Microfinance in Europe

In most parts of the world, microfinance offers people excluded from formal financial services the opportunity to obtain microloans in order to generate income and engage in productive activities, often by expanding their small businesses.

Though it is based on centuries-old systems of trust-based lending, the modern microfinance movement began as an economic development tool in the 1970s. It rapidly gained prominence in the 1980s and 1990s and is now successfully being implemented by schemes throughout the world; in Asia, Pacific, Africa, Latin America, and more recently in Eastern and Western Europe.

Introduced in Central and Eastern Europe after the fall of the Berlin Wall, microcredit today is already represented by a dynamic sector. With the banking sector antiquated and unable to respond to emerging needs, microcredit has proved capable of filling the gap by providing transitional support for people needing to enhance their own livelihood. Within five or six years of the collapse of the Wall, microfinance institutions (MFIs) in Central and Eastern Europe and in the New Independent States had attracted more than 1.7 million borrowers and 2.3 million depositors, with an average client growth rate of 30% per year. In addition to the involvement of MFIs and NGOs in the provision of microfinance in Eastern Europe, commercial banks are increasingly interested in downscaling in order to provide microloans for the poor. The microfinance sector thus continues to expand and become more highly structured.

In Western Europe, however, the sector’s growth has been more limited, despite increasing interest in its potential. Although microfinance has some deep roots through institutions such as the Raiffeisen Bank in Germany, lending charities in England, and the co-operative model of the “Casse ruralie” in Italy, it remains a fairly recent phenomenon in this region.

Microfinance is mainly perceived in Western Europe as a tool for economic growth and social cohesion. Many small businesses and families lack access to financial services in spite of the existence of a dense and competent banking network. Financial exclusion is mainly concentrated among those suffering from poverty and social marginalisation. Micro and small enterprises form the core of the Western European economic system, they represent 99% of the 2 million start-up enterprises that are created every year. One third of these enterprises are launched by the unemployed.

Consequently, these businesses have both an economic as well as a social impact. The ability of the banking system to reach and serve such small entities is therefore crucial to the achievement of general socio-economic improvement. Exclusion from banking services often constitutes a major obstacle to the launch of new business activities.

In this context, the development of microfinance services, either by banks or other intermediaries, is needed to fill the gap. Microcredit can help foster entrepreneurship by facilitating business start-ups. Granting microloans to the unemployed and marginalised can make them economically independent players able to participate more fully in a financial society. Hence, microcredit plays an important role in contributing to the Lisbon strategy for growth, employment, and social cohesion, as defined by the European Union.

To achieve these objectives microfinance in Western Europe requires support from the business sector as well as from the community development and social services sectors. Such services, such as working with volunteers to provide mentoring, are essential in ensuring the positive development of microenterprises. The importance of non-financial services is one of the characteristics of microfinance in Western Europe, a sector that still faces many challenges in growing and developing in order to reach more clients. 

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