Over One Billion People Lack Access to Basic Financial Services 

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Over One Billion People Lack Access to Basic Financial Services 

Press release number: IFAD 38/04

IFAD calls for greater access to basic financial services to lift millions out of poverty annually

Rome, 16 November 2004 - More than one billion people – 90 per cent of the world’s self-employed poor – lack access to basic financial services, depriving them of the means to improve their incomes, secure their existence, and cope with emergencies. Providing financial services to poor people in developing countries can help transform their lives permanently and lift millions out of poverty each year.

Giving the poor access to such basic financial tools as credit, savings, insurance and money transfers will help meet the globally-agreed Millennium Development Goal of halving by 2015 the proportion of people living on less than US$ 1 a day.

On 18 November, the UN-designated International Year of Microcredit 2005 will be launched from stock exchanges in several cities, including New York, USA and Milan, Italy.

IFAD is calling for global efforts to further accelerate the growth of microfinance in order to enable millions of people around the world with little income or collateral to invest – especially women – to start up businesses, save, and support their families’ education and welfare.

“Poor people are becoming part of the global financial market and want to access a greater range of financial services and products. To meet their needs, we have to help microfinance move closer towards the formal financial system, says Lennart Båge, President of IFAD.”

Over the last five years the microfinance sector has grown at an average rate of 25 to 30 per cent. Sixty-three of the world’s top microfinance institutions (MFIs) had an average rate of return of about 2.5 per cent of total assets, comparing favourably with returns in the commercial banking sector.

Banks can no longer view credit to the poor as a bad risk. In countries as diverse as Bangladesh, Benin and the Dominican Republic, repayment rates are as high as 97 per cent.

Commercial financial institutions such as Triodos Bank of The Netherlands, Citibank of the United States and Deutsche Bank are now moving into microfinance, attracted by the “double bottom line” of making a profit and reducing global poverty. Interest from socially responsible investors in affluent countries is also accelerating. There are currently over 60 investment funds incorporating microfinance in their portfolios, and around 70 per cent of these have appeared in just the past two years.

International capital funds such as equity funds are beginning to look at this market, once considered marginal. In July of this year, the first microfinance bond – for US$ 40 million – was issued from US capital markets to support MFIs in nine developing nations.

Growing commercialization

Until ten years ago, commercial banks were notably absent from the microfinance world, deterred by perceived high costs and risk. Now, many banks in developing countries and elsewhere are viewing the sector as a viable option for investment – transaction costs have been reduced and banks are keen to boost their image as socially responsible entities.

The Deutsche Bank Foundation has invested US$ 3 million in loans to 30 MFIs since its inception in 1998, through its Microcredit Development Fund. ICICI Bank, the second-largest in India, is working with self-help groups – often referred to as the ‘backbone’ of microfinance in India – to enable over 2.5 million poor Indian families to gain access to credit and other financial services.

Non-governmental organizations transform into banks

Similarly, many non-governmental organizations (NGOs) that have provided unregulated microfinance services in the past are now turning themselves into regulated banks or non-bank financial institutions. As such, they are able to offer a full range of financial services to the poor, including much-needed savings services.

In 1997 a pioneering NGO in The Philippines, the Center for Agriculture and Rural Development (CARD), was the first NGO in the country to set up a rural bank, offering services to the landless and asset-less rural poor. In 2001 CARD’s return on assets was around 3.3 per cent.

“We’ve turned conventional banking wisdom on its head by showing that poor people with absolutely no collateral will repay their loans”, says Aris Alip, founder and chairman of CARD. “Clients who’ve been with us for 5-10 years are no longer poor. Eighty-five per cent of them have risen above the poverty line. Some even employ other poor people, and now command greater respect and status in their community.”

XacBank in Mongolia started as an MFI and is now a licensed bank, the second largest in the country, with total assets of over US$ 15 million this year, five times more than in 2001. Around 75 per cent of their clients are herders. Over 80 per cent of their active loans are microloans. According to Chuluum Ganhuyag, Chief Executive Officer of XacBank:

“Our bank has a social mission, not just an economic one. We want to contribute to the socio-economic development of Mongolia by providing access to comprehensive financial services for all citizens, including those who are normally excluded.”

Global poverty and unmet demand

While the microfinance sector has grown over recent years, there is still a vast, unmet demand for basic financial services from an estimated 400 to 500 million households worldwide.

“Although not a panacea for poverty alleviation, microfinance is an important part of fighting poverty, especially in rural areas where 900 million extremely poor people live. Even the poorest people value and need access to some form of savings, and loan-repayment rates among poor entrepreneurs are among the highest in the world”, says Lennart Båge.

Although relatively little microfinance gets to the poorest 25 per cent of any country’s population, concerted efforts are being made by IFAD and other development organizations to address this. In addition, other solutions such as grants or training can be more appropriate for supporting the unemployed or destitute.

The social impact: women are the driving force

Approximately 70 per cent of the 1.2 billion people living on less than US$ 1 per day are women. They have a higher unemployment rate than men in virtually every country and make up the majority of the lower paid, unorganized informal sector of most economies.

The vast majority of microfinance clients are women. Many programmes target them more than men because they tend to be more financially responsible, with higher credit ratings and better repayment rates. In Bangladesh, for example, women default on loans less often than men, and credit extended to them has a much greater impact on household consumption and the quality of life of children.

“Microfinance has drawn millions of women into commercial economic activities for the first time. When they earn and control their own income, women gain decision-making power and better status”, says Rachel N. Mayanja, UN Special Adviser to the Secretary-General on Gender Issues and Advancement of Women.

The benefits of finance for the poor are social as well as financial. Many impact studies conclude that those participating in microfinance programmes are more likely to invest in their children’s education and better nutrition and health practices than those not participating.

In Uganda, the Uganda Women’s Effort to Save Orphans (UWESO), funded by IFAD and the Belgian Survival Fund (BSF), gives small loans to women so they can provide for the many orphans that have lost their parents to AIDS. Benedete Nakayima, a 74-year old grandmother of 35 orphans, was able to improve her plantation, rear goats, grow crops for sale and engage in other trading to help her feed, clothe, educate and raise her grandchildren.

IFAD and microfinance

IFAD, a specialized agency of the UN working to combat rural poverty in the most disadvantaged regions of the world, is one of the lead agencies focusing on improving rural finance. Two thirds of IFAD projects have a microfinance component, and as of September 2004, the agency has an ongoing project portfolio of US$ 640 million in rural finance activities – 30 per cent of its ongoing projects.

Since 1978, IFAD has worked to help rural people overcome poverty, and it was one of the first agencies to support the Grameen Bank, pioneer of the microcredit concept, which now serves 2.4 million borrowers in Bangladesh.

“IFAD is pushing hard for greater diversity in financial services for the poor in rural areas and nowadays we are working with an amazing array of institutional partners – commercial, cooperative and village banks; post offices; and even marketing, insurance and ICT companies to develop and improve the long-term prospects of MFIs”, says Gary Howe, IFAD’s Chief Development Strategist.

Innovation in rural financing

Weak financial infrastructure and communications are the biggest problems in delivering financial services in rural areas. Income from agriculture is also unpredictable and relatively risky, and it is more expensive to extend loans to populations dispersed over large areas than in dense cities. Research shows that the cost of establishing a microfinance network in remote areas can be as much as 80 per cent higher than in more accessible regions.

IFAD-supported MFIs are finding ways to tailor their services to 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 in order to reach dispersed villages more easily and save costs. XacBank in Mongolia, for example, runs mobile banking services to serve nomadic herders and provides credit for the purchase of environmentally friendly heating and cooking stoves.

New technologies are also being harnessed for rural banking, such as automated teller machines and smart cards, which make it easier for farmers and others to make payments and cut down on unnecessary branch infrastructure and employee costs. In Bolivia and India, personal digital assistants and hand-held computers are used to streamline loans, speed up processing and even provide on-the-spot credit ratings. In South Africa, a network of 8 000 armoured trucks equipped with smart-card technology deliver pension payments of about US$ 60 each month to 4.5 million people.

Savings are often the ‘forgotten half’ of microfinance, but are extremely important to poor families. Access to safe and flexible savings services can minimize risks, mitigate income fluctuations and build a small asset base over time. In Peru, the Puno-Cusco Corridor Project, supported by IFAD, is developing new rural finance markets. It encourages members to save by getting community banks to offer them an initial matching grant as an incentive.

Improving access to remittances

Remittances – the money migrants earn abroad and send back to their country of origin – are an increasingly important ingredient of microfinance, attracting more and more attention from donors. The volume of these transfers has grown dramatically in recent years. Each year around US$ 120 billion worth of remittances are transferred from migrants living abroad to their families. Many donors believe the real figure is at least double or triple this, as many migrants use informal means to send cash home – through acquaintances for example.

The Inter-American Development Bank estimates that in 2003 remittances from Mexicans working abroad totalled US$ 21 billion, and the equivalent figure for workers in Latin America and the Caribbean was around US$ 40 billion. In the United Kingdom, official figures show that remittances flowing out to countries such as Bangladesh, China, India, Jamaica and Pakistan amount to more than US$ 7 billion (£4 billion) annually.

Remittances are a major source of income for many disadvantaged families: most meet basic consumption needs and support productive activities. In poor rural areas, especially, they also contribute to savings and help meet repayments in periods of low agricultural income.

Donors such as the British Government’s Department for International Development (DFID) and the World Bank are now working with governments to decrease the high cost of money transfers, in order to put more money in the hands of those that need it most. In the last five years, the average transaction costs for sending remittances have been declining. In Latin America and the Caribbean, for example, the average transaction cost fell from 15 to 7.9 per cent, largely due to greater competition and the use of technology.

“IFAD’s priority is to ease rural peoples’ access to their families’ hard-earned remittances from abroad, as so often people have to travel long distances to the regional capital to access this money. We are also linking remittances to other microfinance services, particularly savings accounts and the opportunity to borrow, so that they can expand their choices for using these valuable funds”, says Henri Dommel, IFAD’s Rural Finance Technical Advisor.

Future directions

Institutions with large existing infrastructures, such as commercial banks, state-owned rural development banks, credit-union networks, financial cooperatives, etc., could play an important role in expanding financial services for the poor. And new products being introduced by MFIs – such as insurance services, micropensions and housing finance – will also help expand their portfolios and attract more clients.

In remote rural areas, however, decentralized and community-based systems may remain the best option for developing low-cost, sustainable institutions.

As more social investors and international financiers in the industrialized world are attracted to the sector, the potential for expansion becomes greater. But the direction and progress of microfinance will largely be determined by the legal and financial conditions of each country.

“The way forward for microfinance is full integration with the formal financial sector, to begin reducing the need for donor support and subsidies, and to move closer to large-scale sustainability,” says Lennart Båge.

IFAD is a specialized agency of the United Nations dedicated to combating rural poverty in the most disadvantaged regions of the world. Since 1978, IFAD has invested USD 8.2 billion in 660 rural development projects and programmes, about 250 milli on rural people have been supported in their efforts to overcome poverty.