The European Microfinance Swindle

Despite the endless awards granted within the microfinance sector, there is not yet one for the silliest publication of the year. Were such a prestigious honour exist, I would propose the recent “Overview of the Microcredit Sector in the European Union 2010-2011” as a serious contender. I cannot recall the last time I ploughed through a 100-page document so brimming with gibberish. It’s mildly amusing though, if you are on a long flight and you’ve seen the decent movies and are sitting next to a particularly dull person. I asked an awkward question at a recent microfinance conference in Norway regarding the wisdom of so-called Italian minister Giulio Terzi’s suggestion to replace unemployment benefit with unemployment loans, explored in this post, and was handed this farcical document. Fortunately Terzi subsequently quit and is no longer making a mockery of the last semblances of the Italian welfare state.

The document is silly on so many counts it is hard to know where to begin. It is badly written, long-winded, and fails to address the key issue – is microfinance in Europe actually working? The premise is that microcredit is not just for poor folk in poor countries, but useful for employment creation in Europe. But there is not one single shred of evidence presented of a single job being created. Despite the endless trivial graphs, there is not a single statistic of “xxxx jobs created”. It’s the same trick the mainstream microfinance sector makes – we made loans therefore people have benefitted. Not necessarily.

That the document was funded at all is surprising, but I enjoyed the opening disclaimer: “The information [] does not necessarily reflect the position or opinion of the European Commission”. Phew, at least one person in the EU must have read this before publication. Even the table of contents is worrying, with a mere 2 pages (of the 100) dedicated to “Social performance”.

Despite employment creation being the stated (albeit un-demonstrated) goal, apparently ethnic minorities and clients below the poverty line were “targeted”, although much of the capital was spent on consumption, as usual. I suppose buying a new TV does generate employment, in China. The usual focus on women was plugged, with the fairer sex mopping up 38% of all loans, up from 27% last year apparently. In an enlightening moment in the introductory waffle the authors clarify: “Social inclusion lending… focuses on lending to self-employed individuals that are excluded from banking services, due to the socio-economic status of being socially excluded…” So, not only are they already self-employed (i.e. hardly job creation), but in order to qualify as a socially excluded person you have to be, er, socially excluded. Thanks for clearing that up.

In the key findings the authors frankly admit that “the availability of data for clients’ outreach and social performance is still limited among the MFIs covered in Europe…. the emphasis of the MFIs mission statements is on job creation… is followed to a lesser extent in the sector.” Confused?

A recurring theme in the paper is that no one actually knows what is going on, including the MFIs interviewed. One of my favourite aspects was on the interview response rate and the so-called Code of Conduct. Only 154 of the 376 MFIs contacted even bothered responding to the survey, and of those that bothered, only 72% knew there was a Code of Conduct. In an astonishing confession found in the appendix (tables 17 & 18), one third of Albanian MFIs and 100% of those in Austria were aware of the Code, and yet 100% of both countries said they were NOT intending to follow it! Likewise, in Belgium and Croatia, half of all respondents said they would NOT be following it. Compare this to the Smart Campaign in vanilla microfinance, where everyone and their dog signs up, and then does nothing about it. I possibly have more respect for an MFI that flatly refuses to adopt a silly code than one that signs-up for pure window-dressing. Obviously it would be better to have a sensible code, but such a code might jeopardise profit and offer genuine protection to the poor – unacceptable in the beloved sector.

This recent survey was a little more representative than previous surveys, as they decided, wisely, to include Europe’s largest MF country – Bosnia, which was ignored entirely in previous surveys. Spain generally comes second, on account of the country barely existing economically – ideal breeding ground for microcredit. The European total broke through the €1bn mark in 2011, alas. This was marginally over 200.000 loans. When they bother to filter out for business-specific loans, perhaps not surprisingly, Germany rises to the top of the pile. Trust the Germans to actually do something productive.

The authors also managed to “forget” the rather awkward fact that microfinance in Bosnia is an unprecedented disaster and one of the main crises to have blighted the sector, right up there with Andhra Pradesh and Nicaragua. See OFSE Working Paper 36, entitled: “The contribution of the microfinance model to Bosnia’s post-war reconstruction and development: how to destroy an economy and society without really trying”. Needless to say this article is a little less optimistic about the impact of microfinance on poor Bosnians.

The average interest rates charged in Europe range from 4% in France to 35% in Serbia, with an average of 11%. Spare a thought for the Latinos and Africans coughing up interest rates perhaps 10x, or even 50x such European rates in the name of poverty reduction. As with Kiva loans in the US – micro-entrepreneurs in rich countries pay a fraction of what the poor in developing countries are expected to pay. Why? Because lending to unemployed gringos and French people at 200% is politically dangerous, but to Mexicans it’s acceptable? Perhaps the PAR (bad loans) of these European MFIs is astonishingly low, enabling the MFIs to charge lower rates? Er, the average PAR30 is 12%, and 6% was simply written-off in the year. This would be considered a total emergency in any “normal” MFI, tinkering on bankruptcy. In the EU it’s fine.

Average loans sizes (deflated by GDP per head) are highest in Lithuania for some reason, and lowest in the UK. But beyond such modest metrics, the report produces reams of utterly useless tables and statistics, like the number of MFIs that only offer credit, per country, or when they were incorporated, or the share of full-time loan officers. I’m not sure who would be remotely interested in such statistics. There are no cross-tabulations, and explanations are generally trivial, so it really is hard to understand why they bothered presenting such data other than to justify two years of work gathering such useless data and producing a report to hand out for free at conferences (to promptly be recycled, one hopes, to at least prevent the erosion of Europe’s few remaining forests).

The social performance chapter (if that is the right word – it’s basically two pages) suggests 72% of respondents thought job creation was critical for their mission. And yet the survey people forgot to ask such penetrating questions as “how many jobs did you create?”. The reason for the modest coverage of this topic is stated in section 5.2: “to analyse [impact] in a reliable way, the clients have to be asked directly for such information, or specific methods, like randomized evaluations, have to be used [but were not]… Therefore, this survey edition has not included any self-assessment questions about the social impact of the MFIs activities” (emphasis added). Great – they ignored impact deliberately.

Indeed, page 44 ends with another astonishing confession: “47% of the business microloans were issued to bankable customers” – i.e. they weren’t even financially excluded. So why bother?

22% of loans were disbursed to people already on welfare, although the report doesn’t discuss to which extent loans are replacing welfare, presumably a critical point. However, the ratio rises in Belgium, where 100% of microfinance recipients are on welfare, 83% in France, and 56% in Spain.

The financial performance section gets off to a dubious start. Astonishingly, of the sub-set that bothered to reply to the survey, over a quarter were unable to report their non-performing portfolio rate – possibly the single most scrutinized microfinance statistic. For those that did manage to calculate this fiendishly tricky statistic, Moldova led the pack with a PAR30 of only 2%, while Ireland reached an impressive 35%, i.e. more than 1 in 3 loans were in default. France boasts 28% and the UK was 27%. In “normal” microfinance any number over 5% is considered worrying, and over 10% is a crisis threatening the future of the institution and rendering funding almost impossible. In Europe this is not a factor, to the extent that 27% of respondents didn’t even bother tracking the ratio. One MFI had written off 34% of its portfolio, but the report doesn’t say which.

“Only around every fifth MFI surveyed provided information regarding their amount of refinancing loans”, i.e. 80% of those who bothered answering the survey had no idea or didn’t want to disclose it.

I wondered why the financial performance section was so much bigger than the social performance section, and the answer is provided on page 49: “this [survey] was the first to include requests for basic financial performance data”. The mind boggles as to how utterly redundant the previous surveys must have been. Only 1 in 3 respondents had any idea of their portfolio yield, i.e. the gross operating margin, but the good news is that the highest gross margin category is growing rapidly! Good for the MFIs, that is, not so great if you’re the unemployed Spaniard coughing up the interest. 1 in 4 of those surveyed knew their debt to equity ratio. 3 in 4 presumably had never considered such a complex calculation. A mere 30% knew their operating expense ratio, so there’s clearly scope for improvement here.

Is it not humiliating, as a manager of an MFI, to be asked such basic questions and simply tick the box “I have no idea how to answer this question”?

Then we have another particularly silly chapter – “Trends in the Sector” (a whopping 2 pages). It bangs on about job creation to begin with, then discusses the Code of Superior Operations or whatever it’s called, which most seem pretty indifferent about, but then there is some optimism:

“At the level of the demand for microfinance the rising number of unemployed people, especially in the Southern European countries, should allow MFIs to grow their operations”. Always look on the bright side:

more unemployment + less welfare = more microfinance

This section goes on to state “the general public support for microfinance provision is expected to decline in the coming years, due to budget restriction and high deficits at national and regional levels”. Er, I can think of some other reasons why public support might wane – it’s a stupid idea that has demonstrated absolutely zero positive impact and there is a global backlash against indebting poor vulnerable people regardless of whether they are from Senegal or Spain. Do the authors read the newspapers?

The report then presents some extremely light country summaries, and doesn’t bother with a conclusion at all, presumably because it is pretty blatantly obvious what the conclusion is for the 1% or readers of the report that make it to page 84. However, don’t stop here – the appendix is quite funny.


This is a nonsense report. Microfinance in Europe is clearly operated by utter incompetents incapable or unwilling to fill out a simple survey. The mild insights regarding performance and results suggest the vast majority of European microfinance institutions are chronically inefficient, have extremely poor quality portfolios, are not lending to the stated target groups, are entirely bankrupt and kept alive by subsidies from asinine governments or donors who still retain some glimmer of hope in microfinance. But let’s not forget the harrowing words of the former Italian minister for foreign affairs, Giulio Terzi di Sant’Agata:

“[Microfinance] can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”.

This is not merely a silly idea, it is an explicit effort to replace welfare with debt to vulnerable people in order to reduce government budgets bursting at the seams following years of crappy economic management. As with the rest of microfinance, and many aspects of European policy in general, whether a policy actually works or not is simply not relevant. It’s a nice idea that some people cling to. If you can make a buck out of it, or slash your welfare costs to free up money for other activities, all the better. Rather than laugh at such jesters, we should be deeply worried – these people are so removed from reality, and yet wield power. Fear them.

According to Wikipedia “Terzi resigned from office on 26 March 2013 in the wake of severe criticism in Italy for his handling of the diplomatic dispute between Italy and India over the 2012 Italian shooting in the Arabian sea.”

Phew. That’s one less to worry about. Let’s hope he leaves the microfinance sector entirely, he is clearly not qualified in this regard.

So, European poor folk unite! Don’t take out silly loans from quasi bank institutions apparently to start up a business but invariably to spent in a bar. Demand governments actually create jobs and engage in a sensible industrial policy rather that littering the streets of Madrid and Milan with immigrants selling trinkets on street corners and re-labelled “micro-entrepreneurs”. In a well functioning economy with well functioning banks microfinance shouldn’t be necessary. It was invented to fill the gaps of such market failures. If the likes of Terzi could focus their attention on fixing their financial sectors and generating growth rather than attempting to replicate a Bangladeshi model (that doesn’t work that well either) in their countries the European experiment would likely be in slightly better shape. The only glimmer of hope is that the EU recognizes the ridicule of these people and ceases all funding to such bodies. But I still have one niggling question for them:

Why do European MFIs charge such staggeringly lower interest rates to the European poor compared to the poor in developing countries? This is nothing more than a massive PR exercise to give the appearance that some governments are doing something remotely useful to help stimulate their economies, generate jobs and target vulnerable groups. But it’s a failure, no one is convinced, and the sooner they stop this nonsense the better.

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