UNITED NATIONS CAPITAL DEVELOPMENT FUND    Microfinance

Issue 18 / November 2005

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By Irena Budimova, Robert F. Wagner School of Public Service, New York University

Richard Weingarten, Executive Secretary UNCDF; Kemal Dervis, Administrator, UNDP; Her Royal Highness Princess Maxima of the Netherlands



Paul Wolfowitz, President, World Bank and José Antonio Ocampo, United Nations Under-Secretary-General for Economic and Social Affairs

The United Nations International Forum to Build Inclusive Financial Sectors (the Forum) took place from November 7-9, 2005 at UN Headquarters in New York, assembling more than 700 representatives from 90 countries. The participants included dignitaries, high-level government officials, corporate CEOs, celebrities and microfinance clients. The Forum served as the culmination of the International Year of Microcredit 2005, and provided an opportunity for leaders in international finance and development to discuss and deliberate how to increase access to financial services for poor people. The goal of the Forum was to create an action plan for building inclusive financial sectors and help bring the world closer to achieving the Millennium Development Goals.

The three-day event included nine panels that generated debate on diverse topics such as the potential role of microfinance in post-disaster countries, the role of the private sector, the impact of technology on microfinance, the commercialization of microfinance, Africa's unique microfinance sector, and the regulation of the microfinance sector.

Panelists repeatedly remarked on the incredible success the Year has achieved in raising awareness of microfinance and its potential for alleviating poverty. During the opening ceremony Paul Wolfowitz, World Bank President, said, "Microfinance is a powerful tool for reducing poverty. It enables people to increase their incomes, to save and to manage risk. It reduces vulnerability and it allows poor households to move from everyday survival to planning for the future".

Kemal Dervis, Administrator for the United Nations Development Programme (UNDP) focused attention on the success of Year by saying, "This year has achieved success beyond all expectations, further demonstrating the worldwide demand for increased access to financial services".

Her Royal Highness Princess Maxima of the Netherlands, an Advisor to the Year, urged supporters of microfinance to ensure the profitability of the sector. "I and my fellow advisors are convinced that to move to the next level, profitability will be crucial", she said. She continued to say that: "The biggest challenge is not how to do microfinance, but how to do it on a big enough scale to make a real macroeconomic difference. To reach the very large number of poor people who need financial services, microfinance must become commercially viable".

The Panels[1]

The first panel focused on two important initiatives started as a result of the Year: the Data Project and the Blue Book. Of the Blue Book, José Antonio Ocampo, United Nations Under-Secretary-General for Economic and Social Affairs, said: "It only has one major policy prescription: that access to finance should be the main goal. It is to serve as a reference point for governments to share best practices". United Nations Capital Development Fund (UNCDF) Executive Secretary Richard Weingarten discussed UNCDF's role in working towards building more inclusive financial sectors in Sub-Saharan Africa, while Asli Demirguc-Kunt, Finance Manager, World Bank, presented the results of the World Bank's first efforts to collect data on access to financial services, initiated under the auspices of the Year. [2]

The second panel focused on financial sector crises in post-conflict countries. James D. Rogers, Governor of the Central Bank of Sierra Leone, spoke about the importance of investing to ensure that conflicts do not take place in the first place. Investment in conflict resolution is more meaningful than large programmes, which come in after the fact. Panelists agreed that microfinance can be a very potent instrument in alleviating extreme poverty and thereby decreasing the risk of conflict. Two microentrepreneurs from war ravaged countries spoke of their ability to build a better life with the help of a microfinance loan, Shakila Sarajulldin, a microentrepreneur from Afghanistan, and Fatu Kanu of Sierra Leone.

One of the most important developments in microfinance in the last few years has been the increased participation in the industry by the private sector, which has demonstrated that microfinance is a viable commercial business. The need for private sector involvement to help build a sustainable microfinance sector was emphasized throughout the Forum and in the third panel: "Will the International Private Sector Transform the Landscape of Microfinance?" Bo Cutter, Managing Director of Warburg Pincus, said, "In order for this sector to evolve to include deep established financial services that reach the poor, as compared to the single product of today, we need to have strong public-private partnerships".

The fourth panel deliberated on technology implementation strategies and how can microfinance institutions obtain access to technology. One of the major obstacles was determined to be the lack of common standards to unite different systems. Henrik Pal, Managing Director of Eurogiro, encouraged interconnectivity between the developed and developing countries. Africa in particular lacks access to technology due to the high costs and this prevents the financial sector to expand or become profitable. Panelists concluded that innovative means to overcome this hurdle must be implemented.

The commercialization of microfinance institutions, the diversification of financial services, and the impact of technological advances are necessary for access to financial services to expand. During the fifth panel, "The Future of Access to Finance", Dr. Stanley Fisher, Governor of the Bank of Israel and Chair of the Advisors Group to the International Year of Microcredit said, "The capacity to reach the poorest people is more important than adding another credit card to someone who already has six in his wallet. My sense is that there's an enormous amount of capital in industry and it doesn't know how to find its way to those who need it."

Economist Jonathan Morduch moderated the sixth panel on exploring the financial needs of poor and low income clients. It was surmised that protecting savings of depositors and ensuring safety of deposits are most important. Dr. Robert Townsend, Economics Professor at the University of Chicago, said that in order to really understand the needs of the various clients, an intensive archive that brings together all existing secondary data and puts it on a geographic system should be created. Microentrepreneurs from Peru and China also shared their experiencesS in using financial services to build better livelihoods.

Sir Nicholas Stern, Head of UK Government Economic Service, who moderated the seventh panel on growth and access to finance in Africa, was heartened by the optimistic tone struck by the panelists. He said the panelists demonstrated that it is possible to create successful strategies in the region, to overcome problems of capacity, and that he hopes that the private sector sees that these strategies can be turned into action.

Panel 8, "Migration: The Changing Landscape of Banking", focused on how banks and regulators can cooperate to create cost efficiency and save remittances for low income workers. Diana Taylor, New York Superintendent of Banks, emphasized the need to keep money service businesses active and not dissuade them from operating by over regulating the sector. "Our hope is that when the banks become more comfortable with how we regulate the money transmitting businesses, they will become more comfortable in doing business with them," she said.

In the final panel of the event, Stanley Fischer summarized the achievements of the Year in bringing microfinance to the forefront throughout the world, and presented the Statement of the Advisors Group to the International Year of Microcredit.[3] Dr. Fischer said he himself was taken aback at how the Year exceeded even the expectations of the Advisors to the Year. It has raised the profile of microfinance among users of microfinance, suppliers of capital, those in the business, and the public. The biggest challenge for the next few years is to provide microfinance on a significantly larger scale, he said.

To close the Forum, 17 Ministers and Permanent Representatives of UN delegations made statements on building inclusive financial sectors in their countries, including: the Deputy Prime Minister of Cambodia, the Minister of Social Development from Morocco, and the Permanent Representative of the United Kingdom to the UN. H.E. Dr. Iftekhar Ahmed Chowdhury, Ambassador and Permanent Representative of Bangladesh to the United Nations, said: "The momentum generated through the observance of the Year must be preserved and further enhanced. It is a categorical imperative for our Governments as well as the UN will to follow up on the progress to date. In microcredit we have an effective tool at hand. We must make proper use of it to supplement our efforts to rid our world of injustice, inequality and indignity that still sadly dot this globe".

The Private Sector at the Forum

The private sector's involvement was evident throughout the Forum. Two high-profile events were held by the Federal Reserve Bank of New York and Credit Suisse First Boston (CSFB). The Federal Reserve Bank of New York hosted a full-day seminar on regulation and supervision in collaboration with the United Nations Capital Development Fund (UNCDF) and the New York State Banking Department. CSFB held a reception on the opening day of the Forum to celebrate the Year's success in microfinance reform.

The seminar at the Federal Reserve Bank of New York provided insights for devising appropriate regulations for microfinance.[4] Diana Taylor, New York State Superintendent of Banks, elaborated on the topic by explaining that the apprehension of regulating the microfinance sector is due to "horror stories" of inappropriate regulation in the past. Ms. Taylor said, "Part of problem is that regulators are government entities of civil servants with strict mindsets." She continued to call for an appropriate system of microfinance regulation that reflects the sector's on the ground and local level participation characteristics.

CSFB's reception drew prominent representatives of the private sector and practitioners of economic development. Renowned economist Jeffrey Sachs, Dr. Arthur Vayloyan, Executive Board Member of CSFB, and Richard Weingarten, Executive Secretary of the UNCDF, highlighted the potential role of the private sector to commercialize and regulate microfinance and ultimately eradicate poverty.

Mr. Sachs examined the role of microfinance in alleviating poverty, concluding that "microfinance is a key tool but it is only one tool...We've seen that microfinance works best when communities that receive microfinance institutions also have clinics, and safe drinking water, and roads, and transport facilities and other means," he said. Dr. Vayloyan said that while he was initially skeptical of microfinance, being part of the Year has convinced him that it is a powerful strategy. "We know it works, it enables the poor to take care of their own destiny," he asserted. "Microfinance is about helping to stabilize this world in terms of making this a better world."

Microentrepreneurs Honored at United Nations Gala Awards Dinner[5]

The success stories of microfinance clients have been instrumental in encouraging the expansion of the microfinance sector. The incredible achievements of microentrepreneurs were formally recognized during the Forum during a Gala Awards dinner celebrating the worldwide winners of the 2005 Global Microentrepreneurship Awards. Nine entrepreneurs from Afghanistan, Bangladesh, China, India, Liberia, Malawi, Peru, Sierra Leone and South Africa were presented with awards for successfully using microfinance services to start their own businesses and build better futures for their families. Presenters included A-list celebrities such as Jennifer Lopez, Marc Anthony, Tim Robbins and Walter Cronkite who joined over 400 prominent business leaders, dignitaries, and high-level government officials in celebrating the tremendous achievements of the microentrepreneurs.

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Although the Forum marked the official end of the Year, activities launched in observance of the Year are being supported by more than 100 National Committees around the world. Long-term initiatives are being implemented by both national governments and the private sector in order to expand the access to financial services. At the CSFB reception, Richard Weingarten expressed the sentiment of all the supporters of microfinance as the Year came to a close: "There is a lot of work to do, and 2005 is the beginning of that work - certainly not the end".