Microfinance: there is a role for all to play

Lennart Båge

Overcoming poverty, for many poor people in developing countries, depends on self-employment through microenterprises. Whether they are small farmers, traders or artisans, poor people themselves need to be able to build their own businesses. But, for many, the potential to better manage their assets, earn higher income and improve their lives is hindered by a lack of basic financial services.

In fact, 70 percent of the world’s poor people lack access to services such as credit, savings and money transfers, that are essential for initiating and running micro or small enterprises. This is especially true for the 900 million extremely poor people who live in rural areas of developing countries.

It is clear that if poverty is to be reduced on a sustainable basis, governments, the private sector and development organizations must each do their part to ensure that poor people have access to basic financial services.

Governments, non-governmental organizations, and United Nations organizations, like IFAD, each play a crucial role in assisting the poorest people, who often are not reached even by the informal financial sector. With access to basic social services, training and other support, they can start to develop or expand their economic activities. Initiatives such as the IFAD-supported Ha Tinh Rural Development Project in Vietnam, improve the incomes and living standards of poor households by training local entrepreneurs and establishing community funds to provide them with credit. Once very poor people have achieved a certain level of income and savings, they may be in a better position to obtain services from microfinance and other institutions.

Financial institutions serving poor people must be self-sustaining. This is the only way they can provide services on a continuing basis , and be integrated into national financial systems. For formal financial institutions, weak financial infrastructure and communication in rural areas are among the biggest obstacles to delivering services to rural poor people. It is also more expensive to extend loans to populations dispersed over large areas than in cities. The use of simple existing technology can off-set these concerns and make providing financial services to rural poor people both feasible and profitable.

Today, microfinance institutions are using new technologies to serve millions of poor people, including those who live in remote rural areas. Automatic teller machines (ATMs) and smart cards are being used by rural banks to make it easier for farmers and others to repay loans, and to cut down on branch infrastructure and employee costs. In Vietnam , mobile banking has proven to be a useful alternative to fixed branches. In Bolivia , the cost of serving rural areas was lowered with the introduction of smart-card technology. I n South Africa , a network of 8,000 armored trucks equipped with smart-card technology deliver pension payments to 4.5 million people every month.

Successful financial services for the poor have to reflect their circumstances. IFAD has been supporting microfinance institutions in their effort to be flexible and to tailor their services for rural clients. Some, for example, have adapted repayment schedules to coincide with crop growing cycles, and others are using shops and post offices for transactions to reach dispersed villages more easily and save costs.

Poor families who have access to financial services are more likely to send their children to school, or obtain health insurance, and they are able to make choices that best serve their needs.

Microfinance is a key element of development strategies that are not built on handouts, but on unleashing the capacity of poor people to find lasting solutions to their own challenges. Meeting the growing demand from poor people for basic financial services will bring benefits that are enduring and well worth the investment of all sectors of the economy.

(Lennart Båge is the President of IFAD, a United Nations agency fighting rural poverty).

On 24 November, in Olso, Norway, the President of IFAD and government officials from Denmark, Finland, Iceland, Norway, and Sweden will participate in a Nordic Policy Seminar, entitled, “”Securing a Better Future for the Rural Poor.” The seminar will focus on ways to ensure that the Millennium Development Goals may be reached by 2015. It will also draw attention to the need to reduce poverty in rural areas, where three-quarters of extremely poor people live. If the MDGs are to be met, it is imperative that rural poor people have economic choices beyond subsistence agriculture and food production. Open discussion by panelists will bring forth trade, microfinance, gender and other relevant issues that contribute to enabling the rural poor to rise above poverty and become active participants in the global economy.