IFAD Asset Request Portlet

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Responding to the diverse financial needs of the poor

Article by Lennart Båge

It is symbolic that the Microcredit Summit Campaign Regional Meeting is being held in Jordan , where women microentrepreneurs are emerging as a significant force in the country's economic development. Microfinance institutions from the Near and Middle East and North Africa regions had a later entry into the microfinance industry than those in other regions of the world. However, in a short time they have made their mark by effectively outreaching to poor rural people.

Most of the world's poor people lack access to basic financial services that would help them manage their assets and generate income. This is especially true for the 900 million extremely poor people who live in rural areas of developing countries. In North Africa and Near East , about 66 per cent of poor people live in rural areas.

What characterises most poor people is not only their small income but also the irregularity of this income. Basic financial services can help stabilise the financial situation of poor people and can contribute to fighting poverty in rural areas. However, with little secure income or collateral, poor people are seldom able to obtain financial services from banks and other formal financial institutions. Through microfinance institutions such as credit unions, financial non-governmental organisations and even commercial banks, poor people can and do obtain small loans, receive money from relatives working abroad and safeguard their savings.

According to a study done for the World Development Report 2000, microfinance institutions help clients protect themselves against risks and not just through credit. Savings is an important tool to poor people to protect themselves against income irregularity and offset risk. Having a safe place to deposit savings allows poor households to transform small sums of money into usefully large lump sums that can go a long way in decreasing vulnerabilities. Income irregularity also discourages very poor people from taking a loan that comes with scheduled repayments.

Placing savings, credit, money transfers, insurance and other basic financial services within the reach of poor people brings benefits. The well-being of poor people at both the individual and household levels is improved when they have access to financial services compared to those who do not. Access to financial services also provides greater opportunities for children to go to school, for families to obtain health insurance and for the poor to make choices that best serve their needs.

For many of the world's poor women, access to financial services brings new economic options, self-confidence and empowerment. Microfinance has drawn many women into commercial economic activities for the first time, enabling them to take advantage of new opportunities and develop new roles as cash income earners and economically influential members of the community. They have increased their income, productivity and decision-making power, which have, in turn, allowed them to play a dynamic role in social change.

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 remittances services, a growing area of importance within microfinance due to large labour migrations, especially across national borders.

As the population of migrant workers increases, the need for financial services that would allow for the sending and receiving of money to family members and others back home expands. Competition among banks and money transfer agencies can help reduce the fees associated with remittances and put more working capital in the hands of rural poor people. In countries, such as Egypt and the Sudan , where labour migration is very significant, the need for remittances service is underscored by the amount of money transferred through risky informal channels. These transfers, often hand carried, are estimated at double or triple the recorded figures sent through banks or other formal financial institutions.

Although the individual amounts involved may be small, the loans, savings, money transfers and other options that microfinance offers can give millions of rural men and women an opportunity to find their own solutions. When combined with other development programmes, microfinance increases the opportunity for poor people to rise above poverty and stay economically afloat.

The writer is the president of the International Fund for Agricultural Development (IFAD) a United Nations agency dedicated to enabling the rural poor to overcome poverty. He contributed this article to The Jordan Times.

Lennart Båge


Published in Jordan Times on 10 October 2004 and The Daily Star, Lebanon on 13 October 2004