This summary provides an outline of the key features of the European Code of Good Conduct for Microcredit Provision published by the European Commission in 2011.

Background

In late 2011, the European Commission (the “Commission”) published its European Code of Good Conduct for Microcredit Providers (the “Code”) with a view to enhancing good practice and engendering sound governance and management in the EU microcredit sector.

The Commission has already looked closely at the much broader area of microfinance (for example, through the “European Microfinance Network”, the “European Progress Microfinance Facility” and the “Joint Action to Support Microfinance Institutions”) and has now turned its attention to the specific area of microcredit. The Code has therefore been developed as part of the Commission's overall initiative to reflect and promote best practices across the EU microcredit sector in the context of a market that is:

(i) young and growing with considerable potential; but

(ii) largely non-homogeneous due to the disparity of the legal and regulatory frameworks for microfinance provision across EU Member States and the diversity of microfinance providers that exist in the marketplace.

The stated aim of the Commission in publishing the Code is to “support the [microcredit] sector in facing the challenges of accessing long-term finance, maintaining and raising the quality of services and moving towards sustainability”.

Executive Summary

The aims of the Code can be summarised as follows:

(i) to establish a unifying set of expectations and standards in respect of management, governance, risk management, reporting and consumer and investor relations that are common to the microcredit sector across the EU.

(ii) to set standards that complement the existing regulations that apply to microcredit providers across the EU.

(iii) to give customers of microcredit a tool to ensure they are tested and treated in a fair and ethical way.

(iv) to give investors and funders a mechanism by which they can obtain comfort that the sector operates with transparency and a set of reporting standards common to all microcredit providers across the EU.

(v) to give regulators assurance that the sector will operate according to sound business practices and principles with an established code of governance. 

Which institutions are covered?

The Code is primarily designed to apply to non-bank microcredit providers that make loans of up to €25,000 to micro-entrepreneurs or self-employed persons.

However, in the EU, microcredit providers are a diverse mix of institutions with microloans being provided by financial institutions, such as commercial banks, savings banks, cooperative banks and public banks, as well as a number of non-bank entities, such as microfinance institutions, foundations, credit unions, charities, non-governmental organisations and others.

Given this level of diversity of microcredit providers, the Code acknowledges that not all provisions can (or should) be applied equally to all providers and, where possible, the Commission has reflected this in the drafting of the Code.

Key Provisions

The key provisions of the Code are split into five sections covering the following areas of business practice:

(i) Customer and investor relations;

(ii) Governance;

(iii) Risk management;

(iv) Reporting standards; and

(v) Management information systems.

The provisions of the Code are also split into categories indicating both their ‘difficulty (of implementation)’ and ‘priority’. This affords providers of microcredit the ability to assess how they should direct their efforts in ensuring compliance as quickly and efficaciously as possible whilst flagging those areas that may cause a significant degree of work from an operational perspective in order to meet the stated objective in the Code.

1.  Customer and investor relations:

The Code states that “the well-being of customers is intimately linked to the missions of microcredit providers to combat poverty and social and financial exclusion, whilst public and private investors are increasingly important in the funding of the sector”. As a result, clear guidance as to how customer and investor relations are handled by microcredit providers is very important. The main emphasis of this part of the Code is to ensure fair and transparent lending processes, customer rights of redress, avoidance of customer over-indebtedness, protection of customer data and transparency for investors.

2.  Governance:

The Code identifies “strong and accountable governance structures” as being of great importance in microcredit institutions. Key elements of this section of the Code relate to the requirement for business planning by microcredit institutions, the role and responsibilities of the board of directors of microcredit institutions and the requirement for external audits. 

3.  Risk Management:

The Code is unequivocal about the fact that microcredit institutions must have (a) robust systems and procedures in place to identify, assess and prioritise risk, (b) controls to detect and prevent undesirable lending behaviours, and (c) internal audit functions. This is intended to address the significant number of risks microcredit providers face to their financial viability and long term development due to the nature of the market in which they operate.

4.  Reporting Standards:

The Commission notes that, more widely in financial markets, the consensus is increasingly that a greater degree of public disclosure and transparency is the best way of promoting better use of public and private funding and greater market discipline. This part of the Code therefore sets out a series of common standards for the reporting and disclosure of social and financial performance indicators by microcredit institutions.

5. Management information systems:

Common standards for the management information systems of microcredit providers are set out in this section of the Code with a view to enabling microcredit institutions to capture information effectively and serve their customers with greater efficiency and reliability.

Concluding Remarks

The Code appears to have had a positive response in the microfinance market. Its development in consultation with a wide variety of participants and stakeholders in the microcredit market and drawing upon the experiences of the European Microfinance Network, the Microfinance Centre and the Community Development Finance Association has led to a specifically tailored and user-friendly series of standards where much of what is stated is not necessarily intended to be new to stakeholders doing business in the microfinance sector.

Its implementation on a voluntary basis ensures that it does not cut across the specific legal and regulatory requirements of each individual EU Member State but that it does present a useful overlay to those requirements as to matters of best practice.