EUROPEAN COMMISSION Employment, Social Affairs and Equal Opportunities DG DRAFT NOTE ON

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1 EUROPEAN COMMISSION Employment, Social Affairs and Equal Opportunities DG ESF, Monitoring of Corresponding National Policies I, Coordination DRAFT NOTE ON THE EUROPEAN PROGRESS MICROFINANCE FACILITY AND THE EUROPEAN SOCIAL FUND : POSSIBLE INTERACTIONS 1. Background The purpose of this note is to present the newly adopted European Progress Microfinance Facility (the facility) and to examine the possible interactions between the facility and the ESF. It examines in some details the possible application of the loan interest rebate. The proposal for a microfinance facility was announced in June 2009 as part of the Commission's response to the crisis. The package adopted by the Commission on 2 July 2009 consisted of 2 legislative proposals one to set up the Facility and the other to use money from the Progress programme to fund the Facility. Parliament and Council reached an agreement early 2010 and signed formally the text establishing the Facility on The legal base was published in the Official Journal on The Commission and the European Investment Fund (EIF, part of the EIB group) will sign two fiduciary management agreements (FMA) concerning the management of the Facility. Currently, the Commission and the EIF are in final negotiations on the terms of the first FMA. 2. Objective, budget and expected leverage The objective is to increase the availability and accessibility of microfinance for vulnerable groups (unemployed, disadvantaged people, young people, etc.) wanting to set up or further develop a micro enterprise (including self-employment). The agreed Union contribution to the Facility is 100 million ( ) consisting of the following elements: 60 million taken from the Progress programme 40 million taken from the margins of the budget At the launching of the proposal, the Commission estimated that the Union's contribution could be leveraged to more than 500 million in micro-credits. This 'leverage' is composed of different elements: Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2)

2 leverage generated by the products themselves. For instance it is estimated that every euro committed in guarantees could generate between 3 and 5 euro in micro-credit. revolving: the available funds could be used more than once during the total lifetime of the Facility (estimated at 8-10 years). attracting funding from third parties: EIB has already announced it would match the Union's contribution into the Facility (debt products part). Other international financial institutions could also join in at a later stage. 3. Products provided under the facility In order to increase the availability of micro-finance to the final beneficiaries the Facility will utilise the following products: Guarantees and risk-sharing, debt financing (loans), equity and quasi equity Negotiations with the European Investment Fund (EIF) continue on the products and how they will be used. These negotiations will culminate in two fiduciary management agreements (FMAs) signed by the Commission and the EIF. Guarantees and risk sharing The first agreement to be signed (April-May 2010) between the Commission and the EIF will be on guarantees for bank and non bank providers of microfinance. Guarantees are generally used to cover - against the risk of default - new portfolios of loans extended by microfinance providers to beneficiaries. The guarantees are mainly used by banks and non banks providers of microfinance. They cannot be used directly by beneficiaries. The EU budget assumes the risk, but the guarantees will be issued by the EIF on behalf of the Commission. The EIF issues an unconditional partial guarantee of the intermediary's portfolio of eligible loans. The Facility will pay the corresponding guarantee fee, including expected loss premium, and allocated capital remuneration. Such portfolio could consist of already granted outstanding loans on which no credit event (e.g. default or restructuring) has yet occurred or loans generated in the future. Debt products SICAV The second agreement between the Commission and the EIF will be on loans and equity products. The need for a second agreement is due to the desire of the European Investment Bank to participate in the Facility by becoming an investor in a collective investment scheme known as SICAV and registered under the Luxembourg law. The EIB announced in November 2009, that it will match the EU funding of the Facility. The EU budget will provide a capital of 75-80mn of the SICAV. 2

3 4. Selection of beneficiaries and capacity building The EIF will publish a call of expression of interest in the Official Journal and on the EIF website, the first one most likely in June 2010, inviting interested providers of microfinance in all Member States to apply. The financial intermediaries which would obtain funding from the EIF are expected to comply with standard banking requirements and have experience in the microfinance. The selection will be performed by the EIF. These intermediaries can lend on to micro-loan providers in their Member State or lend directly to the beneficiaries according to the selection criteria set out in the legal base (article 2 of the decision establishing the facility).. The building up and strengthening of the capacity of non-banking microfinance providers is considered crucial to reach out to those who are most remote from the conventional credit market. The Facility itself will not finance capacity building. Supporting capacity building of micro-finance providers is already possible through the JASMINE initiative run by the European Investment Bank and the Commission. The overall task of JASMINE is to help microfinance institutions to improve the quality of their operations, to expand and to become sustainable. The selected Microfinance institutions (MFIs)/Microcredit providers can benefit from a free-of charge evaluation / diagnosis of their activity, organisation and structure by an independent specialised team, followed by training on specific areas, with particular attention to the weaknesses observed during the evaluation process. 5. Interactions between the microfinance facility and the European Social Fund There are three possible interactions between the facility and the ESF: (1) The ESF can provide inter alia training and coaching for current and future microentrepreneurs as part of its core business or as part of specially designed operations for (micro-) entrepreneurs. (2) The Commission will set up a support scheme for those managing authorities that need advice on how to design specific operations to complement with non lending services the potential beneficiaries of the facility. This support scheme will be financed out of the EU level ESF technical assistance. (3) The ESF Regulation (1081/2006) provides for the possibility to offer interest rate rebates (art. 11). ESF managing authorities in MS may design specific operations for micro-entrepreneurs in order to cover (partially or entirely) the interest rate on the loans. This could increase the take-up of the Facility and reduce the financial burden of micro-entrepreneurs. According to article 11 of the ESF Regulation, the loan interest rebate (LIR) is a form of ESF assistance to beneficiaries. The interest is the fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal. The rate is dependent upon the time value of money, the credit risk of the borrower and the inflation rate. The rebate could take the form of a return of part of a payment or a deduction from a sum before payment. The option offered by article 11 of the ESF Regulation concerns only 3

4 the interest due on a loan and not the principal of the loan (the amount borrowed excluding interest). Managing authorities have the choice of developing an operation for granting LIR either in combination with the European Microfinance Facility (specific rebate support) or to help entrepreneurs who have obtained a loan for self-employment or business creation (general rebate support) from financial intermediaries without the help of the European Microfinance Facility (EMF). For both types of support, the first condition to be met by potential beneficiaries is that the project for which they have obtained a loan corresponds to the objectives, priorities and scope of the European Social Fund. The eligibility test of the decision establishing the facility is a duty of the financial intermediaries. ESF Managing authorities need to ensure that the LIR meets the requirements of the ESF Regulation irrespective of whether a beneficiary obtained a loan backed by the facility. Specific rebate support In this case, the LIR would be granted to borrowers (microenterprises employing less than 10 persons and individual entrepreneurs) who would have obtained a loan from a provider of microfinance funded by the European Investment Fund on the basis of the facility. Managing authorities and monitoring committees should take into account the eligibility rules of article 2 of the decision establishing the microfinance facility in designing the specific selection criteria of the LIR operations but these criteria should also be consistent with the ESF and Operational Programs objectives, scope and priorities. Managing authorities may decide to cover the LIR due entirely (100%) or partially (x basic points). Such a choice would imply a reimbursement on real expenditures evidenced by the loan amortization table which is part of the loan agreement signed between the borrower and the provider of microfinance. Such a table is usually produced by intermediaries and shows the interest rate due. In applying this option, managing authorities would need, inter alia, take into account whether the interest rate due is variable or fix as well as the schedule of reimbursements due against the deadlines applicable for payments under the ESF rules. An alternative choice would be to reduce the interest rate burden by providing beneficiaries with grants according to the modalities of article 11 (3), point (b) as amended by Regulation 396/2009 (lump sums or flat-rate cost based on standard scale of unit costs). Such an approach requires that managing authorities have a dialogue with the providers of microfinance in their countries or the beneficiaries to estimate the interest rate due on loans not exceeding EUR with different maturities. Using grants presents the advantage to reduce the administrative burden and supply beneficiaries with a comprehensive grant (package) to compensate part of the interest due but also to help them in the initial face of their entrepreneurial activities. Calculating the amount of this grant (package) would involve weighting its components (LIR, general support for entrepreneurs for training and coaching and other components) to satisfy the condition of costs "established in advance on the basis of a fair, equitable and verifiable calculation" (art. 11 3(b) of Regulation 1081/2006). In the cases of specific rebate support, the LIR should not be granted to financial intermediaries (providers of microfinance) as they will receive assistance from the Union financed by the facility. This is to avoid any risk of double funding prohibited by article 54(5) of Regulation 1083/20096 in cases of rebates distributed via the network of 4

5 financial intermediaries. In addition, providing beneficiaries with ESF sponsored LIR would increase the visibility of the Fund. General rebate support The general rebate support refers to LIR that can be extended to borrowers who obtained loans from financial intermediaries irrespective of the facility. In this case, loans for SME (loans that exceed 25000) may also benefit from LIR provided that they meet the criteria set by the managing authorities and monitoring committees and are fully in line with the provisions of the ESF Regulation and the Operational Programs. General rebate support may be granted to borrowers of financial intermediaries which do not participate in the facility. In this case, the financial intermediaries may be used to distribute the LIR by deducting it from the rate charged to the eligible beneficiary. Such a choice would imply to follow the appropriate EU and national public procurement and state aid rules in order to select the participating financial intermediaries. However, the design of such an option should duly take into account the provision of article 54(5) of Regulation 1083/ As there cannot be co-financing between the ESF and other Community financial instrument, a great deal of prudence should be paid to circumstances whereby the LIR, if distributed indirectly, is managed by financial intermediaries receiving Community financial support for example in the framework of the JEREMIE initiative and the Competitiveness and Innovation Programme (CIP). In order to avoid that providers of microfinance or of business loans increase their interest rates anticipating a specific ESF LIR operation, managing authorities may fix an upper limit of the rebate and refrain from disclosing it to financial intermediaries. Using an open competition between intermediaries responding to a public procurement procedure according to applicable national and EU rules is another way to keep the interest rate in reasonable range. 6. Reporting and communication activities The Commission will present annual reports on the implementation of the Facility to the European Parliament and the Council. The first report is due for April Besides the usual financial information, the EIF will collect information from the microfinance providers on the profile of the micro-entrepreneurs and their employees. At the start of the loan information will be gathered on gender, age, employment status educational attainment and (where allowed for by the applicable legislation) the belonging to a minority group and disability status. EIF will furthermore provide information on the default rates and the total employment created during the loan period. A dedicated website has been set up and will be developed further over the coming months: A leaflet on the Facility will become available in all languages by the end of May Further publicity will be organised around the signing of the first agreements concluded by the EIF (likely to be in September/October) Requests for further information can be sent to EMPL-MICROFINANCE@ec.europa.eu. 5

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