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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 5 / September - October 2004 |
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Featured Guest | Elizabeth Littlefield
Q & A with Elizabeth Littlefield, CEO of CGAP
Q.1 In May you met with French President Jacques Chirac prior to the G-8 Summit meeting in Sea Island, Georgia, to discuss ways to promote microfinance in developing countries. With government and private sector efforts a major focus of this year’s Summit, what did you emphasize as the key role for the G-8 countries attending the meeting to play in this effort? Much of what I spoke about with President Chirac is reflected directly in the 11 Key Principles of Microfinance that were endorsed by the G8. We spoke of the role of governments in G8 countries—to improve the effectiveness of their aid—and of governments in developing and transitional countries—to create the local conditions in which microfinance can thrive. For developing and transitional countries, a key message for G8 and other governments is that the government’s role is as an enabler rather than a direct provider of financial services. Government’s role is first and foremost to focus on macroeconomic stability and growth. In developing inclusive financial sectors, the government’s role is to provide policy frameworks that stimulate rather than thwart the development of sustainable microfinance services. One of the most important areas is to allow for cost-covering interest rates and an emphasis on competition and institutional efficiency (so that interest rates can come down over time). A focus on transparency in pricing to protect consumers is also key. CGAP’s Consensus Guidelines on Regulation and Supervision, and its forthcoming paper on interest rate ceilings, are examples of supporting documents on these issues.
The Year of Microcredit will introduce microfinance to audiences that may not be familiar with financial services for the poor, and raise the public’s level of consciousness about microfinance – not as a niche development sector but as an integral part of national and international financial systems. Institutions that serve the poor include some of the largest networks of postal banks, public sector financial institutions, and purely private organizations in the world, as well as grassroots NGOs and cooperatives doing important work in what are often difficult environments. But there remains much to be done, as the financial system becomes more inclusive and increasingly draws in unregulated institutions and people that have yet been “unbanked.” The G8 initiative gives impetus to much of the work that CGAP and its members and partners have been developing, which are designed to accelerate and ease the integration of poor clients into financial systems. For example, CGAP has recently launched the Retail Innovation Fund, which works with commercial banks (private or public) with large branch infrastructures and the potential to reach massive numbers of poor clients. The objectives of the Year are very much in line with the activities laid out under this initiative. For integration to truly take place, more MFIs must adhere to financial best practice standards that have been set by the formal financial sector. Institutions serving the poor must become transparent about financial and operational performance, encouraging barriers to private sources of capital to come down. They must be transparent about social performance so aid monies can be effectively allocated. MFIs and banks should find innovative partnerships that leverage each other’s strengths to provide better service. Overarching these efforts, CGAP, its many partners, and the G8 will work to improve the enabling legal and institutional environments for microfinance. As the Year of Microcredit raises public awareness of the importance of sustainability, innovation, inclusiveness, and access, the G8 initiative will use these guiding principles to work with governments, retail institutions and service providers to further integration. Q.3 With the emergence of investment funds (also mentioned in the G-8 document) taking equity in microfinance institutions, what is being done to create a secondary market for these investments, and provide initial venture capitalists with real exit strategies? We must remember that our fundamental aim is building domestic financial intermediaries that serve the poor and unbanked with critical deposit, credit, and money transfer services. The end goal is domestic markets that function to recycle and ease the flow of the vast pools of domestic savings into the demand for credit, via sound institutions. Foreign investments, whether donor money, quasi-commercial, or foreign commercial funds, should be seen as a second-best solution, giving way to domestic sources over time. CGAP is supportive of the foreign investment funds, especially those that provide technical assistance alongside the cash, and is working with many of them in the area of due diligence, credit ratings, financial hedging, and reporting. That said, at the moment we’re paying particular attention to the balance of the supply and demand for non-local (foreign) debt and equity investment in MFIs. With the doubling of assets in investment funds based in Europe and the U.S. during the past year amid a proliferation of new, small funds, there is concern that the US$ 1 billion plus in foreign capital may already surpass demand from the 150-200 MFIs that are eligible for this financing. In recent studies, CGAP found that nearly 90% of this new investment money is actually public money at its origin, and nearly three-quarters of it is hard currency debt. Most MFIs are totally unequipped to deal with the foreign exchange risk they are bearing. The significant balance of unhedged hard currency borrowings may be one of the largest financial risks to leading MFIs going forward. As you mention, the lack of viable exit mechanisms is another major obstacle to equity investment in microfinance institutions. Fortunately, the precedent for a strategic buy-out of an early investor will be set in Venezuela by the agreement on the Banco del Caribe acquisition of BanGente shares that were held by ProFund S.A., a microfinance investment fund. The growing interest of commercial banks in microfinance may be important for more such buyouts, especially in Latin America, where many of the first equity investments in microfinance were made. Investment funds are also taking the initiative to find creative solutions to illiquidity, such as “roll-ups” that allow investors to trade shares in a single institution for shares in a basket of investments. Q.4 Most macro-economic indicators, used by the IMF and other institutions, measure volume and depth, but financial deepening does not necessarily mean access by a larger portion of the population nor does it imply quality of access. What are practical methods of measuring inequality of access to financial services? It is true that traditional financial sector development indicators are inadequate for measuring whether a financial system is inclusive. Financial deepening takes place across four dimensions: diversity of clients, diversity of services, quality and convenience of service, and scale or outreach. A thorough picture of financial deepening requires measuring progress on each dimension in relation to the other three. While many of the poor have access to savings products, loans, money transfers, and insurance, taking advantage of this access comes at considerable cost in time and money. Financial deepening hasn’t occurred when a poor villager must travel several hours roundtrip to the nearest town to deposit monthly savings at a bank branch. A number of simple indicators can be used to examine the depth and inclusiveness of the financial system. For example, what percentage of the adult population has a bank savings account or has life insurance? How many bank branches are present in a country per one thousand inhabitants? What is the total effective cost of a micro-enterprise loan, including transaction costs and the opportunity cost of an upfront period of savings? What is the average savings balance, as a percentage of GDP, in formal financial institutions in a country (at a lower percentage, it’s more likely that the poor hold many of the accounts). While imperfect, these indicators can help paint a picture of the level of inclusiveness of the financial system. Remember that neither the formal nor informal sectors tell the complete story--in each country, some combination of these institutions will serve the poor. Especially among the very poor and geographically hard-to-reach, NGOs and local cooperatives may contribute the most to financial deepening. Our partners at the World Bank, DFID, GTZ, and others are all working to better define indicators for our access agenda, and we are very supportive of this work. Q.5 Remittance flows were emphasized in the action plan that emerged from the Summit. What do you see as some of the most effective steps to be taken in the international effort to help reduce the cost of sending remittances? Introducing competition into remittances markets dominated by a few large players will be the most effective way to bring down prices for this service. In the market for sending money to Latin America, an influx of new players over the last five years has resulted in a 50% decline in the price of remittances. Within the region, prices tend to be lower in countries with more providers competing for market share. Prices for sending money from industrialized countries to regions other than Latin America remain high--by some estimates averaging around 13% of the transferred amount, although financial and transaction costs can make the total cost much higher. To spur increased competition in these markets and bring down prices, CGAP is undertaking a number of initiatives, such as developing an online database of money transfer operators (MTOs) that will reduce the search costs for financial institutions looking for transfer partners in remittance-receiving countries. In addition to North-South remittances, CGAP is also focusing on regional and domestic remittance markets that are important to poorer migrants who tend to migrate over shorter distances. While the distances may be shorter, in some of these corridors the complete lack of payment infrastructure has led to the dominance of informal transfer channels, from hawala to hand-carrying. The scarcity of information on these flows has made formal players slow to enter these markets, despite the enormous numbers of transfers they comprise. In China, for example, 98 million domestic migrants transferred some $45M in remittances in 2003. To shed more light on the demand and scope for improving domestic money transfer channels, CGAP has begun a number of market studies and pilots. Research and pilot projects are underway in India and China, and CGAP is considering 1-2 additional locations. Q.6 As we sharpen the picture of what it will take to build financial systems to meet the huge unmet demand, how do you see role of CGAP as a multi-donor organization evolving to support this vision? It’s clear that building financial systems that serve the poor means working with a wide range of institutions: MFIs that have been front and center in the modern microfinance “movement,” commercial banks increasingly active in serving low income populations, credit unions and cooperatives with large and varied membership including the poor, and public-sector banks with wide branch networks, to name a few. Each of these institutions has particular strengths when it comes to providing financial services to the poor, and one of CGAP’s roles is to encourage and help round out these strengths. We do this by providing strategic guidance, for example, to established commercial banks, by encouraging partnerships, such as those that leverage the comparative advantages of MFIs and banks. We complement this work by supporting market developments that create an “enabling environment” for these institutions. For example, CGAP advises developing countries on instituting supportive policy environments for, and builds market infrastructure such as a central database of financial and other data on microfinance institutions (the MIX: www.themix.org) to encourage commercial investment in MFIs. CGAP is also helping donors to adapt as the boundaries of microfinance blend into the mainstream financial system. Direct subsidies to established MFIs must give way to smart, targeted subsidies to startup institutions and those working in remote and desperately poor areas. As we work with donors, governments, banks, and MFIs to build inclusive financial systems serving the poor, we can’t lose sight of the ultimate objective. Ensuring permanent, ongoing social returns that contribute to our “bottom line” of working toward poverty alleviation is central to all we do. Sharpening our tools to measure this social performance will be a critical ongoing activity.
They are all equally important and linked to one another! That said, if I had to choose one for the audiences that are new to microfinance and will be brought in to the field during the Year of Microcredit, it would be that microfinance, and especially microcredit, is not a silver bullet and we must caution against over promising what it can do. Frequent media coverage of anecdotal success stories has caused much of the public to develop the impression that microfinance is a panacea for poverty reduction. In this kind of environment, I think it’s important to highlight that microfinance (and particularly microcredit) is not always the answer (principle 6). Not everyone who is poor has the ability to take a small loan and lift themselves and their family out of poverty. For those who are destitute, with no income or means of repaying a loan, other kinds of assistance, such as grants, training, and shelter, may be most urgent. Nonetheless, for those who are able to take advantage of it, access to convenient, affordable and flexible financial services can cause an enormous difference in the lives of the poor. In the long run, these services will only be provided by local institutions that are sustainable, customer-responsive, and transparent about their performance.
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