Micro-Lending - A Case for Regulation
Most micro-lending organizations, in most EU countries, claim that banking regulation creates barriers to banking services delivered by non-banks. This paper investigates the legal situation of micro-lending in seven EU member states and the impact of banking legislation on micro-lending.
Outlining the key characteristics of the micro-lending environment in these seven nations, the paper notes that:
- Micro-lenders are often assumed to be small, and acknowledged as non-profit institutions;
- Micro-lending largely focuses on the local economy;
- Micro-lending is often less a form of banking than a social contribution;
- Inappropriate products and psychological barriers are the main causes for lack of access to credit for start-ups.
The European banking regulation landscape projects a diffused picture. While European banking directives do not prohibit the micro-lending functions, some countries have regulations on lending in general, with the exemptions presenting an even more scattered picture. These countries adopt three broad approaches:
- The market approach - the liberal states have opened the financial sector to private participations;
- The welfare state approach - significant State involvement in banking and social lending;
- The social lending approach - social lending supported officially and linked to non-profit and employment.
The paper further notes that:
- To understand the social effects of the existing banking legislation, one has to understand if the need for micro-lending stems from under-developed or over-developed banking in the particular country;
- After such an investigation, there is a need to create separate strategies for under-banked and over-banked areas.
In conclusion, it makes the following remarks and recommendations:
- Micro-lending is not banking but a social policy activity, and hence, should not be covered by banking legislation;
- Micro-lenders should not be treated as individuals but as legal entities;
- Any institution able and willing to fulfill the requisite criteria should be allowed to engage in micro-lending;
- For areas not covered by banking, the EU should provide exemptions to the banking directives, favoring small entities.