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European Microlending Regulations: Everything You Should Know

As the past year has been dominated by words like pandemic, mask, test, virus, vaccine and lockdown, it’s easy to see how businesses around the world lost focus, direction and went into panic mode. 

In an industry like microlending, that was already trying its best to overcome its own challenges, 2020 was not kind at all. The entire business landscape was flipped on its head so things like the European Microlending Regulations went almost unnoticed. 

Today we will go through an overview of these regulations in an attempt to recenter and refocus all interested parties. 2021 will hopefully be the year when everything goes back to normal and these regulations will prove to be necessary. 

More specifically, we will look at the regulations regarding non-bank MFIs in Europe. Before doing so, it’s important to define microfinance in official terms. 

According to a European Commision proposal back in 2018 “microfinance includes guarantees, microcredit, equity and quasi-equity, coupled with accompanying business development services such as in the form of individual counselling, training and mentoring, extended to persons and micro-enterprises that experience difficulties accessing credit for the purpose of professional and/or revenue-generating activities.”

Now that we have the understanding of what microfinance actually is it becomes much easier to categorize the different use-cases for MFIs regarding regulation. 

Countries With Existing National Microlending Legislation

In this use case, countries either introduced specific regulation for MFIs or placed microcredit as one of the products listed in the non-bank financial institution NBFI regulation. 

What’s interesting to see is that the legislation differs from country to country. In France, Italy, Kosovo, Bosnia and Herzegovina and Portugal, the legislation specifically defines the scope for microcredit provision and introduces a distinct category for non-bank MFIs. 

In the case of Romania and Montenegro, microcredit is simply a mention in the general NBFI regulation with no specific provision for microlending providers. 

In both use-cases the non-bank MFI supervisory body is the National Bank and none of the non- bank MFIs in these countries are allowed to take deposits. Talking of similarities and differences, the countries with existing national microlending legislation are usually different in three main categories: legal type, minimum capital requirements and authorized funding options.

In Montenegro, the legal non-bank lenders qualified to offer microcredit are joint-stock companies and limited liability companies with a minimum capital of €125.000. Conversely, in Kosovo, the legal entities allowed to issue microloans are MFI commercial entities (joint- stock companies), NGO MFIs (not-for-profit) and NBFIs (for-profit) with a minimum capital of €200.000.

In countries where microcredit is defined to great lengths, MFIs offer both business and personal microcredit and the features are defined by the internal policy of the MFIs in accordance with existing legislation. In these cases, taking into consideration the far-reaching scope of the microcredit definition, the main reference point is the maximum loan amount. The same maximum threshold is €25.000 which is defined by the EU governing body.  

Countries With No Microcredit Legislation, Where Loans Are Allowed: 

This is a use case regarding the following countries: Belgium, Bulgaria, Finland, Hungary, Ireland, Luxembourg, North Macedonia, Spain, Sweden, the Netherlands and UK. In these countries there is no explicit microcredit legislation but non-bank lenders can issue microloans as long as they do not take deposits. These loans can be business or personal loans. 

In Belgium, Ireland, Luxembourg, Spain, Sweden and the UK, non-bank lenders operate under the national consumer law, although the loans disbursed are meant to finance enterprises.

In the Netherlands, Spain, Sweden and Ireland, the flexibility of the regulation opens the gates for crowdfunding platforms and fintechs to operate in the market. Finland is the only country with a law on crowdfunding, under which non-bank MFIs can operate.

Recap

As you can see, there are many moving parts to these regulations. You can view the rest of the use-cases and a more detailed breakdown in the official paper released by the European Microfinance Network (EMN). Our blog will keep bringing the latest news, trends and industry insights.


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