Entrepreneurship or Self-employment?
29
Annual Conference, MFI’s currently have a limited capacity to meet growing demand for
financial and coaching services from new entrepreneurs, which makes the provision of
economic support for business development services a priority.
4.2 Microfinance in Portugal
Microcredit as an instrument of social inclusion and of support to job creation was first
introduced in Portugal by Associação Nacional de Direito ao Crédito (ANDC) in 1999.
ANDC is a non-profit association founded in 1998 and was the pioneer in the
development of microcredit in Portugal. To do so, a partnership between three entities of
three different sectors was established: ANCD, from the social economy sector;
Millennium-BCP, from the private sector, and finally the Instituto de Emprego e
Formação Profissional (IEFP), from the public sector. Until 2005, Millennium-BCP had
an exclusive partnership with ANDC, but since then the range of the association had
become broader and is currently working with other banks, namely the Caixa Geral de
Depósitos (GDD) and Banco Espíirito Santo. Montepio and BPI are other banks that also
provide microfinance services.
Apart from banks, CASES (Cooperativa António Sérgio para a Economia Social) is
another entity that offers services related with microcredit and microfinance. Together
with IEFP, CASES is responsible by the National Microcredit Plan, which is a subsidized
credit line in the ambit of Programa de Apoio ao Empreendedorismo e à Criação do
Próprio Emprego, which intends to support of the creation of SME. The projects within
the National Microcredit Plan can benefit of a technical support from its creation to its
consolidation, during the first two years. The technical support activities consist on the
accompaniment of the approved project, formation and consulting in the management or
viability of the project. These activities are assured by representative entities from the
social economy sector that work with CASES or by non-profit entities from the private
sector or local authorities accredited by IEFP. IEFP, in partnership with CGD, Sociedade
de Garantia Mútua (SGM) and Sociedade de Investimento (SPGM), have two credit lines:
MICROINVEST and INVEST +. The main characteristics of these two lines can be seen
in the table below:
Microcredit and Economic Development: Entrepreneurship or Self-employment?
30
Maximum Amount Deadlines Interest Rate
Investing Financing 7 years, with 2 years of
capital shortage and 1 year
of integral bonification of
interests.
Reimbursement: 5 years,
with monthly constant
capital repayment
EURIBOR
30days + 0,25%
and minimum
rate of 1,5% and
maximum rate
of 3,5%.
MICROINVEST €20.000 €20.000
INVEST +
€20.000
to
€200.000
€100.000
(95% of the
investment and
€50.000 per full
time job created)
Table 2 – MICROINVEST and INVEST+ main characteristics
Source: Caixa Geral de Depósitos (CGD), 2009
The microcredit bank provider’s panorama in Portugal is summarized below:
Millennium BCP – grants maximum credit of €25.000 for a period of five years.
For credits until €7.000, the line is four years. The spread practiced depends on
the risk and on the type of business. In eight years, Millennium BCP has approved
2888 projects summing a value of €25,8 million;
CGD – operates over the protocol between ANDC and IEFP. The credit given
varies between €15.000 and €20.000 and the term can range between five or seven
years. Through this channel, CGD has granted €12,6 million;
BES – As CGD, it operates in partnership with ANDC and IEFP. The maximum
credit given is €20.000 over four years. Since 2009 it has supported 1000 projects,
giving €16 million;
BPI – Has a protocol with IEFP and MICROINVEST credit lines and it has a own
bank line. The maximum amount is €25.000 for four years or €20.000 for seven
years, according to the different instruments. BPI has supported 879 projects,
summing €20 million;
Montepio – Develops projects and partnerships in microcredit since 2006. The
amount given varies between €500 and €25.000 and the term goes from 6 months
up to 4 years.
The following scheme condenses the microfinance industry in Europe and shows the main
microcredit institutions in Portugal.
Microcredit and Economic Development: Entrepreneurship or Self-employment?
31
4. Conceptual Microfinance Industry Framework
CIP
Microfinance and Microcredit in Portugal
MFI’s types
worldwide
European Commission Initiatives
Hantarska (2005)
Credit Cooperatives
NGO’s
Banks
JEREMIE EPMF JASMINE EPPA
Promotion of the Microfinance and Microcredit Industry in Europe
Non-bank financial
institutions
Microcredit developed in
Bangladesh Grameen Bank (1983)
Microfinance in
Europe
Young Industry
Growing Sector
Heterogonous
ANDC Millennium BCP
CGD
BES
BPI
Montepio
CASES IEFP National Microcredit Plan
MICROINVEST
INVEST +
Microcredit and Economic Development: Entrepreneurship or Self-employment?
32
6. Future Trends in Microfinance
According to the report to MicroNed17 developed by Triodos Facet, a consultancy
company specialised in the promotion and development of sustainable SME, the sector
of microfinance is facing some trends that began in the past years and are likely to
continue, in which the key words are growth, scaling up, increased use of technology,
integration in mainstream finance and segmentation. Considering this, the future relations
between the different providers and clients are described in the following table:
Providers Products Clients
Banks;
Finance Companies;
NGOs;
Savings & Credit coops;
Big box consumer
reltailers;
Property developers;
Money transfer agencies;
Other new providers.
Micro loan & Small loan;
Educational loan;
Credit card;
Mortgage;
Consumer loan;
Checking & Savings
account;
Supplier Credit;
Leasing;
Other new products.
Families;
Micro entrepreneurs;
Small farmers;
Families in their different
roles: as consumers,
house builders, parents,
savers, insurance takers,
part of money flow
networks.
Table 3 - Future relations between providers and clients
Source: Triodos Facet, 2009
The prospect of microfinance will depend on how the industry manages the challenges
caused by its rapid growth. A survey developed in 2008 by the Centre for the Study of
Financial Innovation to microfinance practitioners, investors and analysts identified 20
risks that could aim the progress of microfinance. Among these, six of the top 10 were