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.
The updated version of the Code entered into force on 1 January 2021. The purpose of the update 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 helps 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 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.
Who benefits from the Code?
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 €50,000 to micro-entrepreneurs 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 harmonise best practices in the European Union and promote common ethical finance principles within the sector
What is in the Code?
The Code is available in 23 EU languages. It 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 organisation
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
Code evaluation is one of the services offered by the successor to the EaSI Technical Assistance programme - Social Inclusive Finance Technical Assistance (SIFTA), under the InvestEU Advisory Hub. The EIB is managing SIFTA and is therefore the designated contact for these services.
Step 1 - Sign-up
The first stage of the process is for a microfinance institution to submit a sign-up form to the European Investment Bank (EIB) to email@example.com. By signing up to or endorsing (applicable only to bank institutions) the Code, the microfinance institution is declaring their commitment to apply the Code standards in their operations.
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 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. To find out more about the SIFTA technical assistance services offered by the EIB, just send an email.
In addition to the self-assessment, the microfinance institution is expected to disclose publicly financial and operational information with a view to enhancing transparency and comparability. It will be done by using a standard template that must be validated by the Code evaluator during the evaluation process (see step 4).
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 of “evaluation”. In such a case, it submits the self-assessment, progress report, and a filled in Business Model Description Form to the Evaluator which performs a Code evaluation, aimed at evaluating how well the institution complies with all relevant clauses of the Code. Please contact firstname.lastname@example.org for questions related to the 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 European Investment Fund, European Investment Bank and 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, with a requirement to report on progress in the middle of the award period.
The microfinance institution is informed of the award by the Commission.
If compliance is not achieved, the microfinance institution may decide to make the required adjustments in order to improve its level of compliance and achieve the global marking.
Here, the microfinance institution can contact email@example.com to receive necessary technical assistance. The technical assistance service providers may offer training and coaching in order to support the institution.
Once ready, the microfinance institution submits evidence of the changes for a review by the evaluator, who in turn informs the Code Steering Group whether or not the changes are sufficient to achieve compliance with the Code.
List of awarded institutions
Microfinance institutions in Europe
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 €50 000.
For more information about how to get financing under the InvestEU programme, visit the InvestEU page.