On 6 September 2006, the Minister for the Treasury and Budget, Luc Frieden, and the President of the European Investment Bank, Philippe Maystadt, signed an agreement on cooperation in the field of microfinance. The Memorandum of Understanding they have concluded will enable the two parties to combine in a very practical way their efforts to combat poverty.

Microfinance is defined as the provision of small-scale financial services - such as savings, loans, insurance or other basic financial services - to poor or low-income customers who are excluded from the traditional banking system. These modest financial services help the beneficiaries to earn a daily living, carry out productive projects or set aside reserves to cope with the ups and downs of life. Recognised by the international community as a remarkably effective development tool, microfinance is a key component of the Luxembourg Government's development cooperation policy.

Under the Cotonou agreement, the European Investment Bank actively supports the microfinance and SME sector in the African, Caribbean and Pacific countries. Its wide range of operations includes the acquisition of participations in holding companies that aim to create or develop microfinance institutions, i.e. formal or semi-formal intermediaries offering retail financial services to micro-enterprises or small businesses. These investments give an important boost to the development of the private sector and economic growth in general. However, in order to ensure the sustainability of these ventures and to help microfinance institutions become both commercially and financially independent, it is vital to underpin the investments with parallel technical assistance and training projects.

The Finance Ministry makes EUR 500 000 available each year for technical assistance projects of this type, which are for the most part designed to provide key support in terms of accounting, administration and risk management, or the sound governance of microfinance institutions.

The agreement provides for the EIB to identify technical assistance projects that merit financing through its participation on the boards of directors of investment funds. On the EIB's recommendation, and following appraisal, the Finance Ministry will then finance the projects directly. Monitoring and evaluation will be carried out jointly.