Job creation: Progress Microfinance – implementation report 2011 – frequently asked questions
Job creation: Progress Microfinance – implementation report 2011 - frequently asked questions
The European Progress Microfinance Facility (Progress Microfinance) is an EU initiative that facilitates access to microfinance for people who want to start up or further develop their own business, but have difficulties in accessing traditional loans. The 2011 annual implementation report has just been published (see IP/12/796).
How does Progress Microfinance work?
Progress Microfinance does not directly provide microcredit to entrepreneurs, but microloans (i.e. loans of less than €25,000) are made available through intermediaries participating in Progress Microfinance. Such intermediaries can be public or private microfinance providers in the member countries of the European Union.
Progress Microfinance enables microcredit providers in the EU countries to increase lending to micro-entrepreneurs. This is done in two ways:
- Progress Microfinance offers guarantees to microcredit providers and thus gives an incentive to serve “risky” target groups (e.g. young people who cannot put up sufficient collateral for a traditional bank loan) or to improve the loan conditions for micro-borrowers, such as a lower interest rate or less strict collateral requirements.
- Progress Microfinance also offers funded instruments (e.g. loans and equity) to microcredit providers with the aim of increasing their micro-lending volumes.
The conditions for microloans to entrepreneurs — amount and duration of the loan, interest rates and fees, the time it takes to get a loan — vary according to the microcredit provider.
How is Progress Microfinance managed?
Progress Microfinance is financed by the European Commission and the European Investment Bank and managed by the European Investment Fund (EIF). In the first place, microcredit providers in the EU Member States can apply to the EIF for guarantees or funded instruments (debt, equity and risk-sharing instruments) to become intermediaries under Progress Microfinance. Microfinance providers can then provide loans to micro-enterprises or people who are unemployed, at risk of social exclusion, or otherwise disadvantaged when it comes to securing a traditional loan. The aim of the microloans must be to establish and/or develop micro-enterprises.
For 2010-2013, the EU made €103 million available and the European Investment Bank (EIB) committed to adding another €100 million. Of the total sum of €203 million, €25 million is for the guarantees and €178 million for the funded instruments.
In June 2012, Progress Microfinance had made commitments to microcredit providers of € 74.5m in total (€5.7m under the guarantees, €68.8m for the funded instruments). Disbursements to microcredit providers are usually made in instalments. € 27.5m have already been disbursed.
Which microfinance providers have received support under Progress Microfinance?
Progress Microfinance is a demand-driven instrument which means that a microcredit provider must either reply to the call for expression of interest to apply for a guarantee or contact the EIF directly for equity, debt or funded risk-sharing instruments.
The aim is a balanced geographical distribution, but the outcome depends on the interest expressed from microcredit providers.
In June 2012 Progress Microfinance counts a total number of 19 microcredit providers (an agreement with the 20th microcredit provider is imminent) and of 14 countries covered.
How much microcredit will be generated under Progress Microfinance?
At the launch of the proposal, the Commission estimated that the Union’s contribution could be leveraged to €500 million in microcredit (46000 loans). This ‘leverage’ can be explained as follows:
- Additional funding from other investors. It is assumed that the EU’s investment can attract funding from third parties. The European Investment Bank (EIB) committed to matching the EU contribution and making €100 million available for the ‘funded instruments’ part.
- The revolving nature of the funds. The funds can be used more than once during the lifetime of the Progress Microfinance Facility. The Decision provides for the last (re)investment to be made in 2016.
- Leverage generated by the products. Estimates suggest that every euro committed in guarantees could generate at least six euros in microcredit, while the funded instruments are expected to have a leverage effect of between one and three.
Where do we stand in implementation?
Microloan volume targets of the current microcredit providers
Based on the contractual terms with the 19 microcredit providers, it is expected that the approximately €74.5m committed so far will result in nearly €177m in on-lending to micro-borrowers in the coming years.
This is ensured through a number of incentives vis-à-vis the microcredit providers: failure to reach the agreed microloan generation targets would trigger for instance early repayment of the loan by the microcredit provider. This creates a clear incentive to on-lend to micro-borrowers effectively and efficiently. A similar incentive is used in the case of guarantees: while they are, in principle, provided free of charge, microcredit providers have to pay a commitment fee if they disburse less than 90% of the agreed volume of microloans.
Microloans disbursed to micro-entrepreneurs so far
As of March 2012, a microcredit volume of close to €27.5m had been generated in total. In terms of numbers, by end of March 2012, these microcredit providers had disbursed around 3800 microloans (estimate for June 2012: around 5000 microloans).
In line with the typical build-up pattern of microcredit portfolios, the number of microloans is expected to have a slow start followed by a strong rise. Guarantees usually have an availability period of 2 years, senior loans an inclusion period of 2 to 3 years, which means that between 2013 and 2015, the microcredit providers having signed agreements so far should reach their target microloan volumes and numbers.
Which are the target groups of the current microcredit providers?
The microcredit providers supported by Progress Microfinance target a wide range of final beneficiaries.
- groups that are at a disadvantage with regard to the conventional credit market like young people (e.g. Instituto de Crédito y Finanzas Región de Murcia (Spain), women (e.g. Siauliu Bankas (Lithuania)), unemployed people or job seekers (e.g. JOBS MFI (BG)), migrants (e.g. Microstart (BE)), people threatened by social exclusion (e.g. Millennium Bank (Portugal))
- self-employed people and/or micro-enterprises in general (e.g. Banca Transilvania (Romania), Cooperative Central Bank (Cyprus))
- entrepreneurs in rural areas, with a focus on the agricultural sector (e.g. Mikrofond (Bulgaria), FAER (Romania))
- start-ups (e.g. Pancretan Cooperative Bank (Greece), First Step (Ireland))
In which sectors do micro-entrepreneurs work?
Micro-enterprises financed under Progress Microfinance are active in a broad range of sectors, with a strong focus on trade (28.5 % of the micro-enterprises financed by September 2011) and agriculture (20 %). The high percentage of micro-enterprises in the agricultural sector can be explained by the presence of Patria Credit and Mikrofond in the (relatively small) sample, which focus on rural areas in Romania and Bulgaria.
Source: Progress Microfinance – implementation report 2011
How is Progress Microfinance coordinated with other EU instruments?
Progress Microfinance also fills an important gap in portfolio funding and risk-sharing. It is complementary to the support already available under the European Commission’s Competitiveness and Innovation framework programme (CIP).
Under the Commission’s JASMINE (Joint Action to Support Microfinance Institutions) initiative, which aims to improve the capacity of microcredit providers in various fields, microcredit providers can receive an evaluation and/or a rating of their organisation followed by counselling and training tailored to remedy identified weaknesses. JASMINE helps prepare microcredit providers to be eligible for further support.
Progress Microfinance also complements the structural funds. A number of Member States use the European Social Fund (ESF) to finance business development services, like mentoring or training for starters. These services are known to increase the survival rates of new businesses, even though they are costly for microcredit providers. This is why the microcredit providers supported under Progress Microfinance are required to cooperate with organisations that provide these services, in particular with those financed by the ESF.
What is the added value of Progress Microfinance?
A single EU-wide facility concentrates leverage from international financial institutions and avoids a dispersed approach thus increasing microfinance supply in all Member States.
To ensure and added value, funding or guarantees from Progress Microfinance may not replace equivalent support received by intermediaries under existing EU, national or regional financial instruments but have to generate additional microcredit.
The European Parliament requested that the Commission strengthen its efforts to develop microcredits in support of growth and employment in its resolution of 24 March 2009. The European Parliament also called on the Commission to co-finance projects for microcredits in particular for disadvantaged target groups. Progress Microfinance responds to the resolution of the European Parliament.