Can microcredit fuel jobs in crisis-hit Europe?

LONDON (TrustLaw) - Say "microcredit" and many people think of small loans to the rural poor in developing countries -- basket weavers in Bangladesh, or dairy farmers in India.

But advocates say if restrictive regulations were lifted, it could just as easily help the unemployed in Europe, where a sovereign debt crisis and rising interest rates threaten to compound stubbornly high jobless figures.

It could help those with pitiful credit scores and lack of collateral, who don't stand a chance of getting loans from traditional lenders, pull themselves off welfare by starting their own businesses.

"Small credit is not new but it has sort of disappeared in many European countries," said Maria Nowak, founder and former president of Adie International, the biggest micro-finance institution (MFI) in Western Europe.

"And it's important to bring it back again because in fact the economy is changing from an industrial type of economy towards a service-based economy. Of course you can't develop industry in small production units but you can do it for services, and then microcredit becomes really important."

Originally developed by Nobel Prize-winning Bangladeshi economist Muhammad Yunus, who founded his pioneering Grameen Bank in the 1970s, micro-lending has become a global phenomenon.

But it has been slow to take off in Europe where regulations don't favour MFIs.

"Europe has too many barriers, often well intentioned, to the development of small-scale entrepreneurship," said David Syed, a senior partner at law firm Orrick who has advised the United Nations on microcredit.

"I would very much like to see the harmonisation of rules governing microcredit to promote a single and simple regulatory framework which protects the purpose of microcredit as a tool to assist the most challenged layers of our population to come out of poverty through productive means."

That goal is reflected in the work of 20 law firms brought together by TrustLaw for a major study on the regulatory obstacles to microcredit across the EU's 27 member states.

Led by law firms Orrick and Latham & Watkins, the consortium has poured hundreds of thousands of dollars of pro bono labour into a country-by-country report to be published by TrustLaw later this year.

All the firms are members of the Foundation's TrustLaw Connect service, which matches charities and social enterprises needing free legal help with lawyers worldwide who are willing to offer it.

Paris-based Adie plans to take the report to the European Commission in November to advocate for sweeping changes to regulations across Europe.

MONOPOLY ON LENDING

The European Commission estimates there are some 18 million micro-enterprises in member states, employing 37.5 million people or about 30 percent of the overall workforce. Micro-enterprises contribute 1.1 trillion euros ($1.6 trillion) to the European economy.

A micro-enterprise is defined as a company employing fewer than 10 people, while microcredit is a loan of less than 25,000 euros ($36,000).

Advocates of regulatory change point to the European Commission's new 10-year plan to boost economic growth and create jobs, known as Europe 2020, as an opportunity to integrate microcredit into EU priorities.

Among the reforms MFI are calling for, Adie's Nowak said it was vital to break monopolies on lending. In Germany, for example, only banks or specific financial institutions can grant loans, meaning MFIs can only act as agents.

"The challenge is not to enter into competition with banks," she said. "It's rather to be a sort of entry point for people who do not have access to banks into the banking sector."

She called for a softening of usury rules capping interest rates on small loans, arguing that existing rates were "too low to make the system sustainable" because MFIs are unable to recover real costs.

Austria, Denmark, Finland, Germany, Hungary, Italy, Poland, Portugal, Romania, Spain and Sweden all have usury rules.

Nowak said other countries should follow France's example by allowing MFIs to borrow from banks for the purposes of on-lending to micro-enterprises. Throughout much of Europe, MFIs can only lend out of their own equity.

The TrustLaw report details a catalogue of other obstacles facing micro-enterprises including complex registration procedures for the self-employed, few tax breaks and little exemption from social insurance charges.

It also notes the lack of a clear definition of the "start-up period" during which micro-entrepreneurs can still receive unemployment benefits while businesses get off the ground. In most countries, allowances stop as soon as businesses are set up.

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The law firms involved in the study were Orrick; Latham & Watkins; Eisenberger& Herzog; UGGC & Associés Brussels; Djingov, Gouginski, Kyutchukov & Velichkov, Ioannides Demetriou LLC Cyprus, Balcar Polansky Eversheds, Gorrissen Federspiel Copenhagen, Advokatu birojs VARUL, Dittmar & Indrenius, Szecskay Attorneys at Law, Budapest, A&L Goodbody, Kleyr Grasso Associés, Zammit & Associates, Holland Van Gijzen, General Electric in-house legal team, Morais Leitão, Galvão Teles, Soares da Silva & Associados, DLA Piper Dinu SCA, Wolf Theiss.

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