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The pilot phase testing the European Code of Good Conduct for microcredit provision with some microcredit providers has come to an end in April 2017. This test phase has allowed some conclusions to be drawn in order to better meet the needs of the microcredit market in Europe.

  • Revision of the APR clause:

The networks have voiced some concerns about the APR clause as there’s no clear definition of APR calculation for business loans in Europe. This may be a source of abuse as unscrupulous lenders could define the APR at their own discretion.

In spite of the fact that most MFIs that were evaluated during the pilot phase did not have any major problems with disclosing the APR, it has been decided to revise the APR clause in order to bring the Code better in line with realities of the market for other MFIs that might follow. The clause 1.2 of the Code of Good Conduct now reads as follows:

“Microcredit providers will disclose the cost of borrowing in a credit agreement as the Total Cost of Borrowing. This clause has been identified as a priority clause because disclosing the total cost of borrowing is crucial in enabling the customer to make informed financial decisions. The Total Cost of Borrowing (TCB) is the total charge for taking on a debt obligation (loan) that can involve interest payments and other financing fees to be paid by the customer and known to the lender at the time of disbursing the loan. TCB is expressed in value terms. TCB should be shown in offer letters, fact sheets and other pre-contractual documents as well as the actual loan agreements.”

It goes without saying that MFIs that disclose the APR are still in compliance with the Code as this practice is considered as more challenging than the total cost of borrowing.

⇒ The grace period to comply with the ECoGc has been extended from 18 months to 36 months for greenfield financial intermediaries. A greenfield financial intermediary has been defined as an intermediary that has an operating history of less than 3 years.

⇒ If after a first EaSI agreement (EaSI guarantee or EaSI capacity building), compliance with the code is not achieved within the deadline, access to any further EaSI agreement is restricted. (For any further details please ask your contact at EIF.)

  • Revision of the Code: the sector has its say

In order to adapt the Code to the realities of the market and to avoid any damages that could be caused to the sector, the Code can be revised on an ad-hoc basis. For instance, for an urgent case like the APR clause, the Code Steering Group in which the sector is represented by EMN and MFC can change a clause ad hoc.

Furthermore, in order to adapt the Code to developments in the microfinance world over time, the Commission would like to consult the sector from time to time as it had done for developing the Code in the first place.  A consultation on the Code is planned for 2018. Following this consultation, a decision will be taken by the Code Steering Group involving both EMN and MFC.

  • The European Code of Good Conduct Steering Group which has been appointed to take decisions related to the methodology and the implementation of the Code has separated its two functions as follows:

⇒ First it is tackling issues related to the award of compliance with the Code by microcredit providers. The networks have no role here to avoid any conflicts of interest.

⇒ Second, it is addressing matters related to the update of the Code or the methodology for the Code implementation. EMN and MFC now have voting rights within this function.