5th Annual Conference Nice - European-microfinance.org

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5 th Annual Conference Nice

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5 th Annual Conference Nice 

The European Microcredit Research Award 

2008 - Fundación Nantik Lum 

In the frame of the EMN 5th Annual Conference, EMN and its Spanish member 

Fundación Nantik Lum have launched the European Microcredit Research 

Award 2008. 

This Award is endowed with €1,000. 

In June 2008, EMN and Nantik Lum launched a call for research papers dealing with 

one of the various issues related to microfinance in Europe such as social exclusion, 

social and financial performance, client targeting, financial literacy, etc. The Selection 

Committee received 13 propositions and selected the three best of them. 

The final winner is going to be announced during the Conference. 

Additionally, the researchers are going to present their research papers in front of the 

audience in the Conference research strand to take place on 10th of September 2008 

from 8h30-10h30 moderated by Fundación Nantik Lum. 

This document contains the three selected research papers: 

S. Brana, Senior Lecturer, University Montesquieu-Bordeaux IV: 

“Microcredit in France: does Gender matter?” 

Dr. Karl Dayson, executive director, Pål Vik, research assistant, Community 

Finance Solutions, University of Salford, United Kingdom: 

“Making European microfinance more sustainable – lessons from Britain” 

Michael Unterberg, research assistant, EVERS & JUNG GmbH: 

“Microfinance as a European policy issue – policy images and venues”

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5 th Annual Conference Nice

Abstract 

Microcredit in France: does Gender matter? 

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S. Brana, Senior Lecturer, University Montesquieu-Bordeaux IV 

LARE-EFI, Avenue Léon Duguit 

33608 Pessac 

00(33) 5 56 84 29 75 brana@u-bordeaux4.fr 

The question of the link between microcredit and gender has given rise to an 

abundant literature in developing countries but not in industrialised economies, where 

studies have focused more on women and entrepreneurship or self-employment. In both 

cases, however, observations are similar: women are limited to so-called feminine activities 

that are not very capitalistic and generate little profit. A possible explanation is that women, 

unlike men, do not have enough of their own funds. This leads them to opt for businesses 

that require little investment in terms of capital, but that will not enable them to generate a 

reasonable income. 

Microfinance institutions’ (MFIs) target poor people, excluded from the banking 

system. By giving them starting capital, they should thus enable a greater number of women 

to create their own business, but also in sectors traditionally reserved for men. Our study 

covers a portfolio of 3,640 microcredits in France over the 2000-2006 period. It identifies 

microfinance institutions’ client profiles, brings to light the men/women differences and 

compares them to a wider sample of entrepreneurs. We show that the men/women gap found 

amongst company creators is maintained amongst clients of MFIs. We also demonstrate that 

the gender criterion is a decisive factor of the amount of the microcredit when compared to 

the borrower and firm profile. To a certain extent, MFI thus reproduce gender inequalities. 

Key words: Microcredit, Gender, Entrepreneurship. 

JEL codes: G21, J16. 

I. Introduction 

Although women represent 47 % of the French working population, in 2006 they 

accounted for only 30% of nascent entrepreneurs. Women entrepreneurs, on average, study 

longer than men but have less work experience and start their business with less capital 

(Insee, Sine survey 2006). These reasons may explain why they face greater difficulties 

obtaining bank loans and funding their projects. 

Moreover, women are more likely to be affected by unemployment and poverty. The 

employment rate for women in 2005 was 57.6%, as opposed to 68.8% for men, that is a 

difference of 11.2%. The part-time employment rate is of 30.7%, as opposed to 5.8% for men. 

Women represent the majority of non-working people, of long-term unemployed, of 

beneficiaries of the minimum social income, or of single parent families. They are therefore 

particularly vulnerable to the risk of poverty. 

For all these reasons, women should be particularly concerned by microcredit. 

Microcredits are very small loans (less than 40% of the income per capita) granted to people 

totally or partially excluded from the banking system. In developing countries the aim of 

microcredit is to reduce poverty, promote self-employment and improve the empowerment of 

socially excluded persons, women in particular. In industrialised countries, the goal is first of 

all to reduce poverty by encouraging self-employment. Microcredit thus answers two types of 

needs (Brana, Jegourel, 2007). On the one hand, it enables people excluded from the banking

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system to create their own business, on the other it provides extra funding to entrepreneurs 

by creating a leverage effect with respect to bank credit. 

Microfinance institutions (MFIs) target more specifically poor people, excluded from 

the banking system. By offering start-up funding, they should encourage more women to 

create their own business, but also to create their business in sectors that are traditionally 

masculine due to the initial capital they require. 

Our study covers a portfolio of 3640 microcredits granted in France over the 2000- 

2005 period. More precisely, it covers all the microcredits granted over that period in 

Aquitaine, the 6 th region in France, by the 12 microfinance institutions active in that region. 

The aim of this study is to identify the profile of these microfinance institutions’ clients, to 

reveal the differences between men and women and to compare them to the larger sample of 

entrepreneurs (using the French Institute for statistics’ database – Insee). We will then check 

if the “gender” criterion weighs in on the decision to grant a microcredit and on the amount 

of the loan. Do MFIs reduce the obstacles women face with their projects or on the contrary, 

do they merely reproduce these inequalities? 

II. Review of literature 

The question of the link between microcredit and gender has given rise to an 

abundant literature in developing countries, but not in the industrialised economies 1 . In 

developing countries, the debate has focused on the impact of microfinance on gender 

equality or empowerment of women. According to Mayoux (2007), microfinance programs, 

by helping women to generate an income, trigger a virtuous circle of economic 

empowerment, increased well-being for women and their family, and on a wider scale 

increased political and social power for women. 

Several studies, however, have qualified this positive view. Firstly, social and cultural 

inertia incites one to mitigate the impact of microfinance. As pointed out by Guérin and 

Palier (2006), whatever the quality and availability of microfinance, the road to equality is 

long and, even if microcredit can contribute to it, it does so only marginally. 

Moreover, Goes and Gupta (1996), for Bangladesh, have demonstrated that in many 

cases, women do not really control the use of funds that they have obtained. Indeed, because 

women have easier access to microcredit, men use them to get funds. For Fernando (2006), 

microcredit increases the responsibilities weighing on women, but not their real power, and it 

does not always make them less vulnerable to domestic violence. 

Many microfinance institutions target women primarily because they have higher 

repayment rates than men, their families get more benefit from their extra income, and 

because loan groups work better with them. It seems, however, that of 213 institutions 

reported by the « Microbanking Bulletin », the highest percentage of female clients is to be 

found in the most recent institutions. Conversely, the more mature institutions – banks, nonbank 

financial institutions, profit-making institutions, large scale institutions – tend to focus 

on the less poor of the poor and on small businesses. These large, profit-making 

organisations are less likely to reach women (Cheston, 2007). In fact women, because they 

offer less guarantees than men and have access to smaller funds, are limited to so-called 

“feminine” occupations, not very capitalistic, often part-time, from home and generating little 

profit (Guérin, Palier 2006). The possibilities of economic empowerment and of rising above 

their social status remain limited. 

In industrialised countries, literature has focused more on women and 

entrepreneurship or self-employment, particularly in the United States, in Canada or in Great 

Britain. Anderson, Carter and Shaw (2001) thus list over 400 academic articles on women 

entrepreneurs. These studies reveal major differences between firms created by men and 

1 To our knowledge, the only study is that of T. Underwood (2006).

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those created by women. They show that, compared to men, women start their own business 

with less financial capital, less experience and less resources in terms of human and social 

capital. This causes many women to set up under-funded businesses, which can have a 

negative impact on their long term performance. Thus the men/women differences are felt 

both on the structure (size of the firm, business sector) and on the profits. The performance 

outcomes (profitability, durability) 2 of firms managed by women are generally lower. But the 

impact of gender on economic performance has led to a great deal of controversy. Today 

however, a consensus seems to arise on the fact that if a number of variables can be 

controlled (business sector, starting resources, age of business), men and women’s 

performances will be similar (Watson 2002, Johnsen and McMahon 2005). 

The most important research work has focused on the issue of gender and finance 

(Anderson, Carter, and Shaw, 2001). Women experience more difficulties than men to raise 

start-up and recurrent finance. Whatever the sector or area, women start their business with 

about half the capital that is used by men (Brush, 1992). Moreover in surveys, women 

generally declare that they are or have been discriminated against by banks. The general 

feeling is that banks are reluctant to give them credit. There are three main types of 

explanations put forward for this. 

According to certain authors, women are discriminated against in terms of credit 

supply not because of their sex, but because of the less favourable characteristics of their 

project. Coleman and Carsky (1996) argue that businesses managed by women are less 

attractive for banks because they are small and considered to be more risky. Banks prefer 

financing larger projects that are already established which favours men. Riding and Swift 

(1990) compared the experience of men and women entrepreneurs in their relationship with 

financial institutions over a given period. They show that the financial conditions are less 

favourable to women, but that businesses managed by women are both younger and smaller 

than those managed by men, and have a weaker economic growth. Banking conditions would 

therefore be the result of rational banking behaviour when faced with riskier projects. It 

seems women also experience greater difficulty in offering guarantees. As they are more 

likely to be working part-time or to earn less than men, women find it more difficult to 

accumulate personal savings (Marlow and Patton, 2005). Thus for both these reasons, lack of 

personal funds puts them at a disadvantage when creating their business. Their personal 

contribution is limited and such a small capital cannot be used as collateral to strengthen the 

loan relationship. Work experience before starting a business is therefore crucial to 

accumulate financial capital, but also human capital and to build up a network. Whereas 

Fabowale and alii (1995) for Canada or Coleman (2000) for the United States demonstrate 

that when the firms’ characteristics are taken into account (age and size) women have equal 

access to credit, other studies found that structural dissimilarities cannot account for all the 

gender differences in financing patterns (see Carter and Shaw 2006 for a survey). 

Other authors focused on demand size risk and debt aversion (Bird and Brush, 2002). 

It seems women are less encouraged to start businesses with high growth rates that require 

important investments (financial and human) and prefer to avoid debt, which would explain 

why they do not apply for bank credits so much. Women start their business to ensure their 

own employment rather than to develop it. For Danes and alii (2007), because they give 

priorities to their families and because they are in charge of educating their children, they opt 

for smaller organisation structures that are easier to manage. The 2006 Global 

entrepreneurship monitor survey (cf. Allen and alii, 2007) shows that fewer women than 

men believe they have the skills to start their own business. Women also have less selfconfidence. 

Whatever their reason for starting a business, they consider themselves and the 

entrepreneurial environment less favourably than men, which is a key point when explaining 

the smaller number of women in this area (Langowitz and Minniti, 2007). They are more risk 

averse than men (Watson et Robinson, 2003), which leads them to ask for smaller loans. 

2 In France, the durability rate for three year old firms is 70.4% for firms created by men and 67.7% for firms created 

by women.

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Thus, faced with similar projects, it seems difficult to pinpoint real discrimination by 

banks, although studies are contradictory. It seems discrimination regarding credit supply is 

not systematic but low (6% out of the 325 cases studied by Carter and alii 2007) and not 

deliberate. However, as Marlow and Patton (2005) observed, studies tend to focus on the 

results rather than on the process. Even though access to credit is identical for similar 

projects and profiles, a number of studies show that relationships with lenders are more 

difficult for women. Firstly, women are generally less satisfied with their banking 

relationship than men (Buttner and Rosen, 1988). Secondly, Carter and alii (2007) show that 

the trust relationship, an important aspect of the bank loan relationship, is not the same for 

men and women. Banks will require from women that they give proof of their knowledge on 

starting a business and of its different implications. Men on the other hand, are asked to 

demonstrate their social stability, by being married for example. Fay and Williams (1993) 

mailed to loan officers of major banks the files of people asking for loans where the only 

difference was the level of education or the sex. They demonstrate that among people with 

high school education, women are less likely than men to obtain a loan. For people with 

university education, chances are the same but the education variable will play a more 

important role for women. They come to the conclusion that the feeling women have of being 

discriminated against when asking for start up capital is grounded, but that this 

discrimination is probably unconscious, cultural, which makes it more difficult to change. 

Buttner and Rosen (1998), after surveying 106 bank loan officers, show that the 

characteristics associated with successful entrepreneurs are attributed to men more often 

than to women. Sexual stereotypes can therefore have an influence on the banking 

relationship in general. It seems also that women are asked more guarantees than men as 

well as a higher interest rate (Coleman, 2000). Riding and Swift (1990) created a witness 

group made up of firms managed by men, with identical characteristics in terms of age, size, 

business sector, growth rate and organisation as those managed by women. They show that 

once these variables are controlled, there remains a significant statistical difference linked to 

gender. Women are asked increased collateral to obtain a credit line. 

Whether one is studying microcredit in developing countries or micro-firms in rich 

countries, similar observations can be made: women are limited to activities considered to be 

feminine (personal services, retail trade), to poorly capitalistic activities that generate little 

profit. One explanation is that women start their business with lower level of start-up 

capitalization. This is one of the reasons why they choose a legal structure and a type of 

activity that require little investment in capital but that will not enable them to generate a 

significant income. 

In industrialised countries microfinance, because it provides funding and own funds 

to people, particularly to women that do not have any, may encourage access to bank credit 

and to more ambitious projects. 

III. Statistical results 

Our research covers the activity of all microfinance institutions in Aquitaine. Over the 

2000-2006 period, these institutions gave just under 4,000 micro-loans amounting to a total 

of 18.7 million euros. We created a database using the client portfolios of these institutions. 

The complete data concerns 3,640 microcredit files, for a total of 17 million euros (2,381 men 

and 1,259 women) 3 . The advantage of this study is that it covers the almost exhaustive supply 

(over 90% of files contain correct information) of microcredit in the 6 th region of France 

during seven years. 

3 We excluded the data on the few businesses that were created on a family basis.

Table 1. Entrepreneurs’ characteristics 

Entrepreneurs 

(total) 

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Entrepreneurs 

with microcredit 

Women Men Women Men t- 

Student 

Sex 28.7% 71.3% 34.6% 65.4% 


Difference between 

Women and Men 

(with microcredit) 

Prob. 

Average age (years) 38.6 38.7 36.9 37.1 -0.632 0.527 

Nationality 

French 

Other 

Level of studies 

University 

Primary and 

secondary school 

Occupational status 

Active 

Unemployed < 1 

year 

Long term 

unemployed 

Inactive 

Bank credit 

Yes 

No 

Marital status 

Single 

Couple 

Work experience 

Yes 

No 

92% 

8% 

52.8% 

47.2% 

45.5% 

17.1% 

16.1% 

21.3% 

na 

na 

na 

na 

na 

na 

88% 

12% 

45.2% 

54.8 

57% 

19.3% 

14% 

9.7% 

na 

na 

na 

na 

na 

na 

83.9% 

16.2% 

50% 

50% 

13.4% 

19.3% 

11.2% 

56.1% 

20.1% 

79.9% 

60.8% 

39.2% 

49.4% 

50.6% 

81.1% 

18.9% 

39.2% 

60.8% 

17.3% 

21.5% 

10% 

51.2% 

23.6% 

76.4% 

42.2% 

57.8% 

*** Differences between men and women are significant at the .01 level. 

* Differences between men and women are significant at the .1 level. 

Sources: Our database and the Sine database of the Insee. 

55% 

45% 

1.917 

5.091 

-2.769 

-1.408 

1.084 

3.58 

5.784 

9.984 

-3.016 

0.055* 

0,000*** 

0.006*** 

0.159 

0.278 

0.000*** 

0.000*** 

0.000*** 

0.003*** 

34.6% of microcredits reported in our survey were disbursed to women. This rate is 

slightly above the percentage of women company creators in France (28.7% in 2002), but it is 

lower than the European rates (respectively 39% and 30% in 2004). The percentage of 

women in the MFIs portfolio is close to the Western European rate but is in contrast with the 

East European (62%) and North American (59%) rates, as well as with those of developing 

countries (84%). 

As shown in Table 1, of all entrepreneurs, microfinance institutions tend to target 

relatively more women, young people, foreign born populations, as well as people who are 

excluded from the labour market. Because of their characteristics, these people are often the 

ones that do not have much personal funding, which makes access to a classic bank credit 

more difficult. Moreover the number of women who start their business alone is generally 

higher than for men who are often helped by their partner (or by a family member). Thus 

women, who are often single, will a priori have less income and less guarantees (single source 

of income, fewer assets) to put forward in order to get external financing. Yet they have a

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monthly income that is almost equivalent to that of men (the difference is not statistically 

significant, see Table 2). Moreover, it is interesting to note that a high percentage of single 

female borrowers have children in their care (44.4% of single women, as opposed to only 

14.2% of single men). And yet, it is well known that the risk of poverty is 34% amongst singleparent 

families. In our database, almost 80% of these women benefit from the minimum 

social income or other benefits and 96.7% of them are excluded from bank funds. Conversely, 

men who have loans and are in a couple have children more often than women who are in a 

couple (73.8 % compared to 66.6%).Consequently, self employment for single women may be 

perceived as a necessity entrepreneurship, whereas it may be an opportunity 

entrepreneurship for women in couple. 

The male/female difference amongst microcredit beneficiaries does not appear to be 

significant when compared to the reference population of company creators. In both samples 

women have studied more than men but have less work experience in the sphere they are 

entering. Most of the time they were outside of the workforce (but not on unemployment 

benefits) before they created their business. Indeed if the difference between women who 

have benefitted from a microcredit and those who have not is not very high (amongst 

company creators, the percentage of women who went through higher education is of 52.8% 

and 50% amongst microcredit beneficiaries), this difference is much more significant 

amongst men (45.2% compared to 39.2%). Similarly, male company creators are more often 

in employment (57% compared to 45.5% for women) whereas women are often beneficiaries 

of the minimum social income or other benefits (21.3%, compared to 9.7% for men). Amongst 

microcredit beneficiaries, the gap lessens greatly, leading us to believe that MFIs tend to 

favour active women and men in consistent poverty. Amongst company creators, 1 in 5 

women is on state benefits, compared to 1 in 10 men. Amongst microcredit beneficiaries, this 

rate is almost the same between men and women (1 in 2). Thus comparatively MFIs fight the 

battle against poverty and exclusion more for men than for women. There is no indication, 

however, that this is indeed discrimination by MFIs rather than self-selection 

(discrimination) by women themselves. 

Table 2. Funding characteristics 

Women Men Difference between 

Women and Men 

(t statistic) 

Probability 

for tstatistic 

Loan maturity (months) 25 27 -2.677 0.007*** 

Interest rate (%) 4.65 4.39 1.741 0.082* 

Beneficiaries in % : 

- Interest free loan 

- Own funds 

- Loan subsidy 

- Bank loan 

56.1% 

37.8% 

24.4% 

20.1% 

61.4% 

41.9% 

23% 

23.6% 

-3.054 

-2.339 

0.931 

-2.351 

0.002*** 

0.002*** 

0.352 

0.019** 

Average amount of MFIs loan (euros) 4 106 5 009 -6.666 0.000*** 

Total need for funds (euros) 21 859 30 033 -3.271 0.001*** 

Own resources (euros) 5 067 8 444 -2.405 0.016** 

Average amount of supplementary bank 

loan (euros) 

9 340 12 812 -2.421 0.016** 

Losses (%) 2.6% 3.7% -1.7 0.089* 

Monthly available income (euros) 1 147 1 114 0.835 0.404 

*** Differences between men and women are significant at the .01 level. 

** Differences between men and women are significant at the .05 level. 

* Differences between men and women are significant at the .1 level.

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The total amount of women’s projects is on average lower than that of men by almost 

40%, which corresponds exactly to the gap between both sexes’ complementary bank funds 

(Table 2). It is on the own funds level that the gap is the greatest (- 67%). Women meet their 

need for funds by using relatively more microcredits. Although they borrow less, over a 

slightly shorter period, their lending interest rate is on average higher 4 , which can in part be 

explained by the fact that men benefit more often from interest free loans. 

Beneficiaries of a micro-loan are two times less likely to have access to bank credit 

than the average company creator (20.1% of women and 23.6% of men compared to 45% and 

43% respectively). It is interesting to note that women have a guarantee fund (FGIF), 

managed by France Active since 2002, in order make their access to bank credit easier. This 

fund guarantees loans between 5,000 and 48,000 Euros. It appears to be useful since, in our 

sample, only 0.17% of women had a loan higher than this guaranteed limit, compared to 8.3% 

of men. 

Table 3. Project characteristics 

Legal structure (%): 

- Limited liability company 

- Sole ownership 

- Private limited company under 

sole ownership 

Business sector (%): 

- Retail trade 

- Personal service 

- Services for firms 

- Building industry 

- Farming 

- Catering 

- Craft industry 

Women Men 

29 

59.3 

11.7 

35.8 

40.8 

6.6 

1.2 

2.4 

7.8 

5.4 

43.7 

43.7 

12.6 

30.2 

25.4 

7.6 

16.9 

6.4 

7.5 

5.9 

In accordance with other surveys of company creators in France, but in other 

industrialised countries also, more than three quarters of women are to be found in the trade 

sector or among service providers for private individuals. Men are found in a lot more 

sectors, including the construction sector, agriculture, or service providers for businesses. 

Despite the fact that self-employment has often been presented as an opportunity for women, 

particularly in terms of autonomy, personal development and professional progress, studies 

confirm that women reproduce a certain sectoral segregation. According to Hugues (1999), 

because they do not have enough capital and contacts, and because they are more involved in 

domestic work and in children’s education, women work in “peripheral economic niches”, 

such as the retail trade or in personal service. These highly competitive sectors with low 

barriers to entry have low profit margins. In contrast, men’s work is more diversified, in 

trade, services to businesses, in the construction sector, or in transport. 

Women choose legal structures that are more adaptable and that need less personal 

funds. Almost 60% of them thus opt for a sole ownership, where the borrower is liable for 

his/her debts on his/her personal assets, as opposed to 43.7% of men. The same proportion 

of men choose a limited liability company (43.7% of all projects, against 29% for women). 

The legal status that is chosen is generally correlated with the business sector. 

The univariate analysis of male and female microcredit borrowers revealed several 

significant differences in firm and owner characteristics. Notably, we found a significantly 

4 This confirms the results of S. Coleman (2000) who suggests that higher interest rates are associated with smaller 

loans and female borrowers.

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lower amount of microcredit for women compared with men. We will now carry out a 

multivariate analysis in order to explain these male/female differences. 

IV. Multivariate Analysis 

We estimate the microcredit supply’s determinants by using an OLS regression with 

fixed effects to take into account the structural specificities of the different microfinance 

institutions we studied (Table 4). As we have seen, the impact of gender on the ability to 

borrow money can be linked to two types of considerations. The first is due to an indirect 

effect: women borrow less because they have less personal assets, less experience, and 

because they choose activities that require less investment (financial and personal). The 

second is more direct: the funding differences cannot be attributed to these previous factors, 

in that case, there is a “gender effect” (Verheul and Thurik, 2000). 

The estimated equation takes the following form: 

Y = a + b(Woman) + c(Borrower’s characteristics) + d(Project’s characteristics) + 

e(Funds’ characteristics) + it + 

The « Woman » variable is a dummy variable that specifies whether the borrower is a 

woman. If the differences in the microcredit’s amount can be explained by the borrower’s 

characteristics (other than sex) or by the project’s characteristics (its size, business sector, 

supplementary funds), “Woman’s” b coefficient should not be statistically significant. 

The borrower’s characteristics that are taken into account are age, experience, ethnic 

background, level of studies, monthly income level and occupational status (employee, 

corporate manager, unemployed for less or more than one year, beneficiary of minimum 

social income or other benefits, other). We also introduced the squared age so that any 

potential nonlinearities linked to age could be taken into account. The project’s 

characteristics are its amount, the business sector and the type of project (creation, buyout or 

development of a business). Lastly, the fund’s characteristics are the availability and amount 

of supplementary funds (own funds, bank credits, financial assistance). The results are shown 

in Table 4, the description of the variables can be found in annex 1. Only the variables 

significantly different from zero are presented.


Table 4: Fixed-effects (within) regression: key factors when determining the amount of the micro-loans 

Total Women Men 

Number of obs = 1967 

R-sq: within = 0.3506 between = 0.9204 

overall = 0.6065 

F(12,1952) = 87.81 Prob > F = 0.0000 




F(8,1041) = 54.95 Prob > F = 0.0000 




F(12,2994) = 111.41 Prob > F = 0.0000 

Coefficient Std. Err t P>|t| Coefficient Std. Err t P>|t| Coefficient Std. Err t P>|t| 

Amount of microloan 

Age 10.64191 4.362547 2.44 0.015 14.94929 5.79719 2.58 0.010 

Woman -435.0353 87.09972 -4.99 0.000 

In a couple 205.809 109.8166 1.87 0.061 

Studies -81.60762 36.46281 -2.24 0.025 -134.8779 48.48184 -2.78 0.005 

Social income -230.3135 91.6653 -2.51 0.012 -319.6723 122.2647 -2.61 0.009 

Corporate manager 993.5678 165.2209 6.01 0.000 1052.008 250.325 4.20 0.000 830.4972 209.4064 3.97 0.000 

Employee 1173.831 199.3277 5.89 0.000 1242.429 284.1027 4.37 0.000 1073.815 259.3915 4.14 0.000 

Total need for 

.0298955 .0009016 33.16 0.000 .0201704 .0012003 16.80 0.000 .0353175 .0012122 29.14 0.000 

funds 

Interest-free loan 419.6197 92.78907 4.52 0.000 413.3332 127.3234 3.25 0.001 377.885 123.1045 3.07 0.002 

Subsidy .0636409 .024661 2.58 0.010 .1290228 .0343701 3.75 0.000 

CHR 866.8528 158.5225 5.47 0.000 1333.996 220.0649 6.06 0.000 699.4961 208.9495 3.35 0.001 

Construction 

462.939 130.2347 3.55 0.000 499.1256 142.1787 3.51 0.000 

sector 

Private limited 

company under 1637.492 272.5753 6.01 0.000 2101.54 410.4276 5.12 0.000 1439.377 349.371 4.12 0.000 

sole ownership 

Creation loan 663.8548 87.83886 7.56 0.000 656.5705 122.2172 5.37 0.000 668.8918 114.4661 5.84 0.000 

Constant 2807.345 252.7671 11.11 0.000 2347.985 130.8641 17.94 0.000 2808.616 335.1736 8.38 0.000 

F(4, 1041) = 180.78 Prob > F = 0.0000 F(4, 1952) = 186.33 Prob > F = 0.0000 

F(4, 2989) = 321.86 Prob > F = 

0.0000 

F test all u_i=0 

12

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The multivariate analysis reveals that the amount of the microcredit increases 

with the age of the borrower, his/her level of studies and if the borrower is a man. 

Social and professional status is also important. The loan will be of a greater amount 

if the borrower is an employee or already a corporate manager at the time of the loan 

whereas the loan will be of smaller amount if the borrower receives social incomes. 

The other significant variables have to do with the project: some sectors (such as 

cafes, hotels, restaurants, or the construction sector), or legal structures (private 

limited company under sole ownership) require higher microcredit funds. The 

amount of the micro loan will be greater if the project is of greater importance (this 

amount will also be correlated to supplementary funds, personal assets or bank loan), 

if it benefits from financial assistance (subsidy, interest-free loan) and if it funds the 

creation of a business (i.e. if it does not buyout or plan to develop an already existing 

business). 

The regression was also done separately for men and women in order to 

evaluate whether the amount of the loan was determined by different reasons 

depending on the borrower’s sex. The first result is that the borrower’s personal 

characteristics are of little significance for women, whereas age, level of studies and 

marital status are key factors for men. Another interesting result is that the micro 

loan’s amount will be directly correlated to the amount of the financial assistance 

(subsidy) that will have been obtained by women, yet for men, this variable is never 

significant 5 . This seems to confirm the usefulness of help directed specifically at 

women and therefore, implicitly, that women are penalised in their access to funds. 

Because the gender variable is significant in the general equation, and despite 

the fact that the borrower’s characteristics and his/her project and financial plan are 

taken into account, it seems to confirm the existence of discrimination against 

women on the part of microfinance institutions. This result, however, is based on a 

strong hypothesis: that all of the other characteristics of the individual and of the 

project have indeed been taken into account. As in previous studies, gender 

discrimination is difficult to demonstrate empirically due the existence of several 

factors which make the isolation of gender difficult. Empirical studies are possibly 

subjected to a “missing variable error”. However, our research is based on credit files 

given to us by microcredit institutions. So we included in our estimations all the 

objective information that these institutions had. The data of our econometric 

estimates are therefore relatively exhaustive. More subjective information could not 

be taken into account however, such as the way a banker perceives his/her client, 

which often results from a face to face meeting. Indeed, during an interview, a banker 

can assess his/her client’s ease and the size of his/her social capital (is he/she part of 

a charity network, what is the level of education of those around him, does he/she 

know other corporate managers…). 

In order to confirm our econometric results and test the hypothesis of missing 

variable error (that can lead to biased estimates and inappropriate conclusion about a 

gender effect), we estimated the same equation to determine the amount of the 

supplementary bank credit (Table 5). This estimate can be used for comparison 

(control group). We estimated the key factors that determine the amount of the bank 

credit that supplements the micro-loan by using the same explanatory variables, in 

order to determine whether the gender variable is still significant. 

5 Even if access to subsidies does not vary statistically depending on sex (cf. table 2).

14 


Table 5: Fixed-effects (within) regression: key factors when determining 

the amount of the bank credit 

Amount of bank 

credit 

Coefficient Std. Err t P>|t| [95% Conf. Interval] 

Woman 490.5896 684.2657 0.72 0.473 -851.0766 1832.256 

Employee 5151.505 1497.375 3.44 0.001 2215.544 8087.467 

Amount of 

personal assets 

1.432151 .0208851 68.57 0.000 1.391201 1.473102 

Subsidy -.3942381 .200375 -1.97 0.049 -.787121 -.0013551 

CHR 4563.054 1283.631 3.55 0.000 2046.189 7079.919 

Trade 1245.48 704.3989 1.77 0.077 -135.662 2626.622 

limited liability 

company 

6712.486 1442.23 4.65 0.000 3884.649 9540.322 

Buyout loan 3393.275 752.204 4.51 0.000 1918.4 4868.151 

Constant -1688.588 558.2627 -3.02 0.003 -2783.195 -593.9805 

Number of obs. = 3076 R-sq: within = 0.6261 between = 0.9959 overall = 

0.7296 

F(8,3064) = 641.44 Prob > F = 0.0000 

F test that all u_i=0: F(4, 3064) = 6.51 Prob > F = 0.0002 

A noteworthy finding is that the gender variable is not significant in 

determining the amount of bank loans. This indicates that bank lenders do not 

discriminate against women in providing access to a loan. Of all the characteristics of 

the borrower, this loan depends only on the borrower’s social status (regularity of 

monthly income due to working as an employee) and on his/her personal assets. 

Moreover the bank loan will be higher for buyouts, for limited liability companies, 

and in the retail trade and the cafe hotel and restaurant sectors. Moreover financial 

assistance becomes a substitute for bank loans, which thus turns into supplementary 

funding. 

Finally, we created representative sub-samples. Another way to deal with the 

challenge of disentangling the effect of gender from the effects of variables associated 

with gender is to use a “matching technique” (Fabowale et al. 1995). One factor that 

may explain why women experience greater difficulty in obtaining credit on average 

is their lower level of personal assets. We first study a representative sub-sample 6 , 

based on an identical amount of personal assets in the men’s group and in the 

women’s group (this amount is of 13,800 euros). Women’s need for loans is slightly 

lower than men’s (with a total project of 45,373 euros for women, 47,622 for men, 

that is – 4.5%) whereas the amount of the microcredit is lower by 10% (6,125 euros 

compared to 6,781). To compensate for this, women borrow a little more from banks 

(higher amount and indebtedness rate) 7 . A second representative sub-group, made 

up of 2,152 men and 952 women, was created on the basis of a project with identical 

average amount (25,400 euros). Again, the amount of microcredits obtained by 

women is lower than men’s by 9% (10,570 euros compared to 11,591, bearing in mind 

that the difference becomes statistically significant at 1%). Differences in personal 

assets (on average -2.2%) or in monthly income are not significant. In terms of 

supplementary funds, women obtain more bank loans (+ 9.6%) and a little more 

6 Of borrowers with non-zero personal assets. 

7 The gap is smaller between men and women for borrowers without own funds. Within this group, 

women have projects that are lower than men’s by 10.9% and their microcredit amount is lower by 13%.

15 


financial assistance (+ 3.3%). In the latter case, however, the difference is not 

significant. 

Whether in developing countries or in industrialised countries, the different 

studies show that women face the same difficulties in their projects to create their 

own business. Some of these difficulties are linked to women as individuals (their 

skills, their experience, their self-confidence), some are family-related (couple 

relationships, children), but there are also economic and financial difficulties: poor 

access to outside funds, activities that generate little income, weight of domestic 

chores (Johnson 2000). It appears from our study that women are somewhat more 

penalised that men in their access to microcredit, and that personal differences or 

differences in projects cannot, of themselves, explain such a gap. Yet women, maybe 

because they are subjected to a greater selection than men, have a much higher 

repayment rate than men. But a high repayment rate tells us nothing of the 

difficulties that have to be faced (women often attach more importance to the credit 

relationship than to their capacity to generate a decent monthly income, which can 

jeopardise the business’s survival. The credit will have been paid back in the agreed 

conditions, but the business will have disappeared). Moreover women tend to 

reproduce, in the creation of their business, the poor perspectives they had as 

employees. 

Microfinance institutions are more interested, as traditional banking 

institutions, by the credit relationship and the likelihood of repayment of the loan 

rather by the type of business that is being financed (business sector, legal 

structure…). In other words, MFIs don’t really promote women’s enterprise beyond 

credit and implicitly they will encourage, more particularly, women to stay in 

traditional activities. However MFIs may not be considered like other finance 

organisations, they also have to have a role of counsel and support. More than the 

supply of funds, MFI can also play an important part in informing and guiding 

women towards more profitable projects. Generally speaking, mechanisms that 

enable women to accumulate more personal assets and to have access to larger loans 

should also be considered, as studies have shown that these will enable the funding of 

more profitable and viable projects. The undercapitalisation of new firms has a long 

term implication for business performance.

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18 


Annex 1. Descriptive statistics for dependant and independent 

variables 

Number of observations = 3866 Period = 2000-2006 

Dummy variables 

Variable Mean Standard Errors 

Bank loan 

Yes = 1 Non = 0 

Sex 

Woman = 1 Man = 0 

Ethnic background 

French = 1 Other =0 

Marital situation 

single, widow, divorced = 1 

Married, in a couple = 0 

Social status 

Minimum social income =1 if not=0 

Social benefits=1 if not =0 

Unemployed (< 1 year)=1 if not =0 

Unemployed (> 1 year) if not =0 

Corporate manager=1 if not =0 

Employee =1 if not =0 

Other 

Own funds 

Yes=1 No=0 

Experience 

Yes=1 No=0 

Purpose of the loan 

New business=1 if not =0 

Repurchase=1 if not =0 

Expansion=1 if not =0 

Activity 

Craft industry=1 if not=0 

Services for firms=1 if not =0 

Services for private households=1 if not 

=0 

Retail trade=1 if not =0 

Building industry=1 if not =0 

Farming=1 if not =0 

Catering=1 if not =0 

Level of education 

University (Master’s degree - PhD)=1 

University (Bachelor’s degree)=2 

Baccalaureate=3 

Secondary school=4 

Junior school=5 

0.297 

0.346 

0.821 

0.488 

0.346 

0.134 

0.207 

0.104 

0.091 

0.068 

0.05 

0.413 

0.615 

0.578 

0.276 

0.145 

0.057 

0.073 

0.308 

0.321 

0.114 

0.05 

0.077 

3.34 

0.44 

0.476 

0.383 

0.499 

0.476 

0.340 

0.405 

0.305 

0.288 

0.252 

0.218 

0.492 

0.499 

0.494 

0.447 

0.352 

0.232 

0.26 

0.461 

0.467 

0.317 

0.218 

0.265 

1.136

Quantitative variables 

Variable Average Gap 

Age (years) 37 18 - 70 

19 


Microcredit amount (euro) 4 801 100 - 38 000 

Bank credit amount (euro) 12 689 0 - 785 000 

Total need for funds (euro) 28 719 100 - 1 516 868 

Personal assets amount (euro) 7 581 0 - 1 417 776 

Monthly income (euro) 1 127 35 - 9 100 

Loan’s maturity (months) 26.4 1 - 92 

Interest rate (%) 4.2 0 - 23

20 


Making European microfinance more sustainable – lessons from 

Britain 

Dr. Karl Dayson, executive director, Pål Vik, research assistant, Bob 

Paterson, visiting research fellow, Anthony Salt, research associate 

Community Finance Solutions, University of Salford, Crescent House, Room 214, 

Salford M5 4WT, United Kingdom 

Tel: +44 0161 295 2827 E-mail: k.t.dayson@salford.ac.uk 

Website: www.communityfinance.salford.ac.uk 

Abstract: This paper identifies and analyses best practice in promoting sustainable 

microfinance institutions (MFIs) based on an in-depth analysis of five UK MFIs. The 

study focused on the effectiveness of MFI partnerships, staff efficiency and loan 

portfolio profitability, which previous research suggests are the key pathways to 

enhance sustainability. Situated between the Western European model of statesubsidised 

enterprise support and the Eastern European sector focusing on scale and 

efficiency, the UK microfinance sector may offer important lessons in balancing 

efficiency and social impact. 

We conducted a benchmarking study of five UK MFIs, part of which we analysed and 

modelled the past and future performance of their loan portfolios, their partnerships, 

and the way in which their staff members spent their time and the processes and 

structures driving this time-use. 

We found that the MFIs are still some way away from covering all their costs with 

income generated from their core activity of lending. The results of the analysis of the 

loan portfolio suggest that they can increase their sustainability considerably through 

charging interest rates which more closely reflect the costs of delivery and by 

organising staff to maximise loan officer exposure to potential customers. The degree 

to which the MFIs can boost the sustainability of their operations depend on their 

starting point (i.e. interest rates charged, initial loan officer productivity), product 

mix and cost structure. We argue that the funders and policy-makers can aid the 

sector move towards greater sustainability through ensuring that loan capital is 

available to underpin portfolio growth and through providing development grants to 

stage-manage productivity increases. 

We hope that our findings and recommendations will enable funders and policymakers 

support the UK and European microfinance sector in a more effective and 

progressive manner. In addition to highlighting best-practice in MFIs operations, our 

hope is that the research instigates greater cooperation and sharing of best practice 

across the sector. Building on the experience of sharing data and practices as part of 

the research project, the five participating MFIs are now cooperating on a wider 

range of issues through a newly established user group. 

Key Words: Microfinance, operational sustainability

Introduction 

21 


Achieving sustainability is today a key aim of the global microfinance movement 

alongside its social and economic objectives. Sustainability is seen as important 

because sustainable Microfinance Institutions (MFIs) “meet their goals now without 

harming their ability to meet their goals” in the future (Schreiner, 2000, p.425) 

There are two specific definitions of sustainability: operational and financial. 

Operational sustainability refers to the ability of an MFI to cover its costs with 

income from its core activities (i.e. fee and interest rate income from its loan 

portfolio), whilst financial sustainability refers to the ability to cover its costs if it had 

to raise 100% of its loan portfolio through recycling existing funds and through 

borrowing funds at the market rate (CGAP, 2003; CDFA, 2006). 

Sustainability rose to prominence in research and policy debates following the 

theoretical and empirical critique embodied in the research by a group of researchers 

at the Ohio State University on subsidised agricultural programmes operating in 

Latin America in the 1960s and 1970s (Adams, 1972; Von Pischke and Adams, 1980). 

Their criticism of these programmes was twofold. First, they argued that the 

concessionary terms of lending distorted the potential economic and social impacts 

by enticing higher-income individuals to take out the loans. Second, their limited 

capacity to reuse loan capital, owing to high cost/income ratios, translated into short 

life-spans stifling ability to capitalise on staff and institutional learning. 

However, the emphasis placed on sustainability of microfinance programmes by 

policy-makers and practitioners across the expanded European Union has been 

highly uneven. The Eastern European microfinance sector has generally followed the 

current microfinance orthodoxy in focusing on sustainability, profitability and scale 

(Bateman, 2003; Hartarska et al, 2006). The non-bank MFI sector in Central and 

Eastern Europe as a whole is self-sustaining according to figures from the 

Microfinance Information Exchange (2006, 2007). 

Conversely “Western European microfinance has…a strong focus on social inclusion 

and pays less or almost no attention to its profitability” (Evers and Jung, 2007, p.10). 

For reasons of a difficult and little developed market place, sectoral immaturity and 

the presence of subsidies, there has not been a considerable move towards 

sustainability (Evers and Jung, 2007; Guichandut and Underwood, 2007). This is 

evidenced by the apparent lack of consolidation of the sector in Germany where the 

number of institutions is increasing whilst the number of customers is decreasing 

(Evers and Lahn, 2007). Instead, there has been a general focus on the costeffectiveness 

of microfinance compared to state-run welfare programmes. 

The UK microfinance model finds itself somewhere between the Eastern and Western 

European models. As in the case of Western Europe, there is a strong focus on social 

inclusion, as evidenced by the assignation of funding based on reaching target 

groups, predominantly very low-income households. On the other hand, the UK 

government has stressed the importance of scaling up MFIs to serve excluded 

communities, especially in the case of personal financial services (HM Treasury, 

2007). Moreover, indicators relating to financial sustainability, such as minimum 

interest rates for personal loans and maximum loan delinquency rates, are also often 

attached to grant funding. 

Situated between the Western European model of state-subsidised enterprise support 

and the Eastern European sector focusing on scale and efficiency, the UK 

microfinance sector may thus offer important lessons in balancing efficiency and 

social impact. This paper analyses the degree to which the UK sector has managed to

22 


pursue operational sustainability, whilst meeting social targets tied to funding, 

through an in-depth benchmarking study of five UK MFIs. 

Previous research into the UK MFI sector has identified three pathways of improving 

financial and operational sustainability (Forster et al, 2004; New Economics 

Foundation, 2004; Dayson, 2005; Dayson, 2006): staff productivity and efficiency, 

effective partnerships (to reduce costs and increase client base) and an appropriately 

mixed loan portfolio. Hence, in this paper we conducted a benchmarking study of five 

UK MFIs, as part of which we analysed and modelled the past and future 

performance of their loan portfolios, their partnerships, and the way in which their 

staff members spent their time and the processes and structures driving this timeuse. 

We found that the MFIs in our sample are still some way away from covering all their 

costs with income generated from their core activity of lending. The results of the 

analysis of the loan portfolio suggest that they can increase their sustainability 

considerably through charging interest rates which more closely reflect the costs of 

delivery and by organising staff to maximise loan officer exposure to potential 

customers. 

The remainder of the paper is organised as follows. The second section outlines the 

methodology and the participating MFIs. The third presents the findings of the 

analysis of staff productivity, partnership effectiveness and profitability of loan 

portfolio. The fourth concludes and discusses the implications of the findings for 

European microfinance. 

Methodology 

The case study methodology applied for this study consisted of three components. 

First, we analysed the use of time by MFI staff members, recorded through a 

timesheet complted daily for a three week period by the staff members, in order to 

ascertain the staff productivity and efficiency. In addition to recording minutes spent 

on tasks (e.g. loan interviews, opening up of loan accounts), loans officers were asked 

to record number of loan applicants seen. Based on the latter data, we were able to 

make estimations about annual loan officer productivity, which in turn fed into the 

loan portfolio analysis. We also conducted qualitative interviews with 16 staff 

interviews to explore the drivers and causes of time use. 

Second, in order to analyse the effectiveness and nature of partnerships formed by 

the MFIs, their partner organisations filled in an online questionnaire. This 

questionnaire contained questions concerning three potentially performanceenhancing 

aspects of partnerships: increasing customer base (through referrals and 

marketing), transferring costs and accessing funding. 

Finally, to determine the profitability and sustainability of the portfolio of products 

and activities of the participating MFIs, the following data was collected and analysed 

for business loans (including social enterprise loans), personal loans and home 

improvement loans for the financial year of April 2006 to March 2007: 

- Size of loan book (number of loans, value of loans); 

- Income from interest rates and fees; 

- Staff and overhead costs for delivery; 

- Loans written off, arrears and capital at risk; 

- Capital available to lend (including sources of funding) 

Five MFIs covering England were included in the study (Table 1).

Number of 

employees (FT 

positions) 

Total value 

OLP (£ ‘000)* 

Financial 

products (% of 

OLP) 

Loans granted 

by product 


Table 1: The MFIs studied 

MFI A MFI B MFI C MFI D MFI E 

PL (74) 

BL (26) 

PL: 1262 

BL: 78 

10 12 5 11 5 

951’ 202’ 554’ 444’ 520’ 

PL (37) 

BL (34) 

SEL (29) 

PL: 202 

BL: 46 

SEL: 2 

23 

PL (54) 

BL (46) 

PL: 310 

BL: 23 

PL (58) 

BL (41) 

HIL (1) 

PL: 562 

BL: 41 

HIL: 4 

HIL (100) 

HIL: 89 

Other services SP DMA .. DMA .. 

Branches 

3 2 2 2 1 

Source: Loan portfolio data provided by the MFIs for the financial year of April 2006 to 

March 2007 

Notes: * Assessed on March 31 2007 

Abbreviations: PL = Personal loans, BL = Business loans, SEL = Social Enterprise Loan, HIL 

= Home Improvement Loans, SP = Savings products, DMA = Debt and Money Advice, FT = 

Full-time, OLP = Outstanding loan portfolio 

The MFIs differ in terms of their business strategies and product portfolio. MFI E is a 

specialised home improvement loan lender and was included as a point of reference 

for long-term performance of the product and for administrative and technical 

requirements for introducing the home improvement loan. 

MFI A specialises in personal finance and has since April 2007 stopped offering 

business loans. Conversely, MFI B, MFI D and, to a lesser extent, MFI C offer a wide 

range of services to households, social enterprises and small businesses, including 

advice and home improvement loans. Nevertheless, because personal loans 

constituted the single greatest number of loans and greatest value of the outstanding 

loan portfolio for MFIs A to D, we will in this paper refer to these MFIs as personal 

lending MFIs. 

Findings 

This section presents the main findings of the case study research and is divided into 

three sections. The first discusses the findings from the analysis of the use of time 

among MFI employees. The second analyses the effectiveness of partnerships, whilst 

the third examines the level of sustainability of the loan portfolio. 

Staff productivity 

Increasing the efficiency and productivity of MFI employees is a potentially powerful 

determinant of sustainability, by the number of loans a loan officer can make and the 

amount of time the organisations can spend on reducing loan losses through 

monitoring and debt collection. 

In order to ascertain the level of staff productivity and efficiency staff members filled 

in a daily timesheet over a three-week period. In total, 48 out of 51 MFI staff 

members submitted timesheets (Table 2), and semi-structured interviews were 

conducted with 16 staff members from the 5 MFIs.

24 


Table 2: Participating staff members 

MFI A MFI E MFI C MFI D MFI B Total 

Total staff 7 5 6 11 6 48 

Admin 2 1 1 2 1 7 

Lenders 3 3 3 6 3 18 

Management 2 1 2 3 1 2 10

25 


The data was weighted according to the normal distribution of staff across the staff categories 

to ensure that non-participating staff members did not skew the results. Because MFI E is a 

specialised home improvement loan provider, the tables displays the averages for the 

personal lending MFIs, and much of the analysis will centre on differences and similarities in 

the use of time between these MFIs. 

Table 3 displays the weighted timesheet data according to activity by MFI for all staff 

members. Each activity consists of numerous tasks. For example, making loans consist of 

loan interviews, reviewing application, issuing of loan and loan administration. A key 

distinction made is the distinction between the time spent on sustaining activities – tasks not 

easily linked to the provision of financial products – vs. time spent on core activities directly 

linked to the provision and monitoring of loans. 

Table 3: Proportion of time spent by all staff by MFI (% of productive time) 

MFI A MFI B MFI C MFI D 

Average 

score 

MFI E 

Loan 

enquiries 

7.1 2.5 8.0 3.5 5.3 0.4 

Money 

advice 

1.9 0.3 0.8 0.1 0.8 0.5 

No shows 

2.7 0.1 0.0 1.0 1.0 0.1 

Making 

loans 

31.4 33.7 21.9 29.2 29.1 39.1 

Month-end 

reports 

4.3 1.7 4.6 2.2 3.2 1.3 

Servicing 

loans 

2.7 2.4 5.1 3.8 3.5 0.7 

Delinquency 

control 

7.9 10.0 13.3 12.6 11.0 2.6 

Promotional 

activities 

3.5 9.7 11.5 17.0 10.4 14.4 

Office 

management 

36.6 36.9 33.9 29.1 34.1 37.1 

Other 

activities 

1.9 2.7 0.9 1.5 1.8 3.8 

Notes: Reported as percentages based on weighted data 

Source: Timesheets submitted by MFI employees for the period 25.06.07-13.07.07 

The MFIs appear to spend their time on four activities. First, tasks relating to office 

management constitute the single biggest activity for all the personal lending MFIs with the 

exception of MFI D. There seems to be a certain minimum time a MFI has to dedicate to 

general office tasks (a minimum of 5%), staff meetings (around 5%), queries (4-6%) and 

report preparation (3-5%). Second, tasks involved in making a loan constitute the second 

most time-consuming category, hovering between 20 and 40% of productive time. Once the 

loan has been made, relatively little time is dedicated to servicing loans (2-5%). This reflects 

the insistence among MFIs on servicing the loans through automated bank transfers. Third, 

once a client falls in arrears with their payments, the MFIs display considerable willingness 

to invest time in chasing arrears (8-13% for the personal lending MFIs). The emphasis on 

delinquency control appeared to be driven by a fear that inaction on part of the MFI could 

foment a non-payment culture among borrowers. 

Finally, MFIs also appear to invest extensive time on promotional activities (external 

meetings, presentations, outreach activities, marketing, liaising with partners and 

networking). With the exception of MFI A, the MFIs spend between 10 and 17% of their time 

on promotional activities. MFI D spends the greatest proportion of its time on promotional 

activities largely because it has a dedicated outreach worker. Because the MFIs in the sample

26 


are still dependent on granted loan capital and other forms of subsidies, they must invest 

time on maintaining contracts and relations with public and private sector organisations. 

This may explain the time invested in external relationship management and promotional 

activities. 

Table 4 shows how the administrators across the participating MFIs spend their time. 

Table 4: Proportion of time spent by admin staff by category (% of productive 

time) 


Average 

score 

MFI E 

Loan 

enquiries 

4.9 4.5 11.5 14.9 9.0 0.0 

Money 

advice 

0.0 1.6 3.4 0.0 1.3 0.0 

No shows 

0.0 0.0 0.0 0.0 0.0 0.0 

Making 

loans 

19.8 2.9 21.4 9.9 13.5 2.8 

Month-end 

reports 

1.5 3.2 3.7 3.3 2.9 9.5 

Servicing 

loans 

13.7 15.5 16.0 23.2 17.1 6.7 

Delinquency 

control 

10.7 0.0 15.7 11.9 9.6 0.0 

Promotional 

activities 

0.0 0.0 8.9 0.3 2.3 0.0 

Office 

management 

40.3 69.9 19.4 36.5 41.5 71.0 

Other 

activities 

9.1 2.4 0.0 0.0 2.9 10.0 



Here there is more variation than could be observed for the MFIs as a whole. This variance 

centres principally on the extent to which the administrators get involved in loan provision, 

dealing with loan enquiries and giving applicants money advice. On the one hand there are 

MFIs whose administrative staff specialise almost purely on office management tasks, with 

very limited involvement in the MFI’s core activities. This is very much the case of MFI B, 

where the administrator spends minimal time on lending activities (with the exception of 

servicing loans). On the other, the administrators at some MFIs have an extensive 

involvement in the making, servicing and monitoring of loans, which is the case at MFI A. 

The rationale behind this division of labour seems to be to maximise the exposure of lending 

staff to clients. As we will see when looking at the timesheet data for the loans officers, the 

model seems to achieve that, as MFI A lending staff spend more time than the loans officer of 

any other MFI on dealing with potential customers. 

The two above-mentioned divisions of labour may only work in larger organisations. The 

administrator in MFI C, the smallest MFI in the sample, has a non-specialised role getting 

involved in all aspects of the operation of the MFI.

Table 5 displays the use of time among managers across the MFIs. 

27 


Table 5: Proportion of time spent by management by category (% of productive 

time) 

MFI A MFI B MFI C MFI D Average 

score 

MFI E 

Loan 

enquiries 

1.6 1.2 3.8 0.7 1.8 0.0 

Money 

advice 

0.0 0.0 0.0 0.0 0.0 0.0 

No shows 

0.0 0.0 0.0 0.0 0.0 0.0 

Making 

loans 

17.2 11.4 12.1 3.2 11.0 3.4 

Month-end 

reports 

12.4 4.0 7.7 6.1 7.6 1.3 

Servicing 

loans 

0.0 0.9 4.9 0.1 1.5 0.0 

Delinquency 

control 

7.4 1.7 7.6 0.9 4.4 0.3 

Promotional 

activities 

6.9 25.8 13.9 35.1 20.4 25.0 

Office 

management 

54.5 54.0 48.3 47.5 51.1 64.4 

Other 

activities 

0.0 1.0 1.7 6.4 2.3 5.6 



One of the factors distinguishing the MFIs is the degree of management involvement in 

making loans. On the one hand, the management of MFI D and MFI E only have very limited 

involvement in making loans. This appeared to be related to reliance on contractual income 

and the complexity of funding arrangements. On the other, there are managers who are much 

more involved in the loan process, particularly MFI A and MFI C. In the case of the former, 

the managers spend more than 6% of their time on interviews alone, which is more than the 

managers in all the other MFIs combined. This is largely a reflection of the organisational 

culture of MFI A. All the organisation’s activities are centred on increasing the loan book 

through seeing potential clients. To be able to do that, managers cover for loans officers on 

leave and generally offer extensive lending support. 

Finally, we turn to the use of time among the loan officers across the participating MFIs 

(Table 6). The loans officers play a crucial role in a MFI as they have the most extensive 

contact with the client base and often build relations with customers, vital in informing 

lending decisions and in limiting defaults and loan losses.

28 


Table 6: Proportion of time spent by lending staff by category (% of 

productive time) 


Average 

score 

MFI E 

Loan enquiries 

11.8 2.6 13.4 1.7 7.4 0.6 

Money advice 

No shows 

Making loans 

Month-end 

reports 

Servicing loans 

Delinquency 

control 

Promotional 

activities 

Office 

management 

Other activities 

4.0 0.1 0.8 0.1 1.3 0.7 

5.6 0.1 0.1 1.7 1.9 0.1 

46.5 54.4 38.5 48.9 47.1 58.4 

0.0 0.0 0.0 0.0 0.0 0.0 

0.0 0.0 0.0 0.0 0.0 0.0 

7.2 17.4 21.6 18.9 16.3 3.9 

2.8 2.9 8.7 6.9 5.3 12.5 

21.8 18.8 16.9 19.7 19.3 21.5 

0.3 3.7 0.0 2.1 1.5 2.2 



Making loans constitutes the single most time-consuming activity for loans officers. Three 

out of the four personal lending MFIs spend around 20% on delinquency control. This 

activity generally involves monitoring daily, weekly or monthly bank reports of direct debits, 

and acting accordingly by calling, paying visits to or sending letters to the clients. The lending 

staff are to varying degrees supported by administrators and managers in monitoring and 

acting upon non-payment. 

Lending staff at MFI A spend considerably less time on delinquency control than the other 

MFIs because of its automated arrears monitoring system. This system requires loan officers 

to make a call to delinquent clients, whilst all other aspects of the delinquency control 

(further follow-ups and debt collection) are dealt with by administrative and management 

staff. 

This time-saving arrears reporting system combined with the way in which support and 

management staff are organised enables lending staff at MFI A to focus on seeing potential 

clients. Personal loans officers at MFI A spend around 45% of their time dealing directly with 

clients compared to approximately 30% (MFI C), 25% (MFI B), 15% (MFI D) and less than 

10% (MFI E) for the other MFIs. The MFI A model centre on maximising the loans officers’ 

exposure to clients by assigning most other tasks not directly linked to the loan interviews to 

the administrators and to the management. 

The estimates on number of loans per full-time loan officer suggest that this enables MFI A 

interview and process 40% more loan applicants compared with the second-most productive 

MFI (Table 7).

Annual # of 

loans process 

per FT loan 

officer 


Table 7: Personal loans officer productivity 

Average 


score 

440 308 205 253 320 

Notes: Estimated based on number of loan applicants seen during timesheet exercise 

Assumes 60% success rate based on data from MFI B 


Three factors appear to explain the variation in loan officer productivity. First, the number of 

applicants a loans officer can interview is conditional on the availability of appropriate 

meetings rooms. In the case of MFI B, two loans officers and two debt advisors share one 

meeting room, limiting the number of loan applicants a loans officer can see in the course of 

a working day. Second, the data also suggest that a high proportion of repeat business is 

conducive for loan officer productivity as they are considerably less costly to process and 

generally less risky. MFI A which displayed the greatest loan officer productivity also had the 

greatest proportion of repeat clients: 56% of loans issued in the financial year of 2006/2007 

were to repeat customers, compared to 7% (MFI B), 33% (MFI D) and 52% (MFI C). Finally, 

the timesheet data suggest that there is a link between the proportion of productive time 

spent on seeing clients and loan officer productivity as depicted in Figure 1. 

% loan officer time spent on direct customer contact 

40.00 

35.00 

30.00 

25.00 

20.00 

 

Figure 1: Direct customer contact and loan officer productivity 

MFI C 

 

MFI D 

200.00 300.00 400.00 

 

29 

MFI B 

MFI A 

TIME = -1.33 + 0.09 * PROD 

R-Square = 0.69 

Number of loans made per FT loan officer per year 

In summation, MFI A which puts the greatest emphasis on maximising the time loans 

officers spend on interviewing, by involving administrators and managers in offering lending 

support, also processes the greatest number of loans per full-time loan officer position. 

Further, our findings suggest that part of maximising lending staff exposure to potential 

customers may also lie in outsourcing administrative aspects of arrears control and possibly 

other areas to external companies.

Partnership effectiveness 

30 


Like the productivity of staff, effective partnerships can improve the sustainability of a MFI, 

by increasing its client base through referrals and marketing. In addition, the willingness of a 

partner organisation to donate loan capital and buy other service from a MFI is determined 

by how effective they perceive the partnership to be. 

In order to measure the effectiveness of these partnerships, 27 partner organisations filled in 

an online questionnaire (Table 8). 

Housing 

association 

Debt advice 

agency 

Bank, build 

society 

Local 

government 

RDAs 

Charity 

Business 

advice 

Other 

Total 

Table 8: Partner organisations by MFI 

MFI A MFI B MFI C MFI D MFI E Total 

1 3 .. 3 0 7 

0 0 .. 2 0 2 

1 2 .. 1 0 4 

0 0 .. 3 6 9 

0 1 .. 0 0 1 

0 0 .. 1 0 1 

0 1 .. 0 0 1 

0 2 .. 0 0 2 

2 9 .. 10 6 27 

Source: Online questionnaire filled in by MFI partner organisations September and October 

2007 

Local government and housing associations constitute the majority of MFI partners. In this 

sample, the majority of local councils are cooperating with the MFIs in relation to the 

provision of home improvement loans. For housing associations, partnerships with the MFI 

sector is seen as a key strategy in reducing the risk of households falling behind on their rent 

by offering an alternative to their tenants to pawnbrokers and doorstep lender who often 

charge very high interest rates. 

The MFIs and their partners cooperate in numerous ways (Chart 1, N = 27).

% 

100 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

Chart 1: Type of partnerships 

Funding Make referrals Receive referrals Service Marketing Product 

development 

Source: Online questionnaire filled in by CDFI partner organisations September and October 2007 

31 


Joint tendering Other 

The majority of partner organisations refer clients to the MFI, market the MFI’s product to 

its clients and provide the MFI with funding. About a third of the partner organisations fund 

the MFIs in exchange for a service, which in all cases refers to home improvement loans. 

Broadly speaking we can draw a simple typology of the different types of partnerships. First, 

there are the partnerships which MFIs form with arms-length funders. Second, there are the 

organisations which fund a MFI in exchange for a service, typically local governments 

funding MFIs for the delivery of home improvement loans. Finally, there are the 

relationships between MFIs and so-called peer organisations, which provide non-financial 

services to low-income households, such as debt and money advice. These organisations 

include job centres, debt advisory agencies, business links and housing associations. These 

relationships are typically limited to referrals and basic marketing. 

In total, 18 out of the 27 partnerships were referral-based, 15 of which were local government, 

housing associations and money advice agencies. Most partner organisations made less than 

one referral per week and most of the referrals from local government are made in relation to 

home improvement loans. 

The way in which partner organisations perceive the MFI and the services it provides is likely 

to be important for their willingness to invest time and resources in a partnership, enhancing 

its effectiveness. Overall the survey data suggest that most partner organisations had very 

favourable views of the MFIs in terms of trustworthiness and reliability. However, the 

partner organisations expressed greater doubt about the effectiveness and meaningfulness of 

the partnerships themselves. 

Loan portfolio analysis 

So far we have looked at two key levers in enhancing operational sustainability – 

partnerships and staff productivity – and the extent to which the MFIs make use of them. But 

how sustainable are the MFIs? 

Chart 2 shows the degree to which the MFIs are operationally sustainable. Specifically, using 

their most recent audited accounts, we calculate the total earnings (fees and interest income, 

and bank interest earned or paid) as a percentage of total overheads (staff, overhead and 

governance related costs). The average column refers to the average for the personal lending 

MFIs (i.e. it excludes MFI E).

Operational sustainability (%) 

100 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

Chart 2: Overall operational sustainability 

32 


MFI A MFI B MFI C MFI D Average MFI E 

Source: Audited accounts for the calendar year of 2006 or for the financial year of 2006/2007 

The MFIs are some way away from covering their costs exclusively through the income 

generated from their loan portfolios. The average for the personal lending MFIs is below 40% 

and the most sustainable MFI has an operational sustainability of just above 60%. However, 

compared to other UK MFIs, the MFIs in the sample perform reasonably well. The average 

operational sustainability for the personal lending MFIs surpass those of Aspire (32%) 

(Forster et al, 2006) and Street UK (7%) (New Economics Foundation, 2004). The average 

operational sustainability ratio is also on par with the average of UK MFIs (36%) (Brown and 

Nissan, 2007). 

MFI A and MFI E are the most sustainable MFIs in that they are able to cover around 60% of 

their income through interest rates, fees and bank interest earned. The low level of 

operational sustainability of MFI B is largely explained by its reliance on contractual income 

to fund its money advice programme. 

So far we have examined the current level of operational sustainability of the MFIs. However, 

given that the personal lending MFIs are relatively young organisations at an early stage in 

their development trajectory, a more interesting question may be how far along the 

sustainability continuum they can progress over the next few years. Therefore, we project 

several possible future development trajectories for the MFIs. 

Drawing on the basic cost structure (staff, governance and office costs), loan and product 

portfolio mix (average amounts, number of loans, split repeat/new loans, interest rates, fees 

etc), and capital and funding streams (liabilities, financial expense, funding contracts) of the 

MFIs for the financial year of 2006/2007, we made projections about the future growth and 

performance of the MFIs for the following seven financial years: 2007/2008 through to 

2013/2014. Furthermore, we also made some assumptions about the future behaviour of the 

organisations and the climate in which they operate. We assume an annual growth in loans 

issued of 10% for personal loans and a range of growth rates for business loans and home 

improvement loans, depending on funding arrangements (see Dayson et al, 2008 for further 

details). We also assume a 5% annual increase in the value of loans and an annual inflation 

rate of 4%. Furthermore, we have applied a standard bad debt ratio of 15% (10% for repeat 

clients) for both business and personal loans, and a ratio of 0.5% for home improvement 

loans. In addition to these base budget projections (as now), we hypothesise that the MFIs 

can alter their level of sustainability by increasing loan officer productivity (increased

33 


productivity), raising the interest rates charged (increased interest rates) and by adding 

higher-value loans (with HIL). Chart 3 shows the average operational sustainability ratio for 

the MFIs under each of these scenarios. 

Operational sustainability 

100 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

Chart 3: Enhancing sustainability 

06/07 07/08 08/09 09/10 10/11 11/12 12/13 13/14 

As now Increased interest rate Increased productivity With HIL Best practice 

Generally, providing that they can ensure portfolio growth at the rates given above, the MFIs 

appear to be gradually enhancing their ability to cover their operating costs with income from 

fees and interest rates in all scenarios including the scenario “as now.” The results of the 

financial modelling indicate that over time the MFIs are improving their performance even if 

they make no changes to the way they operate (as now), providing they can grow their 

personal loan portfolio at 10% and keep their business loan portfolios constant. That said the 

MFIs can make considerable improvements by using any of the abovementioned levers. 

Raising interest rates to the highest charged in the peer group and introducing an up-front 

administration fee on personal loans constitute the single-greatest improvement to 

operational sustainability. In particular, the introduction of an upfront administration fee for 

personal loans has positive implications for operational sustainability. The advantage with 

such a fee is that it is not affected by arrears and as such can give a disproportionate boost to 

income. For MFIs A and D, who operate with an upfront administration fee of 5 and 3% of 

the loan value respectively, the administration fee income constitutes around 40% of total 

activity earnings. Raising loan officer productivity to the highest level among the 

participating MFIs (400 loans per year per full-time loan officer) also makes a considerable 

contributing increasing operational sustainability on average by nearly 10% within the first 

year. 

Finally, adding a higher-value, low-risk loan product in the form of the home improvement 

loan can make a significant contribution to the long-term sustainability of the MFI sector as 

shown in the graph above. The home improvement loan is offered to low-income home 

owners as a means of improving the standard of their housing. Many local authorities fund 

such schemes through paying subscription fees and subsidising interest rates, making them 

an attractive option for customers and MFIs alike. 

We assume that the MFIs make 41 home improvement loans at an interest rate of 8% and at 

an average value of £5,500 in their first year of operation (2009/2010). As suggested by 

Chart 2 even a modest higher-ticket loan portfolio can make a considerable contribution to 

raising sustainability, assuming a 10% annual growth. However, the effectiveness of each of 

the levers outline above for the individual MFIs depends on the starting point of the MFIs

34 


(i.e. interest rates charged, current loan officer productivity) and product mix (i.e. a high 

reliance on contractual income negatively affects the operational sustainability ratio). 

So far we have assumed that the MFIs have access to interest free capital for on-lending. 

However, a potentially very important barrier for the expansion and future sustainability of 

the sector may be the availability of lending capital. Currently the MFI sector is not able to 

offer deposit services, except on an agency basis, and even if they were, it is questionable the 

extent to which the funds raised through medium and long-term savings products would be 

able to significantly contribute towards loan capital. 

Chart 4 displays the size of the gap in funding (expressed in £‘000) to support a 10% annual 

growth in their personal loan portfolio using best-practice approaches (e.g. in terms of 

interest rates, productivity and home improvement loans), once the MFIs have recycled their 

existing loan capital (i.e. the opening balance at the beginning of 2007/2008). Here we 

exclude the capital requirements for the home improvement loan given that there are 

particular funding arrangement in which it is given that the MFI borrows to on-lend part of 

the home improvement loans. 

£'000 

700 

600 

500 

400 

300 

200 

100 

0 

Chart 4: Future capital requirements 

07/08 08/09 09/10 10/11 11/12 12/13 13/14 


The chart reveals that even if the MFIs were to implement best practice there would still be a 

considerable funding gap. Already in Year 1 (2007/2008), MFI A experiences a six-digit 

funding gap, whilst MFI C has a shortfall of £75,000. The figures for MFI B are similar to 

MFI C, whilst MFI D first experiences funding shortages in year 2011/2012 because of its 

slower projected volume growth in personal loans and considerable reserves. 

The future capital requirements for MFI A are considerably greater than those of the other 

MFIs, because of the much greater scale of its operation. For example, according to our 

projections, MFI A will lend out more than £1 million in personal loans alone in year 1 

(2007/2008) and over £3.5 million in year 7 (2013/2014). In comparison, MFI C will make 

loans (business and personal loans) for less than £350,000 in year 1 and less than £900,000 

in year 7. This would suggest that a recapitalisation strategy based exclusively on recycling 

existing loan capital is not a viable means of supporting the expansion of the sector. The 

sector remains dependent on raising funds through grants, contract income and through 

borrowing loan capital.

Conclusions 

35 


Over three decades since Adams, Von Pischke and their colleagues at Ohio State University 

highlighted serious problems with the theoretical and institutional underpinnings of the 

subsidised and concessionary agricultural lending programmes in Latin America, the notion 

that MFIs should strive towards full sustainability is today part of the development 

orthodoxy. Situated between the Western European model of state-subsidised enterprise 

support and the Eastern European sector focusing on scale and efficiency, the UK 

microfinance sector may offer important lessons in balancing efficiency and social impact. In 

this study, we have drawn on the findings of an in-depth benchmarking analysis of five UK 

MFIs to highlight lessons for the European microfinance market on reaching sustainability 

whilst targeting the lower end of the market. 

Our findings suggest that the MFIs are still some way away from covering all their costs 

exclusively through customer fees. The most sustainable MFIs in the sample are able to cover 

just over 60% of their costs through interest rates, fees and bank interest earned. The results 

of the financial modelling indicate that over time the MFIs are improving their performance 

even if they make no changes to the way they operate. However, the MFIs can, depending on 

their starting point and mix of products, make considerable improvements by adjusting 

interest rates and fees, and by increasing productivity. However, we also found that high 

overhead costs relative to activity earnings (interest income from bank deposits, income from 

interest and fees earned) can act as a break on sustainability. 

The financial sensitivity analysis of future capital requirements and different models of 

recapitalisation suggest that raising loan capital purely through recycling existing funds is an 

unviable strategy to fund future expansion of the MFIs in the sample. Already in the first year 

of operation without granted or borrowed loan capital, the most sustainable MFIs experience 

considerable funding shortages. 

There also appears to be a set of norms for maximising staff efficiency and productivity. We 

found a strong relationship between the time the lending staff spent on direct customer 

contact and loan officer productivity. Provided there is sufficient demand for the products of 

the MFI, by organising the non-lending in such a way to maximise the exposure of the 

lending staff and by allowing non-lending staff to step in for interviews when necessary, the 

MFI can raise the loan officer productivity considerably. Further, our findings further 

suggest that part of maximising lending staff exposure to potential customers also lies in 

outsourcing administrative aspects of arrears control and possibly other areas to external 

companies. In terms of outsourcing administrative parts of arrears control, it does not appear 

to affect arrears levels. 

Finally, we also found that the loan officer productivity is crucially linked to the proportion of 

repeat clients. The MFI which displayed the greatest loan officer productivity also had the 

greatest proportion of repeat clients. Repeat business involves lower transactions costs and 

generally constitutes a smaller risk for the MFI. It is considered crucial therefore to design 

products and procedures in a way which entices customers to come back. 

Based on the above findings, we suggest that there are certain structural and process-related 

changes which are likely to have a particularly positive impact on the sustainability of the 

sector. First, the MFIs can charge interest rates which more closely reflect the costs involved 

in providing loans. Second, the sector can take steps to maximise the lending staff’s exposure 

to potential customers, namely reorganise staff to increase time frontline staff spend on 

seeing potential customers and implement time-saving outsourcing mechanisms. Finally, the 

MFIs can capitalise on links with other MFIs to enhance innovation and costs, through 

sharing best-practice and start-up costs and franchising certain products. 

For their part, and in light of the likely shortages of loan capital of the sector in the future, the 

funders and policy-makers can aid the sector move towards greater sustainability through

36 


ensuring that loan capital is available to underpin portfolio growth and through providing 

development grants to stage-manage productivity increases. 

However, the potential for becoming more sustainable is not uniform across the sector, but is 

likely to depend on the starting point of the MFI (i.e. interest rates charged, initial loan 

officer productivity), its product mix and its cost structure. Moreover, given the heterogeneity 

of the expanded EU microfinance sector and of the context in which they operate, the 

effectiveness and feasibility of these levers may not be uniform. There are in particular two 

contextual factors which condition MFIs’ ability to make use of these levers. First, the 

regulatory framework, especially caps on interest rates, may limit the possibility of closing 

the gap between delivery costs and customer fees. German law, for example, prohibits 

charging very high or usurious interest rates (Mark and Tilleßen, 2007). Second, the depth of 

the market and the level of cost-sensitivity of the customers will determine the MFIs ability to 

reach scale and set customer fees resembling costs. The Microfinance Information Exchange 

(2006) notes that, in Central and Eastern Europe a highly cost-sensitive customer base 

prevents the microfinance sector from increasing interest rates. 

Perhaps, most importantly the case studies indicate the difficulty faced by MFIs operating 

within sophisticated financial services environments. All the MFIs were seeking to reach 

clients that mainstream providers were reluctant or unable to serve, or compete with highcost 

sub-prime suppliers. In both cases this reduces the potential market, while increasing 

the delivery costs. For example, clients have to be persuaded to move away from entrenched 

sub-prime providers, which involves time and an element of financial education. In such a 

market MFIs are likely to remain niche players and even the most efficient will struggle to 

reach and maintain sustainability. The question this poses for policymakers is whether the 

scoio-economic benefit of MFIs is of greater priority than MFIs sustainability. It is the 

reverse problem that Adams and Von Pischke highlighted among agricultural programmes: 

does pursuing financially sustainable interventions result in placing borrowers in a riskier 

financial situations through ‘real cost’ pricing. Thereby undermining social inclusion policies. 

We suspect that a European approach to MFIs role in economic inclusion resides somewhere 

between the high cost policy driven interventions of the 1970s and the supply side solutions 

of the 1990s and early twenty-first century.

Bibliography 

37 


Adams, D. W. (1972). Agricultural Credit in Latin America: A Critical Review of External 

Funding Policy, American Journal of Agricultural Economics 53(2), 163-172. 

Bateman, M. (2003). ‘New wave’ microfinance institutions in south-east Europe: towards a 

more realistic assessment of impact, Small Enterprise Development 14(3), 56-65. 

CDFA (2006). CDFA Glossary of Community Development Finance. February, 2006. 

CGAP (2003). Microfinance Consensus Guidelines – Definitions of Selected Financial 

Terms, Ratios, and Adjustments for Microfinance. Washington: CGAP. 

Dayson, K. (2005) Are community finance institutions doing too much? Paper presented at 

the Institute of Small Business Entrepreneurs conference, Blackpool. 

Dayson, K. (2006) Assessing the performance of microfinance providers in the UK, Paper 

presented at the European Microfinance conference, Budapest. 

Evers, J. and Jung, M. (2007). Status of microfinance in Western Europe – an academic 

review. EMN Issue Paper, March 2007. 

Evers, J. and Lahn, S. (2007). Status of Microlending in Germany: An Empirical Survey of 

Programmes in 2006, In KfW Bankengruppe (Eds.), Microfinance in Germany and Europe 

(pp 33-52). Frankfurt: KfW Bankengruppe. 

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Business: Operational and Funding Lessons for the Future of Microfinance in the UK. A 

report for the Esmée Fairbairn and CDFA submitted April 2006. 

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Institutions in Eastern Europe and Central Asia. William Davidson Institute Working Paper 

Number 809, January 2006. 

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and Central Asia 2005, November 2007 

Microfinance Information Exchange (2007). Benchmarking Microfinance in Eastern Europe 

and Central Asia 2006, November 2007. 

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(UK). A report for the Esmée Fairbairn Foundation submitted 2004. 

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Organizations, Savings and Development 23(4), 375-405. 

Von Pischke, J. D. and Adams, D. W. (1980). Fungibility and the Design and Evaluation of 

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38 


Microfinance as a European policy issue – policy images and venues 

Michael Unterberg, research assistant, EVERS & JUNG GmbH 

Deichstraße 29 

D-20459 Hamburg 

Tel: (+49.) 40 3680968 31 E-mail: Michael.unterberg@eversjung.de 

Website: www.eversjung.de 

Abstract 

This paper aims at identifying the major driving forces behind the rise of the issue of 

microfinance as a policy issue in the EU from the late 90s up to the announcement of an 

European action plan on microcredit in 2006. The paper was influenced by the experiences of 

the author working in several EU-funded projects on the development of policy measures to 

foster microfinance in the EU. 

The research is designed as a policy analysis on agenda-setting processes at EU level. It draws 

heavily on recent political science approaches to EU agenda-setting and policy making that 

focus on the impact of epistemic communities, policy entrepreneurs and issue networks. At 

the core of the research done lies an extensive analysis of public available EU documents 

dealing with the issue of microfinance/-credit. Processes that were not possible to reconstruct 

through document analysis were discussed in interviews with key actors, like Ms. Nowak, 

president of the EMN and Mr. Mulfinger, former Head of Unit at DG Enterprise. 

Additionally, an online survey was conducted in 2007 to gather an exploratory picture of the 

attitudes in the microfinance community toward microfinance as a policy issue. 

The agenda-setting process is analysed in four distinctive steps or phases: issue initiation, 

issue specification, issue expansion and issue entrance. The main focus lies on assessing the 

involvement of microfinance experts in the phase of issue specification and their role in 

shaping policy images of the issue of microfinance. 

The main findings of the research support the thesis of an important role of the EMN and its 

president Ms. Nowak in the process of positioning microfinance as a policy issue at EU-level. 

They also show that the European microfinance community was successful in shaping the 

dominant policy image of microfinance at the EU-level to include aspects of social inclusion. 

Another key result is the finding that the success of microfinance as a policy issue at EU-level 

was strongly connected to the availability of accessible policy venues, mainly thanks to the 

OMC. Since the new action plan on microcredit demarks a new step in the issue career of 

microfinance it will be interesting to see how future changes in the EU modes of governance 

will affect accessibility to the EU policy-making for the European microfinance community. 

Subheadings: 

Introduction 

Policy initiation in the EU and agenda setting 

Agenda-setting in the EU 

A framework for analysis 

Actors and policy venues 

Two routes of agenda-setting in the EU 

Microfinance in Europe – problem structures and policy implications 

The policy community of microfinance 

The route of microfinance in the European Union 

Issue initiation 

Issue specification 

Issue expansion 

Issue entrance 

Conclusion 

Keywords: EU, microfinance, agenda-setting, policy making

Introduction 

39 


Since the first mentioning of microfinance in Europe as a policy issue in the early Nineties the 

issue quickly rose to more prominence in different policy arenas of EU-politics. Right now 

the issue of developing microfinance in Europe can be found on the agendas of many DGs of 

the Commission, covering a wide range of social and economic policy implications. With the 

announcement of a European initiative on micro-credit in 2007 the issue finally has reached 

the formal institutional agenda of the European Union. 

From the viewpoint of political science this process of policy initiation is a phenomenon that 

needs further explanation. Why is it that an instrument originally developed to fight poverty 

in the underdeveloped countries of the south gets this much attention from EU policymakers? 

This is even more the question since, despite some success stories, the microfinance 

sectors of Western Europe have up to now failed to prove that microfinance programs can 

operate in an effective and self-sustaining way in an environment characterized by highly 

developed financial sectors and welfare systems (see Evers/Lahn/Jung 2007). Although the 

situation is different in Central and Eastern Europe, where microfinance providers were able 

to realise considerable growth rates since the late Nineties, mostly due to weak financial 

sectors and economic reconstruction (see Foster et al 2003), it seems unlikely that the 

development of broad policy activity on the EU-level can be mainly explained with regulative 

pressure from emerging microfinance sectors in Europe. 

Therefore this paper tries to identify the main drivers that started and shaped the process of 

policy initiation on the issue of microfinance in the European Union. Furthermore the paper 

examines how institutional and temporal corridors of opportunity in the ‘low policy’ area of 

European politics influenced the involvement of actors at different stages and venues of the 

process. It is in this policy area that the governance mode of the EU has shifted markedly in 

the past years towards more soft and coordinated forms of governance, most noticeable with 

the implementation of the Open Method of Coordination (OMC) in the Lisbon process 

starting in 2000. Since some of these ‘new modes of governance’ allow a more direct 

involvement of non-state actors in the EU policy making process it seems likely, that the 

policy initiation process of the issue of microfinance was also influenced by this shift in 

institutional opportunity structures. 

The chosen analytical approach relies mainly on the conceptual toolbox of agenda-setting. 

The time period observed reaches from 1998 to 2006, when the public announcement of an 

EU-wide action plan on microfinance put the issue finally on the formal agenda of the EU 

Commission. Empirically the analysis is based on an extended analysis of public EU 

documents, an online survey in the European microfinance community and halfstandardized 

interviews with key actors from the community and the Commission. 

Policy initiation in the EU and agenda setting 

Based on a typology by Ripley (Ripley 1985), three different processes of policy initiation can 

be specified. These are: the process of problem definition, the process of agenda-setting and 

the process of development and specification of policy alternatives. Recent literature on 

policy initiation in the EU argues that these three processes can be interrelated and 

subsumed in a broader understanding of the concept of agenda-setting (e.g. Princen/Rhinard 

2006, Parrish 2003). If agenda-setting is understood this way it relates to the processes by 

which new issues are recognised by policy makers as well as to the ways in which those issues 

are (re-)defined and framed and, finally, addressed with specific policy solutions. Moreover, 

agenda-setting in such a broader understanding does not only concern how new issues enter 

the agenda, but also the ways old issues move up and down the agenda and get redefined 

along.

40 


Agenda-setting in this wider sense is mainly used as a concept for policy analysis at national 

level. Up to now it has not received much attention as a conceptual framework to analyse EU 

policy making. This is striking, since most of the scientific literature does characterize policymaking 

in the EU as a multi-venue process that offers many entrance points to actors that 

wish to influence the range of issues considered by EU policy makers. Agenda-setting should 

therefore be able to offer a valuable toolbox for the study of these processes. 

As applied to policy-making, the term agenda can be defined as “the list of subjects or 

problems to which government officials, and people outside the government closely 

associated with those officials, are paying some serious attention at any given point in time” 

(Kingdom 1995: 3-4). Cobb and Elder (Cobb/Elder 1972) draw a distinction between the 

systemic and the institutional agenda in political systems. As Parrish (Parrish 2003: 40) 

notes, in the European Union the function of a systematic agenda is carried out by the 

agendas of the European institutions, while the notion of an institutional agenda can be 

paralleled to the stage where issues are finally defined and European policies are shaped. 

Agenda-setting in the EU 

As a political system the European Union is characterized by a highly fragmented decisionmaking 

system with multiple avenues of policy making and many entry-points for influence. 

Also, the absence of a functioning mechanism of policy co-ordination and its complex multilevel 

system of governance create many paths for agenda-setting. This is even more the case if 

one considers the organisational structure of the European Commission, the most important 

institution in the agenda-setting process of the European Union. It is organised in different 

DGs, that are weakly coordinated administrative entities, dominated by a different policy 

making styles and administrative cultures (Knill 2005: 206) ii . The DGs rival constantly over 

the definition and the framing of issues and policy alternatives in the process of EU policymaking. 

Additionally, their staffs are in a sort of steady flux, making their agendas especially 

open for change and external influences. Conflicts and misunderstandings occur often, 

mostly due to missing or underdeveloped interfaces between the political and administrative 

level. Therefore, the European Union can be regarded as a relatively open institutional 

environment for agenda-setting processes. But due to the high amount of consensus needed 

to start decision processes, this holds not true for the whole agenda-setting process: „It may 

be easy to get someone at the EU level to consider an issue, but it is more difficult to get an 

issue high on the political agenda of the EU as a whole.“ (Princen 2007: 33) 

A framework for analysis 

For analytical purposes four elements or phases of the agenda process in political systems 

can be distinguished. The first phase is the phase of issue initiation or issue recognition, 

when the attention of policy-makers and those around them is drawn to particular problems 

or issues for the first time, hence allowing them to enter the agenda. This initial phase is 

followed by the phase of issue specification. This phase takes central stage in most studies of 

agenda-setting processes because the way an issue or problem is defined and demarked 

against other issues is an influential step for its further development on the agenda. It 

includes the specification of different policy alternatives and the process of linking them to 

the issue at hand. In the phase of issue expansion, political dynamics are at work to spread 

the specified issue further throughout the political system. Finally the phase of issue entrance 

when the issue enters the formal institutional agenda of the system concludes the agendasetting 

process. To build a more informed framework for analysis of the process of agendasetting 

in the EU the literature on national agenda-setting can be of great value. Especially 

two approaches are considered here, John Kingdon’s “multiple streams” approach (Kingdon

41 


1995) and the “punctuated equilibrium” theory of Baumgartner and Jones 

(Baumgartner/Jones 1993). 

Building on Kingdon’s work on agenda setting, three major forces that drive agenda-setting 

processes in political systems can be identified: problems, actors and institutions. To 

understand the dynamics of specific agenda-setting processes it is therefore important to 

analyse how these forces interact. Regarding agenda-setting in the EU especially two 

concepts of Kingdon can be of much help to model such interactions. The first is the notion of 

the important role of individual ‘policy entrepreneurs’ that influence the agenda-setting 

process in a political system by strategically coupling problems to policies through the use of 

issue framing. The second is the importance of temporal limited shifts in the politics stream 

(so called ‚opportunity windows’), like elections or changes in the mode of governance, that 

produce new patterns of problem recognition and policy alternatives and therefore offer 

strategically minded actors opportunities for the use of coupling strategies. 

Despite this notion of institutional opportunity windows, Kingdons’ approach lacks further 

specifications of the role of institutional aspects in the process of agenda-setting. Here 

Baumgartner and Jones’ approach to agenda setting offers a helpful addition, as they are 

bringing the role of policy images and policy venues to the forefront. A policy image is 

considered by Baumgartner and Jones as the way an issue is simplified, (re-) defined and 

specified for political discussion through experts and specialists. The elements of policy 

images are open for manipulation and their constant development is an important part of 

policy making. A single issue can be attached to different policy images, which emphasize 

different social or political aspects of the issue or even contradict each other. Policy images of 

issues are always constructed to address specific policy venues, which are understood as "the 

institutional locations where authoritative decisions are made concerning a given issue." 

(Baumgartner/Jones 1993: 32). The strategic use of this attachment of policy images to policy 

venues is called „venue shopping“ and is seen by Baumgartner and Jones as an important 

option for policy entrepreneurs and other actors in the process of policy making to get an 

issue higher on the agenda. It is especially useful in fragmented political systems, since 

"[m]any venues with only vague or ambiguous constraints on their jurisdictional boundaries 

create opportunities for strategically minded policy entrepreneurs to shop for the most 

favourable locus for their policies."(Baumgartner/Jones 1993: 36). In view of the 

fragmentation of the European Union policy making process as well as of the Commission’s 

administration, the concept of venue shopping seems especially suited to be used to 

understand how issues are framed in a certain way to address specific policy venues in the 

European Union’s institutional setting. An important part of this concept is to examine how 

policy images of issues and problems are defined to establish the supranational European 

level as the suited policy level to deal with them. (vgl. Princen 2007: 32). 

Actors and policy venues 

The processes of policy initiation are characterized by the importance of knowledge resources 

and technical expertise. In this respect, the literature on the policy making process of the EU 

notes that transnational networks of experts are playing an increasingly important role in 

many stages of the process (vgl. Richardson 2006: 5). These networks are reported to 

originate in scientific projects, funded by the Commission or working groups of independent 

non-state experts (Radaelli 1995: 171). One way to conceptualize such a network is to 

understand it as an ‘epistemic community’. An epistemic community is defined by Haas 

(Haas 1992) as a network of knowledge-based experts or groups with an authoritative claim 

to policy-relevant knowledge within the domain of their expertise. Members hold a common 

set of causal beliefs and share notions of validity based on internally defined criteria for 

evaluation, common policy projects, and shared normative commitments. (Haas 1992: 3). 

Following Zito (Zito 2001: 590f), one can assume that such networks or communities are 

especially important in agenda setting processes when the issue shows a high grade of 

uncertainty and addresses problems that are connected with accepted quantitative data sets.

42 


Additionally, most approaches to agenda-setting include individual policy entrepreneurs iii as 

important actors, that are able to manipulate the representation of problems and issues in 

the agenda-setting process and therefore to influence the decision of policy makers in a 

strategic way. While the agenda-setting process in the EU is in general open for policy 

entrepreneurs, there are also systematic barriers and obstacles that policy entrepreneurs 

have to overcome in order to influence the process. A striking example is the amount of 

possible veto-positions, especially regarding routine processes with a high number of actors 

involved that often exceeds the influence capabilities of individual entrepreneurs. 

In the fragmented multi-level system of policy making in the European Union it is possible 

for analytical purposes to establish a horizontal distinction between policy arenas, that 

feature different functional layouts and different modes of governance. In these arenas, that 

are connected to specific policy fields, like social policy or structural policy, processes of 

policy initiation can develop relatively independent of each other, therefore paralleling the 

notion of policy venues by Baumgartner and Jones. The interplay of activities in these policy 

venues is especially relevant in processes of developing policy alternatives for cross-cutting 

issues iv . At the level of the Commission there is also a constant need of coordination with 

national administrations, interest groups and external experts, who are often embedded 

through working groups into the processes of policy and programme formulation (Knill 

2005: 206/207). Non-state actors can exploit their participation in those informal arenas to 

influence the process of policy formation, especially regarding technical issues that are not 

yet routinely processed (Zito 2001: 590). 

Two routes of agenda-setting in the EU 

Princen und Rhinard have identified two routes into which agenda-setting can unfold in the 

EU’s institutional framework that builds on the distinction between high and low politics in 

the EU. 

The high poltics route (Princen/Rhinard 2006: 1121-1123) unfolds mainly top-down and is 

primarily a political route. The main driving force at the beginning of the agenda-setting 

process are high-ranking political figures assembled in the European Council, where the 

problem is recognised (issue initiation), mostly due to a focussing event, and first steps 

toward problem definition and issue framing takes place (issue specification). Since the 

European Council will normally limit itself to provide rather general principles about the 

issue in question. The task of further problem definition is delegated down one level to the 

Commission and Council of Ministers, that have to interpret the decision of the political 

leaders and act accordingly. So once the problem is recognised and framed, it moves outside 

the initial circle of policy initiators and to the institutional agendas where policy alternatives 

will be considered and influence from outsiders may be possible. The high politics route of 

agenda-setting is characterized by a high degree of political momentum stemming from the 

top-down initialisation. This momentum may be watered down if the technical aspects of an 

issue dominate the debate. 

The low-politics route (Princen/Rhinard 2006: 1121-1123) unfolds bottom-up and is mainly 

technocratic and technical. Issues do not enter the agenda due to political concern but 

through the technical concerns of experts and professionals working in the same area. This 

initiation route is rather typical to Commission and Council working groups. Issue framing in 

the low politics route takes part in the Commission but is much more specific and technical 

than in the high politics route, mostly due to the work of expert groups. Once the problem is 

framed it is brought to the formal agenda and goes through the decision-making process. The 

moving up of issues towards the institutional agenda is a difficult process, since advocates 

need to gradually build support around them and generate a general consensus over the 

importance and the specific framing of the problem at hand. There is the risk that problems 

get blocked re-defined or even hijacked by other actors in the process. 

It is important to understand that the two routes are modelled by Princen and Rhinard as two

43 


ends of a spectrum. In reality it is unlikely that an agenda-setting process follows only one of 

them in all stages. Over the whole process of agenda-setting issues and problems may change 

from one route into another. Moreover, both processes can unfold simultaneously and have 

reciprocal effects on each other. 

Microfinance in Europe – problem structures and policy implications 

Based on the developed conceptual framework for analyzing agenda-setting processes in the 

European Union the issue of microfinance in Europe can be operationalised to lay the 

groundwork for the further analysis of the specific processes of policy initiation in the 

European Union. The first step in doing this is to identify the general problem structure, 

microfinance appeals to as a policy tool in Europe. Building on this it should be possible to 

assess the social and political implications of microfinance in Europe that can be framed into 

policy images. 

Regarding the problem structure one have to consider that microfinance operations in 

Europe have a different emphasis as the original approach in underdeveloped countries. The 

central problem microfinance addresses in Europe is a market failure of credit allocation in 

the developed financial markets of Western Europe, mostly due to rising cost and risk 

awareness on the side of banks in lending small business loans to start-ups, SMEs and 

entrepreneurs without collateral. In Central and Eastern Europe the problem arises due to a 

lack of capable financial intermediaries. In this regard, credit can be considered as a semipublic 

good, since it is an important factor of production in capitalist economies v . Its 

distribution can produce externalities with grave implications for economic and societal 

developments in society. Lacking access to business credit for some parts of the population, 

due to market failure on the supply side can therefore be seen as a problem that demands 

public policy action. 

Another aspect of the problem structure microfinance appeals to as a policy tool in developed 

countries is the change in the organisation of labour towards new forms of self-employment 

and the resulting need of adaptations in the interplay between labour market policies, state 

investments and welfare state development (Pearson 1998: 812). In this view microfinance 

shares common ground with the rise of ‘market friendly’ social and employment policies 

connected to the so called ‘third way’-ideologies in the Mid-Nineties (Schreiner/Morduch 

2002: 19-21). Finally microfinance can be seen as a tool to tackle the recently recognised 

problem of stagnating numbers of enterprise start-ups and restricted access to 

entrepreneurship in the European economies. 

Based on this assessment the social and political implications of microfinance can be located 

between social, employment and economic policy. A further specification of its attachment to 

policy fields depends on the target group approach and the organisational form chosen in the 

provision of microfinance. In this regard is important to note that microfinance providers in 

Europe perform their services in very different ways. Some are working at national level 

(ADIE [Association pour le droit à l’initiative économique] in France or Finnvera in Finland), 

others operate at local level. Some are originally charity organisations (Prince’s Trust in the 

UK) others are private organisations aiming at making profit (Fundosz Mikro in Poland). 

Providers in Western Europe focus on identified target groups to support mainly business 

start ups. In Central and Eastern Europe the microlending providers focus more on existing 

SMEs to bridge their financial gaps of running business activities. Regarding the main target 

group of microfinance providers in Western Europe, Rosalind Copisarow stated in 2004: 

“[..] micro-finance in the West has been primarily introduced as a tool to combat the 

social and financial exclusion of a segment of society that lies between the poor and 

nonpoor: i.e. a population group that falls below the radar screens of commercial 

banks but above the upper limits of most forms of charitable/state support”. 

(Copisarow 2004: 16)

44 


The average loan amount given out by microfinance providers in Europe was 7700 EUR in 

the EU-25 and 10.243 EUR in the EU-15 in 2005 (see Underwood 2006). Additionally, it is 

important to recognise that microfinance providers in Europe often maintain close contacts 

to start-up and business support networks, financial planning support and welfare service 

organisations (see Nolan 2003: 81). Most of them offer complex support packages for their 

clients, encompassing training and professional support. Policy implications of microfinance 

in Europe are therefore to be seen more in the active support of entrepreneurs and micro 

enterprises rather than in the establishing of a new class of financial services. As the 

illustration shows, this includes social policy as well as entrepreneurial/economic policy and 

labour market/employment policy. Not included here is the policy field of financial 

regulation, to which microfinance operations are connected if they are provided by nonbanks. 

Figure 1: Microfinance and policy fields 

Social policy 

Target group 

socially 

excluded 

Microfinance 

Employment policy 

Enterprise/Economic 

policy 

Target group 

SMEs without 

access to bank 

finance 

Since the microfinance sectors in Western Europe are yet underdeveloped and in need of 

public support to grow, policy measures connected to the issue of microfinance are mainly 

measures to foster microfinance operations. They can be direct or indirect, concerning public 

action or regulatory measures. Direct measures like public microfinance programmes, public 

guarantees and funding for private microfinance programmes as well as tax measures to 

foster private investment in SMEs (either directly or via fonds, banks or microfinance 

programmes) are widespread. More indirect measures include the direct support of start-ups 

in the target groups of microfinance programmes through training offers and financial 

support for microfinance target groups like welfare bridges for start-ups out of 

unemployment. Additionally the regulatory framework for giving out credit in the national 

financial systems is of strong importance for microfinance operations, since some regulations 

permit efficient and sustainable microfinance operations. Recently, an expert group of DG 

Enterprise has identified the most important aspects of such reforms (see COM 2007a). They 

include regulations to allow non-banks to give out credit, the cutting of usury caps and the 

definition of a set of (minimal) legal standards for microfinance organisations. 

Summing up, the provision of microfinance in Europe can be seen as an innovative financial 

tool to foster self-employment and the development of micro enterprises and SMEs. On the

45 


one hand it challenges established views on the functioning of the financial and economic 

system. On the other hand it fits relatively well into recent developments of market conform 

social policies and traditions of socially aware banking in Europe. As a policy issue it offers 

many options to build policy images that include specific aspects of its provision and exclude 

others. From a political science perspective it seems important to analyze which of these 

images have been dominant in the process of agenda-setting at the EU level and which actors 

where successful in placing and supporting them in specific policy venues. 

The policy community of microfinance 

Regarding the policy community that drives the agenda-setting process of microfinance in 

the European Union, two groups of actors should be distinguished, state actors and non-state 

actors. State actors that are concerned with the issue of microfinance at the European level 

can be found in national administrations and governments as well as in European 

institutions. Since the European Commission is the central actor in the development of policy 

initiatives and therefore the formal agenda-setting process of the European Union, the 

analysis concentrated on members of the different DGs. 

Relevant non-state actors are mainly identified in European microfinance practitioners and 

microfinance experts that together form a European microfinance community. The role of 

European interest groups organisations like the UAPME or European banking organisations 

was considered in the analysis, but showed no significant influence on the process. Regarding 

the European microfinance community a distinction is drawn between expert networks and 

individual policy entrepreneurs. The most important expert network in the process was 

identified in the European Microfinance Network (EMN) that can be seen as an epistemic 

community which members share a vision and have accepted competence in the field of 

microfinance in Europe vi . Other networks like the Network of European Financial 

Institutions (NEFI) and the Eastern-Europe Microfinance Centre (MFC) played only a minor 

role in the analysed process. 

With an online survey the attitudes of the members of the European microfinance 

community towards microfinance as a European policy issues were explored. The survey 

covered general aspects of microfinance as a European policy issue as well as more specific 

questions and was sent to 120 persons that have worked on microfinance at the European 

level. This encompassed participants of EU working groups on microfinance, members of the 

EMN and members of the European Commission. Beside other aspects, the results indicated 

that with Maria Nowak the president of the EMN, the European microfinance community 

features a central figure that acted as policy entrepreneurs throughout the process. Therefore, 

an interview with Ms. Maria Nowak was conducted during the EMN conference in Berlin as 

well as with Dr. Jan Evers, Co-Founder of the EMN, who was also mentioned as a central 

person in the process. Additionally discussions were held with different practitioners and 

experts during the EMN/MFC conference in Budapest and the EMN conference in Berlin. 

The route of microfinance in the European Union 

The process of policy initiation regarding the issue of microfinance in the European Union is 

not yet concluded. Nevertheless it reached a peak in 2007 with the announcement of the 

“European initiative on the development of micro-credit” (COM 2007b). Using the 

introduced terminology of agenda-setting phases, this can be seen as issue entrance, since 

microfinance now has entered the formal institutional agenda of the European Union. The 

next steps in the policy making process will be the beginning of the formation of more 

specific EU policy measures on microfinance. 

Based on the framework of Princen and Rhinard the whole process of agenda-setting building 

up to this point can be understood as a agenda-setting route that combines elements of a ‚low

46 


politics’-route (role of experts, ‚bottom-up’ evolution of the issue in the commission’s 

administration) as well as elements of a ‘high politics’ route (role of high-level policy makers 

in the European Council‚ top-down’ development in EU institutions). The activities that were 

identified as milestones in the different phases of the process are chronologically listed in the 

following table, including the involved actors and the allocation to the high or low politics 

route. 

Table 1: Milestones in the agenda-setting process of mirofinance as a European 

policy issue 

Year Actors Activity Phase Route 

Experts, Interest groups, European 

1998- 

Commission (DG Enterprise, DG 

2002 

Employment) 

First studies and scientific projects, 

Recomendations of 2nd Round table of 

Banks and SMEs 

Issue initiation low 

Council of the European Union Guarantee window for microcredit in the Issue initiation high 

2000- (ECOFIN), European Council, EIB, Multi-annual Programme for Enterprises 

2002 European Comission 

and Entrepreneurship (MAP) (2000- 

2005) 

DG Regio 

2002 

Microcredit as instrument of risk capital 

financing (Financial Engineering) 

Issue specification high 

DG Enterprise 

Working group: Microcredit for Small Issue specification low 

National administrations 

Business and Business Creation: Bridging 

2003 Experts 

a Market Gap 

2003- 

2005 

DG Employment and Social Affairs 

Experts 

Setting up of EMN, study on microfinance 

as tool to fight social exclusion 

Issue specification low 

2003 European Council Presidency conclusions with request for 

more activity on microfinance 

Issue expansion high 

2004 EMN, DG Enterprise 1. Microfinance-Conference in Brussels Issue expansion low 

2005 

European Commission, European 

Parliament, Council of the European 

Union 

Inclusion of microcredit into the 

Integrated Guidelines for growth and 

employment (guideline 15) 


2005- 

2006 

DG Regio, EIB 

JEREMIE (Joint European Resources for 

Micro to Medium Enterprises) 


2007 European Commission, EMN European initiative for the development of 

Issue entrance low 

micro-credit 

Issue initiation 

The Commission-funded studies and projects between 1998 and 2002 were the first 

systematic work conducted on microfinance operations in Europe and acted as reference 

points for the further development of microfinance as policy issue. They established the most 

important aspects of political representation of microfinance in Europe that were taken up 

later in policy images: microfinance as efficient tool to finance SMEs without access to banks 

(Evers et al 1999); microfinance as tool to fight social exclusion and unemployment (Nowak 

et al. 1999); microfinance as tool for local development (nef et al 2001) and microfinance 

provision as a challenge to the regulation of the European financial systems (Reifner 2002). 

In retrospective, the collaborations that were formed to write these studies acted as a nucleus 

for an emerging expert community on microfinance in Europe that would finally evolve into 

the EMN. These activities indicate an issue initiation on the low-politics route, with non-state

47 


experts and their contact persons in the Commission’s administration as the pivotal actors, 

successfully initiating the agenda-setting process of microfinance referring to “professional 

concerns” (Princen/Rhinard 2006:1122) supported by the provision of data and expertise. 

Thus with regard of the role the EU institutions played in this phase of the process, this 

notion cannot be maintained. Mostly because the main impulses for the first recognition of 

the issue of microfinance at EU level came top-down from the systemic level of the European 

Union. Especially the political dynamics of the Lisbon Strategy and the concerns in Council, 

Commission and Parliament about instruments to address the financing gap for SMEs in 

Europe provided the political momentum for the start of the further agenda-setting process 

on microfinance. Therefore, the issue initiation of microfinance has to be located mainly on 

the high politics route. The activities of non-state experts played a supporting role in this 

phase of the process. A role that should became more influential in the following 

development of the agenda-setting. 

Issue specification 

A similar mixture of top-down and bottom-up activities was observed during the phase of 

issue specification that took place in the years between 2002 and 2005. Yet the influence of 

non-state experts, especially from the emerging European microfinance community, was 

stronger and more important than during the initiation phase. Issue specification developed 

over three main policy venues: the venues of social/employment policy, enterprise policy and 

regional/structural policy. All three venues were mainly governed by the accordant DGs of 

the Commission. 

The explorative online survey showed that the policy image of microfinance as a tool to fight 

poverty and social exclusion was closest to the self-conception of most of the representatives 

of microfinance providers organised in the EMN and was strongly supported by their 

representatives during the process of agenda-setting. Additionally the institutional conditions 

for the involvement of non-state actors were especially favourable regarding social and 

employment policy in the European Union, since this venue is generally dominated by the 

horizontal aspect of policy making. This DG Employment and Social Affairs mainly acts as 

coordinator of trans-national cooperation between stakeholders in the member states to 

develop and support innovative policy measures for policy transfer throughout Europe. With 

the European Employment strategy (EES) and the OMC Social inclusion, this policy venue 

offered non-state actors in the past years many opportunities to frame and place policy 

images of their policy projects (see de la Porte/Pochet 2005). 

The analysis identified multiple references for a direct involvement of the European 

microfinance community in the issue specification process on microfinance in this policy 

venue. The non-state experts were successful in placing a policy image of microfinance that 

emphasized its use as a tool to fight poverty and social exclusion in Europe as well as to 

stimulate employment (see Siewertsen et al 2005). DG Employment and Social Affairs itself 

supported the community in this phase substantially with funds for network building and the 

awarding of study projects, which in turn were used to further frame the policy image of 

microfinance. 

Similar to the venue of social/employment policy the mode of governance in the policy venue 

of enterprise policy is characterized by activities of the DG Enterprise to facilitate 

coordination and exchange between the member states and the relevant interest groups (see 

Linsenmann et al. 2007). But in contrast to social/employment policy the involvement of 

non-state experts in this venue is normally rather limited and focuses on the deliverance of 

technical expertise in working groups. This has not much changed with the introduction of 

an Open Method of Coordination in 2000 to develop a supportive environment for SMEs and 

start-ups in Europe (European Council 2000: 5). 

The analysis showed that during the phase of issue specification the political representation

48 


of microfinance in this venue changed markedly. It developed from an early policy image 

characterized by an emphasis on the support of start-ups with high-growth potential and 

already existent small and craft enterprises (COM 2001: 15) into a wider one that explicitly 

understands microfinance as well as a tool to support socially excluded target groups (COM 

2006: 8). As main driver of this change in representation of the issue, the analysis identified 

non-state experts and their influence on the outcome of a working group that was installed in 

2003 by DG Enterprise. The formation of this working group was mainly a top-down 

decision, connected to the need of the Commission to develop a well-founded position on 

microfinance due to its inclusion into the MAP. But during the consultations the involved 

non-state experts were successful in using their technical expertise to change the original 

framing of the issue towards a definition that was more in line with the positions of the 

European microfinance community. The influential report of the group, titled “Microcredit 

for Small Business and Business Creation: Bridging a Market Gap” defined microfinance in 

Europe as the granting of business loans up to 25 000 EUR and, for the first time in this 

venue, explicitly included lending to social excluded into the definition (COM 2003: 3). So, 

despite institutional conditions that offered them only limited access to the specification 

process, non-state actors of the Microfinance community were successful in opening up the 

policy image of microfinance for the support of excluded target groups and to be compatible 

to the policy image developed in the social/employment policy venue. 

Unlike the other venues the venue of structural and cohesion policy is characterised by an 

interventional mode of governance (Knill 2005: 197), with DG Regio as the main actor, that 

develops strategic guidelines for the EU policy on the base of the budget guidelines given by 

the Council and in coordination with the national and regional actors responsible for 

program implementation (see Allen 2005). DG Regio also cooperates with the EIB/EIF, 

which activities are the main instruments of EU structural policy besides the structural funds. 

The analysis showed that the issue specification of microfinance was closely connected with 

the aim to redesign the EU structural funds towards financial engineering and risk capital 

financing vii . This aim mainly resulted from the need to adapt the structural policy guidelines 

of the European Union to the difficult task of developing instruments for regional policy in an 

enlarged EU-25 with many underdeveloped regions lacking functioning financial sectors for 

enterprise financing. The political representation of microfinance in the area of structural 

policy was markedly influenced by the experiences of DG Regio and the EIB/EIF with 

funding programmes in Eastern Europe and showed until 2005 no hints of closer 

coordination with the other DGs working on microfinance in Europe. Microcredit was 

defined by DG Regio at first as loans with amounts up to 10.000€ (COM 2002: 29), while at 

the same time DG Enterprise defined microcredit as loans up to 25.000€ (COM 2003: 3). 

The later development of the political representation in this venue shows an adaptation in 

terms of definitions, but the policy image of microfinance as a tool for financial engineering 

kept being dominated by technical aspects (e.g. leverage effects; role of guarantee 

intermediaries like the EIF), and the involvement of non-state actors was mostly reduced to 

the provision of technical expertise and data (modes of microfinance operation, portfolio 

structures, market potentials viii ; etc). 

The phase of issue specification was characterised by different levels of influence and 

involvement of the European Microfinance community. Most of these differences can be 

explained by institutional conditions that were most favourable in the venue of social and 

employment policy. The policy images of microfinance that were shaped in this phase started 

out quite different in the observed venues, due to diverging interests on the side of the 

involved DGs. During the phase the European microfiance community successfully opened 

up these images for a wider representation of microfinance as a policy tool addressing the 

financial gap for SMEs as well as social exclusion. Since the policy image of microfinance as 

instrument for financial engineering was mainly technical defined it also could be attached to 

this political representation.

Issue expansion 

49 


In the phase of issue expansion, starting in 2003, aspects of a high politics-route were 

dominating again the process of agenda-setting. The mentioning of microfinance in the 

presidency conclusion of the European Council 2003 (European Council 2003) gave new 

political momentum to the process, spawning activities from DGs that were up to this point 

less involved in the process of agenda-setting, like DG Market and DG EcoFin and pushing 

already involved DGs into more activity. Another systematic influence on the process was the 

reformulation of the Lisbon process in the year 2005. Especially the growing recognition of 

entrepreneurship as an enabler for growth and employment in Europe (see COM 2004) 

opened up further opportunities for framing microfinance as a tool to reach the Lisbon goals 

and drew new actors into the process.. The observed strong support by the European 

parliament for an inclusion of microfinance into the “Integrated Guidelines for Growth and 

Jobs”(COM 2005) emphasizes this. The first Microfinance Conference in Brussels on the 

other hand can be seen as expansion on the low politics route as it widened the recognition 

fort he issue based on sharing technical expertise and the experience of practitioners in the 

field. 

Issue entrance 

The announcement of the Commission in 2006 to develop a European action plan on 

microcredit, which led to the “European initiative for the development of micro-credit” in 

2007 (COM 2007), is interpreted here as the entrance of the issue on the formal institutional 

agenda of the European Union. The specific dynamics that led up to this decision could not 

be cleared entirely on the empirical base of the study. Nevertheless some aspects can be 

identified, that played a major role in this phase. 

In the documents that framed the issue of microfinance as an issue that should be addressed 

by an action-plan of the Commission (EUROFI 2006, Hübner 2006), the connection of the 

political representation of microfinance to the socio-economic goals of the Lisbon Strategy is 

most striking. Through the agenda-setting process the European microfinance community 

was obviously successful in establishing a policy image of microfinance that framed the issue 

as „exactly the kind of instrument that we are looking for in Europe to promote growth, jobs 

and innovation while reinforcing social cohesion“. (vgl. Hübner 2006:1). 

Drawing on the concepts of Kingdon (Kingdon 1996) the development in this final phase of 

the agenda-setting process can be seen as the result of a successful strategy of coupling the 

already specified issue of microfinance with highly visible and recognized problem definitions 

available at the systematic level of the EU. The Lisbon Strategy can be understood in this 

sense as a temporal window of opportunity for the European microcredit community with the 

EMN president Maria Nowak as the central policy entrepreneur. Especially between 2005 

and 2007, after the relaunch of the Lisbon Strategy, Ms.Nowak constantly campaigned for 

the idea of developing the European microfinance sector as part of strategies for more growth 

and employment in Europe. In doing this, mostly in direct contacts to the commission but 

also in speeches at high-level EU conferences, she was able to organise a coalition of decisionmakers 

inside the Commission to support the development of a European action plan on 

microcredit. But this success of coupling microfinance to the goals of the Lisbon Strategy was 

only possible thanks to a ‚softening up’-process (vgl. Kingdon 1995: 127-131), in which 

microfinance was established as a policy issue in different policy venues of the European 

Commission. The analysis showed that this was mainly possible due to the “collective 

entrepreneurship” of the European microfinance community organised in the EMN (Zito 

2001: 590) and the availability of multiple access points for it, due to the adoption of the 

Open Method of Coordination in the fields of social and economic policy. The relevance of 

this ‘preparatory work’ for the final step of agenda-setting shows in the speech of

50 


Commisioner Hübner on the announcement of an action plan on microcredit: ‚[T]here has 

already been a great deal of cooperation within the Commission, and there is enormous 

interest in the development of micro-finance’ (Hübner 2006: 7). 

Following Princen and Rhinard’s framework such a development is part of a low politics 

route of agenda-setting, on which the growing engagement with a given issue at lower levels 

of policy-making creates a self-sustaining dynamic that leads to “a point of no return” in 

expanding the activity toward high level institutions. (vgl Princen/Rhinard 2006: 1122). 

Conclusion 

The main findings of the research underline the important role of the European microfinance 

community, the EMN and its president Ms. Nowak in the process of positioning microfinance 

as a policy issue at EU-level. The analysis also showed that the influence of the microfinance 

experts was highest during the phase of issue specification and that they were successful in 

using their technical expertise on the issue of microfinance provision to shape the dominant 

policy image of microfinance at the EU-level to fit their position toward the issue. 

Another key result is the finding that the success of microfinance as a policy issue at EU-level 

was strongly connected to the availability of accessible policy venues, mainly thanks to the 

Open Method of Coordination in social and economic policy. The observation that the 

specification of microfinance as a tool in structural policy was characterised by a stronger 

influence of the Commission and member state actors of regional policy, strengthens the 

thesis that the institutional conditions of the different policy venues were an important factor 

regarding the involvement and influence of the microfinance community. 

Since the European initiative on the development of microcredit” demarks a new step in the 

issue career of microfinance it will be interesting to see how future changes in the EU modes 

of governance will affect accessibility to the EU policy-making for the European microfinance 

community. Since decision-making in the European Union is characterised rather by the use 

of power resources and bargaining than by knowledge and technical expertise, it will become 

more difficult to organise the consensus needed to pass policy measures for the development 

of microfinance in Europe. But the chances for continuous political momentum are good, 

since the research showed, that the success of bringing microfinance to the institutional 

agenda of the EU could be traced back to the fact that the issue of microfinance received 

support as well form the institutional top as form the base of the European Union. 

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Notes 

1 MFI D’s outreach worker is here included as a manager. The timesheet data of this staff 

group is only included in the analysis of the use of time of the organisation as a whole. 

ii Following Knill, different administrational cultures manifest themselves mainly in different 

modes of involving interest groups into the process of policy-making and in divergent norms 

and interests (Knill 2005: 206) 

iii Mintrom defines policy entrepreneurs as a class of political actors that can significantly 

increase the probability of consideration and adoption of policy innovations through their 

presence and actions (Mintrom 1997). 

iv A Cross-cutting issue is understood here as an issue that encompasses different policy 

fields, e.g. environment protection or gender equality. 

v The important role of credit for the economical development was already emphasized by 

Schumpeter (see Schumpeter 1912). 

vi The results of the exploratory online survey supported such a view. Members of the EMN 

showed similar patterns in their attitudes towards microfinance as a policy issue. However, 

the number of participants was too low to produce representative results. 

vii A development that is in turn closely connected to a growing distribution of policies to 

foster SMEs as a central element of local and regional development strategies in Europe 

(Nolan 2003: 79). 

viii E.g. : In preparation of the JEREMIE-initiative, the MFC produced a study for the EIF on 

the market potential for microfinance in Poland

5th Annual Conference Nice - European-microfinance.org

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