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Joint Action to Support Micro-Finance Institutions in Europe

JASMINE:. Joint Action to Support Micro-Finance Institutions in Europe. Philippe Delvaux - DG REGIO, Financial Engineering. “Train the trainers” European Commission seminar for managing and certifying authorities Brussels, 9 June 2009. Background Micro-credit initiative JASMINE.

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Joint Action to Support Micro-Finance Institutions in Europe

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  1. JASMINE: Joint Action to Support Micro-Finance Institutions in Europe Philippe Delvaux - DG REGIO, Financial Engineering “Train the trainers” European Commission seminar for managingand certifying authorities Brussels, 9 June 2009

  2. Background • Micro-credit initiative • JASMINE

  3. SMEs are the backbone of the European Economy • 23 millionSMEs in Europe, representing99%of all businesses in the EU • SMEs provide about2/3of all private sector jobs in the EU • SMEs are responsible for almost all net job creation in the EU • SMEs are a major factor of regional, economic and social cohesion

  4. > 250 employees 9 255 50 - 250 employees 1 693 10 - 49 employees 0 - 9 employees 21 228 Informal sector (Income-generating activities) Number of enterprises in the EU (x 1000) 23,2 million enterprises in EU 25 92% of enterprises in Europe are micro-enterprises (0 – 9 employees) Informal sector represents 10 to 15% of GDP Active population below the poverty line : 28 million µC

  5. Small businesses are top priorityof Cohesion Policy 2007-2013 • Cohesion policy strongly supports the Lisbon Agenda goals of growth and jobs • Cohesion Policy is the biggest provider of EU funds supporting Small Businesses • Total business support 2007-2013:€ 55.000.000.000 • of which >50% is directly targeted to support for small businesses, including micro-businesses

  6. 12% / €3.2bn 65% / €17.7bn 14% / €3.7bn 9% / €2.5bn € 27 billion of support specifically dedicated to Small Businesses

  7. JEREMIE and Micro-credit JEREMIE:A new financial engineering instrument designed in the framework of the new regulations on Structural Funds • to improve access to finance for SMEs and micro-enterprises in the Member States and regions • to create financial leverage using risk and loan based instruments, guarantees, etc., and their combination • to help managing authorities responsible for European programmes to reach that goal JEREMIEcan be used to improve the provision of micro-credit in the European Union

  8. EC’s definitionof micro-credit Max. Amount : € 25.000 Number of staff 1 – 9 Max. turnover : € 2.0 Mio

  9. Why do we need to do more for micro-credit? • An important gap in the market • A high potential demand for micro-credit estimated to some700 000loans amounting to some€ 6 billion • Potential entrepreneurs with no collateral cannot obtain loans through traditional channels • Not enough micro-credit intermediaries providing mentoring on the market

  10. Why can’t this be left to the traditional banking sector only? • Access to finance is a real problem for those who are considered non-bankable customers • Banks usually provide access to finance for existing micro-enterprises and traditional start-ups • They are reluctant to deal with those who lack collateral, steady employment or a verifiable credit history, although the default rate on micro-loans is quite low • Operational costs are not proportionate to the size of the micro-loan • Not enough micro-credit intermediaries providing mentoring on the market

  11. Background • Micro-credit initiative • JASMINE

  12. Why a micro-credit initiative? • Several actions have already been taken at EU level and in Member States to support micro-credit (CIP, ESF, EQUAL, PHARE, …), but this is not enough to allow forsustainable development of micro-credit in Europe • Micro-credit operations need to be seen in a broad support framework in line with the principle of subsidiarity • A more favourable environment is essential => COM/2007/708 of 13 November 2007

  13. What is the purpose of the micro-credit initiative? • To promote a favourable legal and institutional and environment for micro-credit in Europe • To help non-bank financial intermediaries who want to act on the micro-credit scene reach a high standard in terms of governance and lending practices • To help them raise funds on the private capital market and attract borrowers in confidence • To help them grow and reach sustainability

  14. What is the Commission now proposing to do? (1) • Promote a more favourable legal and institutional environment for micro-credit • Invite Member States to adapt national institutional and legal frameworks as appropriate • Encourage Member States to adopt quantitative targets and to report on implementation in the framework of the annual Lisbon cycle.

  15. Examples of changes to the legal and institutional environment • Development of micro-credit providers/MFIs • Relaxing interest caps for micro-credit operations • Allowing MFIs access to borrower databases and facilitating their evaluation of the risks • Reducing operating costs applying favourable tax schemes • Adapting national regulation • Ensuring single market rules are applied to micro-credit • Incorporating micro-credit into regulation and accounting standards

  16. What is the Commission now proposing to do? (2) • Encourage Member States to further entrepreneurship. • Set up, in inter-institutional partnership with the European Investment Bank group, a European facility, to provide technical support and funding to non-bank micro-credit providers/MFIs

  17. Background • Micro-credit initiative • JASMINE

  18. JASMINE(Joint Action to Support Micro-finance INstitutions in Europe) A joint initiative of the European Commission and the EIB Group launched on 10 September 2008 in Nice • to channel various forms of technical and financial support to selected non-bank micro-credit providers/Micro-finance Institutions (MFIs) • to help MFIs improve the quality of their operations, to expand and become sustainable • to promote best practices in the field of micro-credit lending

  19. Two main issues: • Providing to Micro-credit providers/MFIs • Operationaltechnical assistancefor capacity building (mentoring, training, information, toolkits, etc. ) • General support measures like evaluation and rating of MFIs, drafting a code of conduct, designing a quality label, etc. • Providingflexible fundingto selected MFIs (equity, loans, guarantees or their combination) through a co-financing facility established in the EIF and involving EIB, European Parliament, Commission, private or public financial partners, MAs(+/- € 50 m)

  20. Important practical elements • Need for acode of good conductfor MFIs to spread ethical and customer-friendly best practices among MFIs. • Specialized rating agencies to swot the potential of MFIs by and provideassessment and rating • On the ground trainingby practitioners or networks of practitioners • Designing aquality labelfor micro-credit which will be awarded under strict conditions to MFIs to acknowledge their reliability • Provision ofstart-up equityto help MFIs cover their operational costs and become sustainable. • Launching apilot projectto gain experience in delivering funds and support to non-bank micro-credit providers

  21. Drafting a code of good conduct for MFIs Purpose : • Create a business reference • Streamline practices • Provide lending security • Facilitate quality assessment and refinancing operations • Prepare for rating • … in co-operation with banking sector

  22. Assesment/rating methodology (example) Elements to be assessed : • Governance (e.g. 24%) • Information System and data quality (e.g. 10%) • Risk management (e.g. 10%) • Activities : Portfolio management (e.g. 20%) • Funding and liquidity (e.g. 14%) • Efficiency and profitability (e.g. 22%)

  23. Designing a quality label for MFIs Criteria : • Good governance • Financial performance • Social performance • Results compliant with business plan • Distance to sustainability • Risk management • Rating (e.g. B onwards) • …

  24. JASMINE

  25. Financing aspects A 3 pillar approach : • Technical support (capacity building) • Seed capital • Repayable funding (lending operations) • …

  26. Funding at a glance • Method: Co-financing • Target : primarily non-banking MFIs close to sustainability (e.g. : new branches of well-established MFIs, young and more mature MFIs) • Initial phase: 20 – 30 MFIs to be funded over 3 years • Area: 27 Member States • 3-year pilot phase funding :+/- EUR 50 m • Financial instruments for MFIs: mainly short-term to medium-term loans, guarantees, equity / quasi-equity, technical assistance, non-repayable assistance, … • Investors: (EU, EIB, EP, private and public banks, regions, etc..)

  27. Nextsteps • Practical set-up of JASMINE, (implementation in Q3 2009) • Start of a 3-year pilot phase to identify best practices in the field of micro-credit with selected “model” non-bank micro-credit providers to prepare scaling up of operations • Finding ways to improve the micro-credit environment in the European Union • Promotion of micro-credit through JEREMIE Holding Funds

  28. Conclusions

  29. The Curve of Change Performance Integration / Moving on 7 Confusion / Denial 1 Anger / Blame / 2 Questions Acceptance 6 Bargaining 3 Testing 5 Depression 4 Decreasing stress Positive growth Period of loss Increasing stress Time

  30. Conclusions (1/3) • Developing the provision of micro-credit in the EU is a challenging undertaking which understates a process of change • It is however not a single man’s job. It involves a large number of stakeholders • Is not solely a financial issue as well. It also requires appropriate and qualified intermediaries

  31. Conclusions (2/3) • In this respect, MFIs seem better positioned than banks to help non-bankable entrepreneurs start their business • JASMINE will seek to develop the potential of micro-credit providers and to make adequate funding available to them • JASMINE will seek to foster as much synergies as possible between the actors on the micro-credit scene

  32. Conclusions (3/3) • Partnership between banks and MFIs needs to be encouraged, as it can be a win-win undertaking for all. • The Lisbon Agenda, the micro-credit initiative of the Commission, the Small Business Act, the Becsey-Report and the financial crisis offer a unique framework to improve the micro-credit environment in Europe

  33. A few stakeholders… • Member States (improve the micro-credit environment), • Regions (local development, fight against exclusion), • The Commission (Cohesion Policy, JEREMIE, JASMINE, Guarantee window of the Competitiveness and Innovation Programme, SBA, …), • The European Parliament (political action, financial support), • The European Investment Bank Group (financial expertise, fund raising and leverage effect), • Banks, Savings banks (expertise, social responsibility, funding, best practices) • Micro-finance Networks (on the ground knowledge, dissemination of information, best practices), • Private and public investors, retail banks (funding and expertise), • Rating Agencies (Evaluation, commercial rating) • Donors, • You.

  34. Thank you for your attention • For further Information Website: http://ec.europa.eu/regional_policy/funds/2007/jjj/micro_en.htm Email: REGIO-FINANCIAL-ENGINEERING@ec.europa.eu DG REGIO – Unit D3 –Financial Engineering

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