Summary country report Germany

Micro Lending and Banking Supervision

The activities of credit institutions are subject to banking regulation and supervision. The regulatory obligations imposed on credit institutions are laid down in the German Banking Act (Kreditwesengesetz) as amended in 1998. Section 32(1) of the Banking Act requires institutions to obtain a written authorisation before engaging in banking activities. Such authorisations are granted by the Bundesaufsichtsamt für das Kreditwesen (BAKred), which is the competent supervisory authority. The requirements an applicant must meet in order to obtain an authorisation (e.g. minimum initial capital, reputation and qualifications of management personnel) broadly correspond to those prescribed by EC Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions. After obtaining an authorisation to engage in banking activities, a credit institution is subject to further and ongoing supervision. The ratio of own funds to the risk-adjusted value of assets must not fall below 8% and the institution must also satisfy liquidity requirements. Supervision is not restricted to the financial affairs of the institution, it also addresses organisational issues such as the propriety of the institution's management structure, including the adequacy and application of the mandatory risk detection and control mechanisms.

The far-reaching and cost-intensive consequences of compliance with the obligations imposed by the Banking Act raise the question of whether organisations involved in micro lending projects ("micro lending organisations") fall within the scope of the Banking Act.

An enterprise is subject to regulation under the Banking Act if it qualifies either as a credit institution within the definition of section 1(1) of the Act, or as a financial services institution under section 1(1a). Credit institutions are defined as enterprises which engage in banking activities, either on a for-profit basis, or on a scale that requires a sophisticated business organisation. The transactions defined as "banking activities" by the second paragraph of section 1(1) of the Act include deposit-taking, making loans and providing guaranties. Micro lending organisations may qualify as credit institutions to the extent that they conduct these activities in the course of a micro lending project.

As the intention to make a profit matters only in cases where the scale of business does not call for a sophisticated business organisation, the term credit institution includes non-profit organisations which conduct banking activities on a scale that exceeds the sophistication threshold. Similarly, a micro lending organisation may not avoid being defined as a credit institution by arguing that its activities are intended to serve and improve economic and social welfare in the public interest. The theory that deposit-taking transactions which are designed and intended to further social welfare should be exempt from the scope of the Banking Act once had some support amongst judicial and academic authorities, but has now become obsolete, largely as a result of a change in the legislative basis.

A micro lending organisation will be considered to conduct the business of deposit-taking if it accepts funds from the public in order to finance its (lending) activities. It does not constitute deposit-taking, however, if the organisation receives equity or quasi-equity funds (risk capital); nor does the borrowing of funds from a parent organisation count as deposit-taking. Therefore, a micro lending organisation would be found to conduct the business of deposit-taking if it received funds from third parties or from its borrowers on the basis of loan agreements that constituted the organisation's obligation to fully repay the received sum. But given the fact that most micro lending organisations (in Germany) do not work profitably and depend on subsidies received from their public and private parent organisations, the need for the authorisation of the issue of debt instruments to the public by micro lending organisations does not seem to be a realistic scenario. A more customary practice of micro lending organisations is the taking of funds from current or prospective borrowers as deposits. Such a practice will qualify as deposit-taking in the sense of section 1(1) Banking Act and may therefore trigger the obligation to apply for an authorisation. Moreover, if the micro lending project calls for a mandatory deposit by the (prospective) borrowers in around 50% or more of the organisation's clients, deposit-taking is strictly prohibited (section 3 number 2 Banking Act): no one, not even banks in possession of a banking license (authorisation), may run such a program!

The granting of money loans to micro entrepreneurial borrowers is considered lending business and therefore a banking activity that requires authorisation by the BAKred. It is irrelevant whether or not the organisation simultaneously takes deposits or engages in any other banking activity: under section 1(1) Banking Act, conducting any of the listed banking activities requires authorisation and supervision. Attempts have been made to challenge this rule by arguing that the only reason for the supervision of lending is the need to ensure that the lender is able to meet its obligations towards depositors. It follows from this that an enterprise conducting lending business without taking deposits should be exempt from supervision. However, this argument has not gained acceptance. It was dismissed by the administrative court of Berlin in 1997 and lacks support among legal academics. The rationale behind its rejection is based on the proposition that the policies of banking supervision are not limited to the protection of deposits, but also include the promotion of microeconomic ends, such as the functioning and stability of the lending sector which is an important capital provider for the entire economy.

Similarly, the provision of guarantees and sureties is subject to banking supervision even in cases where the guarantor does not engage in any further banking activity.

A micro lending organisation which accepts deposits, provides loans or guarantees will therefore qualify as a credit institution within the scope of section 1(1) Banking Act if it conducts these businesses on a scale that requires a sophisticated business organisation. For lending business, a sophisticated business organisation will be deemed necessary either if the lender grants more than 100 loans or has more than 20 loans with a total value of more than 1,000,000 DM outstanding. Correspondingly, for the business of guarantees, a professional business organisation is required if more than 100 guarantees have been provided, or more than 20 guarantees where the total liability amounts to more than 1,000,000 DM. If the organisation plans to engage both in the business of lending and of providing guarantees, the organisation becomes a credit institution if the number of guarantees and loans granted exceeds 100, or exceeds 20 if the total value of loans and guarantees is more than 1,000,000 DM.

Micro lending organisations which operate below the threshold of a "sophisticated business organisation" must nevertheless obtain a specific exemption from the BAKred from the application of most parts of the Banking Act. Such exemptions will be granted if the BAKred rules that the applicant enterprise "does not require supervision". This may still be the case if the scale of the business only slightly exceeds the above mentioned limits that normally trigger the need for supervision. It is unlikely that such a ruling would be obtained solely on the ground that the undertaking organisation pursues social ends in the general or public interest, although this may be taken into consideration if the scale of the business is relatively small.