Responsible Finance Forum

Microfinance Institutions and Banks in Europe: The story to date

Anastasia Cozarenco
01 March 2015
Source:  European Microfinance Network

Banks represent a dense network in Europe. According to the European Central Bank, as of March 2015, the European Union (EU) counted 7,233 credit institutions1. They play a crucial role in business financing (80% of European business activities are funded by banks; European Banking Federation, 2014), especially for Small and Medium Enterprises (SMEs). However, access to finance is not easy for the SMEs, particularly when they lack formal collateral or credit history.

In comparison, Microfinance Institutions (MFIs) mainly focus on the financing of very small and small businesses (business microcredit) and low income or poor individuals (personal microcredit). The driving force of the microcredit market is financial and social inclusion. Targeted microborrowers belong to segments of the population such as (long-term) unemployed, women, migrants, young, rural and/or disabled people. Business loans generally target very small (new) businesses that lack any form of collateral or credit history. However, no single definition of microfinance exists in Europe (European Banking Federation, 2010). The relative number of European MFIs is relatively low, estimated to range between 500 and 700 institutions (Bendig et al. 2014).

Another issue faced by MFIs in Europe are regulatory constraints. In countries like Germany and Serbia, MFIs are not allowed to disburse microcredits on their own (see Table 1) and are therefore constrained to collaborate with banks to develop their activities. In other countries, such as Greece, there is no bank monopoly, but financial institutions require excessively high minimum capital requirements to legally perform credit activities. Such regulations make the development of the microfinance sector particularly cumbersome. In addition, MFIs that can disburse credits directly are generally not allowed to collect savings from their clients. Being denied access to this relatively cheap source of funding, MFIs had to find alternative ways to refinance themselves.

Given this context, interactions between MFIs and banks occur naturally in Europe. However, these interactions are not always voluntary; the national legislative frameworks, illustrated in Table 1, shape the partnerships and strategies observed in different countries. Obviously, both banks and MFIs are impacted by these interactions. On one hand, MFIs integrate mainstream banks into their business models. On the other hand, banks revise their operating strategies in response to the growing role of MFIs on the financial market in Europe.