This document is an excerpt from the EUR-Lex website
Document 52012DC0769
REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the application of Directive 2006/48/EC to microcredit
REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the application of Directive 2006/48/EC to microcredit
REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the application of Directive 2006/48/EC to microcredit
/* COM/2012/0769 final */
REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the application of Directive 2006/48/EC to microcredit /* COM/2012/0769 final */
TABLE OF CONTENTS 1........... Introduction.................................................................................................................... 3 2........... The microcredit landscape in the
European Union............................................................ 3 2.1........ Microcredit is a concept with
various definitions.............................................................. 3 2.2........ The wide spectrum of definitions
is reflected in the variety of microcredit suppliers............ 4 2.2.1..... Overview of the types of
institutions supplying microcredits within the EU......................... 4 2.2.2..... Banking institutions play a key
role in the EU even though microcredit is often only a side activity 5 2.2.3..... Non-banking institutions that
primarily grant microcredits are another important supplier... 6 2.2.4..... The public sector is one of the
most influential actors on the microcredit market................ 6 3........... Prudential supervision of
microcredit activities within the EU resulting from the application of
Directive 2006/48/EC...................................................................................................................................... 7 3.1........ A large portion of microcredit providers are exempted from the
application of prudential requirements laid down in the Directive 2006/48/EC............................................................................................... 7 3.2........ Several
factors tend to mitigate the impact of the prudential requirements laid down in Directive 2006/48/EC on microcredit activities although
there may be some burdensome effects.............................. 7 3.2.1..... The Directive 2006/48/EC does not take account of the specific
nature of microcredit...... 7 3.2.2..... Access to public guarantee schemes enables microcredit providers to
significantly reduce the level of own funds required to cover the credit risk
they are exposed to........................................................ 7 3.2.3..... Most microcredit can be exempted from the large exposure limit
designed to limit concentration risk 9 3.2.4..... The Directive requirements in
terms of risk management help the banking microlenders to mitigate their risks 9 3.2.5..... Directive 2006/48/EC requires banking microcredit providers to
comply with prudential rules to mitigate liquidity risk................................................................................................................................. 9 3.2.6..... Directive 2006/48/EC may involve
high administrative burdens which may reduce the attractiveness of microcredit
as a banking business while strengthening financial
investor confidence in microcredit providers 10 4........... Conclusions.................................................................................................................. 10 REPORT FROM
THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the application of Directive 2006/48/EC
to microcredit 1. Introduction Microcredit is generally recognised – by Member
States, financial institutions, national supervisory authorities and more
widely – as an effective financing channel for job creation and social
inclusion, which can attenuate the adverse effects of the current financial
crisis while contributing to entrepreneurship and economic growth in the EU.
That is why the development of microcredit has been high on the European
Commission agenda for the last few years. In November 2007, the European Commission
published its communication “A European initiative for the development of
microcredit in support of growth and employment” in order to promote a more
favourable environment for microcredit provision. In the past few months, the
European Commission has been directly engaged with both the microcredit sector
and national public authorities to identify obstacles microcredit providers
face in deploying their services throughout the EU and to consider how these
might be overcome and whether there is a need for regulatory action at national
or EU level. The review and discussion stage led by the European Commission has
included a conference organized jointly with the European Economic and Social
Committee on 2 December 2011. The willingness to develop microcredit in the
EU was also shared by the EU co-legislators during the negotiation process of
the Directive 2009/111/EC[1].
They requested the European Commission to review the application of the Directive 2006/48/EC[2]
to microcredit. As laid down in Article 156 of the latter, the European
Commission has been asked to report the results of this review to the European
Parliament and the Council together with any appropriate proposals. The next section aims at clarifying what is
meant by microcredit with a special focus on the microlenders, to begin with a
clear appreciation of the participants to this lending activity and the issues
at stake. The third section gives an overview of the prudential supervision of
microlenders across the EU and identifies the effects of the prudential
requirements on microcredit activities resulting from the application of the
Directive 2006/48/EC. The last part concludes whether or not the EU banking
prudential requirements need to be amended. 2. The
microcredit landscape in the European Union 2.1. Microcredit
is a concept with various definitions There is no single definition of microcredit.
The term 'microcredit' is generally used to refer to small loans provided to
people excluded from the traditional financial system or lacking access to banks,
with a view to helping them create or develop businesses. However, the
definition of microcredit varies widely amongst Member States and stakeholders
depending on the social environment, economic situation, and policy goals. The demand for microcredit is sustained by a
wide spectrum of borrowers. Microcredit may be only available to
'micro-entrepreneurs', self-employed people seeking to finance small
businesses. It may also focus only on other groups such as socially excluded
people trying to cope with emergencies, fund education, or even acquire basic
household assets. Microcredits are generally very small, short
term and unsecured, with usually more frequent repayments and higher interest
rates than conventional bank loans. However, beyond this general description,
microcredits are granted under widely varying loan terms and conditions. For
instance, the loan repayment term is generally less than six months, but may
extend to ten years. As regards interest rates, an important factor determining
their level is the existence of usury laws. Where usury laws are in place,
lenders are not allowed to charge above a stated maximum interest rate. In
Member States which do not have such restrictions, the interest rates may be
higher than where there are usury laws. In amounts, microcredit generally
refers to loans not exceeding EUR 25,000[3].
However, a lot of European stakeholders define microcredit as loans with either
much smaller or much higher amounts. The activities carried out by micro lenders may
go beyond lending and include other financial services, such as savings
products, current accounts, payment services, transfer services, insurance,
leasing, and so forth. This wide range of financial services should however be
referred to as 'microfinance' and used in a wider sense than the term
'microcredit'. The lack of a consistent and generally used
definition of microcredit is an obstacle to collecting information and data
about this activity, which makes it difficult to track the evolution of
microcredit in the EU. Sound facts and figures on the volume of microcredit and
related services, particularly for the EU as a whole, are difficult to find.
Loans with similar characteristics may be classified alternatively as
microcredit or conventional loans, depending on the context. They can be
reported as consumer loans, retail loans, corporate loans or loans to small and
medium-sized enterprises (SMEs). 2.2. The
wide spectrum of definitions is reflected in the variety of microcredit
suppliers 2.2.1. Overview
of the types of institutions supplying microcredits within the EU The varying definitions are reflected in the
variety of legal forms used by microcredit suppliers. Providers of microcredit
fall under different categories: commercial and savings banks, cooperatives, microfinance
institutions, non-banking financial institutions, credit unions, foundations
and other types of non-profit organisation such as non-governmental
organisations and associations. The microcredit sector within the EU is also
diverse with respect to sizes and business models. In addition to classifying
lenders by institutional types, microlenders can be broken down into further
groups: –
institutions which are required to obtain a
licence to carry out banking activities, versus those required to be registered
with some banking supervisory authority without being required to obtain a
licence or those required to be only registered as a legal entity; –
those which have a not-for-profit status versus
those with a profit-making purpose; –
private institutions versus public ones; –
lenders which have microlending as their core
business versus those for which microlending constitutes a relatively small
proportion of their business portfolio. Lenders can also be differentiated according to
the categories of their borrowers: non-bank institutions often grant the
microcredits provided to poor households whereas microcredits to
micro-enterprises and small businesses are mainly provided by banks. The
microlenders also differ in terms of what products and services they are lawfully
allowed to offer; whether they are subject to prudential supervision; and how
administrative and business operations are funded. This diversity is related to the regulatory
environment in each country (see section 3). Some Member States in the European
Union have a banking monopoly, which means that lending activities are
restricted to only banking entities. Conversely, in other Member States,
non-banking institutions are allowed to grant microcredits. There are also some
exceptions with certain jurisdictions allowing specific non-banking
institutions to grant microcredit despite the banking monopoly. It is worth
nothing that EU banking legislation only prohibits non-banking microlenders from
taking deposits. 2.2.2. Banking
institutions play a key role in the EU even though microcredit is often only a
side activity The banking system is an important
institutional supplier of microcredit in the EU through savings, co-operative
and commercial banks. These can be broken down into four main groups depending
on their business models: –
banks having regular microcredit activities with
specialised lending departments; –
banks granting microcredits through separate
foundations; –
banks going into partnership with public
financial institutions which define the credit policy and assume the full risk
of the loans (under certain conditions) while the banks remain responsible for
the credit decision; –
banks having indirect involvement in microcredit
through wholesale loans, credit and liquidity facilities to financial
institutions specialised in microcredit. While being only a side activity for most of
these banking institutions, microcredit is often considered as an opportunity
to participate in the development of businesses and clients which might be
profitable in the future. Cross selling (where the provision of loan gives
banks opportunity to sell other services to the borrowers) may then help to make
the funding of microcredit more profitable. Banks can also be motivated by the
potential benefits of collaborating with public bodies through public-private
partnerships. 2.2.3. Non-banking
institutions that primarily grant microcredits are another important supplier In most Member States, non-banking institutions
carry out the bulk of microcredit provision. The existing non-banking
institutional models range from non-governmental organisations, non-profit
associations, charities, trusts and foundations to credit unions and religious
institutions. In accordance with EU banking legislation, apart from a few
exceptions, non-banking institutions are not allowed to receive deposits from
the public, which are restricted to licensed and supervised banking
institutions. These non-banking institutions grant microcredits to socially or
financially excluded groups as a primary activity. Over time, some of these non-bank microcredit
organisations evolve into for-profit companies such as regulated banking
institutions. This institutional transformation is often driven by a need for more
capital and a desire to offer a wider range of services such as deposit taking. In some Member States, partnerships between
non-profit organisations and banking or public institutions are established.
The former perform an informal selection of the applicants to receive funding and
offer them assistance after credits have been granted while the latter provide
for the funding of the credits. 2.2.4. The
public sector is one of the most influential actors on the microcredit market Despite the difficulty of measuring the size of
the microcredit sector, one of the most influential actors within the EU is the
public sector that provides banking and non-banking institutions with support
aiming at bridging gaps or failures in the microcredit market. This support is
provided at national, regional, and European levels by a wide range of public
actors from state-owned banks to the EU structural funds and other public
guarantee, loan or equity schemes. EU policy gives high priority to microcredits
enabling institutions to receive funding from various European sources such as
the European Social Fund, the European Regional Development Fund, the European
Investment Fund, the Joint European Resources for Micro to Medium Enterprises
(JEREMIE programme financed by the Structural Funds), the Competitiveness and
Innovation Programme (CIP) and the European Progress Microfinance Facility (Progress
Microfinance). The objective of these EU programmes is to encourage financial
institutions to grant microcredits. Other EU programmes also help microcredit
providers to improve governance, mitigate risks, and partially offset the high
administrative costs inherent in microcredit through guarantees and technical
support, such as the Joint Action to Support Micro-Finance Institutions in
Europe (JASMINE) which focuses mainly on the capacity building of non-bank
microcredit providers. At national and regional levels, a number of
measures are taken to promote microcredit funding and partially share the risk
with microlenders through guarantee schemes. Public programmes giving direct
financial support to micro-lenders and borrowers are also implemented. Where
state-owned banks exist, they tend to be the main funding providers for
microcredit activities. 3. Prudential
supervision of microcredit activities within the EU resulting from the
application of Directive 2006/48/EC 3.1. A large portion of microcredit providers are exempted from the
application of prudential requirements laid down in the Directive 2006/48/EC The variety of institutional forms used by
microlenders is reflected in the diverse landscape of regulatory frameworks
applied to these microcredit providers across the EU. Broadly speaking, only
microlenders operating under European banking law have to fulfil the
requirements of the Directive 2006/48/EC. The trigger to fall under European
banking law is to receive deposits or other repayable funds from the public
and, at the same time, grant credits for its own account in accordance with the
definition of a credit institution as laid down in Article 4 (1) of Directive
2006/48/EC. That means that non-deposit taking microlenders are not required to
obtain a banking licence and meet the Directive 2006/48/EC prudential
requirements unless the Member States apply a stricter approach by allowing
only licensed banking institutions to grant microcredits. Moreover, whereas the prudential legislation
concerning banking institutions is harmonised to a certain extent by Directive
2006/48/EC, the regulatory approach to microcredit provided by non-banking
institutions differs widely from country to country. In most Member States,
there are no specific rules related to these non-banking microlenders that fall
in the scope of generally applicable corporate laws, while specific regulatory
frameworks for the provision of microcredit can be laid down in the national
legislation, as, for example, is the case in Italy. These findings have two implications: –
institutions with similar activities are not
subject to the same regulatory requirements across the EU; and –
Directive 2006/48/EC might not be as penalising
for microcredit as might have been expected, given its limited scope of
application. 3.2. Several
factors tend to mitigate the impact of the prudential requirements laid down in Directive 2006/48/EC on microcredit activities although
there may be some burdensome effects 3.2.1. The Directive 2006/48/EC does not take account of the specific
nature of microcredit The specific nature of microcredit is not taken
into account in EU banking legislation. The provision of microcredit is
considered as a common lending activity and falls in the scope of the
applicable rules on financing and providing loans. This is true with regard to
Directive 2006/48/EC that does not make any reference
to specific prudential rules related to microcredit. That means that there is
neither a waiver allowing banks to exempt their microcredit activity from the
prudential requirements nor
specific rules mitigating the prudential requirements compared with those
applied to other banking activities. 3.2.2. Access to public guarantee schemes enables microcredit providers to
significantly reduce the level of own funds required to cover the credit risk
they are exposed to Microcredits may carry high credit risk – that
is the risk that the borrower defaults before repaying the principal and
scheduled interest according to the loan contract – due to possible
over-indebtedness of microborrowers and lack of guarantees traditionally required by banks. This credit
risk may be underestimated due to information asymmetry. The Directive 2006/48/EC requires banking
microlenders to hold a minimum amount of own funds to cover this credit risk in
order for them to remain solvent in the event of default of the borrowers. Under this Directive, the banking institutions can calculate
the minimum capital using different methods of varying degrees of
sophistication, namely the standardised approach and internal ratings based
approach. Under the standardised approach, which is the simplest and most
common approach implemented by small-sized banking institutions, the minimum level of own funds is determined with regard
to the riskiness of the microcredits. This riskiness is measured in terms of
risk weights (i.e. the riskier the loan for the bank, the higher the risk
weight). Under the standardised approach, microcredits are given a weighting of 75%[4] from the moment that there is low correlation between microcredits[5]. Banks are required to hold tier 1 capital of at
least 4% of the risk-weighted amount of microcredits and total capital of at
least 8%. That means that the minimum total capital comes to EUR 600 if the
microloan value is EUR 10,000 (or 6% of the loan value, after the 75% weighting).
Nevertheless, in the majority of Member States, local, regional, or national
public authorities have implemented credit guarantee schemes which assume some
of the risk borne by microlenders. These guarantee schemes generally fix a
maximum amount that can be secured, expressed as an absolute amount and/or as a
percentage of the borrowed amount (generally from 60% to 80% of the loan). Both
standardised and internal ratings based approaches allow banking institutions
to assign the risk weight of the guarantor to the protected portion (while the
risk weight of the microborrower remains to be assigned to the unprotected
portion). As such public guarantees often carry a 0% or 20% risk weight, the
minimum level of own funds the banking microcredit
providers are required to hold to cover the credit risk generated by microloans
can be sharply mitigated. Existing capital requirements do not seem therefore
to penalise microcredit activity since the level of own funds can be much lower
than 6% of the loan amount. An overall increase in capital requirements and
reinforcement of capital quality are provided for by the upcoming prudential
rules currently under negotiation, 'CRD IV/CRR', that will replace the
Directive 2006/48/EC from 2013. These new rules that transpose the Basel III
framework into the European banking legislation aim at strengthening the EU
banking sector and financial stability. However, SMEs have expressed concerns
over the impact of these new rules[6]
on lending conditions, given the limited availability of funding sources
alternative to the banking channel. That is why a provision is introduced in the CRDIV/CRR proposal (Article 485 of
CRR) requiring the European Commission to review the capital requirements for
exposures to SMEs after three years from the entry into force of CRD IV/CRR. In
the meantime, in July 2011, the European Commission mandated the European
Banking Authority (EBA) to analyse the appropriateness of the existing risk
weights applicable to SMEs lending[7]
and assess the impact of (i) a possible reduction in these risk weights and
(ii) a possible increase from EUR 1 million to 5 million in the threshold below
which exposures to SMEs benefit from these risk weights. In its report finalised in October 2012, the
EBA warns against any permanent modification of the risk weights or threshold
in absence of adequate evidence that justifies a departure from the Basel agreement. However, the EBA suggests alternative measures to ease lending conditions
for SMEs such as (i) the introduction of a temporary exemption of the capital
conservation, (ii) the alleviation of capital requirements during periods of
economic difficulty or (iii) the introduction of a temporary supporting
discount applied to capital requirements without modifying the risk weights.
Without pre-empting the negotiation process on the CRDIV/CRR proposal, any of
the suggested measures would also benefit microcredit providers as a
microcredit is treated in a comparable manner as a loan to an SME. 3.2.3. Most microcredit can be exempted from the large exposure limit designed
to limit concentration risk Given the small size of microcredits, in
theory, there is no loan the value of which would exceed 25% of the regulatory
own funds of the banking microcredit providers (the concentration risk limit).
However, where the microloans are guaranteed by the same counterparty, such as
a state government or local authority, the portion of the loans that are guaranteed could be treated as having been incurred to the
guarantor rather than to the microborrowers, which may lead to a breach of the
25% limit. However, the exposure to the public
guarantor can be exempted from the application of the large exposure limit. 3.2.4. The
Directive requirements in terms of risk management help the banking
microlenders to mitigate their risks Directive 2006/48/EC requires that banking
microlenders have in place a comprehensive risk management process to identify,
evaluate, monitor and control all their risks. Such requirements help the
microlenders to strengthen their internal control frameworks and develop
effective risk management skills and strategies, which can in turn reinforce
their credibility and profitability while improving the financial stability of
the microcredit sector. The development of efficient internal control
frameworks also enables banking microlenders to be less exposed to credit
risks, money laundering and employee fraud. 3.2.5. Directive 2006/48/EC requires banking microcredit providers to
comply with prudential rules to mitigate liquidity risk
On the asset side, banking
microlenders may lack a cushion of unencumbered, high-quality liquid assets to
enable them to face a liquidity stress, given that microcredits
are often illiquid and transformed with difficulty into
liquid instruments (through covered bonds issuance or securitisation). On the
liability side, deposit-taking institutions may face the risk of deposit run
off especially where they have no access to stable sources of liquidity from
other banking, public or international institutions. Directive 2006/48/EC requires that banking
institutions, including microlenders, have sound liquidity management
strategies, policies and processes to identify, measure, monitor and control liquidity risk on a day-to-day basis, and contingency plans for handling
liquidity problems. 3.2.6. Directive
2006/48/EC may involve high administrative burdens which may reduce the
attractiveness of microcredit as a banking business while strengthening financial investor confidence in microcredit
providers The application of prudential requirements laid
down in Directive 2006/48/EC might be disproportionately expensive for both the
supervisory authorities and banking microlenders especially if the latter do
not pose serious risks to the overall banking and payment system. When measured
as a percentage of total assets, the smaller banking microlenders are, the
higher the costs resulting from the application of prudential requirements can be. This may lower the
profitability of microlending
and reduce its attractiveness as a banking business. However, some prudential
requirements, especially those related to prudential reporting, the risk
assessment process and capital adequacy can be commensurate with the smaller
size and complexity of these institutions, which helps to alleviate the
administrative burden. Even though microcredit institutions have no
significant systemic impact in terms of financial stability, the failure of any one of them might affect the credibility of the
other banking microcredit providers. As such, the reduced likelihood of failure
of applicable firms due to the Directive should be welcomed. In addition, the
banking prudential requirements can enhance financial investor confidence in
microcredit providers as a safe destination for investor funds. Such confidence
can help microcredit institutions to attract more long-term funding enabling them to reach a more significant scale and provide their
customers with a wider range of services. 4. Conclusions The European Commission recognises the need to
promote the provision of microcredit and the development of microcredit
providers. It should be recalled that the European Commission is very active in
this area notably with the JEREMIE and JASMINE initiatives and the European Progress
Microfinance Facility launched
in 2010 to increase the availability of microcredit for alleviating
unemployment of young people and helping to set up or develop their business. In this context, neither the European
Commission, nor a number of national public authorities consider that the
prudential requirements as laid down in Directive 2006/48/EC impede the
development of microcredit activities. As noted earlier in this report, these
prudential rules would not seem to be as penalising for microcredit in the EU
as might have been expected, precluding the need for tailoring them to the
particular features of microcredit activities. Moreover, microcredit brings together a wide range of actors which are not subject to similar laws or rules and is
dealt with in a diversity of ways across Member States depending on the policy
framework and the legislation in place. Given this heterogeneous situation
combined with the lack of a consistent and commonly used definition of
microcredit, any action to modify the prudential and regulatory framework would
require prior careful consideration to ensure that microcredit activities are effectively
promoted. It might also be argued that no prudential
reform needs to be undertaken if the development of microcredit is considered to be driven to a large extent by non-prudential
factors. That does not mean that prudential regulation has no impact on the development of such activities, but
that prudential factors do not play a critical role in the development of
microcredit, making any prudential reforms not necessary. A number of areas
outside of the prudential sphere could instead be the focus of reforms. For
instance, a way to foster the supply of microcredits may be to create a more
favourable general environment for institutions specialised in microcredit by facilitating
their access to financial resources. This development
might be promoted through a wider provision of loan guarantees, encouraging closer
cooperation between banks and non-banks or more financial transparency. Under this approach, the development of codes
of conduct of voluntary application like, for instance, those which have been
issued by the microcredit industry itself in recent years, or more recently by
the European Commission,[8] can help to provide a higher degree of recognition and credibility
to those microcredit providers adhering to them. Review of the consumer protection environment for microcredit, which is
outside the remit of Directive 2006/48/EC, and any appropriate improvements, may
also have positive effects on microcredit activities. Finally, greater attention given to the
institutional framework for self-employment and microenterprises could also
increase their chance of success and make microcredit more profitable. Measures
to simplify legal and administrative regimes or to smooth the transition between unemployment or social welfare dependence and
self-employment could be fostered as well. [1] Directive 2009/111/EC of 16
September 2009 amending Directive 2006/48/EC,
2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions,
certain own funds items, large exposures, supervisory arrangements and crisis
management. [2] Directive
2006/48/EC of the European Parliament and of the Council of 14 June 2006
relating to the taking up and pursuit of the business of credit institutions [3] The European Commission refers to this amount in the
EU microcredit programmes. [4] Actually, all exposures to small
and medium enterprises, including microcredits, carry the same risk weight
irrespective of the size, nature (credit or liquidity facility, personal loan,
etc.) and risk profile of the counterparty. [5] A microcredit portfolio
should have less risk than the weighted average risk of
its constituent microcredits if there is a significant number of loans and the
credit risk of these loans does not get worse and better simultaneously. [6] In particular, the introduction of the so-called capital
conservation buffer (2.5% of risk-weighted assets in addition to the current 8%
requirement) which would be phased in between 2016 and 2019. [7] The risk weights are left unchanged in the CRD IV/CRR
proposal. [8] In
October 2011, the European Commission issued a comprehensive European Code of
Good Conduct for Microcredit Provision developed jointly with individual
microcredit providers, banks and their respective national and European trade
bodies, regulators, academics, and rating agencies.