UN International Forum to Build Inclusive Financial Sectors
The International Forum to Build Inclusive Financial Sectors" was held on November 7- 9 in New York at the UN Headquarters and had diverse members of the microfinance community to celebrate the successes of the International Year of Micro credit 2005.
More than 500 representatives from over 100 countries gathered to debate how to dramatically increase the availability of financial services for poor and low-income people.
The goal of the Forum was to adopt an action plan for building inclusive financial sectors, bringing the world one step closer to achieving the Millennium Development Goals of poverty eradication. This concluding event of the International Year of Micro credit 2005 focused on how to move from the Year of Micro credit into a future where all people have access to the financial services they need.
Discussions centered on the changing profile of microfinance from charity to a profitable business opportunity that could benefit poor people, governments and investors alike. Through panels involving multinational and domestic financial institutions, the World Bank, IMF, Central Banks, private sector representatives, UN agencies and micro entrepreneurs, participants deliberated on concrete next steps to increase access to financial services for the estimated four billion people whose demands are currently unmet.
The Year of Microcredit 2005 achieved much towards generating financial sector growth, alleviating poverty and achieving the MDGs. The Year exemplified cooperation by UNCDF, UNDESA, UNDP, other UN agencies, the World Bank, IMF, Citibank, VISA, high level advisors and many others. The Year raised awareness of the importance of remittances as part of microfinance and generated public and private sector interest and involvement. This increased awareness was illustrated through G8, IMF, Data project, DFID and other recognitions. "Inclusive Financial Sectors" is now a commonly used phrase.
It is important to recognize that the Blue Book will be a key document but is not prescriptive. It will analyze why financial sectors are not currently inclusive and will serve as a reference point for governments and stakeholders, while serving as a platform for sharing best practices. Its only prescription is that access to financial services should be universal.
HRH Maxima described meeting many microentrepreneurs and the importance of financial empowerment of women and their families. Examples she encountered during the Year included microentrepreneurs becoming opinion leaders in their villages. Profitability is a critical next step for microfinance. Microfinance must be commercially viable in order to reach a sufficient number of clients like the women she met. Government and regulators are important supporters. Donors can also help support well developed systems. Remittance fees are often still far too high despite some recent lowerings. Financial services are as necessary as water and electricity to poor people.
Mr. Wolfowitz recognized the progress of microfinance and the remaining obstacles. Microfinance's key power is in helping microentrepreneurs move from daily survival to planning for the future. Microfinance underpins the MDGs and access to health care, education, nutrition and women's empowerment. His experiences in Andhra Pradesh, India this year reinforced these points. Microfinance's true power lies in continued access, not one off loans and, as such broader continued, financially sustainable access is critical. A sufficiently wide breadth of services and increased data tracking are also necessary. The "Doing Business" report is a good model. The Blue Book should serve a similar function and further development will be important. Other needs include supporting systems, increased retail capacity, better use of donor aid per CGAP's consensus on what constitutes good practice. Financial markets shouldn't be distorted.
This Forum builds on that task by focusing on issues related to building inclusive financial sectors.
There is a need to provide greater access to financial services. Access is limited by perceptions that this market is not profitable, costs are too high and an enabling environment doesn't exist. Regulations that allow consumer recourse and legal ramifications for non-payment can help make microfinance a viable enterprise. Further, technology can further reduce costs, thus enhancing sustainability.
Financial Sector Indicators and the Blue Book on Building Inclusive Financial Sectors
The Blue Book project guides how expanded access can be approached and accomplished. It was intended to provide a set of options that are based on experiences for developing countries. Key topics include the proper nature of government involvement, how affordability and sustainable interest rates can co-exist, How to promote consumer protection, How many financial institutes should exist and who should play which retail roles, Whether regulators will support access, How to fashion financial infrastructure such as credit records and how the government should support financial sectors.
The Data Project is also assembling quality data that become the base for future policy. UNCDF is building inclusive financial sectors by helping set base lines for financial sector assessment, creating a multi-stakeholder participatory process including center and local governments, working with countries to implement action plans and monitoring process. Focus on microfinance will enhance prospects of achieving the MDGs in sub-Saharan Africa.
The World Bank is developing financial sector data that links financial development and growth. The data will be used by the private sector to design economically viable services and will be used by policy makers to understand which financial services are most closely associated with poverty alleviation and growth. Defining access to financial services is more difficult than usage. It is important to monitor lead indicators that are regularly updated in order to create individual country databases at the household level. Data must be gathered through surveys of regulators, banks and MFIs so as to be comparable internationally.
Three issues contribute to the access problem: Poor people feel more comfortable in informal environments. False ideas exist that the poor aren't profitable or trustworthy. An enabling infrastructure doesn't exist with very limited political demand from poor people. To surmount these barriers, the poor must be educated. Legal changes will also make poor people more profitable. Repossession of collateral must become easier. Technology must be used to decrease costs. National ids for credit history purposes should be increased. Financial services to the poor must be expanded. Regulatory changes to make poor people profitable and to ensure safety and soundness of MFIs are needed. It is also important to enlist the middle class in poor areas. They are also often largely unbanked and, when they are targeted, it will lead to greater financial access for poor people.
Will the International Private Sector Transform the Landscape of Microfinance?
The Year of Microcredit Advisors group agrees that this industry nurtured by nonprofits must now become a for-profit, private sector industry to reach scale.
KFW is a German development bank that sees microfinance as a crucial part of development and sees their role as a linkage point between private sector and social/development work. Both are needed and can be linked.
ABN AMRO got involved because they have a responsibility and the numbers are here. They don't have full access to resources but can help facilitate governance structures with their systems and technology. They need assistance on a local level, understanding the markets, who the right partners are, what the local issues are, etc.
Microfinance cannot be sustainable without the private sector and the only way to build sustainable institutions on the ground is for many people to believe that they can make a living in these areas. As a historical analogy, private equity became important in the U.S. when major endowments and pension funds invested in the field. The best way for the field to develop is with strong private sector emphasis while recognizing there will always be a mixed objective.
Cemex was founded as a world leader in cement 50 years ago. They explored other opportunities in diversification and social responsibility and settled on microfinance because it offers a better life quality to marginalized people while creating a corporate identity in a new market. They later learned that it could also be a profitable business opportunity in itself. Cemex is also functioning effectively without a perfect regulatory system. They aren't going to wait for that system to be in place before getting involved.
Technology: Expanding the Outreach of Microfinance
Electronic payments contribute to a robust banking system, develop jobs and use technology to explore new markets. Technology helps deliver remittances at lower prices.
Vikram led an exercise in recalling the typical day of a loan officer seven years ago at SKS Microfinance. The loan officer awoke at 5am, picked up wads of cash, recorded transactions on huge papers, took the cash and collection sheet to the field, met with groups all day and then returned to offices to re-enter all information into ledgers. This became over 100,000 manual entries a year. Finding past errors was excruciating. Today, things are completely different because of their automated branch offices. This was costly - more than $250,000USD - but today they have some of the lowest costs of any MFI in the world. They average 6% vs. the 20% industry average, including 300% annual client growth. They also automated their loan meetings via a smartcard handheld pilot application, which represented tremendous cost savings. It saved costs and eliminates cash in the system. Future applications could include integration with VISA's payment system, biometric identification at local markets, cellphones used to verify transactions for illiterate clients, etc.
Technology is very important in remittances. Common standards are needed. Micro companies begin because ordinary people try to solve ordinary problems. This is how Cisco began; with the owners trying to communicate about walking their dog. Cisco became the largest market capitalized corporation in 2000. This happened because Cisco's founders could access capital. Cisco-like companies need to find new markets in order to grow or to come up with new products. For microfinance; Cost from intermediation is a challenge. Access is a challenge. Identity security is a challenge. The application of Moore's law should bode well for microfinance's application of technology to create more inclusive financial sectors.
The profit opportunity for technology and microfinance is just becoming evident. Other challenges include infrastructure limitations in developing areas. For instance, SKS's computers all require backup generators.
The Future of Access to Finance
Many highly successful microfinance institutions have successfully reached millions of people. Grameen and VRI in Indonesia that have millions of clients, but to increase access to a scale that reaches hundreds of millions or billions of clients, there will be al need to involve the private sector. The private sector has greater technical expertise and the capacity to mobilize capital.
Citigroup was not initially sure whether it was possible to operate a microfinance network on a commercial basis. Thanks to those in this room, it is possible to mobilize the commercial sector to provide microfinance by working in cooperation with existing financial institutions. A large, international institution like Citigroup has high expenses per transaction, but it doesn't need to be the provider of these services in the field. It can take liabilities on its balance sheet of the institutions that do so. Those institutions develop new products and provide remittance services directly at more reasonable prices. Visa, ING, Deutsche Bank and Credit Suisse are also working in this area. These institutions working in the field go beyond charitable activities. Charity will always be necessary because there will always be people who cannot be reached by the commercial sector.
In order to help MFIs do their jobs better, more data is needed. Credit rate ceilings should also be fought. Financial sector regulations should be reviewed so that they don't hamper small institutions. Regulators should be trained to understand the unique environment surrounding MFIs. Large institutions can also better handle currency risk.
Microfinance can help further sustain global economic growth. Credit Suisse's eight million private banking clients have accumulated wealth of $30 trillion. The private sector should make a call for more donations. Credit Suisse has a microfinance fund with a decent money market return, which demonstrates the support for scaling up in microfinance.
Credit Suisse tries to prudently provide microfinance ideas as investment ideas where money market investments reallocated into microfinance. They are not talking about 10%-20% allocation or maximizing returns. More importantly, with such funds, one can prove the concept in an initial state and have monetary returns as well as be active in countries via microfinance where you would never participate with a standard investment.
The greatest impediment is often internal resistance within commercial banks. Also, models that involve governments wisely are needed, models that don't require government subsidy. If you are going to raise a fund to invest in the poorest areas of Britain, you won't be able to attract investment unless there is a normal return (12-15%) and you can only do that with some government financing. The power of government is to back models with incentives. The underlying issue of a lower return is a question of measuring the social impact, which is one of the biggest challenges. It is hard to attract substantial capital unless you receive social returns to compensate for financial returns. However, a World Bank Study shows that with heavy government involvement, there was less access to microfinance.
In the future, the sector will continue to grow more rapidly. Having said that there is a need for more transparent and clearer data to show that this is a profitable activity. This microfinance market is where venture capital was 20-30 years ago. It will grow substantially over the next five years, just look at the increased number and quality of people involved from private sector - Citibank, Deutsche Bank, Credit Suisse. This sector is gaining substantial momentum. Further, technology is changing fast. As the cost of providing modern technology declines, there will be a chance to supply processing services much more cheaply.
There are positive government models, but in the past there were instances of government involvement that have not been positive. Conferences like these and the Blue Book project that will allow government involvement to be positive. A lot more people will be reached by microfinance five years from now.