VITTORIO EMANUELE AGOSTINELLI Consulta giovanile del Pontificio Consiglio della Cultura
Abstract - L’IMPATTO DEL CODICE EUROPEO DI BUONA CONDOTTA PER L’EROGAZIONE DEL MICROCREDITO: INTERVISTA ALL’ESPERTO DOTT. PÅL VIK
Il Codice Europeo di buona condotta per l’erogazione del microcredito mira a stabilire elevati standard etici di prestito attraverso una serie unificata di linee guida sulle migliori pratiche che consentiranno agli istituti di microcredito di affrontare meglio le sfide dell’accesso ai finanziamenti a lungo termine, nonché incoraggiarli a migliorare le proprie operazioni e processi interni. Si rivolge principalmente a istituzioni di microfinanza non bancarie, che erogano prestiti fino a 25.000 euro a microimprenditori o lavoratori autonomi. Per i destinatari finali, è un marchio di qualità che garantisce che le istituzioni di microfinanza si comportino in modo equo ed etico. Per investitori e finanziatori, garantisce che il settore operi con standard di rendicontazione trasparenti ed europei. Per i regolatori, è una rassicurazione che il settore opera secondo solide pratiche e principi commerciali e che è ben governato. Per i responsabili politici, fornisce un modo per armonizzare le migliori pratiche nell’Unione Europea e promuovere principi di finanza etica comuni all’interno del settore. Il Codice è stato recentemente aggiornato. Lo scopo era perfezionare diverse clausole per riflettere le mutevoli realtà del mercato e cogliere l’ampia diversità delle istituzioni nel settore della microfinanza. Il Codice aggiornato contribuirà a rendere il microcredito più diffuso in Europa pur rimanendo un solido standard di qualità per il settore. L’aggiornamento del codice è il risultato di una consultazione del 2019 con le principali parti interessate, tra cui professionisti, reti europee di microfinanza (EMN, MFC), banche, istituzioni dell’UE ed esperti, attingendo agli insegnamenti tratti da una fase pilota che si è svolta tra il 2013 e il 2017. Il Code Steering Group, guidato dalla Commissione Europea, ha adottato formalmente il Codice aggiornato nell’Ottobre 2019. L’aggiornamento è entrato pienamente in vigore il 1° Gennaio 2021. Alla luce della survey lanciata dalla Commissione Europea sull’impatto del codice e chiusa nello stesso Gennaio 2021, ne abbiamo parlato con Pål Vik della University of Salford, tra i principali autori della prima versione del codice ed esperto di microfinanza ed esclusione sociale.
KEY WORDS: MICROCREDIT, BUSINESS,
LABOR MARKET, TRAINING,
ENTREPRENEURSHIP, YOUTH EMPLOYMENT
AND FINANCIAL EDUCATION
summary:
1 interview with the expert dr. Pål Vik.
2 the european code of good conduct for microcredit Provision.
3 latest updated of the code.
4 the certification process.
5 microfinance institutions in europe.
1. interview with the expert dr. Pål Vik.
Dr. Pål Vik is a senior research fellow at Community Finance Solutions, a research unit at the University of Salford, and is a specialist in microfinance and financial exclusion. Together with Prof Karl Dayson, he drafted the European Code of Good Conduct for Microcredit Provision together, which are a precondition to access EU microfinance funding, and sits on the European Commission-led steering group overseeing the Code.
Why a European code of good conduct for Microcredit provision?
The idea of a Code date back to 2007, the European commission issued a communication around microcredit, where it was a sort of number of objectives in relation to making microfinance more available, making more sustainable, one of the tools that identify was a code of good practices, in terms of help disseminate good practices across Europe. I guess the reason why the European Commission went for a code, which is voluntary, more like a self-regulation, was not so much that there would be some sort of systemic failure that affects banks that was a concern that comes to microfinance. Therefore, it is not a piece of regulation or supervision, that’s why they opted for a Code, it is still a very big sector, having one piece of regulation wouldn’t been necessarily suitable. The main goals around the code was to develop a pattern that provides costumer friendly practices, but also makes sure microfinance institutions can move toward greater financial sustainability, that’s the background for developing the code.
The European commission launched in November 2020 a survey on the impact of the code, which ended in January 2021. What are the most interesting results?
I guess there are two different things here. One, there was a process to update the code and that involved several workshops group, some of the national and European microfinance network had being collecting feedbacks about how the code worked in practice. The code was drafted in 2010 and was launched in 2011. There was a start of a pilot where everyone could sign in 2013. A lot happened in the market since then. There was a long period then of trying to put in practice some of the standards. That exercise resulted in several changes, in terms of largely a simplification of some of the contents, so the number of clauses was reduced, there were some changes in terms of clarity, flexibility, and then there were some additional items that were not previously covered for example in promoting environment sustainability and around money laundering. But also as part of this the European Commission asked us to do a survey looking at the impact of the code on practice and we did a survey of 47 MFIs and 11 stakeholders and we also did follow-up interviews with 7 MFIs and 3 stakeholders. First of all, it helped to shape practice. The code has had a significant impact on practice among organizations, especially in areas such as customer relations, business planning, risk management, part of the reason is that the code and the certification process encourage providers to do order to the whole process, where they act with different things, the way it is structured, the way you have to do self-assessments, make you look at all the best practices. There are some standards behind the code. It had also a positive impact in terms of improving reputation, curability, visibility, improve relationship between partners. There was less impact in terms of funding, also in partnerships, part of the reason for that we think is that the code is not that well-know, it is known by the Commission obviously and it is known by quite of few, potential investors then are not aware of it, overall a very few negative effects of the code, a part from to take time for a small organization to implement it.
What do you think about the public investment of governments in the microfinance sector?
There are schemes also in UK, there is a scheme for lending to startups through a sort of government funding, public funding is an essential part of the microfinance market I think because obviously a lot of western countries do deal with market failures, you can tell it is not commercially viable to do so, therefore you cannot expect private sector to invest huge amounts about some form of government involvement. There is not that many public fully loan funds available, I guess historically if we look at a lot of government funds they were called “soft loans funds” where they were really focused of paying it, not so much focused of getting it back, lots of local funds were not clearly given with longevity, lack of institutional learn, but times changes, there are some challenges in relation to having funds. I can also see that there is a potentially important role for them because microfinance institutions might be restricted in terms of being how to reach those that are very much administered in it. I see that is positive, as long as it is trying to compliment also the needs and the market.
What are the principles of the code you would like to underline looking at the results of the survey?
It is a diverse sector on so many levels. We have local government funds that has signed up to the code, but we also have some commercial providers, that provide a return, there are small NGOs, quite a few institutions. That means that there has to be quite a lot of flexibility in terms of the practices. All the code is more around focused having documented process for how you ensure customers standing, having a clear mechanism for identify and assessing risk. It does not necessarily say that we have to do it in a particular way, or this particular person has to do it but there are sorts of practices and principles that you should implement. There is still quite a lot of flexibility around some the principles. Making sure that customers have the right type of information, list of things that we recommended, and we included, a range for ensuring that customers have an emphasis on the writing to make sure that you don’t put them into manageable pattern. I think this is also part of having more formalized business planning, having policies, documented processes and place for dealing with things. Beyond that, in Europe there is a lot of discussion about can we deliver microfinance and be a full profit institution, can we deliver microfinance and be just a facilitator and then directly enabling, also they have to fit the EU definition of microcredit. Having transparency and accountability, how the board should act and be independent and provide a sort of critical body for management. For instance, one the things that microfinance institutions are required to compliance currently is have a pricing policy, have a clear contents sort of comparison in terms of how the prices made happen. For example, if the board should be consulted or should decide when it comes to an MFI changing pricing policy.
What is the impact analyzed of the code on risk management?
Some of the changes that people made have been in relation of having an internal audit process in relation to the type of the elements we should focused on, that those should be independent and report directly to the board, maintain this in relation to have a sort of formalized process to identify and assess risks. Those would be some of the core impact as well as having the policy aspect.
What are the best models in the European union?
Most European countries tend to have one dominant player. Romania is probably the largest. I think it is difficult to choose a particular model, because different models do different things well, there are some good examples in different countries like France is very good at working with banking partners to reach people and they also are proactive on loaning excluded vulnerable groups and also offering services. Qredits in Netherlands is a very interesting model, partly because is very technology oriented but also it is focused in different part of the market, more reflecting the particular market in the Netherlands, they also have very strong links with mainstream financial institutions, I think very much it depends on what it is trying to achieve, if it is oriented primarily around market failure or a focus on poverty dimension, but also the context in which operate determinates the model. In France they have this social contract between different institutions, a very clear definition of what each group is doing, Adie, the main microfinance institution is very clear until who they are targeting, what they are providing, very much focused on the un-bankable element. Government provides supporting regulatory framework and a little bit of funding, banks provide range of things, including learn facilities, technical expertise, how they offer insurance, as a mainstream provider. It is very difficult to see, as you couldn’t really take a great model to UK or Eastern Europe, a lot of this is a condition constrained by the national framework and approach. It is quite difficult to transform a great model in a big path for a lot of European countries is that if you are not a bank you are not allowed to lend. Much less scope for them in terms of lending and building available model. What it is interesting in Europe is that there has been, MicroStart in Belgium for example is very much built on the French microcredit institution ADIE, but so is AFI - Action Finance Initiative in Greece. I think there is these credits partnerships in other countries, I think that is one of the interesting opportunities of within cover market to develop more I don’t see why we could not have microfinance institutions and programs that work across borders to a great degree.
What is in general the benefit of the microcredit practice in EU?
I guess it still going be important microcredit, I don’t think it is going go away. I think the fundamentals around microcredit are probably not going change that much. The fundamentals are still going be largely the same in the sense that self-employment is still going be an important route to employment. I think in the end a lot of people probably would be better offered, better off working for a big company and a local community, someone of those might not be necessary doing a well-paid job and having a permanent secure job, that is not so easy to do because things have shifted around much more greater income insecurity, there is much low employment security, that’s also sort of part of the reason why people go into self-employment, because it is quite really difficult to getting into other forms of employment. I think the need for microcredit will still be there, I think it is beneficial in the sense that it does provide with funding but also with purposed of skills to take up self-employment, even if in an ideal world we just would not have microfinance because we need for self-employment in such a big scale. A lot of self-employed, it is what in UK they call lifestyle businesses, they are very small marginal business. And also, for how many leads to being substantially wealthy. Microfinance institutions have a role to play, they are important giving that we are operating in a world that is the reality. I think there were really positive things in relation to building confidence of people and access to all the forms of services potentially, I think also could be interesting to see what the Commission starts to move the definition of microcredit, especially around sort of personal microcredit this also is going be more professional microcredit when people get perhaps borrow money to be able to work, be able to access for a car, be able to buy a suit to go to an interview or whatever might be.
How important is financial education for the next generations? What is the role of microfinance institutions on financial education?
I think there is a role of financial education, I would say I am probably skeptical about the benefit of having large scale of financial education incorporated into schools. I think the best evidence it is that there isn’t an huge impact on that. You just turn to certain things when you are in a situation, so if you buy a house you might be turned to something that you take out to learn and might be then to open to the idea of financial education probably learn about that when you are 12 or 15 and must not gonna have an impact when it comes to taking decisions when you are in your thirties perhaps. I am not so sure about how effective would be. I think everywhere in Europe there is a big pursue around financial education. All of this is about of changes of responsibility at the end if you are not doing particularly well financially then it is a sort of result that you are not particularly well at managing, but actually there were not reason to say that most of the people are in financial difficulties because of an external shock, someone loses their job, perhaps someone loses someone in their family and then all debt, it is a changing circumstances on some sort of makes a difficult learn to manage, have people come to get better managing money as they get older, circumstances change is less and less predictable. I do think financial education is important at the right sort type of times, so be part of the community finance sector in UK, that help people in terms of personal funds, but people may come to you for a loan in case of emergency and then you train them how to plan the approach of borrowing and spending, or encourage them to save, this type of education is helpful. We evaluated a few financial education projects in UK and it works for those that are motivated to make a change to their lives, that can be a sort of empowering, but you have to be in that moment, you have to be motivated otherwise it is difficult to change it. I would say that it is positive in the sense that there is financial education but you have to be aware of what that takes us in terms of responsibility for them. To get things about the financial regulation sector most of the continent it is outcome orientated, it is focused on good customer outcomes, I am willing to regulate to do that, even in America they also do that. In UK, and partial the more liberalized economies, have a much more process orientation so you have been into the process, we told you all the things you needed to know, so if at the end you have troubles it is not our problem because we told you already, I feel that it is a little bit of my fail rather then a responsibility of financial service providers. It is important the financial education to take away that responsibility.
According to the results of the survey, what is your comment on the European code of good conduct for microcredit provision?
One of the positive things about the code is that it is driving the convergence in practices. There has been a convergence between different types of models, so some countries are very good at customer protection or performance aspects, there are countries that are much better at the whole transparency, having the idea of common reporting. I think there has been a convergence of the great degree of standards and station in terms of at least some assets of the experience of microentrepreneurs and that makes easier to cooperate across countries, but also easier to invest if you know that organizations are quite similar, or easier to develop technology that sort of fits several countries if you know that some of these practices are the same. So that’s probably for me the impact of the code.
What are the next steps for the European microcredit sector?
I think there is already some partnerships going on between different institutions, but I think there will be more cooperation and that makes sense. I am also hoping there will be a little bit more. One of the outcomes so far in terms of the code, what in the past that doesn’t happen to that degree is this idea around having more sort of benchmarking data, learn about trough that sort of thing. I am going expect there will be more partnerships and I am also curious to see when I am going see some institutions operating across borders.
2. the european code of good conduct for microcredit Provision1
The European microfinance sector has been consistently growing over the past decade. It is composed of a variety of players and business models, with diverging legal and institutional frameworks across Europe. As a consequence, lending practices in microfinance vary considerably depending on:
• the type of institution providing microloans
• its legal setup
• the environment in which it operates
• and its own ability to apply sound and efficient management procedures
Given the diversity of the microfinance sector, the implementation of a voluntary European Code of Good Conduct for Microcredit Provision is an important element to promote best practices within the sector. The Code is a self-regulation instrument developed in close consultation with key stakeholders. It serves as a quality label, upholding high ethical and responsible lending practices in the European microfinance sector. Signing up to or endorsing the Code is a pre-condition for accessing EU funding under the EaSI financial instruments. The Code has recently been updated. The purpose was to refine several clauses in order to reflect the changing market realities and capture the wide diversity of the institutions in the microfinance sector. The updated Code will help to make microcredit more widely used in Europe while remaining a robust quality standard for the sector. The Code update is the result of a consultation in 2019 with key stakeholders, including practitioners, the European microfinance networks (EMN, MFC), banks, EU institutions and experts, drawing on lessons learned from a pilot phase that ran between 2013 and 2017. The Code Steering Group, led by the European Commission, formally adopted the updated Code in October 2019. The update is entered fully into force on 1 January 2021. The Code aims to set high ethical lending standards through a unified set of best practice guidelines that will enable microfinance institutions to better face the challenges of accessing long-term finance, as well as encourage them to improve their internal processes and operations. It is aimed mainly at non-bank microfinance institutions, which provide loans of up to €25,000 to microentrepreneurs or self-employed people.
• For final recipients, it is a quality label providing the assurance that the microfinance institutions conduct themselves in a fair and ethical manner
• For investors and funders, it ensures that the sector operates with transparent and pan-EU reporting standards
• For regulators, it is a reassurance that the sector operates according to sound business practices and principles and that it is well governed
• For policy makers, it provides a way to harmonize best practices in the European Union and promote common ethical finance principles within the sector
The Code has five sections, each comprising different clauses:
• Section I: Customer and Investor Relations - presents the obligations of microfinance institutions towards their customers and investors, as well as the rights of customers and investors
• Section II: Governance - covers standards for both management and the board of microfinance institutions
• Section III: Risk Management - details common approaches and procedures for managing risk in the organization
• Section IV: Reporting Standards - details which indicators microfinance institutions must collect, report on and disclose
• Section V: Management Information Systems - details common standards for management information systems
3. latest update of the code2
The transition period of the updated Code, published on 30 June 2020, ended on 31 December 2020. As of 1 January 2021, all new Code evaluations of microfinance institutions will be made based on the updated Code. In addition, the Code Steering Group, chaired by the European Commission, has adopted on 27 November 2020 the following changes regarding the Code evaluation and award process linked to the updated Code:
• Extension of Code award period and mid-term progress reporting
The award period has been extended from three years to four years for future Code awards and renewals, applying to institutions evaluated and awarded based on the updated Code. Awarded institutions will be required to submit a ‘mid-term progress’ form two years into the four-year award period. This form will provide important information to the Code Steering Group report on any relevant structural changes and on the progress made by the institution in implementing recommendations where relevant.
• Completion of business description form at the preevaluation phase
Institutions requesting an evaluation for their compliance with the Code will be required to submit a ‘business model description’ form to the evaluator. The purpose of the form is to provide the Code Steering Group with a better understanding of the institution undergoing the Code evaluation prior to an award decision. This will help minimize additional information that may be requested from the institutions at a later stage.
• New mechanisms for appeals and non-compliance reporting
The Code Steering Group has formalized two mechanisms:
1 an appeals mechanism regarding its award decisions. Any appeals must address the basis for the Code Steering Group’s decision and should be substantiated by evidence and documentation supporting the appeal.
2 a non-compliance reporting mechanism, enabling stakeholders to report instances of awarded microfinance institutions that do not comply with the provisions of the Code
The European Code of Good Conduct for Microcredit Provision (the “Code”) defines a unified set of standards for the microfinance sector in Europe. It serves as a self-regulation tool and a quality label for microfinance institutions committed to ethical finance. The Code has been developed based on recognised best practices in the sector in close consultation with stakeholders. Signing up to or endorsing the Code is a prerequisite for microfinance institutions and banks to benefit from EU financial support. The Code was updated with the extensive involvement of key stakeholders, including practitioners, trade bodies (the European Microfinance Network, EMN, and the Microfinance Centre, MFC), EU institutions, banks, and experts, to reflect the changing market realities and capture the wide diversity of providers within the microfinance sector in Europe.
4. certification process3
Step 1 - Sign-up. The first stage of the process is for a microfinance institution to submit a sign-up form to the European Commission, declaring their commitment to apply the Code standards in their operations. The complete electronic form should be sent to the Commission via email. Step 2 - Self-assessment. After this initial phase, the microfinance institution should take the initiative and drive the process of its implementation. The next step is to fill out a self-assessment tool (2021 update - view previous version of the selfassessment tool) in order to estimate the degree of its compliance with the clauses of the Code at the start of the implementation process. On this basis, the institution may request Technical Assistance to support them with the implementation of all clauses of the Code and ensure a successful evaluation procedure. In addition to the self-assessment, the microfinance institution is also expected to register and share data on the EaSI-MicPro platform. To share all necessary data, the institution should register and log in. Step 3 – Implementation. The microfinance institution commits to implement the Code within 18 months of signing up, based on the results of the self-assessment and the gaps in compliance identified (36 months in the case of greenfield microfinance institutions, which have been operating for less than three years). Step 4 - Evaluation process. Once the implementation period is over, the microfinance institution may decide to go for the step evaluation. If so, it submits the self-assessment and progress report to MFR, which performs a Code evaluation, aimed at evaluating how well the institution complies with all relevant clauses of the Code. Please contact our service provider MFR for the external evaluation. Step 5 - Decision on award. The final step of a “certification” is in the hands of the Code Steering Group. The Code Steering Group is chaired by the European Commission and is composed of voting members who represent the European Commission and the industry, as well as non-voting members, who represent the service providers involved in the programme. Based on the Code Evaluation and Technical Assistance reports (if applicable), the Steering Group decides which institutions are awarded a certificate of compliance with the Code. Institutions that comply with at least 80% of the weighted total of the clauses (the global marking) and with all priority clauses will in principle be certified as Code Compliant for 4 years (3 years when the certification was based on the old version of the Code). Both the microfinance institution, as well as the European Investment Fund are subsequently informed of the award.
5. microfinance institutions in europe4
Micro-enterprises are organisations employing fewer than 10 people, which have an annual turnover or annual balance sheet total of maximum €2 million. They represent over 90% of European enterprises and are thus decisive for boosting jobs, growth and investment in Europe. Lack of access to finance is one of the main obstacles micro-enterprises face. Microfinance, which includes guarantees, microcredit, equity and quasi-equity, along with accompanying non-financial support, extended to persons and micro-enterprises that experience difficulties accessing credit, can help overcome it. A microcredit is a loan of up to €25 000. Based on a 2016-2017 microfinance survey, conducted by the European Microfinance Network (EMN) and the Microfinance Centre (MFC), there are at least 450 institutions offering or facilitating the disbursement of microloans in Europe. One third of them (156) replied to the EMN-MFC survey. These institutions reached an outstanding gross microloan portfolio of €3.2 billion in 2017 and are serving almost 1 million active borrowers. In addition, 443,825 clients were reached with non-financial services in 2017.
https://ec.europa.eu/social/main.jsp?catId=738&langId=en&pubId=8312&furtherPubs=yes
NOTE
1 European Commission, European Code of Good Conduct for Microcredit Provision, https://bit.ly/3ktWIo1
2 European Commission, December 2020, Updated European Code of Good Conduct, https://bit.ly/3yoB7Cn
3 European Commission, European Code of Good Conduct for Microcredit Provision, https://bit.ly/3ktWIo1
4 European Microfinance Network, December 2018, Microfinance in Europe, https://bit.ly/2Wwl87S