Microfinance – an inclusive growth mechanism
European businesses and entrepreneurial people have been having a hard time in recent years. The COVID-19 outbreak and the subsequent lockdowns have severely impacted local economies from which Europe is still recovering. Furthermore, Russia’s invasion of Ukraine has further disrupted supply and value chains in Europe and the increased uncertainty has reduced private capital on the financial markets.
With the increase of inflation and Euribor, traditional loan costs have increased significantly in recent years. Enterprises are therefore struggling to access much-needed capital to sustain and grow their businesses. It is worth turning to the financing concept called 'microfinance' at times like these.
In Burgos, Spain, a dedicated microfinance instrument has been set up for entrepreneurs and SMEs from rural areas. The microfinance facility was set up as a consequence of the 2008 financial crisis which caused severe difficulties for the traditional banking system.
A market gap emerged when traditional financial institutions were struggling for survival and looking for larger operations that would be more cost-efficient than small credit systems. However, this led to credit deficiencies for local businesses. The CEEI-Burgos Microfinance Facility was thus set up to solve this market failure and enable local SMEs to get access to small loans.
The loan is provided for four to five years with an optional six-month grace period. No guarantees, additional fees or collateral is required. The maximum amount per beneficiary is 25.000 Euros. The interest rate ranges between 1.5-3%.
The microcredit instrument is provided by the Provincial Government of Burgos. It is operated by CEEI-Burgos and SODEBUR. CEEI-Burgos is a not-for-profit organization formed by the City Council of Burgos and the Provincial Government of Burgos. Its purpose is to promote entrepreneurship and innovation in the region. SODEBUR is the Society for the Development of the Province of Burgos, a public entity created by the Provincial Government of Burgos. The annual budget of the fund for 2024 is 350.000 Euros.
Over the last decade, the Microfinance Facility has had impressive and noteworthy success:
- Survival of projects/companies – 90%
- Jobs created and maintained – 332
- Fully repaid loans – €1.9 million
- Non-performing loans – 0.46%
- Total granted loans - €3.1 million
- Total leveraged investment - €8.4 million
According to Juan Carlos Martinez Barrio from CEEI-Burgos, the reason why the owner of the fund, SODEBUR, has kept it going for over a decade is that “it is really efficient to offer microcredits in comparison with traditional grants and subsidies as they can recover the money invested and support additional projects. The fact that our default rate is kept under 5% along the whole implementation period underpins this circumstance.”
Behind the low number of defaults is the risk assessment methodology developed by CEEI Burgos which uses a combination of a wide range of evaluation techniques (including risk ratio, structural operational analysis, credit officer assessment and negative credit record). CEEI-Burgos was also a project partner in the ATM for SMEs project which sought to improve the access to microfinance in the participating regions. Other microfinance good practices of the project are available here.
MICROFUTURE – aligning policies with microfinance goals
MICROFUTURE is an ongoing Interreg Europe project seeking to ensure that the correct frameworks are in place on the policy level to enable microfinance solutions. The project has identified several good practices about microfinance instruments. For example:
- AFIN IFN & SFA: AFIN is the first non-banking financial institution in Romania exclusively dedicated to social economy. The main objective of AFIN is to facilitate access to financing for social enterprises that have overcome their start-up phase and need capital resources to grow.
It also supports NGOs that need cash flow on social impact projects and social entrepreneurs who want to initiate economic activities and generate income to continue their social mission in the community. It uses an integrated operational model where AFIN provides capital loans, investment loans and bridge loans while SFA provides non-financial consulting and peer learning services.
The institution has been certified as a social enterprise and since 2023 it started its crediting activity under the supervision of the National Bank of Romania. The institution has been set up with the support of European funds through the EaSi Programme.
- Microcredits for micro and small enterprises: Since 2017, the Slovenian Enterprise Fund has provided micro-lending for Slovenian SMEs. The purpose of the credit scheme is to provide fast, easy and affordable financing. These are direct loans between €5000 to €25000 for financing small investments and working capital for current operations and liquidity.
The loans have been tailored to the needs of SMEs and social enterprises that have difficulty accessing traditional banking services. The financing decisions are made fast, the interest rates are lower and the loan periods are longer than in traditional banking, and there is a possibility of a moratorium on loan repayments.
The Fund also adapts the dynamics of the calls to the funds available from the repayments of micro-loans already granted. The microcredit scheme has been set up with the use of European Cohesion Funds.
Microfinance – a mechanism with several benefits for local economies and societies
All three of the examples above exemplify the core nature of microfinance: to provide accessible credit to those who lack access to traditional banking and related services. While they provide relatively small amounts of money it is often exactly with a small business needs to get over a rougher period or to take the next step in its development. Therefore playing a vital role in local economies for avoiding unnecessary defaults and boosting growth and employment.
With microfinance instruments dedicated to the social economy, you also get the added benefits of the social impact these organizations are creating. Lastly, what makes such programmes great is that they can re-finance themselves with the repaid loans. All these reasons make microfinance an attractive mechanism for European policymakers.
For those interested in learning more, we suggest keeping an eye on the MICROFUTURE project as it continues to produce good practices and tangible policy improvements. One can also follow the European Microfinance Network (EMN) which is a member-based not-for-profit organisation based in Brussels, that promotes microfinance as a tool to fight social and financial exclusion in Europe through self-employment and the creation of microenterprises.