The environment for Microfinance in the United Kingdom

Francesca Mazzieri, MBA MIP                           Isabella Brianza
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The community financial sector gives financing to the start-ups. In United Kingdom there is a population of 61 million of inhabitants and among these the 19% are rural. The GDP per capita is €25700 and there are 26 SMEs per one thousand inhabitants. From 2007 to 2008, the GDP increased of 0,7%. The Microfinance is an urban, not rural, phenomenon. The informal sector weighs on GDP for 12.5%.

In United Kingdom the SMEs are 95% of the total number of enterprises. There are not rules for the loan to enterprises. The Community Development Finance Associations provide the consumer with credit to avoid too high interest rates. Some forms of incorporation require certain conditions by registration with the Financial Services Authority. CDFIs are very flexible and much appreciated.

The microfinance is condensed on the credit market (CDFI). There are 38 organizations offering microfinance products, and 25 of them have a portfolio with 75% of activities of microfinance. There are no numbers about the demand in United Kingdom.

In UK the main concentration is in England, in Northern Ireland there is a governmental agency that allows loans. In each region of England there is a different concentration of institutions. Microfinance needs better marketing and communication activities.

The market is dominated by 4 major commercial banks; there are some good local relationships, but not systematic. The insurance sector is not developed, the product can be offered as a part of personal loan programmes. There are 4 MFIs accredited for state guarantee scheme, but reforms reduced coverage, that

The market of microcredit in UK is the personal lending and business microcredit to people rejected by bank. The average loan is £8,500, with a min. loans £500 and max loans for MFIs around £15k. The average interest rate is fixed at 13.4% (5.6-22%) or variable at ca 5.8% over base rate (3.5-10%).

In UK the microcredit portfolio is stagnating, with fluctuations and decreasing. The outstanding portfolio is £10.4m (1252 loans) and the disbursed amount is £25m for 3691 loans (ca 2003-2007), av. £6773. There are 2646 clients overall (including non-MFI clients). The retention rate is not available.

In UK there are unsecured loans without collateral: over 82% of loans. Loans secured against personal guarantee are for some 100%. There are some experiments with peer group lending.

The monitoring procedures are the repayment record, the personal visits, sometimes coaching programmes. The credit history will be checked but not exclusionary criteria.

The portfolio at risk (28 responses) is 22% (no split 30 days/90 days). The write-offs are ca 13% (27 respondents, range 0%-28%). About the refinancing and rescheduling there are insufficient data.

The operational self-sufficiency has an average of 8.5% with one organisation at 40%. Some CDFIs indicate that they want to be self-sufficient in 4-8 years. No data on financial self-sufficiency.

The Business Development Services are very few formal. Vast majority refers to business advice agencies. Some compulsory programmes in house.

The challenges are funds for operational costs, funds for lending, institutional capacity (staff), and very little government support. The solutions will be the market segmentation from banking sector, the alignment with microfinance movement in European countries for lobbying, and revision of insistence on full financial sustainability.