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Legal Framework for the Microfinance Institutions in the European Union

Legal Framework for the Microfinance Institutions in the European Union. Case study: Romania. European Union - R omania. 2. How microfinance in Europe is suported by the European Commission. Microcredit in the line of the Lisbon Strategy ( economic growth and social cohesion )

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Legal Framework for the Microfinance Institutions in the European Union

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  1. Legal Framework for the Microfinance Institutions in the European Union Case study: Romania

  2. European Union - Romania 2

  3. How microfinance in Europeissuported by the European Commission • Microcredit in the line of the Lisbon Strategy (economic growth and social cohesion) • Microfinance: intersection between economic politicies and social inclusion politicies completed by the regional cohesion policies • With mainly 3 DGs concerned: • DG Employment, Social Affairs Sociales and Equal Opportunies • DG Entreprise • DG Regio

  4. EU Initiative on MF • 4 working areas: • Improvement of the legal framework for microfinance organisations • Improvement of legal framework for micro enterprises • Technical assistance and good practices dissemination • Financial instrument; Investment fund to support the European MFIs

  5. Institutional type of the MFIs in EU- 2007

  6. Improvement of the legal framework for microfinance organisations • Create an environment allowing the development of micro-finance institutions (MFIs) and covering all segments of the clientele • Help micro-credit to become sustainable by relaxing interest caps for micro-credit operations

  7. Improvement of the legal framework for microfinance organisations • Allow MFIs access to borrower databases and facilitate their evaluation of the risks • Reduce operating costs applying favourable tax schemes • Adapt national regulation and supervision to the specificity of micro-finance

  8. Improvement of the legal framework for microfinance organisations • Reduce operating costs applying favourable tax schemes • Adapt national regulation and supervision to the specificity of micro-finance • Ensure single market rules are applied to micro-credit • Incorporate micro-credit into regulation and accounting standards

  9. Case Study - Romania • Romania as part of the European Union – economic context • Existing Legal Framework • MF sector – Segmentation map • MFIs – performance indicators • Lessons learned & Development persepective

  10. European Union - Romania Romania (2007) GDP per capita: 5700 € 35% Av. EU25 Average GDP growth /year: 6- 5% Number of SMEs /1000 inhabitants : 22,6 SMEs contribution to GDP:70% Unemployment rate: 5% Inflation average : 7% 21.5M inhabitants 45% rural population Informal sector : 20-22% of GDP 10

  11. Legal framework • Micro Finance Companies (MFC) Law no.240/ July 2005, created an enabling environment for MFIs to grow and expand their portfolio of products and support services. • Credit Union Law(CU)mo.122/1996; 135/2003 and 186/2004, regulates the credit union sector, it forbids savings but allows utilization of members’ subscriptions as main source for CU’s portfolio. • Government Ordinance 28, January 2006, regulates the conditions for non-banking financial institutions to grant loans in order to ensure and maintain financial stability. National Bank of Romania is the supervisory authority of all Non Bank Financial Institutions (NBMFIs): Leasing, Mortgage, Credit Unions, including Micro Finance Companies. 11

  12. Liberal, NBMFI‘s laws support the development and commercialization of the sector. • Registration and Licensing from the Romania National Bank. • Registration and licensing process is difficult and expensive • Accounting , Auditing and Reporting requirements are similar to the banks • Minimal capital requirement: EURO 200,000. • MF Companies / NBMFI are NOT exempt from Tax on Profit (16%) • NO SAVINGS ( except for the Credit Unions) • Allows deductibility of Loan loss provisions and loan losses • Restrictive regulation for MFIs in terms of maximum loan size: 25,000Euro • Protect the MF Companies / NBMFI, and the beneficiaries: Micro and Small Enterprises.

  13. Mission, Targeted market- clients, Uncovered demand • Social oriented MFIs- CUs • Farmers, former miners; minority groups entrepreneurs; individuals • Social and commercial oriented MFIs - CUs • Not-bankable entrepreneurs and micro-companies located in the urban, peri-urban and rural areas; individuals • Commercial oriented MFIs • Underserved entrepreneurs; individuals Estimated uncovered demand of the SMEs sector (2007): 700 million Euros 13

  14. Romanian MF Sector – Segmentation map 14

  15. Gross loan portfolio ; Number of active clients; Drop out Rate versus Retention rate Romania- 2007 • Gross loan portfolio • Total (MFIs+Cus): 556 Mill € • MFI: 80 Mill € • CUs: 476 Mill € • Number of active Clients • Total (MFIs + CUs): 700,000 • MFIs: 20,000 • CUs: 680,000 • Retention Rate MFIs: 70% (average) 15

  16. Portfolio quality indicators: PAR at 30 and 90 days and Write offs ratio. Romania Portfolio At Risk at 30 days: 3% Portfolio At Risk at 90 days: 1.7% Written off ratios: 0.4% Refinancing / rescheduled ratio: 1.5%

  17. Cost structure ( % Income) - Romania Income 100% Interest on loan portf. 61% Fees and commissions 14% Other revenues 25% Costs 70% Cost of capital 22% Operational cost 45% Personnel cost 22% Administrative costs 23% Loan loss provision cost 3% Net operating income 30%

  18. Profitability and Sustainability Key indicators: OSS and FSS Operational Self-sufficiency (2007) : 120% Financial Self-sufficiency ( 2007): 114%

  19. Impact of the credit extended by the MF to targeted beneficiaries Romania: Micro and Small Enterprises

  20. Lessons Learned • How important is a clear, coherent and supportive legal framework, • How important is the continuous lobby to aware the stakeholders of the sector’s main characteristic: efficient financial services with positive social and development impact. • In order to attract funds needed to serve properly the increased number of clients the MF organization have to become: • efficient, financially self sufficient and to innovative in adapting the microfinance products and procedures to the specificity of the Romanian financial culture. • Participation to EU Funded Projects “ From Exclusion to Inclusion through Microfinance: Learning from East to West and from West to East”. • What the East MFIs are learning from its Western peers is haw to assess the social impact of the microfinance activities developed and how to maintain the social mission by improving and diversifying the support activities provided to the micro entrepreneurs.

  21. Perspective and Challenges COMERCIALIZATION is the strategy of almost all medium and large MFIs, Maintaining their Social mission is the CHALLENGE

  22. Trends of MF sector Development For the commercialization strategy MFIs are focusing on the: improvement of performance indicators, especially operational and financial sustainability, increase of portfolio capital, raising equity and debt from investors and banks and diversification of financial products offered to clients: Micro enterprises and individual entrepreneurs ; Consumer credits (Individuals)

  23. MULTUMESC ! Maria Doiciu Eurom Consultancy and Studies SRL maria.doiciu@eurom-consultancy.ro www.eurom-consultancy.ro

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