|
Statement of the Advisors Group
to the United Nations International Year of Microcredit 2005
United Nations Forum to Build Inclusive Financial Sectors
United Nations Headquarters, New York
8 November 2005
Endorsed by:
Stanley Fischer
Chairman of the Advisors Group
Governor, Bank of Israel
Fouad Abelmoumni
Executive Director, Association Al Amana
Rene Azokli
CEO, PADME
Ajay Banga
Chairman & Chief Executive Officer, Citigroup Global Consumer Group
and Global Consumer Group International
Charles Konan Banny
Governor, Central Bank of West African States
Matthew Bishop
Business Editor, The Economist
Gregory Casagrande
President, South Pacific Business Development Foundation
In Channy
General Manager, ACLEDA Bank
Marilou van Golstein Brouwers
Senior Fund Manager, Triodos Bank
Fazle Hasan Abed
Chairperson, BRAC
Enrique Iglesias
President, Inter-American Development Bank
Diederik Laman Trip
Chairman, ING Netherlands
Marge Magner
Independent Advisor
Princess Maxima
The Hague, Netherlands
Diana Medman
Director, AO Bioprocess
Leonor Melo de Velasco
President, Fundacion Mundo Mujer-Popayan
Raghuram G. Rajan
Economic Counsellor and Director, Research Department
International Monetary Fund
Christopher Rodrigues
President and Chief Executive Officer
Visa International
Hernando de Soto
Director, Institute for Liberty and Democracy
Washington Sycip
Founder, the SGV Group
- 1. The United Nations International Year of Microcredit has exceeded
even our expectations as the Advisors Group to the Year. The UN Year
has raised the profile of microcredit and of microfinance in general.
It has generated a great deal of enthusiasm, among microfinance users
and providers, suppliers of capital, commercial businesses and the
public of many nations, developed and developing: a record number
of national committees - most of which are impressively diverse and
actively engaged - have been formed to promote the goals of the UN
Year. The critical role that access for poor people to financial services
plays in reducing poverty is now much better understood by policymakers.
Promoting greater access has become a key part of the international
development agenda, including achieving the Millennium Development
Goals.
- 2. As an Advisors Group, we are confident that, although microfinance
remains very far from its potential, significant progress can be made
in overcoming the remaining obstacles to the spread of financial services
that can meet the needs of poor people. We have seen encouraging evidence
that microfinance works. We applaud the efforts of thousands of people
who have brought it this far. In this note, we make a number of key
observations arising from the UN Year, and set out our recommendations
for further action. This note contains the collective view of the
20 members of the Advisors Group alone, the result of our meetings
and other conversations during the UN Year. It is intended to complement
other important work produced as part of the UN Year, such as the
"Blue Book" on "Building Inclusive Financial Sectors
for Development".
- 3. The focus of the UN Year quickly expanded from microcredit to
the whole of microfinance, including services such as savings, insurance
and money transfer, as well as lending. With good reason, the main
message of the UN Year became: there is a vital, pressing need to
build inclusive financial sectors in which the billions of poor people
around the world have access to affordable financial services.
- 4. At its launch last November, we said that the overarching goal
of the UN Year was to "secure a global commitment to develop
inclusive financial sectors in which all people have access to the
financial services they need to make the best possible use of their
human potential". Specifically, we agreed that the UN Year would
be a success if it achieved three goals. First, if it increased awareness
of microfinance and the conditions in which it can flourish. Second,
if it contributed to filling the information gaps about who has access
to what financial services, at what cost, what impact this access
has, and why access is currently limited. Third, if it secured the
commitment of governments to ensure that their fiscal, macroeconomic,
regulatory and supervisory policies support rather than stunt the
availability of microfinance, and of multilaterals, donors, NGOs and
private-sector institutions to treat microfinance as a serious part
of the financial sector and as a business concern, not an act of charity.
- 5. Given these demanding goals, our aim as an Advisors Group has
not been to cheerlead but to focus attention on the many difficult
questions that arise regarding financial access for poor people. From
the start, we have been particularly concerned about the lack of reliable
data (except in a few cases) about what financial services are available
to poor people, and what services are actually used by them. This
lack of data has made it hard to move beyond a general observation
that, in sharp contrast to rich countries, a large majority of the
populations of poor countries is essentially ignored by the mainstream
financial sector. In our view, the lack of good data has made it hard
for governments and others to make well-designed policy, hard for
potential providers of financial services to poor people to accurately
judge the need/opportunity, hard for multilaterals and donors to judge
if their actions are helping or hindering the financial sectors in
which they intervene, hard for investors to assess the market opportunities,
and hard even to reach empirically sound conclusions about the relationship
between financial access, poverty and economic growth.
- 6. The generation of good data has therefore been one of our priorities
during the UN Year. Specifically, the Advisors Group has brought together
central bankers, leading economists and statisticians, including from
the UN, World Bank, IMF, Britain's Department for International Development
(DFID), the Central Bank of West Africa (BCEAO) and the private and
non-government sectors, to develop common measures of financial sector
inclusion and to answer the central question of how many poor people
have access to what kinds of financial services and what is the quality
and impact of those services.
- 7. In September, the International Monetary and Financial Committee
of the Board of Governors of the IMF observed in the official communiqué
at its annual meeting that "2005 is the International Year of
Microcredit. The Committee notes the IMF's role in improving data
availability on microcredit and in addressing microcredit issues in
the Financial Sector Assessment Program". Following on this,
we urge the IMF and the World Bank to include more of an analysis
of the financial services targeted at poor people in the various statistics
it collects. We expect that financial access will increasingly be
recognised as a key indicator of the efficiency of a country's financial
sector.
- 8. Although much work remains to be done, we are delighted that
the process of gathering good data about the access of poor people
to financial services has begun. Already it has yielded two notable
achievements. The first is a window into the current state of microfinance.
The second is that it has provided a foundation on which multi-year
comparisons between nations can be built. We strongly recommend that
this work continue, so that inadequate data will soon cease to be
a factor slowing the spread of microfinance.
- 9. We are particularly hopeful that countries will soon employ
common measures of financial inclusion developed during the UN Year
by the World Bank and DFID as an indicator of progress in reducing
poverty. We recommend that national governments (and their regulators
and supervisory institutions) adopt common indicators and methodologies
and work with the IMF, the World Bank and others in using these data
to assess the breadth, depth and inclusiveness of their financial
sectors. We also recommend that multilaterals and other donors support
governments in this effort and help them to strengthen their statistical
collection systems and that the UNDP Human Development Reports, amongst
other publications, include this data.
- 10. We note recent empirical analysis by the World Bank, which for
the first time shows that increased access to finance helps to reduce
poverty (rather than, as is sometimes argued, that greater financial
access is merely a consequence of reductions in poverty). The results
support the view that building an inclusive financial sector should
be considered a driving force of economic development and poverty
reduction, and we hope that the increased availability of data about
microfinance will encourage further research into its potential role.
- 11. The World Bank analysis is noteworthy in two other respects.
First, it confirms that access to financial services remains extremely
limited in most poor countries. Although throughout the UN Year we
have been encouraged by numerous examples of how microfinance can
transform the lives of poor people, it is clear that the biggest challenge
for the next few years is to provide microfinance on a significantly
greater scale than anything we see in poor countries today. A particular
challenge is in rural areas that can be especially costly to reach.
- 12. Second, the World Bank analysis also finds that government ownership
of the financial sector is inversely correlated with access. This
underlines a crucial lesson for policymakers as they consider how
to "scale up" microfinance: the private sector will play
a critical role in enabling poor people to receive financial services.
- 13. This does not mean that governments should ignore microfinance.
On the contrary, we believe that governments have a crucial enabling
role to play in increasing access to financial services.
- 14. In general, financial services are more likely to be available
to poor people in countries which are essentially well-governed: with
sensible macroeconomic policies aimed at keeping inflation and interest
rates low, a competitive economy with strong antitrust laws, limited
red tape, clear enforceable property rights (for poor people as well
as rich, for men as well as women) and effective law enforcement,
including against corruption.
- 15. In addition, there are several crucial areas of government policy
that specifically relate to microfinance. One common temptation is
for governments to impose ceilings (caps) on the rate of interest
that can be charged on micro-loans. Such ceilings have a simplistic
political appeal, by appearing to ensure cheap credit for poor people,
but in practice interest-rate ceilings tend to reduce the supply of
credit, especially to the poorest would-be borrowers, who are driven
instead to borrow from illegal money-lenders whose rates are not capped,
and whose collection methods are notorious. Interest-rate ceilings
can also reduce the transparency of the cost of credit to borrowers,
as lenders seek to evade the caps by adding various service charges
and application fees. We strongly recommend that governments do not
impose interest-rate ceilings on micro-lenders. The evidence shows
that a far more effective way for governments to ensure that interest
rates are not excessive is to foster healthy competition within the
financial sector.
- 16. Government regulations on the collection of deposits often prevent,
or impose a significant cost on, micro-lenders providing other financial
services, in particular savings accounts. These regulations are often
intended to protect savers from bank failure, which is clearly a desirable
goal. However, they raise the cost of capital to micro-lenders, which
are prevented from operating as normal banks that lend money that
has been deposited with them. Moreover, these regulations can mean
that poor people are denied access to savings accounts, and thus have
to save by methods that involve far greater risks than that of bank
failure. We recommend that financial sector authorities should devise
prudent and appropriate means to make it possible for microfinance
providers to qualify to accept deposits.
- 17. Finding the appropriate balance between consumer protection
and a light regulatory burden is not easy, but getting it right should
be a priority for governments everywhere, and particularly in poor
countries. We believe that too often well-run microfinance institutions
are being overly constrained by regulations (particularly with regard
to restrictions on what services they can provide) as they look to
increase the scale and scope of their operations. We recommend that
governments, assisted by the relevant multilaterals, urgently review
their regulations to ensure that they encourage prudent and sound
provision of financial services to poor people. We also recommend
that priority is given to training competent bank regulators, accountants
and auditors, lawyers and credit-raters, who are often in short supply
in poor countries. This may be a fruitful area for international assistance,
from multilaterals and national governments, and from private donors.
We commend the Bank for International Settlements, the Federal Reserve
Bank of New York, the Banking Superintendent of New York, Citigroup
and the Central Bank of West Africa (BCEAO), leading trainers of central
bankers and other regulators and supervisors in developing countries,
for including issues pertaining to microfinance in their training
programmes. We recommend that others follow their example.
- 18. Regarding consumer protection, there are at least three areas
in which government can play a helpful, enabling role. First, we recommend
that lenders be required to inform borrowers clearly of the full cost
of their borrowing, including interest rates and any other fees. Such
a requirement ought not to impose significant costs on either lenders
or regulators.
- 19. Secondly, we are concerned that, in some countries, laws to
protect privacy are preventing the emergence of credit bureaus. Such
credit bureaus can greatly reduce the cost of lending - and thus increase
the overall supply of loans - by giving lenders better information
about the creditworthiness of borrowers. Some rich countries have
managed to combine strong, effective privacy protection with sufficient
freedom to share financial information to enable viable credit bureaus,
and we recommend that poor countries follow their example and take
measures to facilitate and encourage the establishment of credit bureaus.
Furthermore, we encourage efforts to help microfinance providers improve
their information systems, not least so that these bureaus can receive
relevant information.
- 20. Third, deposit protection is often woefully inadequate in poor
countries. Although deposit protection schemes, such as insurance,
can have some downsides, including a heavy regulatory burden and the
creation of a moral hazard that can make savers careless of who they
entrust with their money, combined with effective but light regulation
such schemes can greatly increase consumer confidence in the financial
system. A lack of such confidence is often - and not unreasonably
- a serious constraint on the growth of financial systems. We recommend
that governments explore whether they can sensibly and cost-effectively
introduce deposit insurance or other protection scheme for savings
accounts provided to poor people.
- 21. A difficult issue for suppliers of capital for microfinance
is how or if they should subsidize the provision of financial services
to poor people. Here there is no simple answer. We observe that even
at current levels of subsidy, many microfinance institutions find
themselves constrained by a lack of funds. Increasingly, they are
looking to find other sources of capital, not least by focusing more
on generating profits from their activities, which in turn makes them
attractive to private-sector investors. We welcome this increasingly
commercial approach to serving poor people, not least because we believe
that only the private sector will have the ability to provide the
organization, expertise and capital that can drive a rapid increase
in access to financial services.
- 22. Whether it would even be desirable for more subsidized capital
to be made available is debatable. In practice, government or other
donor subsidy of microfinance has often gone hand-in-hand with a lack
of transparency, significant corruption and general inefficiency,
which in turn has distorted the provision of financial services in
ways that have hindered their long-run development. Whilst there may
be poor people to whom it will never be commercially viable to provide
financial services - in which specific circumstances, a case can arguably
be made for subsidy (but perhaps a better case for social safety nets)
- we believe that the best hope for a rapid increase in access to
financial services lies in the provision of these services to poor
people becoming more commercially-driven. We therefore recommend that
governments and others are restrained in their provision of subsidized
capital to microfinance, and aim to deploy it in ways that encourage,
not discourage, commercially-driven capital into the sector. For instance,
governments and other donors might more usefully invest in the development
of the regulatory infrastructure within which microfinance can thrive,
in seeding new microfinance institutions and new technologies that
speed the increase in financial access, and in providing relevant
education and training to users and providers of microfinance.
- 23. We also welcome the increasing enthusiasm of many providers
of microfinance - old and new - for delivering financial services
to poor people on a commercially sustainable basis. Though many established
microfinance institutions are rightly proud of their charitable roots,
a growing number of them are willing to talk about possible partnerships
with established commercial financial institutions, about scrutinizing
loan portfolios, retailing insurance policies underwritten by commercial
insurers, and even of making profits and perhaps becoming listed public
companies. Some of the best institutions are now reducing their dependence
on donor financing, exposing their operations to critical ratings
agencies, and hunting out private capital. We also welcome the growing
interest of commercial financial institutions in serving poor people,
who until recently they often avoided as customers. Encouraging examples
of commercial institutions entering microfinance include large banks
in Latin America, Asia and Eastern Europe, and some of the major international
banks based in rich areas of the world including America, Western
Europe, and Australia.
- 24. Nevertheless, rhetoric is certainly running ahead of action.
Although a growing number of institutions and governments talk about
treating people who are poor as clients and not beneficiaries, they
often continue to ghettoize microfinance within the philanthropic
arms of their organizations, where resources and accountability are
typically limited, or otherwise evaluate them in non-commercial ways.
A culture change is still required in many of the established institutions
that provide financial services to poor people. In particular, we
recommend that providers of microfinance become more transparent,
especially about their loan problems and about the degree to which
they depend on subsidized capital, and we recommend that they subject
their performance data and accounts to independent audit. Likewise,
whilst we wholeheartedly welcome the growing interest in microfinance
of established mainstream national and international financial institutions
and even some industrial firms, we urge them to back up their rhetoric
with more substantial action.
- 25. We note with some concern the fact that much of the commercial
capital available to microfinance providers is foreign, and therefore
carries significant exchange-rate risk. This risk has been sufficiently
large to bankrupt some microfinance providers in the past. We recommend
that foreign suppliers of capital to microfinance institutions develop
ways of providing such funding in local currency. We further recommend
that governments examine whether their own policies are constraining
the supply of local capital to microfinance.
- 26. We are also concerned about those multilaterals and other donors
who, through their actions, appear wedded to microfinance remaining
an activity subsidized directly through cash contributions or indirectly
through technical assistance and subsidized financing. We recommend
that multilateral institutions and other donors give serious thought
to how they can use their resources more effectively to develop commercially
sustainable microfinance.
- 27. We have been greatly encouraged by the growing interest in microfinance
of a new generation of philanthropists, many of whom made their fortunes
as entrepreneurs during the recent wave of technological innovation.
We recommend that they bring that entrepreneurial mindset to microfinance,
not least so that they avoid replicating existing subsidy-based microfinance.
28. We are also greatly encouraged by various attempts now underway
to use technology such as mobile telephony to dramatically lower the
cost of providing financial services to poor people. This may offer
large economies of scale and reduce the need to deploy traditional
high-cost bank branch networks. We recommend that donors do what they
can to spur this technological innovation in the early stages where
it may not be able to generate an economic return. We also recommend
that regulators have an open mind to such technological innovation,
which may challenge traditional approaches to providing, and regulating,
financial services.
- 29. Throughout the UN Year, we have been greatly encouraged by the
active role played by clients, and aspiring clients, of microfinance
institutions. It is their demand, more than anything, that is driving
the growth of microfinance, and their insights have been invaluable.
We recommend that providers of microfinance continue to actively consult
and otherwise involve microfinance clients to ensure that the financial
services they offer truly meet their needs.
- 30. With the International Year of Microcredit, the UN has exemplified
its role as a neutral broker, bringing together disparate parties
to address an issue of critical importance. We commend the UN for
the seriousness with which it has undertaken this task. In the light
of this, we note that much of our work as an Advisors Group has been
to initiate activities that will not be completed until after the
end of the UN Year. Although our role concludes with the UN Year,
and we do not wish to extend our mandate, we recommend that the UN
should appoint a group of experts, for a limited period not exceeding
two years, to see the work we have begun through to completion.
- 31. All that remains is to congratulate the UN for dedicating this
year to such an important subject, and to thank all the many people
involved in making the UN International Year of Microcredit such a
success.
|
|
