With this report Counter Balance takes a closer look into the microfinance activities of the European Investment Bank, a relatively new sector for the bank. While the EIB scores better than average on some indicators, it does not manage to escape the microfinance trap: social performance is generally subordinated to the goal of financial sustainability.
Main critiques are:
- Lack of strategy and vision: just follow the markets
- Especially in countries with limited capital markets the bank is involved investment vehicles rather than in reaching out to the poor
- Accountability chains are long and obscure
- Aiming at low hanging fruits not at those most in need
- Insufficient portfolio management
Microfinance has been for decades the darling of international donors, development financial institutions and multilateral agencies.
The roots of the success of microfinance can be traced back until the ‘80s and coincides with the rise of liberal ideas in Western economies. The idea that microcredit could defeat poverty while promoting a market based economy of small scale entrepreneurs had in fact a major appeal on the donor community. Only some experiences rejected a pure market logic and tried to develop alternative banking models for reaching out to the poor.
Based on this belief, Western governments, through their financial arms, have been pouring funds into local MFIs in emerging markets for over three decades, turning a niche sector into a multibillion dollar business. New entrants have progressively reshaped the perimeter of this industry, which has expanded into new business such as microinsurance, mobile banking, electronic billing, etc.
With this development also the underlying premise shifted. Microfinance is no longer solely regarded as a tool to get people out of poverty. The question how to maximize profits deriving from microfinancing activities became at least equally important. It is in this context we should see recent events such as the financial crash in 2008, the Andhra Pradesh scandal in late 2010 and the recent repayment crisis in Morocco, Bosnia, Pakistan and Ecuador.
It is also in this context that the European Investment Bank started – as one of the latest entrants – its microfinance activities. Although its portfolio still represents a very small fraction of the total budget, it has been growingly steadily through the years. Since the first operations in Morocco, back in 2003, the average deal size has been increasing constantly and is now expected to top 10 to 50 million dollars.
Download the full report: Is EIB money going to the poorest?