25 August 2004
From Mr. Lennart Bage.
Sir, Most of the world's poor lack access to basic financial services that would help them manage their assets and generate income. This is especially true for the 900m extremely poor people who live in rural areas of developing countries. Good management of even the smallest assets, such as livestock, can be crucial to these people.
With little income or collateral, poor people are seldom able to obtain loans from banks and other formal financial institutions. Microfinance is one way of fighting poverty in rural areas. Through microfinance institutions such as credit unions, financial non-governmental organisations and even commercial banks, poor people can obtain small loans, receive money from relatives working abroad and safeguard their savings.
Microfinance has changed the perception that poor people are not creditworthy. Records have shown that they are a good risk, with higher repayment rates than conventional borrowers. In some of the most successful microfinance institutions, repayment rates are 98 per cent.
During the 1990s we came to realise that there was a pattern emerging in how poor people were using the very large microfinance networks. In the networks that offered credit and savings, there were often as many as five savers for each borrower. While credit is important, it is just one of many financial services that poor people need.
What characterises the poorest is not only their very small income but also the irregularity of this income. This can discourage very poor people from taking a loan that comes with a regular repayment schedule. Data gathered from money collectors around the world show that the poorest people often use their services to save, even when it comes at a high cost.
The Microcredit Summit Campaign has the ambitious objective of reaching 100m of the world's poorest families by 2005. By the end of 2001, more than 2000 microfinance institutions were involved in the campaign, providing financial services, mostly loans, to almost 55m individuals or groups. More than 21m of those clients were women.
There is an urgent need for microfinance institutions to improve their ability to reach the poorest families and to satisfy their growing demand for a range of financial services. This includes safe and flexible savings services.
Although the amounts involved may be small, the loans, savings and insurance options that microfinance offers can give millions of rural people an opportunity to find their own solutions.
Lennart Bage, President, International Fund for Agricultural Development