Microfinance, (only) for enterprising people? a diverse ... · 5. Microfinance for enterprising...

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Microfinance, (only) for enterprising people? ... a diverse market requires a novel approach ... Drs. Klaas Molenaar

Transcript of Microfinance, (only) for enterprising people? a diverse ... · 5. Microfinance for enterprising...

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Lectoraat Microfinance and Small Enterprise Development

www.INHolland.nl/Microfinanciering

Microfinance, (only) for enterprising people? ... a diverse market requires a novel approach ...

Drs. Klaas Molenaar

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Mircofinance, (only) for enterprising people?

…… a diverse market requires a novel approach …..

Drs. Klaas Molenaar

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Met dank aan Spresso voor het gebruik van de foto op de omslag.

Copyright © 2008 Hogeschool INHolland

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Publication with the speech

delivered by drs. Klaas Molenaar for

his accession to the office of lector

at the research group Microfinance and Small

Enterprise Development

at the INHolland University of Applied Research

in Haarlem, on 27 November 2008.

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Content

1. There is a wealth of experience out there; it is not all new,

still developments are... 12

1.1. Evaluations and theory as a basis for the start and growth of

microcredit 13

1.2. Can we compare developments and draw lessons? 17

2. Microcredit for the poor evolving into microfinance for the

self-employed and micro entrepreneurs? 22

2.1. Microfinance, from beating poverty to sustainable organisations

and sustainable borrowers? 23

i. Microcredit for the talented poor... 23

ii. Microfinance and macro economic development...

the chicken and the egg?... 24

iii. Microfinance for the creation of jobs and enterprises... 26

iv. Sustainability for whom? 27

2.2. Policies in support of the clients or the organisations? 31

2.3. NGOs becoming NBFIs or even banks in search for new client groups 34

2.4. From social services to servicing enterprises… 36

i. From credit for all poor to loans for (selected) entrepreneurs... 36

ii. From group-based approaches to individualised services 37

iii. From finance to revival of bds services? 40

3. How green are the pastures in Europe? 42

3.1. Enterprise development or social inclusion? 42

3.2. Mismatch between mission(s) and practice 46

3.3. A large number of organisations, but only a few are actively engaged 48

3.4. So many services, and yet the primary focus is on smes 50

i. Clients are mainly the self-employed and the

micro-/small entrepreneur 50

ii. Service packages mainly geared for small and micro

enterprises 52

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iii. Other financial services coming up 53

iv. Business support services widely accepted 53

4. Is there a future for microfinance in the Netherlands? 55

4.1. Awareness of many problems, but more choices need to be made 55

i. National council for microfinance boosts awareness 55

ii. Unexplored segments in the market 57

4.2. Policy mainly focused on micro-enterprises and not yet imbedded. 60

4.3. There are many banks out there but no microfinance institutions... 62

4.4. Microfinance services not yet tailored to new groups in the market 65

4.5. Searching for know-how across borders 66

5. Microfinance for enterprising people: new markets demand changes

in thinking 71

5.1. There might be something wrong in logic 72

5.2. Microfinance channels, enterprising people and the socially excluded,

new choices to make 75

i. The self-employed in need for appropriate

microfinance (institutions) 76

ii. The enterprising economic and socially excluded call for

innovative approaches 78

5.3 Can the reversed path south to north become a circular process? 79

Reference literature 82

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Microcredit, microfinance and enterprising people

“….. there is only the viability of people: people, actual persons like you and me, are

viable when they can stand on their own feet and earn their keep…”

E.F. Schumacher” 19731

A lot is being written about microcredit and microfinance. Suddenly it was there. It

has been widely embraced and subsequently grown into visibility. One major lesson

can be drawn from experience in developing countries (the South) microcredit is

extremely useful for the poor and microfinance is a proper tool for enterprising

people. And the question may be raised whether it will be a proper instrument in the

Netherlands as well and if so whether we have a clear view of whom to serve, what

products to offer and which channels to choose to reach that market.

Microfinance has been widely accepted as an effective tool in the development

sector. There are few politicians who will deny that. A close look shows that an

impressive number of poor people, often women, are being aided with microcredit.

They make use of the small loans granted to them in various ways. Subsequently,

professionals and practitioners claim success in poverty alleviation. With microcredit

now evolved into microfinance, they even claim that it boosts enterprise development

and business creation. Microcredit and microfinance have become visible and

attract all kinds of attention: from those who see it as the solution to beat poverty,

from researchers who question its effectiveness, from enterprising people intending

to make a living with it through their own microfinance institutions (MFIs) and from

investors hoping to make money in this industry. There are many reasons to

become part of this sector, to support the movement and to be able to say that you

are involved.

The movement has become a sector in itself in many developing countries and a

successful one at that. This message has been sent across borders worldwide. It

has also reached our country, and we are in the fortunate position that politicians

1 , a truth still true….. Schumacher, E. F. (1973). Small is Beautiful, A Study of Economics as if People Mattered, Blond and Briggs. Page 65

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and opinion leaders have embraced it. People in the Netherlands talk about

microfinance and want to launch such programmes. It might be a hype embraced

by politicians with short-termvision, but hopefully it can become a tool for structural

development.

In developing countries the market for microfinance seems quite logical and easy to

operate in: there are poor, socially excluded people without access to regular

banking services and if they have proper access they will initiate economic activities

that will generate decent work and income for them. And, those people are best

served by Non Governmental Organisations (NGOs) and Non Bank Financial

Institutions (NBFIs) that propose the new services on a large scale and that will

become self-sustainable by generating sufficient income to offset the relative high

cost of their operations…… Nothing wrong with that at first sight. But a closer look

at development across borders teaches us that the situation is quite different. The

market is not as homogeneous as we assume. There are indeed many people who

wish to participate more actively in our society either socially or economically. They

need microloans and other financial services. But not all of them intend to set up

businesses, nor do they aspire to becoming an entrepreneur. Still there are others

with entrepreneurial attitudes who want to set up a micro-enterprise, and others yet

who wish to be self-employed during a given period in their economic active life.

They form new segments in the markets attended more by specialised microfinance

banks and the (mature) NBFIs.

We see microfinance institutions in developing countries gradually shift attention to

entrepreneurship development - with the enterprising self-employed and micro-

entrepreneurs as their prime client, and we subsequently note that poor, excluded

people are (again) left aside.

If we wish to make use of microfinance in the Netherlands, are we then aiming at

assisting the socially excluded, reacting to the needs of the new self-employed or

still following traditional patterns with business start-up programmes? In a 2007

study Triodos Facet already reported (Triodos Facet 2007) that there is a tendency

in the Netherlands to focus mainly on the financial support of starting micro-

enterprise development. The systems in place (both financing through the regular

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banks and training and coaching systems) are more appropriate for enterprise

development. And the question arises whether that is sufficient.

No clear ideas exist as yet about how to develop microfinance for the self-employed

or microcredit for those who just want to start an economic activity that will not only

generate additional income but also induce social participation by economic

activities. Many enterprising people expect us to come up with proper services, but

no clear choices have been made between the two (microcredit and microfinance)

in the policy nor do we have a clear picture of the institutions we need to reach, the

various clients or target groups and of the products to propose. We may ask

ourselves how to do that and what can be learned from others.

In developing countries microcredit and microfinance have evolved logically over

two decades now. People involved know in which direction to go. Lessons have

been learned and principles have been formulated and widely accepted2 in both.

We still lag behind in understanding the differences and in knowing what to do. And

it is precisely this lagging behind that we can turn around to our advantage, based

on a process of reversed knowledge transfer from developing countries (the South)

to the North. It may shed light on the question whom to target and which channels

to choose.

I strongly believe that we can learn from experience abroad if we manage to

systematise such experiences and understand the conditions under which they are

effective. The lessons learned need to be blended with our insight into developing

systems, methods and technologies appropriate for our society. That belief is the

foundation for the programmes of the Lectoraat Microfinanciering en

Kleinbedrijfontwikkeing (Research group Microfinance and small enterprise

development of INHolland University of Applied Sciences and our Centre for

Microfinance INHolland).

We need to ask why microcredit and microfinance are promoted, what policy is

pursued, what institutional and organisational set-up is needed and which services

are effective and in demand. Additionally we may ask whether any consistency

2 See for instance the “Key principles of Microfinance” as accepted by the G8 in 2004 during the Heads of State meeting on Sea Island, Geogia, USA.

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exists between the awareness that microfinance is needed, the policies put in place,

the institutions operating in the sector and the products and services developed and

introduced3.

Over the past decade a growing number of papers, articles and books have been

published about microfinance with most publications dealing with the development

in the South. Know-how and experience are gradually being systematised and this

body of knowledge can be helpful in us. Still in the course of time I have come to

understand that many things we believe and say about microcredit and microfinance

are difficult to prove and substantiate.

Academics have not yet linked on sufficiently. Our knowledge about microfinance

and microcredit is practice-based and will remain so. Still we could well do with

some more underlying theoretical frameworks to avoid that we start following trends

and hypes without clearly specifying what we wish to achieve. At INHolland we wish

to make that contribution by critically questioning common beliefs and how things

are done in our research activities. We will plough back through the practice-based

knowledge now at hand into formal education as well, offering students the

opportunity to become well-trained - and critical - professionals in microfinance. The

future professionals will be challenged to broaden our understanding and deepen

our knowledge about microfinance.

In the following chapters I will assess the evolution and development of microcredit

and microfinance in developing countries (chapter 2), in Europe (chapter 3) and the

Netherlands (chapter 4). The four elements, awareness, policy, institutions and

services, will be discussed in each chapter separately.

Comparing the developments in those three different “worlds” will help us to

understand in which direction microfinance and microcredit can evolve in our

society. And it will provide us with a framework for future research to be undertaken

by INHolland preferably in cooperation with other research centres and more

importantly, with practitioners.

3 This line of thinking is based on the APIS model Molenaar, N. (2005). Institutional development based on the APIS Model.

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That way we intend to contribute to this broader and deepened understanding of

microfinance across our own borders and will make an effort to create a circular

process of transfer of experiences and know-how. The ideas presented here are

such a contribution and definitely subject to debate and critique.

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1. There is a wealth of experience out there; it is not all new, still developments are...

The microcredit and microfinance industry would not have developed so rapidly if

both had not been supported by in-depth insight in the small- and micro-enterprise

sector at large and the theories developed in the late eighties. Rarely do we see

development processes being supported by a well-founded theory, but the

microfinance sector is one of them. The start and growth of the sector with the

launch of many, fast growing microcredit programmes for the poor was based on a

theoretical framework and a strong awareness that something needed to be done

about the plight of the poor. What first started in developing countries gained ground

in European countries as well, with the Netherlands following only a few years ago.

Comparisons are difficult to make, but they do demonstrate that matching client

groups and services/ channels deserves more attention, not in the least to continue

serving the financially weak in our society. Setting the millennium development

goals and the International Year of Microcredit, and awarding the Nobel Peace

Prize to Mohamed Yunus definitely boosted microfinance enormously worldwide, as

it did in the Netherlands, too. Initially, most developing countries accepted

microfinance as an instrument to combat poverty. Then it was acclaimed as an

instrument to boost entrepreneurial initiatives. Subsequently, MFIs developed

comprehensive programmes offering a wider range of products and services to

micro-entrepreneurs. Now, the sector is considered an industry, and legalisation

and regulatory frameworks have been developed and introduced in support of the

sector. However, in spite of the interest shown, such is not the case in Europe

yet.

Microfinance is not really something novel. It is not something invented in the

eighties nor was its foundation laid in Bangladesh. This being said it does not

preclude that we need to have tremendous respect for people like Mohamed Yunus

in Bangla Desh or Maria Novak in France, who both gave microfinance a face and

the industry such tremendous impetus. But savings- and credit-groups have existed

for longer periods and were set up by men and women all over the world for many

reasons. SuSu schemes (in Ghana) or Stokvels (in South Africa) existed for longer

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periods and were set up spontaneously in many places, just like cooperative

savings- and lending groups were in Europe at the beginning of the past century.

The special thing about Yunus was that he demystified the art of banking, believed

in poor people, used existing knowledge and linked that to poverty, and that he saw

microcredit as an instrument to promote social participation and a way for people to

break away from the poverty trap. Similar things happened in the past. In a very

capitalistic and liberal economy, the savings- and credit cooperatives were an

answer to the exploitation of people. It was also understood that the actual users

themselves could not necessarily lead and manage the organisations on their own.

They already had enough on their hands to cope with, and were better off with well-

run financial institutions that offered proper services at the right price. At the

beginning of the past century, it was Friedrich W. Raiffeissen who took steps to

organise poor farmers in credit- and savings cooperatives. He succeeded in

creating awareness for the poor and in showing them a way out of their social

exclusion by organising cooperative savings- and credit groups, both with and for

them. Indeed, there is also an early example of the Rhineland principles where

collective success, consensus and long-term concerns play a dominant role.

Raifeisssen stimulated various stakeholders, such as teachers, leading public

figures and business leaders, to join the cooperatives, and to sit on their boards and

(management and advisory) committees. Thus, he secured social imbedding of the

cooperatives, which in turn contributed to their overall sustainability. However, very

little has been done with this knowledge in the development of microfinance where

self-sustainability still is a determining factor in policy.

1.1 Evaluations and theory as a basis for the start and growth of microcredit

Small and medium-sized enterprises (SME) received ample attention in the

seventies and eighties and many programmes were experimented with. Special

SME financing programmes were developed, as well as training and consultancy

services. Evaluations of SME development programmes in the eighties showed the

limitations of the methods and programmes: they did not reach large numbers of

people, were considered costly and offered all kinds of services to the SME sector

in a supply-driven, ineffective and inefficient way.

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The comprehensive evaluations4 of the small-scale industries sector in the late

eighties (Keddy, Nanjundan et al. 1988) provide an in-depth insight into the

numerous pitfalls encountered in smalland micro-enterprise development and

promotion programmes. Their studies clearly spell out the weaknesses of the Small

and Medium-sized Enterprises (SME) support systems adopted, programmes

developed and policies pursued. These weaknesses led to supply-focused, often

isolated support, reaching few people at relatively high cost. The lessons drawn

from such analyses are manifold and have an important influence on the design of

micro-enterprise programmes and on the role of related Business Development

Services (BDS). Some of these are:

- The need for an enabling environment that will be conducive to the development

of the micro- and small enterprise sector;

- The importance of involving financial institutions in credit and financing

programmes and the need to think in financial systems rather than in credit lines

proper;

- The importance of professionalising intermediary institutions and organisations

and assisting them in their organisational and related human resources

development processes;

- The importance of boosting and promoting local entrepreneurship resulting in

clear demand for services;

- The need for flexible programmes that can be adjusted to changing needs in the

small and micro-enterprise sector.

The studies conducted by the State University of Michigan on the effectiveness of

small and micro-enterprises and the work of Stewart and others stressed the

importance of focusing on the impact of macro-economic policy for SME

development (Gosses, Molenaar et al. 1989). Governments, it was argued, needed

to concentrate on creating a suitable enabling economic environment and to

withdraw from service-rendering, which should be left to the private sector and

non-governmental organisations (NGOs). This was used by governments as an

4 The most important was organised by United Nations Development Program (UNDP) / Dutch Government / International Labour Organization (ILO) / United Nations Industrial Development Organization (UNIDO) thematic evaluation RSIE, Development of Rural Small Industrial Enterprise: Lessons from Experience

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argument to cut down on allocating funds for the sector. Furthermore, donors

decided to concentrate more on policy issues and less on financing of recurrent

costs for services in SME support programmes. These changes sped up the

process of separating Business Development Services completely from financial

services; in some cases it was even decided to discontinue BDS delivery all

together. But we failed to indicate how these services could then be funded and

financed. With the neo-liberal wave that affected the SME industry in the early

1990’s, it was not surprising to see that BDS services and their institutions

disappeared.5 Lessik and Farbman managed to accelerate the debate by introducing

a pragmatic way to classify the SME sector steering us away from endless definition

debates. They introduced a simple way of describing the sector in four major

categories, survival activities, micro, small and medium-sized enterprises (Gosses,

Molenaar et al. 1989).

Following their work and drawing lessons from the micro-enterprise programmes

under the GEMINI programme6, the minimalistic theory gained ground. The basis of

this theory is quite straightforward: it supposes that the development of micro-

enterprises is hampered by one or two critical factors. Eliminating or reducing the

effects of those factors can have a relatively high effect in the development of the

enterprises. Furthermore, it is argued that (access to) credit is the major bottleneck

in micro-enterprise development. The minimalistic approach has indeed led to an

intensified attention for microcredit programmes.

5 In the Netherlands similar processes took place; look for instance at the history of IMK a state supported BDS provider that went bankrupt after it was partly privatised.

6 A comprehensive USAID funded SME support programme in developing countries, that was studied extensively.

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Figure 1 Development and evolution trends of organisations offering microfinance

Additional income

generating activities

Self Employed

MicroEnterprise

SmallEnterprise

Medium scale

Enterpris

Non Governenmental Organisation with MC Programme

MFIs

Non Bank Financial institutions

Micro finance banks

General banks

Source: Triodos Facet, based on classification by Farbman and Lessik

Blending this approach with a neo-liberal view contributed strongly to the emergence

of microfinance initiatives. The state and the donors withdrew from support

programmes for the SME sector. People were expected to pay for the services

offered (without further subsidies) and non-governmental organisations (NGOs)

were expected to take over the tasks of the public sector. Besides, donors told

NGOs to become financially sustainable. The NGOs could only do so if they could

offer a product for which people are willing to pay. Microcredit is such a product,

with large numbers of poor women and men willing to pay for it. The market

consisted of poor people who initiated very small economic activities, often

generating some additional income next to other income generated by the

household. With the introduction of microcredit as the single support instrument,

attention shifted dramatically from small and medium enterprise development to the

survival economy, but not yet to the micro-enterprise sector. This came later, when

microcredit evolved into microfinance, when group-based credit distribution systems

evolved into individual lending, new services and products were developed and loan

amounts increased slightly. The next step has been that some NGOs graduated

into Non Bank Financial Institutions (NBFI), which in turn graduated into (quasi-)

banks attending micro and even small entrepreneurs.

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Following the classification of the sector advocated in the late eighties we can

combine those developments into one framework linking classification with the

channels that emerged over time as presented in figure 1. This can be used to

assess the apparent logical developments and we can ask ourselves whether

developments in Europe at large and in the Netherlands in particular will be similar

and whether there is proper matching between the channels (organisations) and the

target groups. Equally important will be to appraise the markets in which the

microfinance institutions (MFIs) operate, the segmentation of the clients and shifts

that take place in the labour market.

1.2 Can we compare developments and draw lessons?Microcredit and microfinance in developing countries are said to have reached a

large number of clients and significant volumes in lending. Various databases report

so accordingly but unfortunately present different figures, not surprisingly, as we

deal with a significant number of informal operators (both the NGO community and

the clientele). We tend to believe that there are more than 10,000 organisations

worldwide (NGOs and NBFIs, specialised banks but excluding regular banks)

engaged in offering microcredit and microfinance services. There are about 3,000

organisations in a position (or are willing) to submit comprehensive data about their

performance. Based on those data, it is reported that over 300 MFIs are

commercially self-sustainable. Based on the data of MIX (Microfinance Information

eXchange 2007) we estimate that these 3,000 MFIs have approximately

$100 billion worth of outstanding loans and have over 150 million clients7 (of which

over 60% are women) with a growing preference for individual lending (see also

chapter 2).

Many of the NGOs started off as projects with microcredit funds. They applied what

we now label “traditional” methods, such as solidarity loans (group-based) or

gradual lending systems, all methods to extend the very small credits to the poor.

Over time, NGOs became aware that the real issue was access to (a wide range

7 Three - reliable and frequently quoted - sources (Microcredit Summit, CGAP- World Bank and World Savings Banks Institute), give different data but the generally accepted figure fluctuates around 150 million; nevertheless prudence is called for since there is a tendency to overestimate demand in the sector - see also CGAP (2008). “Are we overestimating demand?”

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of) all-inclusive financial services and the building-up of sustainable financial

intermediaries. They began to offer more services to their clientele and became

non-bank microfinance institutions, some of which nowadays have become

regulated financial intermediaries. As this all appears quite simple, we often seem

to believe that the same could happen (without much modifications or adjustments)

in Europe and the Netherlands.

Microcredit and microfinance in Europe are rather new phenomena and were first

put on the agenda seriously in the early nineties. In a relatively short period both

have been embraced fully by politicians in the European Union - and at some

national levels - as a valuable instrument for social and economic development.

This has culminated in the announcement of a European initiative on microcredit in

2007.

The number of (specialised) MFIs in Europe is rather small (see chapter 3), just

over 200, and the total portfolio of 42,000 to 80,000 loans outstanding is estimated

to range from € 390 to 600 million). Compared to the population in Europe and

moreover the overall amount of outstanding loan amounts, this is rather a low

figure. More interesting are the growth rates and the average loan sizes. The

number of loans disbursed between 2006 and 2007 has increased with 14%, while

the growth rate of the value micro-loans disbursed in Europe between 2006 and

2007 was approximately 32%, with an increase of the average loan size from

€ 7,700 to above € 11,000 (Loans ranging from € 525 -sometimes group-based- in

Eastern / Central Europe mainly to over € 30.000 in Western Europe).

In the Netherlands we are quite late in discovering microfinance. As yet, we have

no significant microcredit programmes in the Netherlands, nor an NGO community

engaged in this work. There are about 12 private organisations8, of which only six

are in the position to report on their performance: Annually they reach approximately

900 clients with individual loans ranging from € 4,000 to over € 31,000 (See

chapter 4). However, we do have clear policy recommendations. The private and

public sector are invited to increase their efforts and mobilise more resources to

8 Data exclude the government sponsored programme for social welfare beneficiaries

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promote more entrepreneurial initiatives. Furthermore, it sets a challenging target of

an additional 10,000 new starters per annum. While it aims at providing micro-loans

of an average of € 10,000, it also acknowledges the importance of mentoring and

coaching.

Some may label this as a small loans programme aiming to provide finance to

starting (micro-)enterprises; others may claim it is a microfinance programme that

creates more access to finance for those who are normally left aside. What’s in a

name, we may ask.... or is there a need to be more precise?

A deepened and broadened understanding and proper comparisons (illustrated in

Table 1) can indicate how to further develop and introduce microfinance, the

services, which organisations to develop and what policy to pursue.

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Table 1: Different regions, different developments of the microfinance sector (2007)

Developing

countries

Europe The

Netherlands

Number of NGOs/MFIs

estimated to be operating

fully engaged microcredit/

micro finance9

> 10,000 > 200 ~ 1210

Number of NGOs/MFIs in

position to submit data/

~ 3,000 ~ 100 6

Number of commercially

viable MFIs

~ 300 Not reported

yet

None

Number of active clients > 150 million 42,000 to

80,00011

~ 200

Proportion of female

clients (%)

60 - 65 ~ 44 ~ 32

Total portfolio of loans

outstanding (€)

~ 80 billion

(~ $100 billion)

390 - 600

million

900,000

Range of loans (€) 100 - 850

($145 group

loans - $ 1,150

individual

loans)

545 - over

30,000 (on

average

11,000)

4,000 - 30,000

(on average

13,000 -

15,000)

Proportion of individual

loans (%)

81

(half of which

with group

guarantee

systems)

~ 95 100

9 Excluding banks10 Data Centrum voor Microfinanciering INHolland; corrected by taking out organisations without any

loans and taking out general banks - except for two Municipal Banks; they claim to be sustainable; their microfinance operations are not self sustainable

11 Range influenced by two larger MFIs/ Microfinance banks, i.e.. Fundusz Micro, Poland and Procredrit, both with significant portfolio’s

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21

The hard data as such do not tell us much about the way the sector developed. If

we want to develop the sector in the Netherlands we need to be open to study the

phenomenon in detail to find out how awareness is related to policy and which

channels and services are the more appropriate ones for the respective target

groups. In doing so, it can be useful to critically evaluate a number of “common

beliefs and statements”, asking ourselves what we can learn from the South and

how we can use it in the North.

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2 Microcredit for the poor evolving into microfinance for the self-employed and micro entrepreneurs?

There is no doubt about the many benefits of small loans extended to the poor in

developing countries9; they have indeed been making proper use of this opportunity.

The single instrument - microcredit - has gradually evolved into a microfinance

industry. That development has been gradual and consistent.

First, there was a clear awareness of poverty traps and the possibilities for the poor

to regain self-esteem and participate in society. That was later complemented with

the awareness that the financial systems needed to be developed and that more

services were needed, rather than single instruments like “microcredit”, in order to

meet the needs of enterprising people who wish to set up micro-enterprises.

Additionally, there is a growing understanding that the self-sustainability of the MFIs

needs to be replaced by that of the self-sustainability of the client.

Policies seemed to be in line with the evolution in awareness and have emerged

with strong impulses from its grass-roots and from civil society. Poverty alleviation

policy formed the basis later followed by policy to promote job creation

entrepreneurship and enterprise development”. Policies are now emerging to

stimulate and regulate the new entrants in the financial systems, the professionalised

NBFIs and microfinance banks and policies, leading to more inclusive sustainable

development. The sustainability of the clients is now receiving more attention and

calls for deepening of the present policies.

Organisations and institutions have grown and been logically modified parallel to

this growth. Many NGOs that first tried out microcredit on a project basis to serve

the poor have grown into NBFIs attending the enterprising self-employed and micro

entrepreneur, with those non-banking financial intermediaries now even transforming

into self-sustainable institutions and specialised banks as part of the stakeholders’

intention to create an all-inclusive financial system. The Non Bank Financial

9 Referred to as “the South”

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23

Institutions and Banks start playing a more important role in the sector, start to

compete more openly and are in search of new clients.

Products and services development have followed suit as well. A supply driven

approach with a single product (groups based microcredit) presented to the poor on

a “take it or leave it” basis has been replaced by an understanding that a demand-

driven approach is more effective and that the needs of the socially excluded, self-

employed and micro-entrepreneur are wide. Hence an array of financial products

and services is now on the market. The question remains whether the client base

has been changed over time and whether services offered match the needs of the

clients; and whether we can draw lessons for the development of microfinance in

the Netherlands.

2.1 Microfinance, from beating poverty to sustainable organi-sations and sustainable borrowers?

i. Microcredit for the talented poor...

“Poverty will be eradicated by developing and introducing microfinance. If all poor

people have access to finance and can borrow money, poverty will be eradicated.”

(Microcredit summit; MDG)

We can now see happy faces that tell us that, with only a € 50 loan, Naomi was

able to start her market stall and can now buy more food for her children. The data

are impressive: over 150 million people living in poverty have been reached and

have used the micro-loans extended to them, which have helped them to survive

and generate additional income. Millions of people appreciate this service and there

are thousands joining them every week. They are all fully engaged in their own

small economic activity: the running of market stalls or kiosks, or the stocking of a

vending place with items that can generate some income.

But are microcredit and microfinance reaching the very poor? It is rightly argued that

it is not (Vossen 2007): micro-lending started with offering credit (in a supply driven

mode) to a market accepting loans offered under almost any condition as long as it

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24

was competitive with the money lenders. Over the years, the sector became self-

selective, becoming a tool for the less poor.

Data reveal also that most microcredit programmes extended their small loans to

already existing activities, for example to people who have already started a venture

and acquired some resources. Microcredit is most useful for people endowed with

the talents to initiate an economic activity, who are willing to take such risks and are

in a position to accept the related financial obligations. Microcredit is used to a

limited extent by people who have just started something; it is aiming at and

selecting those who have initiated something already, those who have already

acquired some resources and assets. And microfinance is becoming even more

selective. At the higher end we even see that microfinance is now geared towards

the needs of the enterprising and entrepreneurial people, who have already made

a good start, have developed their venture and have acquired relatively considerable

resources.

We have become aware that we are losing sight of the poorest of the poor. In some

cases this leads to new NGOs entering the market with a particular focus on the

very poor. Sometimes they do so with the traditional approaches. However,

technological developments and innovations (IT based approaches) that offer new

chances to reach larger numbers of (potential) clients at rather lower costs are used

more frequently and there is a growing understanding that many of the people who

are not reached are the ones who would be better off with grants.

ii Microfinance and macro economic development...

the chicken and the egg?...

Practice shows the significant positive effects of microcredit and microfinance; in

many respects the poor are better off. Some governments even included statements

to that effect in their development plans. But will microfinance lead to sustainable

economic growth? Can we state that there is a correlation between macro-economic

growth and the growth of the microfinance industry? To what extent is it justified that

governments and the private sector invest in the microfinance industry?

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25

An assessment of the publications on microcredit and microfinance does not give

explicit answers to those questions and to date there are not enough longitudinal

studies that will shed light on the issue either.

It appears that the growth of the MFI sector has followed the growth of the economy;

a (tentative) conclusion in line with practice-based knowledge about the developments

in small and medium enterprise sector. But as in so many instances more in-depth

analyses reveal that such statements about microfinance are hard to support with

scientific data. An analysis of the Centrum voor Microfinanciering INHolland (Centre

for Microfinance INHolland) regarding the developments taking place in a selected

number of countries shows that the MFI sector has grown parallel to that of the

national economy (INHolland 2008). Until now there is no evidence that one has an

influence over the other - besides indirect effects.

In Bangladesh, 274 MFIs have provided loans to over 24 million borrowers. On a

population of 120 million (25 million households) this means that the MFI sector is

significant in this country. In spite of this, it is not possible to find and to prove a

direct relation with the national economy in traditional terms. In his biography,

Mohamed Yunus takes a defense stand by stating that economists only look at per

capita income and consumption levels, and that one needs to look at social aspects

as well. Others (Hulme and Moore 2006) conclude that the poor have improved

their economic position significantly but insufficiently, as it will still not lift the

household above the poverty line.

Bolivia has also developed a substantial microfinance industry. The number of

loans has tripled in the last ten years to slightly less than 600,000 on a population

of 8.8 million (2 million households). Gross Domestic Product (GDP) has grown

since 1999 with an average of 4% per annum. Social participation has increased,

but again we have not found evidence that one has triggered the other.

Our general knowledge about the development of the small enterprise sector can

be enlightening. A major lesson drawn from the comprehensive and global

evaluations of small enterprise development and support programmes in the late

eighties was that “the growth of the small enterprise sector is determined by the

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macro-economic development”. In other words: if you intend to develop the small

and medium (SME) sector, you need to pay attention to and promote the growth of

the economy at large. In laymen’s words: small enterprises do not bring

development, they follow development” (Gosses, Molenaar et al. 1989). Policy to

stimulate the SME sector needs to focus on the creation of an enabling environment

with a level playing field. They should focus on the growth of the economy and only

then on the establishment of (private and public private) SME-support organisations

that will render services on a demand-driven basis. The public sector needs to play

a facilitating role in removing the bottlenecks and/or stumbling blocks and keep a

proper distance from the actual implementation of support programmes. The same

is (probably) true for micro-enterprises and the self-employed and so far there is no

empirical and scientific evidence to prove the opposite.

For microfinance - just an instrument - to be effective, economic and political

conditions must be favourable for overall growth of the economy. This will create

the market conditions for enterprising people to sell products and services, however

tiny their business may be.

iii Microfinance for the creation of jobs and enterprises...

Public statements are often made that microfinance leads to more enterprise

development and boosts entrepreneurship. However, there is no evidence that such

a relationship exists. We do see, however, a growing understanding and acceptance

amongst management of NGOs, donor communities and policymakers of the

changing needs of the micro-borrowers over time. With the growth of the economy,

a number of micro-borrowers have become more mature and enterprising, wishing

their business to grow. From just accepting what is offered to them, they have

started to explicitly demand more services: larger loan amounts at reasonable and

affordable costs and long(er) repayment periods. They are pushing NBFIs towards

lending to the micro-enterprise sector. If the NBFIs want to retain their clients they

need to react to that trend, adjust their structures and services, and their staff will

need to understand them10.

10 See: Ecofuturo FFP in Bolivia that of the function of credit officers into that of salesmen of financial services

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27

Over time, the number of MFIs engaged in individual lending programmes for the

larger self-employed and micro-entrepreneurs has gone up, with 81% of all lending

being in the form of individual loans (Microfinance Information eXchange 2007).

Data collected by the Centrum voor Microfinance INHolland in 2008 shows that in

countries where microfinance matures the average loan sizes go up even with the

fast growing number of clients attended by the growing number of MFIs.

See table 2

But the shift towards attending the micro enterprises puts NBFIs in unexpected

dilemma’s. MFIs sustainability depends on the relatively high margins on the small

loans traditionally offered. The supported micro-entrepreneurs cannot afford to pay

the (interest) rates usually charged, and short lending periods are also not in their

interest. If the MFIs do not offer those products at affordable costs, clients will look

for other service providers. The often acclaimed client loyalty is probably a myth in

which the NGOs/NBFIs and some donors still believe; it hardly exists, as people will

opt for products at lower costs (lower interest rates) if these are on offer (Molenaar

and Hofstede 1998). And such can be offered by local (and international) banks

entering the markets. In spite of the definite needs of the micro entrepreneurs of

financial services it remains to be investigated whether the NBFIs with roots in

micro-lending are the appropriate organisations for this segment in the market.

iv Sustainability for whom?

Exigimos créditos ágiles y oportunos

1992, San Salvador, graffiti on a wall next to a bank

Las ONGs de crédito son ladrones.

2002, La Paz, graffiti on the wall of a building in front my hotel

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28

Tab

le 2

: N

umbe

r of

MF

Is,

borr

ower

s an

d av

erag

e lo

an s

izes

,

Cou

ntry

Num

ber

of

MF

Is

repo

rtin

g an

d

asse

ssed

Num

ber

of c

lient

s

repo

rted

by

MF

Is

Ave

rage

num

ber

of c

lient

s

Gro

wth

rate

in

port

folio

Ave

rage

loan

size

US

$

Gro

wth

in

aver

age

loan

siz

e

20

0320

0720

0320

0720

0320

07

2003

2007

Bol

ivia

1022

247,

612

676,

554

24,7

6130

,752

24.2

0%1.

397

1.50

07.

37%

Ken

ya9

1120

9,14

684

9,81

623

,238

77,2

5623

2.45

%28

240

041

.84%

Pak

ista

n5

616

2,96

272

8,46

632

,592

121,

411

272.

51%

170

190

11.7

6%

Uga

nda

78

188,

948

207,

200

26,9

9325

,900

-4.0

5%19

550

215

7.44

%

Sou

rce:

Cen

trum

voo

r M

icro

finan

cier

ing

INH

olla

nd,

base

d on

dat

a of

(M

icro

finan

ce I

nfor

mat

ion

eXch

ange

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29

People went to the moneylender but cried out that they needed help. The NGOs

came to their rescue, but they are criticised nowadays. Ten years have passed, but

has the situation changed for the poor for whom microcredit was intended? Was it

all to build up self-sustainable organisations or are we concerned with the

sustainability and continuity of the business venture set up by the clients?

Over time, many donor organisations have shifted their attention from extending

loans to the poor to the creation of this new sector. Many believe that the

development of this instrument and its organisation have received and still receive

more attention than the development of the client. Creating an all-inclusive system

has been advocated by the United Nations Development Programme11 (UNDP

2006), accompanied by a growing pressure by the donor community to account for

the funds made available and to report on effects and impacts.

The whole sector is expected to serve all target groups: the very poor and less poor

who merely want to survive or add some income, the (temporary) self- employed,

the micro-entrepreneurs and the small entrepreneurs. Furthermore, all institutions

are expected to be self-sustainable, with the clients paying for the actual services.

The question may be put whether such a pattern is sustainable in itself. To what

extent are we correctly charging the clients?

The Microfinance Information eXchange reported that of the 3,000 NGOs/NBFIs

surveyed (Microfinance Information eXchange 2007) there were (only or already?)

300 organisations that claimed that they had reached sustainability. They had

achieved this through proper financial management, charging interest rates that

cover costs; interest rates that the clients willingly paid.

A closer look into general practices is very illustrative of a reality many do not want

to see. The sustainability of the micro-lending organisations is determined by the

income they generate, i.e. the margins they make on lending operations. The

operations are costly; therefore high interest rates are needed and justified.

11 The so called Bleu Book is a now a major reference document for anybody engaged in microfinance development programmes

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Studying the issue of sustainability one remains with the impression that all

reporting is about sustainability of the actors in the sector. What about the

sustainability of the borrowers? Do they have a chance to opt out? How many of

them will indeed become sustainably self-employed? You have no income, no job,

and no choice but to start for yourself. The poor self-employed emerge. You hardly

have any savings and finance your economic (survival) activity almost for 90% with

borrowed money. The interest rates you pay are as high as 45% per annum. Do you

have to be a macro-economist to know that, in the long run, this is not

sustainable?

Anyone bitten by the moneylender will know it is disastrous and often fatal.

However, being bitten by an NGO can be painful as well. Are people better off?

Have we offered them a chance to set up economic activities that are really self-

sustainable? Will those new economic activities generate sustainable work and

therefore income? Which economic activities in society generate sufficiently high

returns for the borrower to be able to pay such rates indeed? And also, will it

eventually lead to economic growth? Those questions were pushed to the

background when most attention went to the building up of an all inclusive - self

sustainable - financial system. Nowadays clients have matured, become conscious

of their own situation and are more aware of their needs. They become more

outspoken and make it understood that their sustainability is more relevant than that

of the institutions proper. The question arises for stakeholders whether a neo-liberal

stand will hold ground. Maybe time has come to reassess the issue of sustainability

and search for new solutions whereby stakeholders take a broader view.

If for macro-economic reasons we consider it important that people participate -

economically - in society and can only achieve this through microcredits, we may

as well ask who needs to pay for all costs. For a dynamic economy we need not

only social participation but (economical) sustainable micro and small enterprises

as well. Both sectors in the markets require their approaches. Sustainability also

implies level playing field and equal chances for the enterprises started. It obliges

us to look into sustainability and fairness again with a more social-economic view.

In my opinion, the era to pay attention to this has come.

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2.2 Policies in support of the clients or the organisations?Policies in developing countries to support the sector have been modified in line

with a broader awareness of the many problems to tackle: poverty, weak financing

of the intermediaries, lack of jobs and entrepreneurship. The actors, the NGOs and

NBFIs have played a very determining and active role in shaping those policies.

Over time, many micro-finance organisations have adjusted their policies and have

gradually shifted away from a direct focus on the user towards a basic concern with

the development of their own organisation and its sustainability. The challenge in

the years to come is to develop policies that take into account the sustainability of

the clients as well. See figure 2.

Figure 2 Evolution of policies for microfinance

1900 - present• Povertyorientationandsocial

participation through economic activities (income generating)

• Developmentoffinancialintermediariesand their sustainability

• Developmentofall-inclusivemicrofinance system

• Sustainabilityofenterpeneurialclients• Fairnessforthepoor

Since late 90ies

2006 - present

The future?

The client

The institutions

The clientagain (?)

By the early nineties, development specialists and fieldworkers had become well

aware of the limitations of development strategies and the disastrous effects of

poverty on the poor and on society as a whole. New approaches were sought that

could be instrumental to stimulate the poor to actively participate in society. Grants

did not lead to desired independent behaviour, but microcredit was expected to

have such effects. It was introduced and developed at several places in the world

at almost the same time. It turned out to be the right instrument at the right time.

And microcredit was received favourably by poor people.

NGOs understood quickly that extending microcredit could also generate income,

allowing them to reduce dependency on external donors. The target group appeared

to be willing to pay relatively high interest rates, as long as they were significantly

lower than those of the moneylenders. The NGOs themselves were instrumental in

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32

formulating policy to that respect. Donors have jumped happily onto the bandwagon,

as this gave them an argument to, in time, withdraw assistance from NGOs that

they had supported for years. The income generated should be sufficient to ensure

self-sustainability of the NGOs and the poor could generate such an income.

In many countries, the financial systems were deficient in such a way that indeed

attention was paid to developing the microfinance sector: as a matter of fact most

of the attention by the donor community was dedicated to this issue. The primary

objective has become organisational development and not so much the development

of the micro-enterprises or other economic activities. Attention first focuses on the

creation of new intermediaries who in turn will focus primarily on their own

sustainability and development patterns. The generated income, the performance

of their organisation, the quality of management and staff and the risks incurred are

all of prime concern.

Transformation processes and organisational development programmes nowadays

get full support. Many of those programmes are based on the belief that there will

be a gradual growth of NGOs evolving into NBFIs and eventually into (Non) Banking

Financial Institutions and even regulated - specialised - banks. This goes hand in

hand with a belief that clients will graduate too, contrary to findings that such

graduations are of limited significance. Once established and functioning properly,

these organisations can shift attention to the prime concern of their borrowers: their

own sustainability.

In growing economies, the roles of micro- and small enterprises and of people

wishing to set up such businesses become more relevant and important. There is a

new group of people that wish to set up new enterprises with an eye to continuity,

generating decent work and a more steady income. In order to do so, these new

entrants in the economy need larger amounts of money, more tailored to the need

of the new enterprises and entrepreneurs. To support this, there is a need for

policies to promote and stimulate micro- and small enterprises. These policies focus

on creating an enabling environment, a level playing field for the sector and

effectively functioning support institutions. New financial services are needed

besides pure lending such as guarantees, transfer facilities, factoring and leasing,

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but often still in amounts smaller than financial institutions - if at all present - are

used to offer. This calls for the development of new financial intermediaries.

We see an increase in the average loan amounts and a prevalence of individual

lending; by 2007 81% of the MFIs were working with individual loan programmes

(see table 3). They have started to extend services to micro- and eventually small

enterprises. Mature NBFIs in countries like Kenya, Bolivia or Pakistan, continue to

offer small microcredits, but they have added smaller loans to their package as well,

shifting their attention to micro-enterprises. Mohamed Yunus, for instance, confirms

that in Grameen Bank average loans have gone up to the extent that now installment

payments are higher than the average loan size in the start-up phase of the bank.

This process is very much determined by a shift from supply-driven operations to a

more market- and demand-oriented approach. While in the past the MFIs could just

offer one single type of product that was widely received and procured by the users

- since these had no alternatives -, the MFIs see themselves confronted with a more

mature client group and, more interestingly, with a more competitive microfinance

market.

Table 3 Average loan size and proportion of organisations in developing countries

engaged in the product for the various types of loans available.

Average

loan size

($)

Proportion of number of MF

organisations engaged in

the product (%)

Individual loans 1,142 36

Solidarity group guaranteed/

individual lending

350 45

Solidarity group-based lending 122 9

Village banking 145 10

Source Centrum voor Microfinanciering INHolland/Triodos Facet based on data of

Microfinance Information eXchange)

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The question here is therefore why do NGO/NBFIs wish to move upwards? If they

do so, it must be because of the new markets they expect to serve. It looks like it is

based on the belief that once the poor have become economically active, they will

eventually graduate and become entrepreneurial. NGOs and NBFIs will then have

to graduate accordingly. But the fact that many will not graduate is thus denied.

Many poor will seek wage employment once they are offered that chance. They

might be enterprising out of necessity but that does not imply that they will become

entrepreneurial12. Secondly the question may be raised whether this traditional view

on the market MFIs operate in, still holds ground. Also in developing countries the

labour and enterprise market are subject to changes with lifelong employment or

entrepreneurship becoming less prevailing. Also the temporary self-employed will

look for financial services. The MFIs need to have programmes and policies to meet

the needs of the self-employed and the temporary entrepreneurs as well.

2.3 NGOs becoming NBFIs or even banks in search for new client groups

Over time, NGOs with donor support started to expand microcredit funds and

became aware that the real issue was access to financial services and building-up

sustainable financial intermediaries13. Therefore, they offered more services to their

clientele (ranging from savings, transfers to insurances and even leasing) and

became microfinance institutions, some of which are regulated nowadays. Now,

however, there is doubt whether the poor, who indeed deserve very good services,

are better off with financial intermediaries functioning like that. To what extent will

that be to the expense of the client when they have to pay for all costs? And to what

extent is it justified to let them wait (and how long can and must they wait) while the

NGOs are still transforming themselves into self-sustainable (non) banking financial

intermediaries (fig. 3)? The fast growth of internet based lending systems (like

KIVA, Prosper, Empresar or MYC414) already indicates that the traditional

practitioners leave a gap for others and that the market is far from satisfied yet.

12 Prudence must be observed with the expression “necessity entrepreneurship” for the many people who struggle to survive through income generating activities. It is doubtful whether this is done with a vision to set up an enterprise

13 The development and growth of Credit Unions take place separately and are not discussed here.

14 Different internet based systems that have in common that they seek a way to link clients directly to potential investors

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Figure 3 From NGOs towards microfinance banks

NGOs

NBFIs

MF Banks

General Banks

The aggregated data reveal that the NGOs are gradually becoming less dominant

in the market, with banks and non-bank financial institutions (Rhyne and Otero

2006) taking over a larger share of the market. Three groups of banks are becoming

major players: (i) those graduated from NGOs/NBFIs (such as K-Rep in Kenya or

Mibanco in Peru), (ii) local general banks and (iii) international banks (Boúúart

2008). In spite of their claims that they serve the poor, most of these banks serve

the upper end of the market: their major clients are the micro-entrepreneurs. Their

entry into the market leaves less room for those NBFIs that are gradually moving

upward in lending operations. This obliges NBFIs in search of new markets to

distinguish themselves: the individual customer who wants to become self-employed

and has not yet dared to start a micro- or small enterprise might be that particular

client. In addition they might pay more attention to the question to what extent they

are still operating in line with their original social mission15.

When MFIs move upwards with their operations, they leave the poorer clients

unattended and create a gap in the market. Of late, we have seen this gap being

filled in two ways: Firstly, new NGOs are entering the market but now with a very

15 Social performance measuring programmes might be a way out here.

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36

clear focus on poverty alleviation, seeking to introduce new methods and very well

aware that they do not wish to follow the development path that the previous NGO/

NBFIs have travelled. They will seek for innovative approaches in organising

service delivery to the poor referred to as social innovators (Rhyne and Otero

2006). Secondly, organisations specialised in IT based innovations will enter this

market launching new cost effective and easily accessible products, such as

lending through mobile telephone and internet-based lending and savings operations

(technology innovators).

2.4 From social services to servicing enterprises…

i From credit for all poor to loans for (selected) entrepreneurs...

Economic survival activities have less to do with enterprise development than

generally thought. Poor people are indeed ingenious in finding ways to survive, as

Gert van Manen rightly argues in “Microcredit, Sound Business or Development

Instrument” (van Manen 2004). It is impressive to see how, every day, poor

women and men alike find ways to generate just that little bit of income that brings

them to the next day or even allows parents to send their children to school. This

gives all family members hope that their children will eventually have a better life.

An enterprising attitude might be needed to survive, but that does not imply that we

are dealing with the start-up and development of a business. It also does not imply

that all those who struggle daily to survive have the entrepreneurial acumen and

attitude that will result in successful enterprises. How many of the poor that now run

a market stall will become owner of a super or minimarket? How many rickshaw

drivers will become owners of a transport company? How many of them will

consider dropping their activity when offered a formal job? How many of them really

look beyond the immediate future and think of building up their businesses? Most

of these people will prefer to pay off the small micro-loan and take that job.

We must be careful in labelling a microcredit programme as business development.

Most of the smaller loans are used to finance permanent working capital for trade

and for some service activity. With very short repayment periods, often in terms of

weeks or months, aggravated by the high interest rates, borrowers hardly have a

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chance to build up capital and will need to renew their loans constantly. A

percentage started as micro entrepreneur or has become one; they prefer to stay in

their business and let it grow. Sometimes, some of them graduate into becoming

larger scale enterprises.16 These are presented as the role models for others to

follow.

The more successful NBFIs develop new financial instruments, catering for the

needs of those micro and small entrepreneurs. However, by doing so, they will need

to adjust their systems. Loan decisions could first be based in the repayment

capacity of the household. When MFIs will wish to sell their loans to the new

enterprises, they will need to evaluate the financial economic return of the proposed

businesses and the entrepreneurial capacity of the applicants. From an “open to all”

programme, they become more selective. This implies adjustments in the

organisational culture, new procedures and recruitment of other type of staff

members. And, above all, new loan conditions.

ii From group-based approaches to individualised services

Many NGOs started their microcredit programmes with group-based methodologies.

Originally it was assumed that such methodologies were effective and efficient in

attending the target groups. Larger numbers of poor people could be attended to

and transaction costs were kept to a minimum.

Only 20% of organisations engaged in microcredit and microfinance are solely

concentrating on group-based programmes (table 4).

Of course, some NGOs are convinced that group-based mechanisms are the

proper instrument for development. They can be quite effective in introducing social

mobilization processes and programmes to create more awareness. To reach out

to large numbers, group-based approaches can be most effective. Other services

- dealing with literacy, education, awareness raising, health, sanitation - can be

16 Studies carried out in the eighties have already showed that relatively few people will graduate from survival or micro to small business study of.Little, I. M. D., D. Mazumdar, et al. (1987). Small manufacturing enterprises : a comparative study of India and other economies. New York; Oxford University Press [for] the World Bank,.; Although the contrary is often mentioned that has not yet been proven…

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channelled effectively through such groups, but these groups do not function as a

guarantee system. Others start with groups mainly for distribution reasons, whereby

the members of the group are a mere referral instrument to find the right clients.

Groups can be very effective as referral system, distribution channels and social

control mechanisms, but such control systems can become social pressure cookers

as well. Practice shows that groups disintegrate once one or more members

become successful, graduate to entrepreneurial levels and need more personalised

financial services17

This issue so far has been studied on a very limited scale18 but apparently too much

criticizing is taboo. Nevertheless we may state that group work can be effective in

social participation programmes, but practice reveals that when it comes to

enterprise, development group lending is less adequate.

17 In 1998 I argued such already in Molenaar, N. (1998). The Myths of Microcredit. Time for reflection.

18 Fundamental research is for instance undertaken by Dean Karlan and his team at Yale University, and Innovations for Poverty Action, as presented at the seminar on Entrepreneurship and Microfinance organised in October, 2008, Amsterdam, University of Amsterdam

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The shift to more individual-based lending programmes goes hand in hand with an

increase in the average loan amount and a shift in the use of micro-loans. It reflects

a shift from survival economic activities to a focus on enterprise development. See

table 4.

Table 4 Shifts in microfinance methodology and channels

2006 2003

Sample size MFI’s 704 231

Methodology;

individual lending

based mainly

Individual lending systems22 (%) 35.8 32.0

Individual lending mixed with Solidarity

programmes

44.9 41.6

Methodology :

Group based only

Solidarity - group guarantee based

programmes

9.2 15.2

Village Banking - group based lending 10.1 11.3

Organisation/

channel Type (%)

Bank 8.0 13.4

Credit Union 10.5 8.7

Non Bank Financial Institution (NBFI) 32.7 31.2

NGO 40.1 41.1

Rural Bank 8.8 5.2

Average Loan

Balance per

Borrower/ GNI per

Capita (%)

82.5 74.7

Source Data of Mix market MFI benchmarks 2007 adjusted by Centrum voor

Microfinanciering INHolland

19 Example: 9.2% of the MFI’s from this sample were using solidarity methodology in 2006

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iii From finance to revival of BDS services?

Offering only financial services to (micro-) entrepreneurs is expected to suffice and

enable them to start and develop their businesses. The minimalistic approach and

theory has strongly steered us toward that line of thinking and may even have done

harm. Coaching and training are not considered as effective as lending, and the

RSIE studies in the late eighties revealed the importance of macro-economic

conditions for the growth and development of the SME sector. Without a conducive

and enabling environment, and without a level playing field for all participants, it will

be difficult for SMEs to develop and grow. The evaluative studies also argued that

supply driven services are less effective, but that did not imply that they need not

be developed and offered.

Figure 4. L’histoire se repête?

From integral services for SMEs to BDS added to...

Financial andbusiness

development servicesfor small and micro

enterprises

Mono product i.e.micro credit for the

poor

All inclusive financialservices for microborrowers / users

Financial services formicro entrepreneurs

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MFIs took off on mono-service paths and many of them even closed the BDS

service delivery units altogether. If they offered training or counselling, it was mainly

focused on explaining borrowers how to make use of the micro-loans, what

procedures to follow and which conditions to meet (fig.4).

The minimalistic approach pushed many BDS suppliers out of the market. However,

with NBFIs moving towards financial services for micro- and small enterprises, so

does the attention move towards additional services to meet the needs of the micro

and small entrepreneurs.20 General feeling is that those are more relevant and

effective for small enterprises, but it is still not quite clear whether the very small

borrower will need such BDS services (Sievers 2004). An important lesson to draw

when promoting this in Europe.

20 For instance in Bolivia NGOs such as IDEPRO that once fully committed themselves to microcredit and even set up special financial institutions (Ecofuturo FFP) are not setting up new BDS programmes again.

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3 How green are the pastures in Europe?

We are very rich in Europe. Our wealth allows us to introduce and develop systems

and programmes. There are a number of successful organisations that have grown

significantly, but it is not yet clear in which direction things will evolve. There is a

rather top-down approach, with the EU now taking a prominent place, launching the

“European Initiative for the development of microcredit in support of growth and

development”, but stakeholders are stuck between a focus on combating poverty,

social exclusion at the one hand and enterprise development at the other. The

Lisbon Agenda plays a dominant role in that debate.

The people successfully running MFIs have learned from practice, from each other

and from the many evaluations carried out. However, there is not one single overall

approach There are a variety of programmes and methodologies, most of which are

engaged in enterprise development (regardless of the client groups they target).

The biannual survey on microfinance in Europe undertaken by Foro Nantik Lum at

the request of the European Microfinance Network EMN demonstrate this

clearly(Jayo, Rico et al. 2008)

Most noteworthy is that average loan sizes are rather high compared to those in

developing countries. Still, there are a large number of enterprising people in

Europe who consider themselves excluded from the existing financial system. A rich

society which has become very diverse with dramatic changes in the labour market

is in need of innovative approaches to strike a balance between two overriding

objectives: making Europe more enterprising and reducing social exclusion. Thus,

linkages between policy and practitioners trying to develop MFIs need to be

established and due attention needs to be paid to further boosting organisational

development, with the aim to serve the market.

3.1 Enterprise development or social inclusion?... The mission of EMN is to promote microfinance as a tool to fight social and

economic exclusion by developing self-employment and micro-entrepreneurship.

This will be achieved by supporting the development of microfinance organisations

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through the dissemination of good practices and by improving the regulatory

framework at European Union and country level …..

(Mission statement of the European Microfinance Network - EMN)

Microfinance is still a new phenomenon in Europe and gradually receives more

attention and support. It is embraced as an effective instrument either through

stimulating social inclusion by economic participation or through the promotion of

entrepreneurship and development of businesses. A wide range of initiatives are

deployed, resulting in emerging NGOs setting up programmes for the unemployed,

state-owned development banks developing business starting up programmes or

private financial institutions embarking on small enterprise lending. In most cases

the initiators claim to be engaged in microfinance. There is no consensus yet as to

the role of microfinance in Europe, yet the European Commission and some

governments centrally state that it needs to be supported. In the past five years

microcredit and microfinance have evolved dramatically. This goes hand in hand

with a progressive understanding of possibilities and limitations of these instruments

in Europe. Scattered over Europe, initiatives have been taken without much

uniformity: community based microcredit programmes versus donor supported

programmes. Interestingly, a number of them have flourished, often attributed to the

charismatic leadership of the founders.

In 2005, it was still difficult to report significant results in terms of numbers of people

served and hardly any common objectives among the initiatives could be revealed;

in 2007, data have demonstrated that the sector has gained ground. (Jayo, Rico et

al. 2008)

The number of loans disbursed between 2006 and 2007 has increased with 14%,

while the growth rate of the value micro-loans disbursed in Europe between 2006

and 2007 was approximately 32%.21 The loan sizes vary with the institutional type

in Europe. Banks, non-bank financial institutions and government bodies tend to

offer bigger loans than credit unions, NGOs, savings banks or foundations

(Table 5).

21 The highest growth rate can be seen in Spain (154%), followed by Netherlands (63%), Austria (59%) and Belgium (54%), where the sector is very young but growing fast.

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Table 5 Average loan sizes and microfinance organisations in Europe

Type of intermediaries Approximate average /

range of (individual)

loan sizes (€)

Microfinance

organisations engaged

(in %)

Credit Unions 4,500 2

NGOs/Foundations 8,200 54

Savings Banks 9,700 6

Public/private bodies -

project status

11,000 - 13,000 23

Banks/non-bank

financial institutions

14,500 - 15,500 14

The aggregated data demonstrate that there is an apparent tendency for the

attention to shift to larger loan amounts and therefore to small enterprise

development. This implies a change in the type of clients targeted. A closer look at

the distribution of this growth within the EU shows us that this upward trend is

spread evenly across all member states. In 2005, the average loan size increased

from € 7,700 to above € 11,000, with loans ranging from € 545 - sometimes group-

based - in Eastern / Central Europe mainly to over € 30.000 in Western Europe.

There are two distinct developments in Western and Eastern/Central Europe.

In Western Europe microfinance is considered - by policy makers - a valuable

instrument, following the Lisbon agenda, designed to promote growth, employment

and social inclusion. Social security systems undergo drastic changes, stimulating

people to become socially and economically active. This goes hand in hand with

changes in the labour market, stressing the importance of self-employment and

placing more emphasis on the education systems on entrepreneurship. Those

changes “produce enterprising people” in search for new financial instruments for

business start-up and self-employment.

In spite of the presently developed financial markets and institutions in Western

Europe, people wishing to become self-employed and/or setting up an SME have

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difficulties in obtaining external financing for economic activities (due to costs, risk

perceptions, and evaluation methodologies) and the absence of relevant additional

financial services (pensions, insurances).

Initiatives have a more local and personalised character, with local organisations

experimenting with microcredit programmes (Underwood 2006) and, in spite of all

policy support received so far, the microfinance sector in (Western) Europe has

difficulty demonstrating that MFIs can operate in an effective and self-sustaining

way in an environment characterised by highly developed financial sectors and

welfare systems (Everts and Lahn 2006).

In Central and Eastern Europe, the micro-lending providers’ main focus is on

reaching larger numbers of people without access to external financing, either due

to the absence of financial intermediaries or due to the collapse of the overall

financial system.

We see a “traditional development pattern”, with NGOs and MFIs being set up - with

external donor support - to provide services to people not reached by formal

financial institutions. Their main aim is to reach large numbers of socially and/or

economically excluded people.

According to the European Commission’s estimates, there are about 700,000 (new)

potential microfinance clients in Europe, representing a loan portfolio of € 6 billion.

This seems to warrant special support. The debate about the role and purpose of

microcredit and microfinance takes place most at central levels. Contrary to the

situation in developing countries, the NGOs play a limited role in this debate.

Representatives of the EMN are consulted on an ad hoc basis. Banks appear to

play a more important role; their representative bodies, such as Eurofi22, are

listened to by the European Commission and consulted more structurally in the

policy formulation process.

Recently the European Commission has acknowledged the potential of microfinance

with the launching of the “European Initiative for the development of microcredit in

22 Eurofi, a European think tank of EU leading Financial, Insurance and Banking Institutions (based in the main EU countries) created in 2000.

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support of growth and development “(European_Commission 2007).Not only does

the name of the initiative proper hint at the difficulty of reaching a consensus in

which direction to work, but it also hints at the development of commercially self-

sustainable microfinance institutions. The MFIs are expected to offer microcredit to

beat social exclusion and a financial system needs to emerge with a diverse set of

financial intermediaries offering a wide range of financial services to large numbers

of enterprising people who wish to set up their own business. Even the EMN seems

to struggle with this dilemma, as can be learned from its mission statement at the

beginning of this section.

3.2 Mismatch between mission(s) and practiceOver the past years, microfinance has been introduced and has rather quietly

gained a place in a number of European countries, such as Finland, France, Spain,

the United Kingdom and Rumania. Many of these programmes have been launched

by people inspired by microcredit in developing countries and are often lead by

professionals with previous experience in such programmes. In most cases the

launching of the programmes was not the result of explicitly formulated policy, policy

often followed practice. Exchanging experiences and ideas from the South

constitutes the start of the policy formulating process among the practitioners. The

European Microfinance Network (EMN) plays a catalyst role in this process. At

present, it has 67 members from 21 EU member states(EMN 2008), with a joint

portfolio size of over 80.000 clients

For the European Initiative to be effective, coherence between the European and

national poliies needs to be sought. In the 2007 Survey of the Microfinance sector

in Europe (Jayo, Rico et al. 2008) an assessment was also made of the Mission

Statements of the majority of the organisations. These could be classified into the

following four main categories:

- Job creation and entrepreneurship promotion

- Small and Medium Enterprise (SME) and economic development

- Financial inclusion

- Social inclusion and the fight against poverty

Creating jobs and promoting employment as well as social inclusion and fighting

poverty are considered the primary goals (29%). Twenty-six percent focus on SME

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and economic development and 20% on financial inclusion. Overall, the greatest

emphasis in Western EU countries is on job creation and financial and social

inclusion, and in the Eastern EU states on SME and economic development. See

figure 5.

Figure 5 Microfinance diverse mission statements in Europe

Social inclusion andfighting against

poverty.26% Job creation and

entrepreneurshippromotion.

29%

Financial inclusion.20% Small and Medium

Enterprise (SME) andeconomy development.

26%

Source; EMN survey 2006-2007

The EMN survey reveals that most of the foundations and NGOs claim that they

concentrate on employment and on a combination of social and financial inclusion,

whereas banking institutions (banks and savings banks) concentrate on financial

inclusion and SME development. Governmental bodies focus on employment and

SME development and non-bank financial institutions focus on SME development.

Apparently there is a mismatch between reality and mission statements, and overall

loan sizes are increasing. In Western Europe, most microfinance organisations tend

to focus on business start-up and business development; this is the type of

economic activity the banks and existing financial intermediaries prefer to support

and for which they have services in place. This trend may still leave the self-

employed person without being served. Additionally, it will not reach the many

socially excluded who seek ways to supplement limited household income with

small economic activities (for example for those depending on social welfare and

those who just want to do something in addition to formal - part time - work).

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In Eastern/Central Europe, the microfinance institutions seek their own self-

sustainability. As this can be achieved by attending large numbers of clients with

“traditional” microcredit, loan sizes tend to increase. Larger loan amounts offered to

existing clients give clients the opportunity to improve income and to reduce costs

relatively. This might be sustained as long as the clients are willing to pay relatively

high interest rates, but it still lures the intermediary away from its original mission.

3.3 A large number of organisations, but only a few are actively engaged

In the European Union there is a wide spectrum of organisations (most of them

not-for-profit entities) offering microcredit and/or microfinance: non-governmental

organisations, foundations, government bodies, savings banks, banks, credit

unions and non-bank financial institutions. This variety is related to the regulatory

framework in each country.

The vast majority of the European Union lenders are not-for-profit organisations in

the form of Non-Governmental Organisations (NGOs), foundations (; 54% of

microfinance organisations) or government bodies/projects (23%). In Central/

Eastern European countries (e.g. Rumania or Hungary), microcredit providers tend

to have a for-profit legal status. In Europe, banks have not yet made serious

attempts to move into the microfinance market. So far they have incidentally

assisted NGOs, but no special programmes have as yet been set up by them

independently. Should they do so, they would most probably seek to serve the small

and micro-entrepreneurs. Additionally, they might opt to form a coalition with NGOs

to reach the lower end of the market. This remains an area where policy and options

still need to be worked out. Credit unions, state banks, ethical banks, savings banks

and non-bank financial institutions also disburse micro-loans within the EU, but they

form a smaller part of the spectrum.

In Poland, Portugal and the UK, hundred percent of the organisations are NGOs. In

Italy, NGOs and foundations make up two-thirds of the market. In Spain, Germany

and Finland, lending activity is restricted to banking or government agencies. In the

UK, non-governmental lending institutions have a specific legal status: “community

development financial institutions”.

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This group of organisations engaged in microfinance service delivery can be split

up again into small - specialist - organisations and larger institutions, where the

microcredit programme represents a small portion of their activity.

Most non-bank lenders have a geographic scope limited to regions or localities. The

most striking issue is that most of them (above 50%) tend to disburse less than 50

loans per annum.

In 2007, only 20% of the organisations reported that they were disbursing more than

400 loans per annum. Most of these organisations are located in the Central/

Eastern EU countries (Poland, Bulgaria and Romania). In these countries, MFIs are

also founded with that perspective. In Western Europe (France, Finland, UK and

Spain) there are also some larger organisations operating on a large scale, but

there is as yet no general consensus that the market needs to be served by larger

organisations. Many organisations in Western Europe became engaged through

project funding (European Social Fund, local, central government funding). Their

organisation life cycle seems to be determined by the project funding and no clear

policies have as yet been formulated to support them beyond such a period.

Banks, non-bank financial institutions and government bodies tend to offer bigger

loans (ranging from € 15,450 to € 11,000) mainly for micro and small enterprises

(start-up) than credit unions, NGOs, savings banks or foundations (€ 11,100 to

€ 4,500). In most - Western - EU countries, well established networks of banks and

financial intermediaries exist, covering almost all types of services (contrary to the

situation in many developing countries). To reach out to a large number of clients,

their networks of banks and their administrative and IT systems are very valuable.

Microfinance operators state that they wish to operate with banks. However,

working with banks also pushes microfinance programmes towards financing of

business (start-up) and enterprise development. This also appears to be the case

in pilot schemes such as the ones set up in the Netherlands with the Ministry of

Social Affairs. Whether the present banking system is geared up for rendering

services that lead to active social inclusion remains to be seen, but active policy

formulation and implementation in that direction by the banking community should

not be expected.

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3.4 So many services, and yet the primary focus is on SMEsAlmost all microfinance institutions in Europe offer credit in the form of small

individual loans (ranging from € 525 to more than € 30,000). Hardly any of them

have opted for group-based lending or lending supported by group guarantees. The

MFIs and other organisations do not offer “traditional” microcredit, e.g. very small

amounts with relatively high interest rates and extremely short repayment periods,

nor are the loans offered intended for survival economic activities. Rather, there is

a tendency to offer smaller loans in support of enterprises and self-employment.

i Clients are mainly the self-employed and the micro-/small entrepreneur

The client groups reached and serviced by microfinance organisations in Europe

tend to be quite different from the traditional target groups of MFIs in developing

countries. Again, it becomes apparent that their main focus is on enterprise

development. The following significant issues emerge:

- Focusing on SMEs

- Relatively large proportion of business start-up (in Western Europe)

- Tendency to increase loan size

- Less presentation of women in the portfolio

- Less dominance of rural/urban differences

MFIs claim that they focus on the unemployed people or people on welfare, ethnic

minorities and immigrants. Some MFIs also claim that special attention is given to

youths and people with special - physical or psychological - needs.

Whatever target group they claim to attend to, MFI’s main focus is on enterprise

development and business creation. The majority of MFIs currently active in Europe

target start-up businesses (86%) as well as existing enterprises (74%). The smaller

enterprises are of major concern, with 61% of the organisations supporting

businesses with five or fewer employees. Most operate in the formal economy, with

approximately one in three (32%) rendering services to unregistered informal sector

businesses. Lenders subsequently tend to assist businesses in making the

transition to the formal sector (see figure 6).

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Figure 6: Organisations in Europe offering microfinance and their client groups

Start-up enterprises

Existing enterprises

Registered businesses with lessthan 5 employees

Entrepreneurs in the pre-start upphase feasibility studies

Informal sector / unregisteredbusinesses

Registered businesses with 5-9employees

Other

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

86%

74%

61%

36%

32%

30%

17%

Percentage of organisations attending respective client groups

Source: EMN 2007 Survey 2006/2007

In the UK and the Netherlands, micro-lending is primarily an urban phenomenon. In

France, Spain and Italy, the organisations focus both on urban and rural areas. In

Romania and Poland, the main emphasis is on the rural population (although 50%

of the MFIs target both rural and urban clients). This focus is a response to high

rural unemployment after the closure of state farms during the transition from a

centrally planned to a market economy. But again the tendency is to attend the

relatively larger clients.

With 44% of microloans(Jayo, Rico et al. 2008)23 extended to them, women remain

under-represented in lending figures, both in relation to their proportion in the

population and in relation to micro-lending programmes elsewhere in the world.24

23 This lending rate, however, is greater than female entrepreneurship rates in Europe, which are estimated to be 30% see Middlesex, U. B. S. (2000). “Young Entrepreneurs, Women Entrepreneurs, Ethnic Minority Entrepreneurs and Co-Entrepreneurs in the European Union and Central and Eastern Europe.”

24 Combined lending data for Central and Eastern Europe, the Balkans and the Newly Independent States suggests that 62% of micro-loan clients are women. In North America, 59% of clients are women and in developing countries well over 80% of clients are women (Underwood, T. (2006). Overview of the Microcredit Sector in Europe 2004-2005. EMN Working paper. 4.).

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Again it shows that more attention is being paid to the higher end of the market and

less to the issue of social exclusion often without explicitly opting for this direction.

ii Service packages mainly geared for small and micro enterprises

The service packages that prevail in Europe reflect the (implicit) preference to

support SMEs. The key characteristics are:

- Individual loans rather than group-based lending. Almost all operators in Europe

prefer individual lending programmes to group-based lending.

- The average loan size in Europe is around € 11.000, ranging from € 525 to

more than € 60,000, far above the EU defined of € 25,000, and increasing over

time with the higher loans offered by a number of German, Hungarian and

Italian MFIs and Dutch - governmental programmes25.

- Loan terms are determined by the type of business: the current average loan

term is three years, quite long in comparison with most developing countries.

Grace periods are normally six months. Again, comparing this with practice in

developing countries, it is apparent that the financial burden plays a determining

factor in defining such conditions.

- Interest rates remain a controversial and unsolved issue. The average interest

rate charged in Europe by MFIs is 8%, which is more than three points above

Euribor (4.9%). There is, however, a clear distinction in Europe: in Western

Europe market rates are indeed acceptable but extremely high rates are not

accepted on moral or ethical grounds. In Eastern and Central Europe in

countries such as Romania, Bulgaria, Slovakia and Hungary, more for-profit

organisations can be found, which strive for self-sustainability and charge high

interest rates to cover operating and financial costs.

- In addition to interest, most MFIs - in their desire to cover costs - in the EU area

charge loan application fees, loan processing and interest penalties on top of

the interest as a means for covering operational costs. This is most common

where MFIs strive for their own self-sustainability.

25 The Ministry of Social Affairs and Employment finances a support programme offering training, advise and sub-ordinated loans up to € 31.900 for business start up to social welfare beneficiaries

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iii Other financial services coming up

Microfinance refers to the provision of a range of financial services that includes

small loans for enterprise development but also to non-financial services or better

referred to as business development/support services.

Almost one third of the MFIs in Europe offer “other financial services” (beside

individualised lending for self-employed and SMEs), such as consumer loans,

savings products, insurance, money transfer services, pensions, home mortgages

and debt counselling services geared towards vulnerable people with no access to

formal banking.

Unsecured lending is not very common in the Europe. Most MFIs seek ways to

secure loans through collateral or through external guarantees (third party

guarantees or guarantees from guarantee funds). In quite some EU countries,

general and specialised guarantee funds are in place in support of lending to SMEs.

MFIs tend to seek cooperation with such guarantee funds, especially when they

themselves move more towards supporting SMEs. Interesting enough, in Central/

Eastern EU countries such as Hungary, Bulgaria and Rumania, where achieving

operational sustainability is a main goal, most organisations make secured loans.

iv Business support services widely accepted

There is a clear segregation in Europe between financial services and business

support services. When training, counselling, mentoring or business advisory

services are needed, most of the MFIs cooperate with specialised SME support

organisations and refer clients to such organisations. Most of the services developed

are geared towards support for small business start-up and enterprise development.

Often they focus on special target groups and fail to become mainstream (Triodos_

Facet and IMES 2008).

In some instances there are special programmes for the socially excluded to

motivate them or to remove psychological barriers that prohibit their participation in

society. There are, however, no special business support programmes that are

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geared towards people who wish to embark on small economic activities26. In both

cases the real challenge is to develop cost effective systems that have the potential

to reach out to large numbers and that are fit for the enterprising self-employed and

for individuals who wish to embark upon small economic activities.

26 Only recently some initiatives to develop Financial Literacy programmes have been launched in Europe

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4 Is there a future for microfinance in the Netherlands?

The lucky ones may be living in the Netherlands. We are late in discovering the

possibilities of microfinance and this can be to our advantage. We have the

possibility to study the evolution of microcredit and microfinance in the South and in

Europe. Over the past decade, attention has primarily been focused on providing

services for (small) business start-up, but nobody has taken any real microcredit of

microfinance initiatives. Insight and experience have mainly been gained through

projects with external funding. The activities initiated by the projects have not lead

to large scale programmes (numbers of loans extended are extremely low), neither

have privately-owned NBFIs emerged. At the same time, the number of self

-employed (actual and potential) people has increased significantly and even more

impressive are the numbers of men and women contemplating to start “something”.

No clear choices have been made as to which target groups to aim at, which

services to offer and through which channels. Subsequently processes of product

development and innovations but moreover the sector at large, are still in their infant

stage.

We are lucky that we cannot only learn from the transformation processes of NGOs/

MFIs in developing countries, but also from the diverse instructive initiatives in

Europe. In order to learn from such experience further research is needed, a task

that INHolland University will be taking up the coming years. We are convinced that

reversed transfer of knowledge from the South to the North is needed, which in turn

will hopefully lead to a circular transfer process.

4.1 Awareness of many problems, but more choices need to be made

i National Council for Microfinance boosts awareness

Microfinance has found a place on the agenda of politicians, policy makers and

practitioners in the Netherlands, but this has taken time. They all refer to microcredit

and microfinance as a valuable instrument for either the promotion of

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entrepreneurship, the improvement of urban areas and the support for the

unemployed or the promotion of social participation. The International Year of

Microcredit has stimulated thoughts about microfinance and microcredit closer to

home. Studies carried out during that year revealed that there was indeed a need

for it, that there was scope for MFIs and specialised NGOs and that there was an

advantage in ‘catching on late’ (Triodos_Facet 2007)

A special “Advisory Council on Microfinance in the Netherlands” was established by

the Ministry of Economic Affairs in early 2007. This council consists of high ranking

individuals from the public domain, the government and the private sector, including

microfinance experts. The main task of this Council is to make policy recommendations

to the Dutch government through the Minister of Economic Affairs and to formulate

solutions to improve access to microfinance in the Netherlands27. Furthermore, it

holds the role of ambassador for promotion of the use of microfinance nationwide

and of networking amongst parties active in micro-entrepreneurship development

and microfinance.

This Council has acknowledged that microfinance and microcredit have not yet

been introduced on a large scale in the Netherlands and has referred to four

problems in society that can be addressed with microfinance and microcredit:

- The need to let the unemployed participate actively in society

- The need to assist people to earn a decent, additional income

- The need to revive a selected number of urban areas28

- The need to boost entrepreneurial initiatives in society

In spite of the apparent acknowledgement of these problems, as yet no clear

choices have been made in society as to which of these to tackle or exploit with

microcredit and microfinance and on which group to target.

27 The Council supported by an Information Centre was organised by Senter Novem - of early 2008 its work will be integrated into the Microfinance Support Bureau of the Ministry of Economic Affairs.

28 The so-called “prachtwijken”, preselected urban areas that need special attention to redress degradation processes.

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ii Unexplored segments in the market

In the past few years, a number of studies have been carried out to determine the

potential demand for microcredit and microfinance in the Netherlands. The most

recent one (SEON 2008) estimated that the potential annual demand for small

loans for micro-entrepreneurs and self employed comes to 43,508 people (with a

weighted average loan size of € 17,000). This is composed of:

- Potential demand for loans below € 15,000 from 26,105 people (with an

average loan size of € 8,000, corresponding to € 208,840,000 in total); most of

them the self-employed and

- Potential bankable demand for loans for micro-entrepreneurs from 17,403

people (with an average loan size of € 22,000, corresponding to a total portfolio

of € 382,866,000 in total)

The National Council advocates that intensified attention to microfinance must

result in an annual increase of 10.000 starting micro entrepreneurs. Microfinance

practitioners have criticised this approach since it mainly deals with support to

micro-enterprises and leaves out the many enterprising individuals who are also in

need of improved access to financial services(van Manen 2004). Apparently, there

is a blind spot in the Netherlands for the many enterprising people who could do

more with less, i.e. who would be well off if they had access to microcredit services

offering external finance in amounts less than € 5,000 to initiate their economic

activity.

Studies in 2007 by McKinsey (McKinsey 2007) for the National Council of

Microfinance indeed revealed a large demand for microfinance services. They

estimate the total market at 1.54 million29 persons; that market again can be

subdivided in different groups (see table 6). They further estimate, that out of that

group 600.000 people consider setting up a (full time) enterprise, becoming self-

employed or initiate economic activities to supplement their income (from wage

employment). If we deduct the above-mentioned (maximum) number of micro-

entrepreneurs and self-employed there is still an enormous number of people who

29 Corresponding to 15% of the economic active population.

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only need financial support on a limited scale to initiate additional income generating

activities. For that group, no instruments and services exist yet. It offers a chance

for NGOs and specialised MFIs to introduce a modern microcredit programme with

low-cost services (using IT based product) and it calls for explicit policy in support

of such initiatives.

Table 6 Estimate of the market for microfinance in the Netherlands

280 3303.000 1.540

140

25

50

30

35

195

30

65

25

15

105

10

30

15

5

395

85

210

115

65

5

5

25

40

20

750

185

330

165

105

1.910

280

460

180

170

10

5

10

75

5

100 110

Employmentsituation

Considersstartingbusiness

Target groupformicrofinance*

Specific target groups (overlap between groups)

Loweducation

EthnicMinority

Urban districts

< 50.00050-100.000> 100.000

employment> 12 hrs/wk

employment< 12 hrs/wk

100%unemployed

Housewives/menman

Others ***

Total

* corrected for overlap** also for part-time jobs*** students pre-pension

Focus governmentinitiatives

Source McKinsey and Cy. Based on the 21minuten.nl survey (2007)

There is a large market out there, but how is it possible that projects and

organizations in the Netherlands have only extended 200 micro-loans in 2007? If

we follow the microcredit theory that demand will follow supply (M. Novak, 2005),

we must invest in programmes to offer such microfinance and meet that demand.

In 2008, the Centrum voor Microfinanciering INHolland conducted a study on the

legal and regulatory framework in which MFIs and (potential) clients should operate.

Based on the data collected and analysed, we dare to state that this demand is also

positively affected by modifications and adjustments in the regulatory framework. In

France it became evident that when legal impediments are removed or softened,

the number of clients in microcredit programmes increased notably(INHolland and

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EMN 2008). Likewise, there is a significant increase in the number of (small/micro)

enterprises that have been started in the Netherlands after the introduction of

modifications of (fiscal) rules affecting the self-employed. In addition, we found that

in Europe laws and regulations mainly protect people on social welfare and that

these do not really stimulate them to engage in one’s own business. It also became

apparent that only a limited number of countries have got initiatives in place to

change the legal framework introducing stimulating measures. But there are

indications that people implementing rules might stop social welfare beneficiaries

from starting one’s own business, even when rules have been introduced to

stimulate the latter to do so. We believe that further research is warranted on this

topic.

The present situation in the Netherlands reveals that little thought has been given

to the changes in the labour market and the needs of a great number of people.

There is a tendency to target programmes mainly on the unemployed and on social

welfare beneficiaries. Subsequently, the following issues arise:

- There is no explicit policy in place to serve that new and vast group of

enterprising people;

- There are no NGOs/MFIs in place to reach out to the vast number of people that

might be willing to start an economic activity;

- The present set of services is not adequate, as we are not used to thinking in

terms of small financial services in large quantities. We miss the Wastora

approach in this sector30.

If we want to make effective use of microcredit and microfinance in support of the

“newly discovered” enterprising individuals and wish to ‘”create such supply and

demand”, we need to pay attention to the following three points:

- Policies for the respective target groups needs to be formulated,

- Adequate systems and organisations should be put in place

- And innovations are needed to develop new products and services.

30 Klaas and Henk Molenaar, owners of the company Wastora, were the first to see that it was profitable to sell in large quantities (household appliances) with small margins

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4.2 Policy mainly focused on micro-enterprises and not yet imbedded

In spite of the absence of policy, microfinance is not new to the Netherlands(Lobbezoo

and Molenaar 2008). History tells us that it has always been with us. The cooperative

savings and loans schemes are deeply rooted in society and nowadays the largest

Netherlands cooperative bank, the Rabobank,31 is a global financial institution.

Quite a successful transformation process!

Studies conducted in 2007 (Triodos_Facet 2007) already mentioned that the

general banks extended numerous small and micro-loans through overdraft

facilities, personal loans and mortgages, but we have not yet succeeded in making

this perceived as microfinance. The programme of the Ministry of Social Affairs and

Employment to assist unemployed people depending on welfare benefits to start

their own business is equally relevant. Many social welfare beneficiaries have

received counselling, training and small loans to set up a new business. The main

aim is to offer the unemployed an opportunity to gain a decent income and to

become independent of social welfare. Since loans extended under this programme

almost fall within the EU defined limit of € 25,000 (the maximum loan amount is

approximately € 32,000), this programme is considered a microfinance programme,

but it was never set up as such.

Until 2007, when the first advice of the National Council on Microfinance was made

public and taken over by the Dutch government, there was no policy on microcredit

or microfinance in the Netherlands. A special “Support Bureau for Microfinance

Initiatives” became operational within the Ministry of Economic Affairs in early 2008

to translate that advice into policy.

The advice of the Council referred to groups whom they expect to be capable of

setting up micro-enterprises (not yet referring to self-employed or people that want

to generate additional income).

- The unemployed depending on social welfare

31 Once started as a small Farmers’ Cooperative Bank, now the largest Cooperative Bank in the Netherlands even with a Triple A status. This bank now started in three larger cities a micro/ starters fund under its CSR programme.

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- People living in urban areas in special need

- young school leavers

To reach these target groups, the Council acknowledges the absence of (locally

operating) MFIs that offer services at sufficient scale and to boost local initiatives to

develop new programmes. For that reason it also recommends the creation of a

central facility that can co-finance such local microfinance programmes and

organisations. In 2008 funds have been made available, creating a central facility to

support local initiatives.32

The major focus of the new policy is to develop a system to assist starting micro-

entrepreneurs with a comprehensive programme, including promotion, coaching,

mentoring and access to formal bank lending. In this scheme, participating banks

will provide micro-loans directly, based on a pre-screened business plan and an

ex-ante guarantee. Special attention is placed on coaching and mentoring to assist

people in formulating business plans rather than in the mere provision of finance

only. This fits very well with the present way of working and thinking geared towards

small and micro business development and business start-up. It does not touch yet

on the question of how to reach the larger number of enterprising people that want

to participate in society as well, either as self-employed or by embarking upon a

small economic activity.

Striking, however, was the absence of local operators in the policy debate in the

past years. In developing countries, national policies were a result of pressure from

the main actors: the NGOs/MFIs, which existed in large numbers, and the actual

users of microcredit, who existed in even larger numbers and were becoming very

apparent in society. This has triggered numerous policy debates and dialogues,

many facilitated by the donor community. Hence, there is a clear exchange of views

and adjustments of policy between the national policy and the individual actors’

policies. This is not the case in the Netherlands, where the NGO/MFI community

engaged in microfinance or microcredit is a very loose one and almost

non-existent.

32 This follows very much the example of the MicroStart -UNDP Programme

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For policy to reflect the actual needs and demands in the market and to develop

programmes that dovetail with such demand, the sector needs to be more organised

and participate more actively in political dialogue.

4.3 There are many banks out there but no microfinance institutions...

In the Netherlands, only four of the general banks (ING/Postbank, ABN-AMRO,

Fortis and Rabobank) and the Ministry of Social Affairs (through the municipalities)

offer microfinance on a significant scale. As yet, the banks have no special

programmes or units for microfinance operations. They tend to prefer to create

special projects and funds if they are approached to become involved (e.g. the

Rabobank and the Startersfunds in some of the big cities). Individuals can opt for

approaching specialised consumer banks such as DSB for assistance, but these

banks only offer consumer loans, which they do not register as microloans.

With financial support from the European Social Fund (in the early nineties under

Adapt and Emploi and later with Equal funding), local pilot projects and programmes

focusing on specific target groups were launched, often with a credit component.

Private organisations specialised in rendering BDS, such as training, mentoring or

coaching, have tried to incorporate microcredit programmes, but often without much

success. Getting started was not that difficult, but they faced great difficulty in

institutionalising the credit programmes and in obtaining sufficient funding to reach

a workable and sustainable scale of operations.

At present, few organisations exist that are specialised in and dedicated to providing

micro-loans/finance services. As per September 2007, not more than 12 to 20 of

these organisations and/or projects have been recorded33. None of these

organisations has a portfolio of more than 20 clients per annum. The corrected data

by the Centrum voor Microfinanciering INHolland also reveal that the sector is still

very fragile in the Netherlands (see table 7)

33 Estimates of Senter Novem, corrected by the Center voor Microfinanciering INHolland - Sept 2007

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Table 7 Providers/channels in the Netherlands (2007)

Providers/channels Number of

organisations

Micro loans

extended

2007 2007

Microloan component 4 68

Private NBFIs specialised in microfinance37 1 13

Public programmes - local level extending

microloans

10 81

Public programme - national; extending

comprehensive services (BDS and loans)

1 61

Municipal banks with microcredit programmes 2 5

General banks with explicit microfinance

programmes

1 10

General Banks - with “hidden/ undisclosed” -

microlending

6 n.a.

Credit providers on the internet38 11 n.a.

Total 37 248

Source: Centrum voor Microfinanciering INHolland, 2008 based on data of Senter

Novem (2008)

Based on related studies (Bartels 2004; Triodos_Facet 2007) we know that about

50% of the people in need of external funding will seek support from friends and

relatives. Another 21% will be served by the banks, both directly (mainly through

overdraft facilities) and indirectly (personal consumer loans used for enterprise

development or part of mortgage loans on private houses).That leaves a relatively

small market that can be serviced by only one or two MFIs, a type of organisation

that has not yet landed in the Netherlands. The newly created Foundation for

34 The newly established (2008) Foundation Microkrediet Nederland not yet included35 Mainly consumer loan providers except for one business oriented provider (Bizner) aiming at the

higher end of market

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Microcredit the Netherlands can perhaps become that player in the market? The

challenge for this new bank (created by the Dutch government and with financial

support from the larger banks) is to become rooted in society and supported by civil

society operators.

The role of private MFIs (even with an NGO status) in the microfinance market is

limited and most have difficulty in reaching a significant stage. For example,

organisations such as Mama Cash offering guarantees in support of microloans36

have withdrawn from the market, and others like Start St(BDS and microloans for

starting micro-entrepreneurs in Arnhem region) or STASON (microloans for migrant

entrepreneurs) did not succeed in breaking through the glass ceiling and continue

to operate at a modest or even insignificant scale. There is a verbal willingness

among private banking institutions and the public sector to (jointly) develop

microcredit or microfinance programmes and systems on a wide(r) scale, but so far

no large scale service delivery has emerged. When individuals try to set up an MFI,

a lot of attention and general support is extended, as in the case of Hands On. 37 It

is however disappointing to note that it has not resulted yet in reaching large

numbers of borrowers/ clients. This leaves space for new initiatives. The National

Council on Microfinance has acknowledged this and has voiced its concerns about

it. It is one of the reasons why it has recommended establishing a central facility

with which local initiatives can be supported and boosted. The newly proposed EU

Initiative (European Commission 2007) might indeed become a very important

facility to support these new initiatives.

Traditionally, organisations render training and advice to starting entrepreneurs.

Additionally, they have added credit to their package of services. Those two factors

are still stumbling blocks in the development of specialised MFIs. Assessing the

programmes of the existing organizations reveal that the present organisations

have no explicit plans to extend financial services to the many self-employed who

enter(ed) the market, nor are there organisations prepared to support the untapped

reservoir of individuals who wish to generate some additional income (next to social

36 Mama Cash has been successful in operating a guarantee scheme for women entrepreneurs37 The first private initiative to set up a Microfinance Institution in the Netherlands; operating mainly

in Amsterdam region

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benefits or job seekers allowance) by means of a small economic activity. This

might create opportunities for new approaches and systems based on IT and the

Internet. Acknowledging the intensive use of IT-based systems and the level of

computer literacy amongst the Dutch population, we may anticipate (and may even

stimulate) the development of new, innovate approaches rather than the emergence

of new organisations.

4.4 Microfinance services not yet tailored to new groups in the market

As yet, no specific microcredit or microfinance programmes of any significance

have been developed in the Netherlands, either by locally operating non-governmental

banks or by other organisations, and there are no special products or services in

the market.

Institutions and banks involved in developing and setting up business start-up

programmes tend to claim that these are microcredit/ finance programmes.

However, closer assessment reveals that this is usually not the case and that they

are merely starters financing schemes(Triodos_Facet 2007).

Some of the main Dutch banks (ABN AMRO, ING, Rabobank and Fortis) have the

biggest share of the small business (start-up) loans, which could be labelled

microloans if one would adopt the EU definition (with its limit set at € 25,000). The

extremely low number of small loans extended by other banks is negligible in

comparison. Furthermore, these other banks usually do not provide start-up

financing.

A more extensive analysis reveals that the current account loan (overdraft facility)

prevails in the Netherlands. Personal loans are also commonly used by people to

finance the set-up of a micro-business or other economic activity. But, as banks do

not register on the use of personal loans by micro-entrepreneurs as such, it is

impossible to get quantitative data on this.

Banks use simplified systems in which the assessment of an application for a

microcredit is based on various - standard - criteria, such as age, current work and

income and education. Indirectly, also the place of residence and business location

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is taken into account. These systems were developed with cost reduction and risk

minimisation in mind and intended to speed up decision making on small loans.

This means that presently, financial services are not developed based on an

analysis of the financial needs of the new start-up, let alone of the self-employed or

of other enterprising people.

Even for start-up financing the present systems are not that adequate. Firstly, they

actually need longer term funding to supplement their own relatively limited

contribution. Secondly, the new start-up will need permanent funding for working

capital, with a facility for absorbing unforeseen events in the start-up phase. This is

the period in which the pressure on liquidity has to be low, as the earning capacity

of the business is still modest. Thus, there is a need for low initial repayments.

Some Municipal Banks (GKBs), which until recently were solely concerned with

debt restructuring, have started to extend (micro- loans. Data on the current start-up

projects in which these GKBs participate show that the number of borrowers, at

least for the time being, is not large. In the long term, their limited mandate and

budgets could become a problem.

Since enterprise development is the prime concern of most organisations, coaching

and mentoring potential entrepreneurs are seen as essential services. It also

pre-supposes that well designed applications for microcredit and improved

preparation of the prospective entrepreneurs and their plans will result in fewer

rejections.

To assist those who wish to become self-employed and those who intend to initiate

a micro-activity and need relatively small amounts (not exceeding € 3,000 to 4,000),

no services have yet been developed in either a formal or structural way.

4.5 Searching for know-how across bordersIn the studies on microfinance in the Netherlands (Triodos_Facet 2007), it was

already clear that (i) the products developed were not yet tailored to the “micro-

borrower”, be it the self-employed or the person in need of very small loans for an

(additional) income generating activity, (ii) in the product development process, little

use was made of positive or negative microfinance experience from abroad, and (iii)

limited attention was paid to IT-based systems/services.

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There are some major changes taking place in our society and in the labour market.

First, society is becoming more diverse, hence the plea for more mainstream

thinking and less target-group-specific product development. Secondly lifelong

employment and lifelong entrepreneurship will not be perceived as being as

intensive as they used to be in the past amongst the younger generations, and (pre)

retirement will not imply that one will stop working. On the contrary, the built-up

skills, expertise and savings serve as assets for new entry into the labour market

but this time as one’s own boss. People will opt for part-time self-employment or

even part-time entrepreneurship. Therefore, financial products and services need to

be adapted to such needs. And thirdly, more people want to become active citizens

and do not accept to remain socially excluded. They will demand more outspokenly

for services enabling them to participate in society.

The new target groups for microcredit and microfinance will be more varied and

each opts for its own type of economic activity and business venture:

- The socially excluded look for ways to combine the social benefits with income

generating activities;

- The young professionals look at self-employment not as a career, but as a

temporary activity;

- The housewives and househusbands - even or maybe just those who have not

been registered as “unemployed”” - look for ways to initiate small economic

activities that would allow them to generate additional income, albeit on a small

scale;

- The part time employed will look for ways to generate additional income through

part-time self-employment and small economic activities

To develop the microfinance sector in the Netherlands in line with the demands of

those target groups, we can look at developments in developing countries and

Europe. These people in turn can opt for three “careers”:

- First there are the (young) starting entrepreneurs, people who want to set up a

micro or small enterprise that will generate full income for them. This is a group

to be attended to by the banking sector more actively. That sector must then

adjust its evaluation procedures, risk assessment methods and develop new

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products; a task not too hard to take up as demonstrated in earlier studies

(Triodos Facet 2007)

- Secondly we have the self-employed, a growing group in the Netherlands (de

Zelfstandige Zonder Personeel ZZP); an option for many who wish to be their

own boss for a certain period in their career, and lesst often in life-long self

employment. It is a sector with a variety of demands for financial products, not

necessarily just loans for working capital or small investment. They also need

special insurances, guarantees, transfer facilities or for instance pre-financing

for tenders. This is an area where organisations with an innovative culture can

flourish, definitely a market for well organised Microfinance Institutions. It takes

public and private support to set up those organisations and to cover (part of)

the operational costs. They can only be sustainable as long as all stakeholders

believe in the relevance and effectiveness of the work undertaken. Charging the

clients for all costs will not be possible or socially or ethically acceptable.

- And thirdly the many enterprising people who wish to generate some additional

income on top of wages from part-time employment or social welfare benefits.

In numbers this is a very large group; it comprises all kind of people: housewives

and housemen. Formally employed persons (either in the public or private

sector), people on a sabbatical, underemployed people, students and drop-

outs, (early) retired citizens. It is group that can be aided by very small financial

services of a wide variety; an area where we need innovations both in

technological and organisational way. There is a need for product development

that will result in the offer of very low transaction costs, for products offered in a

large scale via IT-based systems. And those products will be offered by

organisations capable of adapting themselves to that market; most probably

those will be private organisations operating without much public support. On a

limited scale support might be effective in the design stages only.

All three identified client groups comprise social welfare beneficiaries and people in

(part-time) wage employment. In the first two groups these persons might be willing

to give up their social welfare benefit expecting sufficient income from the business

ventures, in the third one definitely not.

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69

To boost the micro-enterprises the banking sector seems to be the adequate

channel. Here we can definitely draw from experience abroad rather than inventing

the wheel again. Downscaling some of the financing operations seem to be the

most effective option: there is definitely no space in the Netherlands for a specialised

micro or small enterprise bank. The present banks are challenged to draw from the

experiences in developing countries with such down-scaling approaches. If

necessary the public sector can assist them in that process taking away special

bottlenecks (for instance by widening the scope of operations of the present

guarantee facilities and in stimulating them to develop new products and design of

staff training programmes) but their resource basis is strong enough to pick up that

bill.

For the other two groups the challenge is to stimulate the creation of new institutions

and the development of new products. Given the size of the market and the specific

target groups to aim at - the self-employed, enterprising person - there is only room

for one or two new MFIs attending the self employed in the Netherlands,

Development of financial products tailored to the need of these target groups is the

prime area of attention; a growing number of MFIs in the South are presently

engaged in similar innovation processes. Setting up platform to exchange

experience in this area will speed up the product development process. The position

of the ZZPer in the Netherlands market is rather exceptional and deserves special

attention. Comparing developments in other European countries and in some

developing countries can generate new insights. Sharing that experience can also

help us developing one or two sustainable MFIs.

For the third group there is - only - room for locally operating NGOs that explore

market opportunities. Especially when it comes to linking the informal economy and

informal society with the formal one the local NGOs are still needed. Once they

have detected new market opportunities they must then be capable of developing

the required products or transferring the market to a third party that can offer the

services on large scale at low costs.

Policy that reflects the specific market segmentation as depicted here does not yet

exist, nor have we embarked upon the related institutional development and

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70

product innovation processes. In developing countries NGOs and MFIs have been

confronted with similar challenges and have already actively sought solutions.

Particularly in the area of product development and innovations much can be

learned. We may consider ourselves lucky; our lack of initiatives over the past years

now gives us an opportunity to speed up processes.

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71

5 Microfinance for enterprising people: new markets demand changes in thinking

The analysis of developments in developing countries, Europe and The Netherlands

where microcredit and microfinance have emerged, are promoted and grow in

different ways show consistency and logic on the one hand and great differences

on the other hand. While in developing countries there is a logical interrelationship

between awareness, policy, institutional development and product/ service

development such is not the case in Europe and the Netherlands. But in all three

areas the actors are struggling with changes in the labour markets and asking how

best to serve the different client groups in those markets. MFIs in developing

countries have left open spaces, inciting new initiatives to serve the poor and

excluded people better. Similarly changes that have taken place in our society and

labour market (in the Netherlands) in terms of mobility, diversity and globalisation

call for redefining our client groups and the development of new approaches.

The past years the awareness that microfinance in the Netherland deserves

attention and needs to be introduced has definitely increased. The initiatives taken

at central level in society have been quite adequate. Policies now need to be

developed and imbedded in society. Contrary to the development in the South the

initiatives to raise awareness and the policy dialogue have not been a result of

pressure from the practitioners and people in the field. For a consistent development

and a proper reflection of the real problems faced by the target groups such

imbedding is indeed a prerequisite for effective programmes to be put in place,

adequate (demand-driven) product development and the setting up and growth of

the right organisations. The challenge is to adopt policies and programmes that

reflect the actual segmentation in society and meet the needs of the various groups

in search for external financial services. And to develop the proper channels.

We can reinvent the wheel to meet such diverse and changing demands from

enterprising people, or we can build upon what has already been learned. Drawing

upon experience in the South and adapting that to our conditions are needed. After

proper systematising and documenting we can share our insights and ideas again

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72

with our partners in Europe and beyond, thus initiating a circular process of sharing

technology South-North-South rather than transferring South-North or vice versa. A

challenge that we at the Centrum voor Microfinanciering INHolland want to take up

in the coming years.

5.1 There might be something wrong in logicMicrofinance in developing countries, its evolution and the growth of organisations

has developed gradually. The question arises whether such processes can be

transferred to the Netherlands. In developing countries awareness has grown

gradually and the various stakeholders have influenced each other over time.

Together they have understood the interrelationship between the various problems

and the need to develop policy for the various areas of attention.

Microfinance has developed, as there are well-formulated policies in place,

accompanied by adequate theories. These policies and theories are practice-based

and widely accepted by the various stakeholders in the field and at the top level.

However, most of the policy dialogue and formulation took place in the field, with

the practitioners playing a dominant role.

Organisational development has been a gradual and logical one. Organisations

have adjusted themselves to changes in the economy and to the members of the

target/client groups. When before, the destitute poor person was the receiver of

credit offered, the organisations (MFIs and banks) now need to deal with the

enterprising self-employed and micro- or small entrepreneur. Organisations needed

to be set up and assisted in this development process. Even the absence of

financial intermediaries has to be tackled by the creation of new ones, in large

numbers. (see table 8)

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Tab

le 8

C

ompa

red

evol

utio

n; a

war

enes

s, p

olic

y, in

stitu

tions

, se

rvic

es a

nd t

arge

t gr

oups

Evo

luti

on

s in

dev

elo

pin

g

cou

ntr

ies

Evo

luti

on

in E

uro

pe

Evo

luti

on

in t

he

Net

her

lan

ds

Aw

aren

ess

leve

l

Con

sist

ent p

roce

ss fr

om p

over

ty

alle

viat

ion

to d

evel

opm

ent f

inan

cial

inst

itutio

ns to

all-

incl

usiv

e sy

stem

s

At E

urop

ean

leve

l foc

us o

n bo

th s

ocia

l

incl

usio

n an

d en

trep

rene

ursh

ip (

Lisb

on

agen

da)

- to

p do

wn

tend

ency

Aw

aren

ess

at c

entr

al le

vel b

oth

focu

sed

on e

ntre

pren

eurs

hip

and

redu

cing

dep

ende

ncy

on s

ocia

l

wel

fare

Po

licy

leve

lP

olic

y de

velo

pmen

t at a

ll le

vels

with

ofte

n cl

ear

botto

m u

p pr

oces

ses

and

stro

ng in

fluen

ce o

f act

ors

and

civi

l

soci

ety

Few

nat

iona

l gov

ernm

ents

dev

elop

natio

nal p

olic

ies

Pro

vide

rs w

ith d

iver

se

polic

ies.

Pol

icy

not i

mbe

dded

due

to w

eak

part

icip

atio

n of

civ

il so

ciet

y an

d ac

tors

Pol

icie

s de

velo

ped

at n

atio

nal l

evel

emer

ging

with

focu

s m

ainl

y on

supp

ort o

f sta

rtin

g m

icro

ente

rpris

es

Inst

itu

tio

nal

leve

l

Logi

cal a

nd c

onsi

sten

t dev

elop

men

t

of N

GO

s, M

FIs

, NB

- F

I evo

lvin

g in

to

(reg

ulat

ed)

bank

s an

d fin

anci

al

inte

rmed

iarie

s

Div

erse

set

of o

rgan

isat

ions

with

out c

lear

deve

lopm

ent p

atte

rns

Sea

rchi

ng fo

r lin

kage

s be

twee

n N

GO

s

and

Ban

king

sec

tor

Wea

k N

GO

and

MF

I sec

tor

with

limite

d sc

ale

of o

pera

tions

Str

ong

bank

ing

netw

orks

(no

t

activ

ely

enga

ged)

Pro

du

cts

and

serv

ices

Fro

m s

ingl

e -

supp

ly d

riven

- p

rodu

ct

to w

ide

rang

e of

pro

duct

s be

ing

deve

lope

d fo

r al

l kin

d of

clie

nt g

roup

s

New

tech

nolo

gies

bei

ng a

pplie

d

Mai

nly

prod

ucts

for

the

mic

ro e

nter

pris

e

sect

or

Mai

nly

for

mic

ro e

nter

pris

es a

nd

with

bia

s to

war

ds tr

aini

ng a

nd

coac

hing

Tar

get

an

d

clie

nt

gro

up

s

(ad

dit

ion

al

rem

arks

)

Cle

ar s

egm

enta

tion

of th

e m

arke

t

with

slig

ht te

nden

cy to

leav

e sp

aces

to a

ttend

the

very

poo

r

Sta

rtin

g m

icro

ent

repr

eneu

rs w

ith

pref

eren

ce fo

r sp

ecia

l tar

get g

roup

s

(wom

en, m

igra

nts)

and

peo

ple

on s

ocia

l

wel

fare

(W

este

rn E

urop

e) o

r so

cial

ly

excl

uded

(E

aste

rn a

nd C

entr

al E

urop

e)

Mai

nly

star

ting

mic

ro

entr

epre

neur

s; th

e se

lf em

ploy

ed

com

ing

up fa

st; n

o cl

ear

pict

ure

of

the

low

er e

nd o

f the

mar

ket

73

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74

In the North the situation is slightly different: there are a significant number of

financial intermediaries, albeit that the majority of those will not take steps to open

up for the new - small - clients, enterprising though they might be. The present

institutional network is focused traditionally on assisting small or medium enterprises,

not so much the entrepreneur let alone the new self-employed. Business

development and hence its financing is the main area of attention and servicing the

enterprising self-employed is still a new area. New approaches and organisations

are needed.

The question remains whether the creation of intermediaries with a top-down

approach, whether these are MFIs or banks, will work. The lessons to learn are

contradictory: in the majority of situations the answer is no, but the rare exception

(Mibanco, Peru38) shows us the opposite. With the Netherlands Government putting

great efforts in creating the “Foundation for Microcredit the Netherlands” this is

definitely an area that requires in-depth study.

In the South, product development has been a very logical one: what started as

microcredit - often as group-based systems and more of a consumer/household

type of credit -, has evolved into microfinance. MFIs and specialised banks offer a

wide range of financial products such as savings, insurances, leasing, transfer

facilities and seek cooperation with BDS support organisations for the non-financial

services. In the North we need to follow a similar path to serve the (temporarily self-

employed). But equally important are product development and innovation if we

want to reach out to the many people in need for financial services to finance their

income generating activities.

Related to this, we can learn a lot about sustainability. In the South, for quite some

time now, due to the absence (of adequately functioning) financial intermediaries,

most attention went to the build-up of organisations. The prime focus has been on

the sustainability of the organisation, the instrument, and not on the clients. Clients

have become more aware of this and are more assertive nowadays. They will speak

out against the practice of charging them for all the costs, costs that are considered

38 MiBanco is a successful microfinance provider that experienced significant growth after it was pushed by the Peruvian Government to become leader in the market in the nineties

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75

too high and detrimental to the chance of survival of the business. In the

Netherlands, there is a broad understanding that this needs to be avoided, hence

no exorbitant interest rates are charged. In Europe, social economic thinking allows

us to solve this, getting stakeholders involved in co-financing the support

mechanisms. Here, the South can learn from us that the prime concern in both the

North and the South should be the sustainability of the businesses set up. In this

case, the South can learn from our experience in this field.

5.2 Microfinance channels, enterprising people and the socially excluded, new choices to make

At first sight, the problems in developing countries and in our own society seem to

be quite different. On the one hand, there is the issue of extreme poverty and

absence of organisations offering the right services to people who wish to break

away from that poverty. On the other hand, there is the need to stimulate more

people to participate in society with a changing labour market and to make the

society at large more enterprising/entrepreneurial.

In developing countries and in Europe there are two apparently different, but in

essence similar developments taken place. These developments will determine the

future of the microfinance industry. Timely reacting to both of these developments

is required.

- There are a growing number of - more assertive - enterprising people who wish

to be self-employed and who seek appropriate services, and

- There are a very large number of socially excluded, often poor, people who wish

to initiate economic activities (often of a temporary nature) that might generate

additional income to the household.

For both groups we need the proper instruments and channels. The self-employed

and the micro-entrepreneurs are in search of financial services at an affordable cost

that will provide support for the set-up of a sustainable business venture, and the

poor and socially excluded need easy access to financial support in small amounts

at low cost.

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i The self-employed in need for appropriate microfinance (institutions)

The self-employed are becoming important and are in search of new MFIs. In the

South, when income is needed but cannot be found at the formal private and public

labour market, there are the options for survival economic activities or micro-

enterprises. In the North, because the labour and enterprise markets are changing,

both lifelong employment and lifelong entrepreneurship are gradually disappearing.

Being enterprising will be helpful. One minute one will be employed, the next minute

this will be interrupted by self-employment or becoming one’s own boss. Again, the

latter might be for a fixed period with reversal of the employment status.

Both types of self-employed are in need of other financial services than the ones

offered by the regular organisations. Therefore, there is a need for new and different

products and most certainly for other organisations to offer these.

In the South, this shift has been accepted and this awareness has formed a basis

for policy dialogue between all the stakeholders. That in itself was the basis for the

necessary programme and product development and related organisational

developments. (see figure 7)

In the North we need to accept that self-employment will not be for one’s entire life,

as it can be interrupted by formal employment, and the same can happen in the

South. Improving economic conditions will generate new opportunities on the labour

market. That will be attractive for those who opted for self-employment as a new

career option and will be accompanied by changes in the types of services needed:

next to micro-loans, the entrepreneur expects the MFI to offer additional services

such as guarantees, money transfer, payment facilities, insurances, pensions,

factoring and leasing. Therefore, the MFI will need to diversify its services and

existing organisations will need to be prepared for new demands. This is a process

that will take place in the Netherlands, where the number of self-employed is rising

fast.

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77

Figure 7 Comparison and anticipated evolution in developing countries, Europe

and the Netherlands

Additional income

generating activities

Self Employed

MicroEnterprise

SmallEnterprise

Medium scale

Enterpris

Developing countries

Traditional area for NGOs;new area for NGOs with social innovation Technology innovations

MFIs graduated from NGOs

NB - FI and MF Banks

Future area for general (and inter-national) banks entering the market

Europe Technology innovations by private companies and locally based NGOs for target group speciffic / ad hoc operations

MFIs specially set up to attend the sector

Alliances between MFIs / NGOs and Banks

Traditional area for banks

The Netherlands

Technology innovations by private companies and locally based NGOs for target group speciffic / ad hoc operations

Micro finance by one or two specialised MFIs

Banks with down-scalling operations

Traditional area for banks

The question is whether and what we can learn from MFIs in the South. We need

to study how they deal with two different organisational development processes:

- The pattern whereby NGOs following their development stimulate the graduation

of the more successful entrepreneurial people who wish to develop into micro

or even small entrepreneur, and

- The process of downscaling financial operations of existing banks that see a

new market opportunity.

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78

Both processes take place in developing countries and contain lessons that can be

attractive to us.

But we might also opt for a new approach, e.g.

- Developing a new type of MFIs that is geared towards the needs of that client

group

This is a process not yet found in developing countries. The lessons from the past

can indeed be instructive for other countries, so maybe it is not only a reverse

transfer of technology but a circular one?

ii The enterprising economic and socially excluded call for innovative

approaches

Our conviction that microcredit and microfinance can develop entrepreneurship and

create enterprises brings along a danger of neglecting the plight of the many poor

and socially excluded. Not all people are bank-worthy, or even credit-worthy. While

there are many people stepping forward to start a micro-enterprise or to become

self-employed, large numbers of poor and socially excluded will still need support.

In Western Europe/the Netherlands we have not yet found an answer to this

challenge and neither have we explicitly acknowledged the opportunity that lies

ahead of us: a large segment of the marked is as yet unattended, without

organisations offering services, maybe even a segment that calls for completely

new approaches. This segment might be better off if we dare to break away from

the traditional ways of thinking and step “out of the box”: It should be seen as a new

challenge for microfinance policy makers and practitioners. Innovative IT and

Internet-based lending systems such as KIVA MYC4you; Prosper Booper, Bizner

may be the solution.

In developing countries we see that the shift of MFIs towards the micro-enterprise

sector creates new gaps in the system. This entails the danger that the poorer

clients originally helped with a microcredit are now left aside again. This is not

merely solved with the entrance of new NGOs filling the space left by the former

ones, now graduated into self-sustainable MFIs. It also offers opportunities to

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79

introduce new systems and services. Technological innovations offer new chances

to launch products that can reach even more people at very low costs. That might

be an answer to one of the most important challenges for us: develop systems

whereby the sustainability of the client becomes of prime concern, not the

sustainability of the instrument.

5.3 Can the reversed path South to North become a circular process?

There are people who claim that, if we want to serve to the poor, it will be better to

continue focusing solely on microcredit. Others prefer to talk about microfinance

and promote a self-sustainable microfinance sector, and yet another group tends to

put emphasis on the sustainability of the economic activities made possible and set

up by the enterprising people with the microfinance. The sector has become a

visible and mature one, and so are the opinions and visions: manifold and hopefully

applicable on our own society as well.

In order to carry on the debate properly without harming what has already been

achieved by the restless efforts of so many, we need to critically study and research

the sector, the industry proper and the organisations operating in it. This will lead to

improved functioning and an effective use of the instruments. Hopefully, it will

eventually lead to systems that contribute to real sustainable development and

support clients in setting up sustainable business ventures.

From the developments in the South we can conclude that we have to be careful in

copying processes: (I) there is no scope for the traditional microcredit programmes

with very small loans The social welfare systems, the costs of living and the level of

required income (to meet daily costs) are clear limiting factors. There is just no

scope for it in our own society. However, when it comes to microfinance, we can

indeed learn a lot from the up-scaling and down-scaling processes that have taken

place in various countries. Even more important, however, is the recognition that the

need of the enterprising self-employed will determine the future for the microfinance

sector. These needs of the self-employed are to be met by new services and

microfinance-developing institutions interested to aid this group. It is a market

segment that offers chances for incumbent MFIs to become (self)-sustainable as

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80

well. Secondly we need to be creative in designing systems to reach the very large

numbers of people that can be assisted with very small loan amounts provided rules

and legislation will allow people to earn such additional income on top of wages

from part-time employment or limited social welfare benefits,

This will be the challenge in the Netherlands: will we see new MFIs attending to

such needs, and will we dare to go that one step further and set up systems to

extend very small amounts. This will also be the challenge in developing countries:

will MFIs be willing to move further towards the enterprising self-employed rather

than the micro- entrepreneurs? Will the NGO community be in a position to develop

the right systems to continue serving that part of society that benefited so much

from microcredit, but this time at a reasonable cost? The Centrum voor

Microfinanciering has set up a research programme in that respect. Among other

plans we will start a study on the development of IT-based technologies to extend

micro-finance to large numbers of people in small amounts (at local/ municipal

level), we will set up an MFI directly linked to the Centrum39 where we will test target

group specific lending technologies, and we plan to study the actual microfinance

needs of the self-employed.

We can learn from the past and we can learn from the work that has been done in

other countries. The challenge is to do so and to plough the lessons learned back

into our own society. The path to follow will take an opposite direction from what is

usually expected, from the South to the North. At INHolland, we have chosen to

follow the path in this opposite direction. Too often, in my opinion, we claim that we

can bring more knowledge and expertise to the South. This is usually warranted,

given the technological and knowledge gaps that have grown between societies

over time, but in certain sectors this is not so. Microfinance is such a sector. We will

systematise lessons learned, assess under which conditions mechanisms and

programmes operated effectively and appraise how we can adjust things to the

specific social, cultural and economic conditions in our own society. We will achieve

this through a joint research projects with our colleagues in Europe and in the many

countries with experience with microfinance and microcredit. Working with people

39 A so-called leer MFI where students can gain hands-on experience during internships and final examination studies. This MFI will be jointly set up with other interested parties

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81

in the field, we will subsequently design new systems, adapting existing ones to the

conditions under which microfinance operates in the Netherlands. Applied research

of the new programmes put in place will be initiated thereafter by INHolland. The

newly acquired insight will be made available to other practitioners and policymakers.

But more importantly, it will serve as input for the education programmes that we

operate and that we expect will yield highly qualified professionals.

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82

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Lectoraat Microfinance and Small Enterprise Development

www.INHolland.nl/Microfinanciering

Microfinance, (only) for enterprising people? ... a diverse market requires a novel approach ...

Drs. Klaas Molenaar