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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 3 / May - June 2004 |
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News | Challenges and Prospects in the Mobilization of Domestic Resources Through MicroFinancial Intermediation
The following working brief was used to provide some background for the ECOSOC discussions on "Resource mobilization and enabling environment for poverty eradication in the context of the implementation of the Programme for Action for the Least Developed Countries for the Decade 2001-2010" Well functioning microfinance systems are vital for the prosperity of people from all income levels, as well as the long-term growth of vibrant national economies. In Least Developed Countries (LDC’s), where the majority of the citizens hover at or around the poverty line, governments can generate and grow domestic capital resources by fostering the efficient intermediation of small amounts of money. Creating efficient systems that formalize microfinance services allow for greater circulation of funds and higher rates of investment. For example, banking and institution legislation introduced by the Central Bank of Cambodia in 2000 has removed obstacles to formal financial institutions engaged in microfinance. As a result (and with assistance from UNDP), ACLEDA, now the largest microfinance institution in the country, has been able to expand its operations to over 100 branches in 21 provinces that provide more than 100,000 clients with savings and credit products. It is clear that government policies that support deep capital flows can impact poverty and assist countries in fulfilling the Millennium Development Goals. Microfinancial intermediation refers to the management of flows of small amounts of capital within an economy – in particular, the collection of deposits and their subsequent lending for consumption or productive purposes. Although specific numbers for LDC’s are not available, it is estimated that there are more than 10,000 institutions worldwide providing financial services to over 68 million poor and low-income people. Even though the actual amounts are small, for example, the average loan size of UNCDF-UNDP supported programs is $44; in aggregate they can represent a significant portion of the capital flow in LDC’s. Government policies are repeatedly cited as the deciding factor in whether financial intermediaries are efficient.
There are three key components to microfinancial intermediation – deposit systems, lending systems and capital flow systems – in other words savings, credits and remittances.
Savings services allow for permanent, seasonal or excess liquidity to be stored safely for future use. Poor people do not need loans all of the time, but they do need savings all of the time. The need and demand of poor and low-income people for secure and sustainable savings instruments are clear; however, many of those who wish to save responsibly do not have access to the appropriate vehicles. An extensive survey conducted in Uganda reported that people who have access to the formal sector saved three times as much ($386) in the 12 month period studied than those who saved in the semi- and informal sectors. In Rwanda, 539,163 savings passbook accounts with an average account size of $57 in 2001 pulled almost $40 million into circulation. Although this may not appear significant, proper circulation of these funds into credit products could have a significant multiplier effect in the Rwandan economy. After Benin’s financial sector underwent deep structural adjustments in the 1990’s, the government implemented a program of rural savings and loans designed to better serve the poor; the economy grew at an annual rate of 5% during the last five years as a result of these interventions. From a national perspective, the provision of secure and accessible savings systems both inculcates savings habits and, if efficient financial intermediation policies are in place (as measured by the spread between savings and lending rates), can spiral economies upward through increased domestic, and ultimately foreign, investment.
Credit is an amount of capital made available to a client by a bank or other institution. Good credit tailors the terms, pricing, criteria, evaluation, and distribution to provide greater access to clients, mitigate risk and offer long-term services. Often referred to as “the fuel of private sector development”, credit can give people the means to invest according to their own priorities. Even if the poverty impact is not immediately apparent in an increase in household income, access to finance can start a long-term development process. For example, a study in Tanzania showed that household access to credit acted as a substitute for child labor. From a national resource strategy perspective, credit provided to the bottom income levels is a tool to invest in the productive capacities of local communities, facilitate the inclusion of poor people in economic flows, support the growth of local markets, and extend economic opportunities through new jobs, investment and infrastructure. Good microcredit induces investment in high return projects, which in turn, accelerate economic growth. The estimate that 68 million people worldwide receive microcredit services, at an average of $500 a loan, translates into an immense market. Recent studies show that the number of poor people worldwide who benefited from microcredit more than quadrupled between 1997 and 2001, however, there is a huge unmet demand: rough estimates suggest that 500 million of the total population could still benefit from access to credit. Though the data on penetration rates is not entirely reliable, it suggests that few LDC’s have reached a rate over 1%; the exception is Bangladesh, a leader in microcredit where roughly 7% of the population accesses credit.
Remittances are transfers of funds from migrants to relatives or friends back in their country of origin. Remittances are now acknowledged to represent the second largest source, behind foreign direct investment (FDI), of development financing. In fact, remittance receipts exceeded official development assistance throughout the 1990’s. Though the extent of remittance flows are difficult to accurately assess, it is conservatively estimated that in 2003, $88 billion was sent to developing countries from workers based elsewhere. Among low-income developing countries , formal remittances, sent through wire services or banks, represented 2.9% of the total GDP ($26 billion) and 380% of FDI. The true value of remittances is likely to be much higher because a great portion is sent through informal hand-carry methods that go largely undocumented. Remittances are extremely important to the economies and standard of living in some countries and are often thought of as FDI for the poor. For example, Lesotho receives remittance payments totaling 27% of the country’s entire GDP and remittances in Cape Verde amount to 14% of the country's GDP. In Bangladesh, remittances totaled $3.06 billion in 2003, up from $2.5 billion the previous year. Compared with other forms of capital flow, such as FDI that can fluctuate depending on the political or economic climate, remittances remain a relatively steady source of funds and have a significant development impact.
The Role of Donors: UNDP and UNCDF currently support microfinance projects that reach more than 511,000 clients in the Least Developed Countries with the total portfolio valued at about $22.5 million. As an example of successful donor intervention, in Haiti, UNCDF invested in expanding rural microfinance in one of the most difficult areas of the country, and increased outreach through a system of local financial intermediaries. UNCDF also sponsored the initiative in support of a new cooperative law. Most notably, MFIs in Haiti with UNCDF assistance reached operational self-sufficiency, a significant step towards financial sustainability. In addition, the UNCDF MicroStart programme in Mozambique has achieved high levels of operational sustainability and client outreach. For example, the level of client outreach grew 137% during the pilot phase of the programme alone. The MFIs involved in this programme have also succeeded in attracting additional donor-funded support and new capital investment.
Recently, UNCDF has been immersed in laying the foundation for economic growth in emerging microfinance sectors in post-conflict settings. UNCDF has mobilized donors to work with the government in Sierra Leone in a five-year programme to build an inclusive financial sector that fully integrates microfinance. The goal is a competitive microfinance industry by 2009 that provides services to at least 90,000 clients. All amounts in
US ($). Marguerite Robinson,
“The Microfinance Revolution: Sustainable Finance for the Poor,”
The World Bank, 2001, pg. 38.
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