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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 2 / March - April 2004 |
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News | Public Sector Effectiveness The Role of the Public Sector in Building Inclusive Financial Sectors On 9 February 2004 at a panel organized by UNCDF and UNDESA as part of the 42nd session of the Commission for Social Development, investors from two leading financial institutions, Alliance Capital and Deutsche Bank, as well as two international experts in the field of microfinance from ACCION International and Finca International, shared their views on how the public sector can become more effective at deepening financial sectors. Private and public sector experts agree that the more inclusive financial sectors are, the more people participate productively in economies, and contribute to the growth and strength of their country’s economies. The question posed to the panelists was: how can public institutions most effectively contribute to building the architecture, and regulatory and supervisory frameworks that promote inclusive financial systems?María Otero, President and CEO of Accion International, stressed that viable and sustainable institutions that can cover their costs should be able to reach a large number of poor people. To achieve an environment conducive to banks serving a range of clients and not just elite clients, the public sector must address a country’s regulatory framework by constructing a real ability to operate without the restrictions imposed by interest rate ceilings. To create conditions favorable to building inclusive financial sectors, government should not engage in lending to the poor itself but instead should be guided by long-term goals that are based on sustainable solutions. Keeping in mind that viable institutions are the “point of departure” for poor and low-income clients, Ms. Otera says that governments should concentrate on building capacity at the local level as chief differences between traditional banking and microfinance are technology and the methods of delivery of services. Asad Mahmood, Director of the Community Development Group and General Manager of the Microcredit Development Fund at Deutsche Bank, concurred with many of Ms Otero’s conclusions about the role of the public sector. He suggests that microfinance be regarded as a business that fulfills many of the social objectives of development; this outlook should direct the decisions made concerning the provision of financial services. He described instances where the NGO sector and smaller microfinance institutions have been successfully linked to banks, particularly in India. Government money can leverage these linkages while reducing the risk of the private sector so that more people have the opportunity to deposit money and obtain loans with trustworthy institutions. Deborah Burand, Director of Capital Markets at FINCA International, framed her talk by describing the three areas that should be most important to government in the provision of microfinance. She first underscored the development of the “market” for microfinance by saying that the industry can only be as healthy as its customers. If there are individuals that will benefit from financial services and be an economically active apart of the population, there must be what Ms. Burand calls a “neighborhood” that is amicable to microfinance; the neighborhood should be characterized by the removal of barriers common to the provision of financial services including interest rate caps. A consistent rule of law and an economic system that is not subject to the capriciousness of government also helps to build the trust of a country’s citizens. Underscoring the well-documented relationship between national growth and the stability of institutions, she highlights the capacity of these institutions to create an environment in which resources may best be used. She also mentions “fuel” to illustrate the need for public resources to be tapped as well as the need to develop the skill base to support the human resources. She concludes that effective products in the appropriate “neighborhood” will promote a real middle class that in turn will support regional political and economic stability. James Barrineau Senior Vice President,
Global Economic & Risk Research at Alliance Capital, noted that because
mainstream banks have not yet invested in microfinance and therefore suggests
that steps must be taken by the public sector to get them involved. First, governments
need to take measures to aggregate small loans into a package that can be invested
in as a single product with liquidity and a secondary trading market. This package
could be a way to give international investors an exposure to a country without
the volatility that traditional sovereign debt has since microfinance customers
ultimately are less affected by external shocks on a country's capital markets.
In turn, the cost of funding should go down for microfinance institutions and
will ultimately be passed on to customers. Standardizing the aggregation of
loans would bring in additional investors who would then presumably drive down
the cost of funding further. By promising favorable conditions for the traditional
packaging of sovereign debt if investment banks contribute to the promotion
and development of a country’s microfinance institutions, the public sector
could engage them in exploring the packaging of microfinance loans in ways similar
to loans in developed markets. |
