3 billion people seek basic financial services – is Microfinance the answer?

Access to financial services can help poor and low-income clients increase and stabilize their incomes, build assets, and invest in their own future. A new book, Access for All: Building Inclusive Financial Systems published by CGAP and the World Bank, offers a fresh vision for the future. Drawing on lessons from 10 years of research, the book describes how microfinance can help poor people to become part of the financial mainstream. Access for All addresses the hotly-debated topics in microfinance today – the role of donors and governments; how to reach poorer clients, and those living in more remote rural regions; and the potential for new technology to reduce costs, allowing commercial businesses to serve poor clients. With only about one sixth of those who could use basic financial services currently having access, the book shows how to bridge that gap and reach the majority of the world’s population – the poor.

"Building financial systems that work for the poor is the next great frontier of development and finance,” according to Mark Malloch Brown, Chief of Staff to the United Nations Secretary-General. “This book gives some thoughtful and provocative ideas on how this can be achieved." The book can be purchased here for US$30. Access for All describes where the microfinance field finds itself in 2006, as well as the opportunities and challenges ahead. The book examines all levels of the financial system and answers key questions about clients of microfinance—Who are they? What financial services do they want? What is the impact of financial services on their lives? It shows what works, what does not work, and where more learning is needed. By focusing on promising models and practices, it offers a vision of how to achieve financial systems that will ultimately offer access for all.

Drawing on experience from Asian, African, and Latin American countries, Access for All demonstrates that when international and domestic providers, governments, and financial service providers commit themselves to the vision of inclusive financial systems, the results are impressive.

For example in Cambodia, less than 15 years ago the environment for microfinance was hostile as a result of long term civil unrest. Today, Cambodia has 17 banks (foreign and domestic, private and government-owned), including a globally recognized microfinance bank, the Association of Cambodian Local Economic Development Agencies (ACLEDA) Bank. What began as small, isolated donor-dependent initiatives has evolved into a financial system of profitable, regulated institutions serving nearly 400,000 poor clients.

In Kenya, Equity Bank is opening 18,000 accounts of poor people each month. K-Rep bank, which began as a small nongovernmental organization, is today a fully converted commercial bank—among the fastest growing in the country. India’s ICICI Bank, through partnerships with microfinance institutions and nongovernmental organizations, has added 1.2 million microfinance clients in the past three years. In Mexico, Compartamos has grown from a donor-supported institution to a licensed financial institution serving more than 400,000 clients and regularly tapping the local bond markets.

“These are exciting times for microfinance,” said CGAP CEO and World Bank Director, Elizabeth Littlefield. “Microfinance institutions are becoming more and more professional. And at the same time commercial banks are reaching out to a much broader clientiele which includes the poor. Today we know a lot about how and why microfinance works. But we are still faced with some big challenges if we are to reach the billions of people who could make use of financial services to improve their lives.”

Access for All addresses the hotly-debated topics in microfinance today – the role of donors and governments; how to reach poorer clients, and those living in more remote rural regions; and the potential for new technology to reduce costs, allowing commercial businesses to serve poor clients. With only about one sixth of those who could use basic financial services currently having access, the book shows how to bridge that gap and reach the majority of the world’s population – the poor.

Housed at the World Bank, CGAP, the Consultative Group to Assist the Poor, is a global resource center for microfinance standards, operational tools, training, and advisory services. Its members—including bilateral, multilateral, and private funders of microfinance programs—are committed to building more inclusive financial systems for the poor.

Key Principles of Microfinance

CGAP is a consortium of 31 public and private development agencies working together to expand access to financial services for the poor, referred to as microfinance. These principles were developed and endorsed by CGAP and its 31 member donors, and further endorsed by the Group of Eight leaders at the G8 Summit on 10 June 2004 (Sea Island, Georgia, USA). 1 Poor people need a variety of financial services, not just loans. In addition to credit, they want savings, insurance, and money transfer services. 2 Microfinance is a powerful tool to fight poverty. Poor households use financial services to raise income, build their assets, and cushion themselves against external shocks. 3 Microfinance means building financial systems that serve the poor. Microfinance will reach its full potential only if it is integrated into a country’s mainstream financial system. 4 Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people. Unless microfinance providers charge enough to cover their costs, they will always be limited by the scarce and uncertain supply of subsidies from governments and donors. 5 Microfinance is about building permanent local financial institutions that can attract domestic deposits, recycle them into loans, and provide other financial services. 6 Microcredit is not always the answer. Other kinds of support may work better for people who are so destitute that they are without income or means of repayment. 7 Interest rate ceilings hurt poor people by making it harder for them to get credit. Making many small loans costs more than making a few large ones. Interest rate ceilings prevent microfinance institutions from covering their costs, and thereby choke off the supply of credit for poor people. 8 The job of government is to enable financial services, not to provide them directly. Governments can almost never do a good job of lending, but they can set a supporting policy environment. 9 Donor funds should complement private capital, not compete with it. Donor subsides should be temporary start-up support designed to get an institution to the point where it can tap private funding sources, such as deposits. 10 The key bottleneck is the shortage of strong institutions and managers. Donors should focus their support on building capacity. 11 Microfinance works best when it measures—and discloses—its performance. Reporting not only helps stakeholders judge costs and benefits, but it also improves performance. MFIs need to produce accurate and comparable reporting on financial perfomance (e.g., loan repayment and cost recovery) as well as social performance (e.g., number and poverty level of clients being served).