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Finance

Germany sets example for microcredits in advanced economies

Small loans to start-up businesses have helped many people in developing countries to grow out of poverty. As microcredit financing becomes popular in advanced economies, its downsides raise some questions.

Sylvia Höhentinger doesn't exactly fit the image of the young, upwardly mobile business person that's usually associated with start-up founders. In fact, she already runs a small mail delivery service, and this has made her take a pragmatic approach to doing business.

Borrowing the easy way

While delivering mail, she noticed an increasing number of photovoltaic installations appearing on the roofs of houses along her daily route.

"I was wondering how people clean all those solar panels, and I began to research what type of machine would be needed to do this on a professional basis," she told DW.

Sylvia Höhentinger 
Photo: Private

Höhentinger's solar panel cleaning start-up gives her every reason to smile

Höhentinger learned that a solar panel cleaning machine costs about 2,000 euros ($2,753) - a sum too small for her bank to bother setting up a loan for. But a regional German microfinance lender took the opportunity and granted her the small loan she requested. The bureaucracy involved was "easily handled" she said, and after she had signed the contract the funding arrived within just two weeks.

Lending goes new ways

Germany's Mikrokreditfonds, or microcredit fund, was launched in 2010 with financing provided by the German government and the European Union. Demand for the fund's small loans was already high during the first year of its existence and has since multiplied. Boosted by additional startup funding from the German Labor Agency, the financing was originally meant to encourage mainly long-term unemployed people to launch a business of their own.

Until then, jobless Germans seeking to get into business for themselves often met with reluctance on the part of commercial banks, which still consider small-scale lending as unprofitable and laden with risk.

Before 2010, Germany used to be a developing country with regard to microfinancing, according to Jörg Schoolmann from the German Microfinance Institute, which advises microcredit lenders. But this has changed, he told DW, because more than 60 financial institutions now offer small loans of between 3,000 euros and 20,000 euros on the German market.

"With about 5,000 microcredit loans being granted a year, Germany is still lagging behind," Schoolmann said, but he added that the slow growth meant lending structures expanded in an organized fashion.

EU micro-lenders between boom and bust

According to a survey commissioned by the US business daily "The Wall Street Journal," microcredit lending in Europe grew by a third between 2008 and 2011. In Spain alone, the financing tool was used by 75,000 businesses over that period, the paper said.

Muhammad Yunus
MANDEL NGAN/AFP/Getty Images

Yunus won the Nobel Prize for providing small loans to people too poor to qualify for other loans

"The Wall Street Journal" also wrote that the finance instrument had notably helped small business owners overcome the country's severe economic crisis - just as microcredit founder Muhammad Yunus and his Grameen Bank had originally intended it.

The success of microcredit lenders in Spain and France remained limited because the magnitude of the crisis was overwhelming, Schoolmann said. That is why many such lenders were facing bankruptcy due to a rising number of insolvencies among borrowers, he added.

Moreover, interest rates of between 30 percent and 60 percent for microcredits in liberalized markets such as England and the Czech Republic were also having adverse consequences, Schoolmann noted.

"In England, this has led to the massive demise of microcredit lenders from the market," he told DW. But in Germany, doubts also remained about the financing tool as it was still subsidized with state funding.

"Interest rates of about 10 percent do not cover the costs for lending small sums," he said.

Small loans unsuitable for big projects

For start-up founder Johann Schorr, microfinancing was not an alternative to get his business, Hub Munich, up and running. The 29-year-old wanted to provide shared office space for start-ups in the social sector and hopes to have his enterprise fully established by March next year.

"We want to rent out office space for people working in social projects," he told DW. Working space, which he called co-working desks, are loosely arranged on a sprawling floor in an office building, giving his business tenants the chance to interact and collaborate.

Interior view of HUB Munich
Photo: HUB Munich

The Hub Munich was too large of an undertaking for microfinancing

For that he needed start-up capital to the tune of half a million euros, which he said he would have never been able to raise through microfunding. But he used small-scale support of a different kind, securing bank guarantees from friends and relatives, which convinced a major bank to grant him the loan he needed.

Nevertheless, microcredit remained a viable alternative for startup businesses insisted, Alexander Kritikos. The startup consultant from the Institute for the German Economy (DIW) told DW that time was a factor to be reckoned with.

"Normal loans, even from state-owned banks, are granted only under certain conditions and require a lot of time-consuming paperwork," he said. Therefore, the time saved with microfinancing would often compensate the higher interest rates borrowers pay for it.

Höhentinger said funding her business plan with microcredit had fully materialized. The solar panel cleaning service she had set up with a nephew and a friend had meanwhile developed into a robust business as orders had tripled from initially 80 orders a year.

She told DW that the 300 to 400 euros she earned from a single order enabled her to repay the microcredit within just a year. Being the first licensed solar panel cleaner in southern Germany, she said she would do it the same way all over again, as there was no simpler and faster way to secure startup funding.

DW.DE