Support, co-operation and learning

In recent years there has been growing interest in micro-lending among bankers, governments and those involved in area regeneration initiatives or working with unemployed people. Micro-lending involves issuing small loans to micro-enterprises who are considered to be a very high risk and/or very costly to serve in commercial banking terms. Definitions of micro-lending vary, usually according to the size of the businesses that are eligible for loans and the amount of money they can borrow. For the purposes of this study micro-lending is defined as loans of between 1,000 and 25,000 EUROs to people running business with less than five employees.

Micro-entrepreneurs face a number of significant, and often insurmountable, obstacles in gaining access to appropriate finance. Similar issues were raised by entrepreneurs in all four of the countries involved in the research, although the extent of the problems they encountered varied between the countries. The main problems experienced by micro-entrepreneurs fell into three categories:

• psychological obstacles;
• practical obstacles;
• inappropriate loan products.

Despite the difficulties of making credit available to entrepreneurs, experience shows that many can, with appropriate finance and support, establish viable businesses and repay loans.

Micro-lending organisations can help bridge the finance gap by lending to micro-enterprises who cannot get a loan from a bank. However, micro-lenders - using the techniques they have developed to enable them to lend in such a risky market - could also help banks learn how to distinguish between micro-enterprises that are likely to be successful and those that are not. They can also share the experience they have developed in lending to these customers, and the loan products and packages of support that are most appropriate in this market. In doing this, drawing on the experience of micro-lenders could help banks to extend their loan portfolios to include micro-enterprises with the potential to succeed.

It is important to recognise, however, that just as it is not always appropriate for micro-lenders to lend instead of banks, neither would we advocate banks lending in this market instead of micro-lenders. In fact, there is a whole range of ways that banks can be involved with micro-lenders and, further, can benefit from these relationships. Evidence suggests that these partnerships can bring valuable returns to banks - both financial and non-financial. This report aims to demonstrate the main forms of co-operation between banks and micro-lenders and help banks to determine what is most suitable for them and their clients.