Methodology on assessment of financial risk in uncertainty environments for micro credits aiming at entrepreneurs and SMEs.
Within the framework of a partnership with the Province of Burgos, CEEI offers business microcredit to micro entrepreneurs and small enterprises located in rural areas. Following its involvement in an Interreg project called DIFASS, CEEI Burgos developed an ad hoc risk assessment methodology. Implemented and tested for over 5 years, the methodology allows CEEI Burgos to serve rural entrepreneurs without asking collateral keeping a high quality portfolio with 98,30% of survival rate of the projects funded.
Business microloans offered are up to EUR 25,000 (including EUR 5,000 of working capital) and have a 4 years maximum duration including an optional grace period of 6 months. The interest rates range from 1,5% to 3% with no other fees charged and no guarantee is required. On one hand this last feature supports the financial inclusion of rural microenterprises, but on the other, if it is not backed up by a sound risk assessment methodology, it can put at stake the sustainability of the microcredit institution in case of defaults. In order to keep a high portfolio quality, CEEI Burgos developed a risk assessment methodology that follows a comprehensive approach based on the combination of a wide range of evaluation techniques (including risk ratio, structural operational analysis, credit officer assessment and negative credit record). The methodology has been tested and fine-tuned on the specific features of rural entrepreneurs taking into consideration the local context.
CEEI-Burgos currently employs 6 staff members counting on a diversified talent pool. Starting with a public-private mixed funding scheme, currently it is formed by the following partners: City Council of Burgos, Provincial Government of Burgos and the Federation of Burgos Managers Associations.
Evidence of success
From January 2013 until June 2017, 120 applications were received of which 59 were approved for a total amount of EUR 1,097,354. The survival rate of the financed projects is 98,30%, being 89 jobs created and 81 consolidated. 41,53% of them were start-ups and 58,18% other types of beneficiaries such as selfemployed. Just 10% of the loans are requested for working capital; the rest fund fixed assets. The non-performing portfolio (1,7% as of June 2017) stresses the efficiency of the methodology.
Potential for learning or transfer
This product has maintained itself in the long run since it addresses a specific market niche. The practices are regularly reviewed and there is an intention to include every economic sector to attract and retain young people in rural areas. Entrepreneurs are also welcome to participate in the business incubator when they need further advice or guidance. This close relationship with the beneficiary is a main factor in the success of the program. Sound risk management ensures the long-term sustainability of the institution and the reuse of the capital reimbursed to disburse new loans.
As the methodology has been already tested and implemented, it can be easily transferred and replicated in other communities and environments.