Microfinance: A Response to Europe’s Debt Crisis?

European debt crisis microfinance

In an effort to combat Europe’s lingering debt crisis, European financial institutions have created bailout funds worth hundreds of billions of euros. While these funds are largely designed to support large banks and national governments, the EU is also supporting smaller entities in the private sector through an ambitious microfinance initiative.


For decades, small loans to small business owners have helped boost employment and improve the standard of living in some of the world’s least developed economies, and banks like Credit Suisse have been backing microfinance projects for years. Now European policymakers are using microfinance as part of a comprehensive policy effort to rally some of Europe’s badly slumping national economies.


The European Union Takes Action


Microfinance loans have long been an integral part of development policies aimed at some of the world’s poorest countries, but they have seen much less service in the developed world. However, with large parts of Europe wrestling with high unemployment and little access to credit, EU officials have decided to foster entrepreneurship through a microfinance program of their own.


In 2010, the EU launched the European Progress Microfinance Facility. Across Europe, there are almost 20 million small and medium sized enterprises (SME) that employ more than 65 million workers. In the hard hit economies of Southern Europe, up to 80% of the working population is employed by SMEs.


Access to Finance a Serious Concern for European Companies


Europe’s SMEs have had a difficult time financing their growth because the debt crisis has limited their access to capital. In a recent survey, the heads of EU companies registering turnover of less than 10 million euros said they believed they had more difficulty accessing loans than their counterparts at larger companies.


Progress Microfinance aims to make it easier for Europe’s small companies to secure financing – this is especially important in light of new goals calling for 75% of the EU population aged 20 to 64 years to be employed by 2020.


Greece Shares Problems with Developing Economies


While several EU countries are facing economic difficulties, Greece was hit particularly hard by the debt crisis. A recent competitiveness report from the World Economic Forum ranked Greece 90th out of 142 countries, and according to the International Monetary Fund (IMF), 30 percent of all deposits have left the Greek banking system since the start of the crisis. Given the lack of both competitiveness and capital in the Greek economy, it is unsurprising that a recent survey found that 40 percent of Greek business owners think access to finance is a pressing issue.


In the wake of the crisis, Greece now shares many of the structural problems of developing economies, including high unemployment rates, a large informal sector, limited access to financing, and low confidence in political institutions. These very real issues have depressed levels of Foreign Direct Investment, including the venture capital dollars that normally support early-stage companies.


Greece’s problems have set the stage for the emergence of microfinance. In 2012, a local bank, the Pancretan Cooperative Bank (PCB), launched a 6 million euro microloan initiative, partly supported by Progress Microfinance. The loans finance startups for up to three years. The PCB has also earmarked an additional 8.75 million euros to support existing small businesses that cannot secure financing because of the strict lending covenants brought on by the credit crunch.


While the Greek economy may be in an especially dire position, other EU member states are also benefiting from EU-backed microfinance programs. The European Commission (EC) and the European Investment Bank (EIB) fund the loans Progress Microfinance provides to PCB and Europe’s other microfinance institutions. The European Investment Fund (EIF) chooses local partner institutions and funds and guarantees the loans. The local partner institutions disburse loans to selected microentrepreneurs. In 2011, the EIF entered into contracts with 14 microfinance intermediaries in 12 countries. Each of these intermediaries is supported by a portfolio of financial products, including senior loans, subordinated loans, risk-sharing loans, and equity participation.


A Good Starting Point


While microfinance may not be taking Europe by storm just yet, it remains a good starting point. High unemployment rates in many member states are likely to increase the demand for funding to assist budding entrepreneurs. Ultimately, Greece may be an early indicator of microfinance’s future in Europe. While PCB is essentially a regional player with much of its operation focused on Crete, its embrace of microfinance could give it a national footprint. If that happens, it may be a signal that Europe as a whole is ready to embrace microloans as a means to tackle the worst symptoms of the debt crisis.


Marion Struber is a research analyst at Credit Suisse in Zurich