MICROFINANCE MATTERS - Update on the International Year of Microcredit 2005

The Advisors Group for the International Year of Microcredit is a small group of high-level individuals who advocate the goals and objectives of the Year. This group represents a wide range of people with a strong commitment to the ideals and principles of the United Nations and the potential of microfinance to foster social and economic opportunity.

Led by Stanley Fischer, Governor of the Bank of Israel, the Advisors Group presented a letter to the leaders of the G8 on the occasion of the Summit in Gleneagles, Scotland in July 2005, declaring the importance of access to finance. The letter specifically urged the members of the G8 to encourage the World Bank and the International Monetary Fund (IMF) to "broaden the scope of their financial data to develop and include indicators of access to, and use of microfinance." To view the text of the letter, please click here.

As a result, the following text was included in the Progress report by the G8 Africa Personal Representatives on implementation of the Africa Action Plan, paragraph 55:

In addition, the following references to microfinance were included in the G8 Communiqué, Africa section:

By the World Bank/DFID/FinMark Trust Working Group on Developing Core Indicators for Access to Finance*

The week of June 20, 2005 saw high-level political and technical meetings related to the International Year of Microcredit held in Paris and Frankfurt. Organized in conjunction with a meeting of the Advisors Group to the International Year of Microcredit as well as the Agence Française de Développement (AFD) conference "Expanding Access to Microfinance: Challenges and Actors",[1] the World Bank, and the UK's Department for International Development (DFID), in collaboration with the United Nations Capital Development Fund (UNCDF), hosted a technical meeting on June 21 titled "Financial Access for All: Better Measurement, Monitoring and Policy Action" to further examine the critical issue of how to measure access to finance. Participants included donors, international financial institutions, policymakers and representatives from the private sector.

Documenting the Benefits of Access to Financial Services

It has been well established that increasing access to finance has both private and social benefits. Much recent empirical research has shown that financial deepening causes economic growth and can improve income distribution. It also has become known that poor people benefit disproportionately from financial intermediary development.[2] Obvious to many observers from anecdotal evidence and some studies have been the benefits of access to financial services: alleviating credit constraints which reduce child labor, increasing access to education and healthcare, and helping bring people up and out of poverty.[3] These latter gains that access to finance can provide, however, have received less attention than other aspects of financial sector development. As Cesare Calari, World Bank Financial Sector Vice President, said in his remarks at the June 21 workshop: "To be sure, financial reform and development have been high on our [World Bank] agenda for years, but considerations of stability and efficiency, as well as the implementation of standards and codes, have been paramount, with access to financial services often receiving little attention".

The Need for Data

The benefits of access to financial services have been less well documented for one major reason: the lack of reliable, systematic, comparable data. There is surprisingly little known about who has access to financial services, what affects the supply and demand of financial services and consequently how financial sectors can best include poor people. Some data exist on firms' access to finance, and previous research and analysis has concentrated the determinants of that access. So far, little has been documented on how individuals and households fare.

The International Year of Microcredit Data Project

This lack of data is partly due to the inherent difficulty of documenting household or individual access to financial services and the wide variety of concepts used to measure access. To address this, under the auspices of the International Year of Microcredit, UNCDF, the World Bank and the International Monetary Fund initiated a working group on measuring access in October 2004. The effort aimed to engage leading experts to define international guidelines on the collection of household and institutional data to ensure comparability across countries and across time. Practitioners, researchers and the private sector will use the data to more fully understand the current and potential supply and demand for financial services; more comparative data will also serve to motivate countries to reform their financial sectors so as to encourage greater access.

Recent Workshops

A smaller working group comprised of DFID, the World Bank and FinMark Trust made specific progress on defining access indicators, and held discussions over the past few months, including on June 14, 2005 by video-conference between London and Washington.[4] The technical workshop in Paris on June 21 involving a broader group was a further step in the efforts towards the development of international indicators on access to financial services. The event was opened by Stanley Fischer, Chair of the Advisors Group to the International Year of Microcredit and Governor of the Bank of Israel. Mr. Fischer has spearheaded the data initiative and has been a vocal advocate for better data. At the workshop, the World Bank and DFID presented core concepts and the proposed guidelines on core indicators for access-related surveys and other indicator work. The workshop also considered existing household and individual data collections. In addition to recent specialized World Bank country surveys in Brazil, India and other countries, FinMark Trust's FinScope model now used in Southern Africa was considered as well as the ongoing data collection efforts on access to financial services by Banque Centrale de Etats de l'Afrique de l'Ouest (BCEAO). Finally, the workshop solicited feedback from policy makers, practitioners and academics from Brazil, India and South Africa.

Defining Terms

Four main core concepts were discussed that require more common definitions - usage and access; individual and household; financial functions (products); and formal and informal services.

Access versus Usage
High among the key concepts is the question of access versus usage. In developing countries, access does not automatically correlate to usage. Or put differently, the supply and demand curves for financial services are not necessarily such that there is an intersection. Theoretically, simply measuring usage would not necessarily yield a reliable indication of the access to financial services. Some people may not have any access to financial services. Other may have access, but prefer not to use financial services given the prices being charged. In practice, however, these differences are very hard to distinguish, and there will be a continuum of current consumers: (A) voluntarily excluded consumers; (B) consumers which are involuntarily excluded; and (C) see chart. Considerable attention was therefore devoted to the definition of access and usage and setting boundaries for the core indicators. As a starting place, it was agreed that usage will be used as a proxy for access. Current consumers offer a natural base for the collection of data, but getting information on those excluded, and the reasons why they are either excluded voluntarily or involuntarily are essential to document as well.

Individual versus Household
Another key core concept discussed was the boundary of individual versus household as a measure of response. While much theory and practice is centered on the household as a unit, the intra household power structure can often be opaque and access cannot be assumed for all in the households if one has access. Using only the household as respondent also risks losing valuable characteristic data, or completely missing it, should the head of the household not be aware of the entire household's use of financial services. Although more time consuming and potentially more difficult, it was agreed that to make the adult individual the appropriate unit of response for survey data on access to financial services.

The Boundary between Formal and Informal
The next significant core concept reviewed was that of the boundary between formal and informal financial services. In many of the target countries, this is often a continuum: some consumers will only use formal, some only informal financial services, while some will use both formal and informal services. Furthermore, the nature of the formal and informal financial services providers will vary greatly among countries. In order to establish comparability across surveys, it was proposed that the following common groupings be distinguished for this issue: " Formal providers - legal entities that are reporting to a legal authority (not necessarily supervisory), are deposit taking, have access to the national payments network, have some supervision and oversight, and operate on relative standard terms. o Examples of this group include commercial banks and broad-spectrum financial intermediaries (e.g., some credit unions, niche banks) " Other formal financial institutions (more specialized) - not necessarily subject to prudential regulation, with the definition to vary by country and by service, introducing thus a tradeoff of comparability and comprehensiveness across countries o Examples of this group include insurance and money transfer agents, and finance/credit companies " Informal - no legal status, but still organized entities o Examples of this group include rotating savings and credit associations (ROSCAs), tontines, moneylenders, pawn shops, ususus, stokvels etc.

Functional Dimension (Products)
The functional dimension was another key concept reviewed. Three, possibly four, main functions were identified: transaction/payment; savings/investment; loans/credit; and insurance/risk transformation. Surveys and other indicators should include core measures for the first three functions. It still remains a question whether insurance and risk management tools can be measured as their own functions or whether for measurement purposes would be better considered to be a derivative of a savings function.

Secondary Issues: Time and Representative Coverage

In addition to the four main core issues of usage/access, individual/household, formal/informal, and functional dimensions, there are secondary issues of time, and representative coverage. The reference time period for poor people to use financial services can be expected to sometimes be less regular, and typically longer than those in wealthier countries. In response to this, existing surveys range from 30 days, 12 months, to even three years. International consensus on a standard reference time period will be important, with twelve months currently proposed as the reference point.

The existing household and individual level surveys run the gamut of geographic and other coverage, such as only rural, only urban or national surveys, or only poor or a cross-section of all type of users. Given differences in resources likely to be available for such surveys, it is suggested that information from less than national coverage cannot be eliminated, although caveats on the exact coverage will be required if used for the purposes of cross country comparison. However, strong efforts should be made to ensure a representative sample is constructed.

Can such a sample be used to extrapolate up to nationally representative indicators? This could only be realistically attempted by incorporating 'supply side' information on quantities of services provided with national indicators on factors such as local economic activity, population density and income, etc. However the interpretation of such hybrid indicators would have considerable limitations, and would be particularly problematic if one were to try to scale up from say rural samples to a mixed rural and urban population.

Developing a Headline Indicator

With all of the possible variants on these select core issues, it is easy to see how important international cooperation and coordination is for the development of comparative indicators. In addition, critical to the development of core standards in surveys is the development of a composite 'headline' indicator. Such an indicator should have maximum impact and easily translate into policy. This is imperative should the measurement of access make it onto the global agenda in the same way that other indicators are now part of the UN Human Development Indicators and the Millennium Development Goals. The headline indicator should be easy to update on a regular basis, comprehensive yet simple and transparent, and empirically robust. How to achieve this was discussed as well, for example, using supplier surveys complemented with other data, but no firm conclusions were reached.

Next Steps

The events in Paris brought together many of the key players in this effort and the momentum created by these exciting discussions will need to be sustained. The next step in the development of these indicators will be the publication of a concise and precise guide about the indicator definitions and their use. A small working group will be working on continued communication with the international community. No single bilateral or multilateral donor can accomplish or lead this effort and it will be important to simultaneously develop both the technical details of this mission and to disseminate the broader objective to a high-level policy discussion. In his capacity as Chair of the Advisors Group to the International Year of Microcredit, Stanley Fischer has indeed already called upon the leaders of the G-8 to "urge the World Bank and the IMF to broaden the scope of their financial data to develop and include indicators of access to, and use of, microfinance".

*Contributor's Note: The June 21 event was organized by jointly by the International Year of Microcredit, DFID, the World Bank, and UNCDF in collaboration with the Consultative Group to Assist the Poor and le Collectif des Acteurs Français de la Microfinance, with generous logistic support from Ministère de l'Economie, des Finances et de l'Industrie of France. People involved in the World Bank/DFID/FinMark Trust working group and the events include Priya Basu, Thorsten Beck, Anne-Marie Chidzero, Stijn Claessens, Karen Ellis, Brigit Helms, Patrick Honohan, Jennifer Isern, Anjali Kumar, Asli Demirguc-Kunt, Mark Napier, Douglas Pierce, Robert Stone and Marilou Uy. For further information please contact:

World Bank
Anjali Kumar, Adviser
Financial Sector Operations and Policy Department
Tel: 202 458 0004.
Email: Akumar@worldbank.org

DFID
Karen Ellis, Economic Advisor
Department for International Development, DFID
Tel: 44-20-7023-1059
Email: K-Ellis@dfid.gov.uk

For more information on the International Year of Microcredit, please visit: www.yearofmicrocredit.org.

(1) For more information, see "France Convenes Microfinance Conference: Financial Leaders from across the Globe Discuss the Changing Sector," July issue, Microfinance Matters: http://www.uncdf.org/english//microfinance/newsletter/pages/2005_07/news_france.php

(2) Beck, Thorsten, Asli Demirguç-Kunt and Ross Levine. 2004. "Finance, Inequality and Poverty: Cross-Country Evidence." World Bank Policy Research Working Paper 3338, and Honohan, Patrick. 2004. "Financial Sector Policy and the Poor: Selected Issues and Evidence," World Bank Working Paper No. 43 (Washington DC: The World Bank). See also Claessens, Stijn. 2005. "Access to Financial Services: A Review of the Issues and Public Policy Objectives." World Bank Policy Research Working Paper 3589, and DFID. 2004. "The Importance of Financial Sector Development for Growth and Poverty Reduction." http://www.dfid.gov.uk/pubs/files/finsecworkingpaper.pdf.

(3) Littlefield, Elizabeth, Jonathan Morduch and Syed Hashemi. 2003. "Is Microfinance an Effective Strategy to Reach the Millennium Development Goals?" CGAP Focus Note 24.

(4) For more information, please see "Using the 'Access Diamond' to Measure Financial Product Usage: DFID to Support Roll-out of FinScope Surveys across Africa"

As set out in the April 2005 edition of Microfinance Matters,[1] the UK's Department for International Development (DFID) has been working with the World Bank, FinMark Trust and others who have been undertaking household surveys of access to financial services in developing countries, to agree on a set of survey questions and indicators that can be collected on a uniform basis going forward in order to facilitate greater cross-comparability of results.

As a result of the International Year of Microcredit Data Project, a World Bank-DFID-FinMark Trust Working Group was established to work on this issue. A videoconference was held on June 14, 2005 to discuss possible approaches, and the outcome was presented on June 21 at the Paris conference "Financial Access for All: Better Measurement, Monitoring and Policy Action" organised by the International Year of Microcredit, DFID, the World Bank, and the United Nations Capital Development Fund (UNCDF).[2]

June 14 Videoconference

On June 14, the participants in a landmark videoconference agreed that the indicators of financial sector access should measure "usage" - as a proxy for access - of financial services by the whole adult population, and should include a range of services offered by both formal and informal providers in the financial sector. The participants at this workshop included the World Bank, FinMark Trust, African Central Banks, Financial Sector Development Projects in Ghana, Kenya, Tanzania, Uganda and Zambia, CGAP, FIRST and ICICI Bank.

Using the Financial Access Strand to Measure Usage

There was also agreement on the use of a "Financial Access Strand" as a visual measure of financial services usage. The Financial Access Strand places the adult population, aged 16+, along a continuum of access, depending on their usage of formal and informal financial services. The concept will continue to be refined, but will look something like the following (the figures used are illustrative only):

The Financial Access Strand

The strand is divided into four segments, according to the proportion of the population that:

This continuum captures all the different elements of the financial sector that commonly exist in developing economies in a clear, visual way.

The strand lends itself to four categories which will form the basis of the core indicators currently being developed, but which could include:

Sub-indicators for Product Usage

It was further agreed that sub-indicators should also be developed which capture usage of particular financial products, i.e., transactions, savings services and credit. These indicators would refine the picture of usage patterns within the formally served market.

Such specific financial product usage indicators could be captured using the Access Diamond approach that was pioneered by FinMark Trust on the basis of the FinScope surveys it has conducted in Southern Africa (see April 2005 edition of Microfinance Matters ): The Access Diamond measures the percent of the adult population that has one or more products in each of the product categories.

Landscape of Access Diamond

In the example above, 48% of the adult population has a transaction account, which would be an account that allows the consumer to receive money and make payments, 49% of the adult population has some form of savings facility, 57% has credit, and 42% has insurance. DFID will continue to work collaboratively to develop the indicators and it is our hope that household surveys will begin to collect this data on a systematic basis so as to bring global attention to levels of financial access, and provide the necessary support towards building more inclusive financial markets.

Replicating the FinScope Surveys

DFID is also working with FinMark Trust to develop a strategy for replicating the FinScope survey more widely across Africa (and elsewhere), with a view to generating much more detailed information on financial services access and usage than is currently available in these countries, in addition to the agreed indicators that will facilitate cross-country comparisons. Interest in undertaking a FinScope survey within the next 6 to 12 months has already been expressed by policymakers and donors in Zambia, Uganda, Kenya, Tanzania, Ghana, Nigeria, Mozambique, India, Pakistan, and Nepal, with preparations already underway in Zambia, Uganda and Kenya.

Of the completed FinScope survey in Namibia, Bank Windhoek Managing Director James Hill has said his company was "delighted with the outcome and excited about the insights we have gained. All we can say is that for the first time in a long time we are able to engage in innovation that will truly respond to the needs of our markets, both current markets and those that we will be able to create in the future".

A second DFID workshop, on June 15 in London, brought together key partners and potential collaborators - including African Central Bank staff from Kenya and Zambia, the World Bank, IFC, CGAP, the FIRST initiative, FinMark Trust and ICICI Bank - to discuss the FinScope roll-out strategy, including issues such as the need for an in-country champion and an appropriate institutional home for the work, methods for securing the buy-in of a wide range of stakeholders in-country, the best method of engagement by FinMark with countries throughout the process, the types of assistance that will be required, and possible funding mechanisms.

From the discussions, it was clear that FinMark Trust's approach should be demand-led and its method of engagement will depend on country needs and requests for assistance. It can either offer a tried and tested model that can be adapted and implemented in-country, or it can provide technical advice and assistance throughout the process of conducting the survey.

It was also clear that there is a need for country level ownership. The impact of the survey process will be enhanced where there is strong local buy-in to inform the design of the survey questionnaire so that it addresses local conditions and meets local requirements, and to ensure that the resulting information is analysed properly, disseminated widely, and used effectively to promote change in financial markets.

FinMark will continue to develop the strategy to roll-out FinScope access to finance surveys across Africa as they begin the survey process in some of these countries over the next few months, and a business plan will be published as a basis for discussion with potential funders.

(1) To view the article, please visit: http://www.uncdf.org/english/microfinance/newsletter/pages/2005_04/news_dfid.php
(2) For more information, please visit: International Year of Microcredit Initiates Cooperation to Develop Core and Headline Indicators: World Bank, DFID and FinMark Trust Team Up to Measure Access to Finance

More than fifty National Committees now formed to celebrate the Year - As of August, the call to build inclusive financial sectors has prompted a formal response from more than 50 nations, which have agreed to form National Committees to assess the challenges poor people face in accessing financial services. Throughout the world, National Committees are holding activities and engaging in dialogue on best practices for building inclusive financial sectors in their countries.

Upcoming Event: United Nations International Forum on Building Inclusive Financial Sectors - From November 7 through November 9, 2005 the United Nations and the Advisors Group to the International Year of Microcredit will bring together the more than 80 countries and National Committees that actively participated in the Year to deliberate on increasing access to microfinance around the world.

G8 and Wall Street recognize the importance of microfinance - Two significant groups have recognized the importance of microfinance and building inclusive financial sectors. In a report issued following the Gleneagles G8 Summit, G8 members wrote in their report that they are "supporting on access to finance, microfinance, and remittances. Overall levels of access to finance are extremely low (less than 10% of the adult population in many African countries with bank accounts,) and this acts as a brake on growth and opportunity. The UN and World Bank have undertaken work to develop indicators on access to finance, and to support national governments to maximize the productive use of remittances. A high level conference on enhancing access to microfinance took place in Paris on 20 June, which agreed that microfinance is a powerful tool to use in helping reach the Millennium Development Goals and discussed how to best promote access to finance globally."

In June, Wall Street professionals joined the United Nations in examining what role they can play in making financial services available to the vast numbers of poor and low-income people around the world. An expert panel debated how Wall Street can apply sophisticated financial solutions to the growing microfinance sector. Opening remarks were given by Nane Annan, wife of Secretary-General Kofi Annan, who spoke of her personal experiences meeting women who have benefited by microfinance.

Australia demonstrates commitment to the International Year of Microcredit with three conferences - The Focal Point of Australia will hold a conference on engaging communities in microfinance from August 14th to August 17th. The Foundation for Development Cooperation, an Australian international development think tank, and the government of Queensland are co-sponsors of the event. The conference will highlight the microenterprise development and its relation with microfinance.

The Indigenous Micro Enterprise Development Public Profile event will be held on August 25 in Australia. Guest speakers include David Bussau, the co-founder of Opportunity International, Gerhardt Pearson, the CEO of Balkanu Cape York Development Corporation, and Hon. Kevin Andrews M.P., the Minister for Employment and Workplace Relations.

In celebration of the International Year of Microcredit, the Victoria Division of United Nations Association of Australia is holding a Conference from August 29 to August 30, 2005. The Conference will provide a platform to share the practical lessons and discuss the wider issues for business, governments and NGOs with leading international experts and delegates from both the developed and developing world.

Burundi promotes the International Year of Microcredit - Some highlights of the communications campaign in Burundi include a radio outreach programme ongoing from July through November, a theatrical play from June through November, and in July and August, the production of a video on basic concepts of microfinance to be broadcast on national television. In August, Burundi's National Committee is planning to host an educational Open House and distribute brochures on microfinance. Burundi will also train individuals to speak about microfinance in laymen's terms in September.

Nicaragua issues commemorative postage stamp - In order to celebrate the International Year of Microcredit, Nicaragua will issue commemorative postage stamps in August. The Microfinance Association of Nicaragua (ASOMIF) is holding a microfinance competition for university students to foster research on microfinance. ASOMIF will also publish a country report on Nicaraguan MFIs' contribution to the Millennium Development Goals. As member of the National Committee of Nicaragua, ASOMIF has 23 members and a combined member outreach of more than 200,000 microfinance clients.

Poland partners with corporate, NGO and student groups for the Global Microentrepreneurship Awards - The United Nations Development Programme (UNDP) country office in Poland, in collaboration with the Kronenberg Foundation, a representative entity of the Citigroup Foundation, is actively organising the Global Microentrepreneurship Awards (GMA) programme under the name "Microentrepreneur of the Year 2005." Students from the Business Centre Club (BCC) and the Microfinance Centre (MFC) have signed on as co-partners for the program. The programme has already become one of Poland's biggest events as part of the International Year of Microcredit. The Warsaw stock exchange will host an award ceremony for the winners on November 8, 2005.

Organizers are in the process of forming the Honorary Committee, which will be comprised of the most prominent advocates of entrepreneurship in Poland. Microfinance practitioners, government officials, members of the stock exchange and the MFC, as well as employer organizations will sit on the Honorary Committee, which convened for the first time in June. They will determine the rules of the programme, the criteria for applicants, and select the jury. They will also make decisions regarding application forms and the invitation letters to microfinance institutions, jury members, and students. The jury will most likely be composed of business journalists, NGO practitioners, government officials, employees of think tanks and members of the stock exchange. The jury's first task is to select 25 nominees from the applicant pool. Each of the 25 initiatives will be verified and described by the students from BCC. The jury will gather for a second time and select the winners for each category.

Invitations were sent to microfinance institutions at the end of June and the organizers have already received informal confirmation from them and expect about 100 applications in total for the contest.

Second International Microfinance Conference to take place in South Africa - The conference will take place on August 29 - September 1, 2005 in Cape Town, South Africa. This event was organized by the Microfinance Regulatory Council (MFRC), and the University of Pretoria, among other institutions. The theme of the conference is "Integrating Microfinance Into Formal Financial Markets." The financial sector of South Africa consists of 28 banks, 2 mutual banks, 28 SACCOs and 1,354 MFIs registered under Micro Finance Regulatory Council.

The International Year of Microcredit website attracts 20,000 visitors a month from over 130 countries - Popular features and sections include National Committees resources, Search by Calendar for Events Near You, Shop the Microentrepreneur Marketplace and Celebrity public service public service announcement videos. In just the past few months, more than 250 events have been submitted to the website and more than 30 microfinance organizations have signed on. For the latest and most exciting information, visit www.yearofmicrocredit.org

Made by Microentrepreneurs, the International Year of Microcredit online store, launches award for "most outstanding logo product" - National Committees from around the world have been invited to participate. Participants should submit product samples by 15 September, 2005. Entrepreneurs who produce the six most outstanding products will be invited to New York for the high-level International Forum at the UN Secretariat on November 7-8, 2005. An overall winner will presented with an award at this event. A selection of logo products will be featured on the website (www.shopmicro.org) and sold at the Forum in New York.

International Year of Microcredit list serve launched - This service is primarily intended for the International Year of Microcredit National Committees and other groups looking to discuss their microfinance experiences. This is a great place to ask questions, find information, share ideas and exchange experiences. To sign up, please visit: http://lists.yearofmicrocredit.org/mailman/listinfo/yomlist

By Peter Zetterstrom and Jeff Reeves, United Nations Development Programme, China

Isolated and poor for much of the twentieth century, China has been launched into the global spotlight in recent years thanks to unprecedented growth and seemingly unlimited potential for economic development. With an annual growth rate of around 9% for the past two decades, China has done more towards raising the living standards of its people during this time than any nation in the history of the world.

Yet despite its accomplishments, China remains divided as development and wealth accrue unevenly across the country. While China's eastern coastal cities thrive with the country's new wealth, large regions remain dogged by poverty with little opportunity for their citizens. Workers flock to the cities as the gap between rural and urban living standards widens, thus draining the countryside of vitality and manpower. This migration exacerbates the challenges of areas already lacking access to many key public and private services taken for granted elsewhere, including basic financial services.

Challenges in Providing Financial Services to Poor People in China

In most rural areas, government microcredit programmes are the only mechanisms in place to provide loans to poor and low-income households. These systems suffer from many known problems, including bad debt, leakage to the non-poor population and diversion of funds into infrastructure projects, and the result is that gross rural financial demand is often unmet. Meanwhile, regular financial institutions are not reaching down to poor and low-income populations.

Financial services are far from inclusive as most institutions see rural loans as high risk and bothersome to monitor making it notoriously difficult for a farmer to get a loan. This lack of effective financial infrastructure has led to a slowdown of some rural and regional growth.

The central government started addressing the need for rural economic reform in the 1970s, intent on widespread financial reform, although many early initiatives fell short or proved unsustainable. Frustrated by such failure, the government started looking towards microcredit as a poverty reduction tool around 1994. In 1996, the government took a step away from promoting more market based reforms and laid out a long term objective, reaching to 2010, to revamp the waning Rural Credit Cooperatives (RCCs), the main distributors of small scale loans in rural areas. These institutions thus enjoy an effective monopoly over rural microcredit and state-owned commercial banks are ensured the exclusive right to provide funds. This practice, while in theory meant to re-establish more cooperative financial sectors, was largely unsuccessful as urban centered banks lacked the experience to address farmer's needs and the larger demands of agricultural development while the RCCs failed to remain credit cooperatives, instead taking on market based attributes. In response to the programme's less than anticipated fiscal returns, as well as to post WTO accession financial reform in which the government encouraged foreign banks to further invest in China in order to "bring increased pressure on domestic banks…leading them to allocate investment resources more effectively"[1], the central government issued policy encouraging "natural person(s) or enterprises" "to establish microcredit associations that press close to the farmers and rural demand"[2], thus partially opening China's microfinance sector to other actors.

China Celebrates the International Year of Microcredit

The United Nations Development Programme (UNDP) has supported microcredit in China since 1994, when the first of its Rural Development Associations (RDAs) was established in Yunnan Province, one of the country's poorest, in what was to become an ambitious US$20 million programme to pilot microcredit for poverty reduction in China. These institutions now exist in 48 counties spread across 16 provinces and have since provided over 300,000 Chinese citizens with microcredit as well as training, which is at the core of UNDP microcredit projects. By providing its clients with diverse business and life skills, the programme strives to empower them to realize the full potential of the loans.

The GMA Programme in China

As part of the United Nations' International Year of Microcredit, UNCDF (the United Nations Capital Development Fund), and UNDP China, have teamed up with Citigroup, CICETE, UNICEF, the GMA Students Alliance, PlaNet Finance and the China Academy of Social Sciences to facilitate the first ever Global Microentrepreneurship Awards (GMA) in China. The GMA seeks to recognize outstanding microentrepreneurs and their achievements in the face of adversity, raising awareness about microcredit and its role in poverty reduction and balanced development.

The enormity of such a task-to select from a potential pool of tens of millions-was daunting as the Country Team was intent on drawing from China as a whole. The Country Team issued individual letters to over 300 microfinance institutions (MFIs) and extended invitations to the vast system of 30,000 RCCs and the institutions set up under the Agricultural Bank of China through their central representatives.

With hundreds of applications received, the Country Team has now begun the process of screening and evaluating the various candidates. After the first round, teams of dedicated students from some of China's top universities will travel across the country to visit candidates in their homes. Meeting the microentrepreneurs in person, the field teams will record their personal stories in greater detail, adding further depth, life, and colour to the initial application. By talking to other clients or loan officers, family members and neighbours, the students will also strive to see the contributions of the candidates to their communities and microfinance institutions.

Upon completion of their field research, students are responsible for writing evaluation reports and narrowing down the number of applicants to four per category. The categories for loan recipients are: rural agriculture, rural animal husbandry, rural non-agricultural, urban trade, urban processing, urban services, as well as a special prize for the most innovative microentrepreneur. The contest also seeks to reward microfinance loan providers by recognizing both best urban and rural loan officer.

The Country Team will then present the final 36 contestants to the awards selection committee, which is comprised of representatives from some of China's most influential institutions, such as the People's Bank of China, the People's University, the Asian Development Bank, the State Council's Poverty Alleviation Office, the All-China Women's Federation, as well as Citigroup and the Ford Foundation. As part of the fourth and final stage of evaluation, the awards committee will review the applicants and then assign first, second and third places within the nine different categories.

A total of US$80,000 has been allocated for prizes of which US$30,000 will be exclusively cash prizes. For both microfinance customers and loan officers, the first, second, and third prize winners will receive US$1,200, US$1,000, US$800, respectively (prizes will be awarded in Chinese RMB).

The remaining US$50,000 will be used for such non-cash prizes as training, equipment, and exchange opportunities, which the country team will award to the winning applicants' microfinance institutions. Assuming each winning applicant comes from a different institution, there will be a maximum of twenty-one that can receive such prizes. Each institution, therefore, could potentially receive an average of US$2,400 in non-cash awards.

Highlighting Poor People as a Worthy Investment

By celebrating the skills and tenacity of China's microentrepreneurs, the Country Team hopes to demonstrate the business potential of the vast untapped market that the poor represent, encouraging the downward outreach of traditional financial institutions. In addition, as China's post WTO accession financial reform focuses largely on overhauling such traditional institutions in order to provide the populace with a more effective, inclusive financial system, the Country Team believes the GMA will highlight the benefits of such reform by clarifying that microfinance, rather than charity, is a tool conducive to overall country development and economic growth.

As Madam Wu Xiaoling, Vice Governor of the People's Bank of China, said at the GMA media launch in Beijing, "in our opinion, the introduction of microcredit schemes marks a revolutionary transformation of China's poverty reduction policy from relying on relief support to that focusing on development, and serves as an important means of aiding vulnerable groups in society in their efforts to achieve prosperity." The GMA team sincerely believes such a truly inclusive financial sector will unleash the drive of poor people themselves to improve their lives and grow out of deprivation, making it a powerful tool for reducing poverty and reaching the Millennium Development Goals.

(1) Nicholas R. Lardy, Integrating China into the Global Economy (Washington D.C.: Brookings Institution Press, 2002), 11

(2) Sustainable Micro-credit for Alleviating Poverty: Report of Participatory Impact Assessment. (UNDP/CICETE, 2005), p. 1

Global interest in the International Year of Microcredit 2005 continues to grow. Many initiatives are underway to help meet the Year's objectives of promoting awareness of microfinance and building inclusive financial sectors. All of the initiatives undertaken by the Year are designed to encourage innovation and strategic partnerships.

An unprecedented global response to the call to build inclusive financial sectors is now underway, with nearly 100 countries - or about half of the countries of the world - pledging their support to the International Year of Microcredit.

Many countries are making a formal commitment to the Year through the establishment of National Committees. National Committees or Focal Points had been established for more than 50 countries, comprising high-level representatives from 44 governments, 30 United Nations local offices, 50 multinational agencies, 222 microfinance networks, 28 central banks as well as key members of the private sector and civil society.

Hundreds of conferences and seminars are being held throughout the Year and more than 30 countries have developed formal public awareness campaigns to reach even the remotest region. Such awareness raising activities focus on introducing quality financial services to the poor and lower income people and are designed to reach a wide-ranging audience. Many governments realizing the benefits of microfinance have initiated innovative ideas at promoting the Year.

Worldwide countries are engaging in activities that include researching their microfinance sectors, hosting symposiums and training programs, and participating in the Global Microentrepreneurship Awards Programme.

More than 30 countries are participating in the second annual Global Microentrepreneurship Awards Programme, which highlights the achievements of low-income entrepreneurs. The programme brings together thousands of microfinance clients, students, private and public sector professionals, celebrities, senior government officials and UN agency staff.

Microcredit associations and microfinance institutions located in the GMA participating countries are now nominating their microentrepreneur clients for the awards. Criteria for the awards include, but are not limited to, innovation, social impact of the microentrepreneur, use of technology, quality of life improvement and creation of new employment opportunities. The winning contestants will be invited to ring the opening bells at over 30 stock exchanges, sending a strong signal to the world that building inclusive financial sectors can play an important role in poverty alleviation.

The GMA programme begin in 2004 and led to the GMA Student Alliance, which is a formal collaboration between Citigroup, the United Nations, and student groups from universities across the globe.

Initiated by the Year, and led by the United Nations Capital Development Fund and the Office of Financing for Development of the United Nations Department of Economic and Social Affairs, the Blue Book on Building Inclusive Financial Sectors used an international dialogue among a wide variety of financial sector experts to address the question of "why so many bankable people are unbanked."

Consultations were organized in Jordan, Mali, the Philippines, and Chile. Additional financial stakeholders' feedback were provided through an e-conference and an online survey. These consultations culminated at a Global Meeting in May, hosted by the International Labour Organization in Geneva and chaired by UN Under-Secretary José-Antonio Ocampo, where over a hundred and thirty experts in finance gathered in roundtable discussions to address the challenges of building inclusive financial sectors.

The basis of these consultations was to identify new perspectives on the most pressing issues and promising avenues for concrete change fostering access to financial products and services to the millions currently unbanked and contributed to the preparation to the publication the "Blue Book on Building Inclusive Financial Sectors for Development". The Blue Book aims to be a compelling analysis, identifying the constraints in the development and effective functioning of financial institutions and markets serving the wide-ranging needs of underserved households and businesses and lays out the avenues of opportunity to address these constraints.

While including the views and visions on the financial sector stakeholders and experts, the Blue Book's main purpose is to facilitate the processes fostering the development of inclusive financial systems; to serve that objective the Blue Book will include strategic options and policy choices. Supported by a multilateral agency steering committee composed of the UNCDF, UNDESA, the World Bank, the IMF, ILO and IFAD as well as through the support from other financial sector experts, the Blue Book will be presented at the General Assembly of the United Nations in September and officially launched on November 7, 2005.

Although there is a broad consensus that microfinance is widely and increasingly used, there is little hard data about who provides it, in what form it is provided, who receives it and at what cost. In the fall of 2004, the Year, under the leadership of Stanley Fischer, Governor of the Bank of Israel, brought a small group of expert statisticians and researchers from the Bretton Woods Institutions and the United Nations together with governments and the private sector to address current data gaps, anticipate future needs and build agreement on the best way to move forward. As a result of this pioneering process, the World Bank and the UK's Department for International Development (DFID) have moved forward, along with the Central Bank of West African States (BCEAO), to develop indicators on the quality of financial access. Preliminary results will be launched on November 8, 2005, at the Year Forum on Building Inclusive Financial Sectors, as a critical first step in assembling this vital information that will allow countries to assess and benchmark their progress.

A collection of 25 items including products made by microentrepreneurs, labeled with the logo of the Year, and books related to microfinance, convey to the public the importance of microentrepreneurs and microfinance. These are sold through an "online boutique" at www.shopmicro.org. The chosen products represent various world regions, male and female entrepreneurs, young and older craftspeople, various media as well as different market segments. The story of the artisan will be told on the website to illustrate the link to microfinance. National Committees and partner organizations are also invited to market and sell these products.

The online store currently has products from Macedonia, Colombia, Rwanda and Bangladesh. The store seeks involvement from microfinance institutional leaders, corporate partners and celebrities who will promote the products.

Microfinance Matters is a monthly web publication from the United Nations Capital Development Fund that was started by the Secretariat in January 2004. The newsletter now reaches over 6,000 direct subscribers and expects to have a circulation of more than 10,000 by the end of 2005. In addition to our subscription list, the newsletter is also distributed through various microfinance outlets, reaching an estimated additional readership of well over 50,000 people worldwide. Microfinance Matters takes advantage of the Year to promote innovative partnerships, raise public awareness, and share effective practices and expertise on building inclusive financial sectors. By inviting reader opinions, the newsletter is developing into a platform for discussion and debate. Contributors range from Central Bank Governors to Ambassadors to microfinance clients.

Celebrities are lending their support to the year by recording public service announcements for worldwide distribution. American actor Michael Douglas filmed PSAs in August, joining international performers Aishwarya Rai, Anggun, Souad Maasi, and Karina. Brazilian musician and Minister of Culture Gilberto Gil has agreed to follow suit. Anggun's PSAs aired at the Pavarotti and Friends Concert in Johannesburg, South Africa on April 2 to an audience of 20,000. The PSAs were produced by Citigroup and are available in English, French, Spanish and Indonesian. Citigroup has agreed to distribute the PSAs internationally with its advertising package. The PSAs are distributed through the Year website, microfinance providers, and National Committees throughout the world. Plans are underway for an additional promotion campaign through posters, postcards and decals and to secure additional mainstream celebrities to promote the objectives of the Year.

The film short: "Microfinance: In Their Own Voices," a collection of client stories produced by Sterling Van Wagenen for the International Year of Microcredit, has been distributed to UN Information Centers and target broadcasters. The film is in demand from many parties, including National Committees, conference organizers, universities and others to promote microfinance messages. In addition, the Secretariat has offered input into a number of documentary film and television productions on microfinance. Films on microfinance produced for the Year will be made available on the Year website.

The Emissary and Spokespersons Groups raise awareness of the objectives of the Year by participating in various events. Brazilian Minister of Culture Gilberto Gil has now joined the Year as a Patron and Emissary, joining in the efforts of several other dignitaries and royalty to promote microfinance.

Queen Rania of Jordan traveled to Washington D.C. to participate in a forum on microfinance in the Middle East. Princess Mathilde of Belgium has participated in an array of activities including visits to microfinance clients in China, Mali, and India and speaking engagements at universities in Europe, Asia and the United States. Princess Maxima of the Netherlands visited entrepreneurs, MFIs and government and Central Bank officials in Uganda and Kenya. Anggun has engaged in promotional trips to Indonesia, performed in benefit concerts, and has promoted the logo of the Year on her most recent album.

The official website of the Year (www.yearofmicrocredit.org) provides extensive information about the Year, its objectives and activities, National Committee contact information and a calendar of national, regional and international events. The site serves newcomers to microfinance, industry practitioners, UN country teams and agencies, and donors. Organizations may link to the website (guidelines on how to do this are available on the site). The site also includes multiple languages to support our international audiences. Key areas include an events calendar, media resources, an interactive microfinance education area, an experts forum, international contact information for all Year country teams, and information about key sponsors and patrons group.

7 to 8 November 2005, UN Headquarters, New York - United Nations International Forum on Building Inclusive Financial Sectors will be held. The United Nations and the Advisors Group to the International Year of Microcredit will bring together the more than 80 countries and official National Committees that actively participated in the Year to deliberate on how to increase access to microfinance around the world.

Information on hundreds of other scheduled microfinance meetings, conferences, activities and events around the world are found on the official Year website (www.yearofmicrocredit.org).