By Daniela Luz Laurel
(First of four parts)
In the last two weeks, we questioned Microfinance’s identity crisis in the developing countries in which it emerged, wherein the model has increasingly become market-driven to sustain itself, impacting its social mission. In tandem, however, Microfinance emerged in “rich” countries. Microfinance is characteristically seen as a substitute for weak financial institutions and flourishes where the traditional financial system is weak. The question is, why and how would Microfinance emerge in Western Europe? Lacking systematic research, we decided to conduct an exploratory, qualitative study in 2017 using 16 personal interviews of relevant persons from member organizations of the Microfinance European Network from seven countries. Several themes and categories emerged during this inductive process that allowed us to gain insight into this. These next four weeks discuss our results and shed light onto how this practice is gaining traction in a completely new context.
In 2006, the European Commission described microfinance activities in Europe as loans of up to €25,000 granted to people unable to access formal credit or to micro-enterprises lacking funds. Microfinance institutions (MFIs) in this geography target vulnerable populations that have been excluded from traditional financial markets including women, migrants, ethnic minorities, youth, people with disabilities, single parents, and individuals with a low level of education and skills.
While Microfinance in the developing world was conceptualized as a tool to fight against financial exclusion, we found that in Europe, being excluded professionally is what first and foremost creates financial exclusion, which eventually creates social exclusion. These three are intrinsically linked in Europe, which is not the case in the developing world. For instance, in French deprived suburbs, the unemployment rate is 2.5 times higher than the average unemployment rate in the country, with 50% of the youth population living under the poverty line. By promoting entrepreneurship and offering professional loans, MFIs in Europe do not just aim to fight against unemployment, but to reintegrate people into the society. Creating a company is not necessarily the aim, but it can be a stepping stone toward financial stability and social integration.
This orientation is reflected in the following three characteristics of Microfinance in Europe: 1.) A focus on entrepreneurial and inclusion loans, 2.) Entrepreneurship training, and, 3.) For-profit status with non-profit funding. Today we focus on the first. There are two types of loans that are provided by MFIs in Europe depending on the purpose: entrepreneurial loans and personal “inclusion” loans. Entrepreneurial loans are widespread among MFIs in Europe and represent the main micro-financial product of developed countries. They can finance a new enterprise, small companies’ take-overs, or the creation of small social businesses. These are usually small loans aiming to support good business ideas that could be difficult to fund through other means, with some even helping finance the personal contribution that will allow the entrepreneur to become eligible for a loan in a traditional bank or provide assistance for things which cannot be financed by traditional banks, such as working capital need or patent costs. MFIs can focus on a specific group of entrepreneurs who are struggling with paperwork or with legal issues that regular banks cannot help them with in order to step in where banks fail.
The objective of entrepreneurial loans is to help the micro-entrepreneur launch his business and grow it until it becomes profitable. However, unlike in traditional Microfinance which targeted the extreme poor with almost no background in entrepreneurship, this type of loan is granted to entrepreneurs or professionals who have a very complete and developed project, which reassure the MFI that it will turn profitable in the near-term, usually consisting of a sustainable and well-done business plan and cash flows forecasts.
The second kind of loan is provided to individuals to finance personal expenses, the amount of which (usually up to EUR 3,000). However, such personal expenses are not linked to personal consumption and cannot be used to repay a debt or a professional loan but must have a role of addressing professional exclusion. It is a timely assistance for the individual in order for him to get out of a difficult situation or a so-called “life accident” such as a divorce, a death in the family, a health issue, or a job loss. Personal loans can thus finance professional training, cars, dental care, furniture, a washing machine, and even computers. MFIs look carefully at the purpose of the purchase, and beneficiaries are selected based on their needs and their motivation to get out of their difficult situation and again, back into the job market.
Hence, unlike the personal loans in the developing world that are used for daily needs, these personal “inclusion” loans have the objective to reintegrate people into society. Further, Western European MFIs are careful in managing their risks and impose standards for granting such loans by requiring a number of documents to control the eligibility of the applicant, such as bank account statements, driver’s license, unemployment insurance amounts, and other welfare benefits: things that barely exist in the developing world version. And though MFIs usually do not ask for any guarantees and do not charge administrative fees, all the same, “good” candidates for personal microcredit are likely to be individuals who have never fallen into indebtedness. A far cry from the original Yunus model wherein beneficiaries were already part of some form of deep and complex indebtedness.
This article is based on a co-authored working paper originating from the Master Thesis of Hélène Laherre under the supervision of the author at the IÉSEG School of Management (Catholic University of Lille) in Paris, France. References are available upon request.
Daniela “Danie” Luz Laurel is a business journalist and anchor-producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Prior to this, she was a permanent professor of Finance at IÉSEG School of Management in Paris and maintains teaching affiliations at IÉSEG and the Ateneo School of Government. She has also worked as an investment banker in The Netherlands. Ms. Laurel holds a Ph.D. in Management Engineering with concentrations in Finance and Accounting from the Politecnico di Milano in Italy and an MBA from the Universidad Carlos III de Madrid.