UNITED NATIONS CAPITAL DEVELOPMENT FUND    Microfinance

Issue 13 / June 2005

Issue Table of Contents

Update

on the International Year of Microcredit 2005

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*The Economist will be producing a survey on microfinance in November 2005. This extensive article will be written by Mr. Tom Easton, New York Bureau Chief, who may contacted at tomeaston@economist.com

1. As Business Editor of The Economist, you have said that one of the most important questions world leaders should be asking is: "How can we improve access to finance for poor people?" Why do you think this question is so important? What is your answer?

   A lot of development policy has focused on top down approaches which are largely about aid and debt forgiveness, and too often ignore the details of the context in which poorer people live their lives, and the role that the poor might play in helping themselves. Development should be about creating an enabling environment for the bulk of the population, including the poor, to do all that they can to help themselves achieve their ambitions - not about seeing the poor as victims in need of rescuing from outside. Microfinance is at its most effective as a serious part of financial sectors built to help poor people help themselves - and when the conditions are right, microfinance can be extremely effective.

2. This is a big year for development initiatives: the General Assembly will review progress in reaching the Millennium Development Goals, the Commission for Africa has released its proposals to address development in Africa, and the July G8 Summit will do the same. In December 2004, you said, "a big danger in the coming year is that policy-makers will focus exclusively on macro, top-down solutions." With the year halfway through, are your fears being realized, or do you see microfinance taking on a larger role in the various aid initiatives?

   It's very much in the balance. All the publicity around this year's headline-grabbing initiatives is encouraging. Poverty is now at the top of the global agenda. But the danger is that politicians will be tempted to go for policies that deliver triumphant headlines and that microfinance, which can't generate such headlines, may get overlooked.

3. Why do you think microfinance has not played a more prominent role in the poverty debate up to this point?

   Microfinance faces two problems. The first is the need of politicians for headlines, to create the impression of dramatic change. Microfinance is incremental, not dramatic. Second, there is a perception among some policymakers that microfinance is not capable of creating fundamental change. Our challenge is to convince them that microfinance can be delivered on a sufficient scale to make a real difference, that it can be the ladder that many poor people can use to climb out of poverty.

4. You have said that good government and the rule of law are essential for financial systems to thrive. With widespread corruption in many parts of the developing world, do you think current efforts to promote microfinance are premature?

   I don't think these efforts are premature. Microfinance is already working in remarkable ways, even in unpromising situations where corruption is rife, because microfinance providers try to by-pass the existing corrupted system. By holding these providers up as an example we can highlight the awfulness of the corrupt alternative, and create an example of best practice that can inspire reforms to the financial systems of poor countries that will give the poor a real chance.

5. What are some additional challenges in extending financial services to large numbers of poor people? What steps should be taken to address these obstacles?

   I see two obvious challenges. The first is the challenge of engaging the for-profit sector of the world economy, and to persuade them that participating in enabling microfinance is a good business opportunity to which they should commit lots of capital, not a charity to which they commit what they can spare. The second big obstacle is that governments tend to ignore the reality of the financial choices that poor people have - which are typically limited and extremely expensive - and so do things like impose interest rate caps which may look fair to the rich, but to poor people, who know the reality of the interest charged by illegal moneylenders, merely serve to limit the supply of good microcredit. One important change, therefore, is to develop legal and other policies that help market forces to serve the poor, rather than hinder them. Interest-rate caps for legitimate microcredit providers should be scrapped, for a start.

6. You have supported the idea of access to financial services as a human right, but this notion has been criticized as counter-productive in attracting the necessary commercial capital to achieve massive outreach. Do you think commercial investors will be strictly interested in microfinance as a business opportunity? If not, why do you think a for-profit entity would be willing to forgo those profits to achieve social goals?

   I used the phrase "human right" because many people who think about poverty look at education, healthcare and voting as rights that are crucial to development but ignore the fact that financial services are also widely denied to poor people, and that the ability to protect what wealth you have and to invest in one's ambitions and dreams is actually crucial to human fulfillment and development. My use of the phrase "human right" is directed at policymakers fighting poverty, many of whom ought to give far greater weight to financial and economic freedom.

   From a commercial perspective, I agree that it is important that banks and others who have capital stop thinking of microfinance as charity, and start thinking of it as a business opportunity. Charity is a discretionary activity; firms do it as and when they feel able to. But when firms do something in pursuit of profit, they tend to commit for the long term and stick at it, even when the going gets tough. If microfinance is going to achieve massive scale, it will require massive amounts of capital and that will be forthcoming only if capitalists believe they can earn profits by providing that capital.

7. You have referred to other UN International Years as having "flash in the pan" themes. What makes the International Year of Microcredit any different? As a journalist, why did you join the Year's Advisor's Group?

   I don't mean to criticize other UN years. But what is exciting about this particular year is that microfinance is something whose time has come, and which is uniquely suited to the UN because it is a real, practical approach to human development, and deals with a subject that is too often ignored by the world policy-making community - a community that tends to take what the UN says particularly seriously. The UN has embraced a very serious issue and can attract the attention of powerful people, as well as getting institutions such as the World Bank and the IMF to do some serious thinking about finance for the poor.

   I don't feel I joined the Advisor's Group as a journalist, but as an economist, and as someone who wants, if only in a small way, to help the poor to achieve a decent quality of life. It may be worth noting, however, that The Economist was founded in 1843 to champion free trade - a policy that it argued would improve the lot of the poor but (then as now) was opposed or ignored by many among the policymaking elite. So, by supporting the spread of microfinance, I am being true to the traditions of my publication!