UNITED NATIONS CAPITAL DEVELOPMENT FUND    Microfinance

Issue 17 / October 2005

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By Perrine Pouget, Student Ambassador for the International Year of Microcredit and staff member, Appui au Développement Autonome

The European Investment Bank (EIB), the financing institution of the European Union, is mainly known as a provider of large-scale loans with very long repayment periods, in support of projects furthering the objectives of the European Union. However, for nearly five years, it has also been involved in the microfinance market, both in Africa and within the European Union. In connection with the International Year of Microcredit 2005, Mr. Philippe Maystadt, the Belgian President of the Luxembourg-based institution, kindly agreed to explain the EIB's work in that area.

Why did the European Investment Bank get involved in the microfinance market, mainly in Africa?

It all started in 2000, when the EIB was faced with quite a challenge: as part of the European development aid and cooperation policy (more precisely the Cotonou Agreements and the MEDA II programme in 2000), we were called upon to help combat poverty on the African continent. Yet, you may wonder how an international bank whose principal activity is lending could possibly contribute to such a goal on a continent where most people are excluded from the banking system, living as they do on less than one dollar a day and unable to provide any security. Financing local microfinance institutions was our answer.

What is the EIB's approach to microfinance?

Let's say that the EIB is very much in line with the general approach that most of the microcredit players have been moving towards for several years now: we believe in a market-oriented, banking approach. Besides, as you may already be aware, the EIB is not allowed to grant subsidies. All our loans have to be financially sustainable, and our work with microcredit institutions is no exception. We see microfinance as a serious endeavour, targeted at people who are poor but nonetheless capable of engaging in economic activity.

In that case, what are the goals of the EIB in the microfinance sector in Africa?

A market-oriented approach to microfinance as I just described requires thinking in terms of permanent and autonomous financial systems. Indeed, microfinance can only create a true resource for the people, if microcredit institutions are stable and operate on a long-term basis. The EIB's aim is therefore to help them become autonomous and rooted into the local banking systems, rather than depending on more or less temporary state or international aid. After directly granting several global loans to microcredit intermediaries (for example, two EUR 10 million loans to the Al Amana Association in Morocco in 2003 and 2004), we are now pursuing a strategy of strengthening the equity resources of regional investment funds specializing in the financing of microfinance institutions. In this way, the EIB taps into their knowledge of local markets, which is indispensable in this area of activity.

In which parts of Africa is the EIB most active in microfinance?

Our strategy is actually to work with several wholesale funds for microfinance institutions, each covering different regions and types of markets in Africa, so as to cover a vast geographical and institutional spectrum. Currently we are working with three main groups: ShoreCap International, which specializes in the most advanced markets, AfriCap Micro-Finance Fund, which focuses on intermediary markets, and, more recently, La Fayette Investments, which deals with the less advanced markets.

The EIB is also supporting microfinance within the European Union. What are your priorities there?

As you can probably guess, our microfinance activity within the European Union is completely different from what we do in Africa. Over here, our strategy is in line with EU policies in favour of microenterprises and SMEs. Therefore, we mainly grant global loans to traditional financial institutions, which on-lend the funds in microloans up to a maximum amount of EUR 25,000 (though usually averaging some EUR 7,000). In this context, our objective is rather to broaden our range of products for microenterprises with less than 10 employees, since they account for 91% of all enterprises and 28% of total employment in the EU.

The European Investment Fund, the EIB's subsidiary company specialized in venture capital and guarantees, is also a key player in this sector -

That's right, the EIF's microfinancing activity started in 2001, as part of its remittance from the European Commission under the Multiannual Programme for Enterprise and Entrepreneurship (MAP 2001-2005). Since that date, the EIF has put up more than EUR 200 million in guarantees to financial intermediaries specializing in this sector within the Union, making it Europe's largest microcredit guarantor.

Does the EIB cooperate with other microfinance providers worldwide?

Yes. Experience gained over the first five years confirms the considerable potential of the microfinance sector. However, if this is to be harnessed fully, some harmonization is necessary since the market remains very fragmented and lacks transparency. The EIB is thus negotiating at various levels with the European Commission, and we have also joined, earlier this year, the World Bank-sponsored donor consortium the Consultative Group to Assist the Poor (CGAP).