Microfinance - It does not take much
Interview with UNCDF Executive Secretary Richard Weingarten
Photo: Thomas Eugster
From Global Investor Focus, June 2007
3 August 2008: Sometimes small amounts make a big difference. Richard Weingarten, Executive Secretary of the UN Capital Development Fund, explains why microfinance is a good tool for development.
Tania Dimitrova: The UN declared 2005 The Year of Microcredit, the 2006 Nobel Prize for Peace was awarded to Muhammad Yunus and Grameen Bank, and more private institutions are getting involved in this field. Is the importance of microfinance increasing?
Richard Weingarten: Definitely. Microfinance is becoming a very important tool for development. At the UN Capital Development Fund, we think microfinance is important as it encourages economic growth and employment, and reduces poverty. I expect that microfinance activities will increase over the next years and contribute to reducing poverty around the world.
Microfinance is a powerful tool in encouraging entrepreneurship. How can it unleash innovation in communities that have been previously untapped?
Microfinance is most effective at reaching individuals, rather than small enterprises. In terms of unleashing individual and small group activity, microfinance can be very successful. In terms of actual enterprise creation, it is not quite clear yet what contribution microfinance can make. However, the microfinance community is focusing more and more on small and medium-sized enterprises (SMEs), particularly as more commercial banks get involved. I expect that over the next few years more attention will be paid to actually creating SMEs that could grow and employ more people. Microfinance institutions and commercial banks will focus more on enterprises; the impact of microfinance on entrepreneurship in the technical sense will increase over the next few years.
What role do financial institutions in this field play and how is it changing?
There are many different roles that financial services companies in particular can play. I expect that more private banks will be involved in microfinance by creating microfinance subsidiaries, or other ways of investing for poor and lower-income people. On the other hand, I feel that other microfinance institutions will continue to thrive in their specialized niches. I think that cooperative groups will become more active; savings institutions that are not currently involved in micro-lending might expand into this area, and retailers who are not currently thought of as financial institutions might get involved in extending microcredit at the retail level, because they are very close to their customers at the local level. Technology companies and infrastructure providers in the private sector will become more involved, particularly on the telecommunications side, as microfinance seeks to reach out to more rural areas, where most poor people live. This is going to be a priority for governments all around the world, particularly in Africa, where the rural agricultural population is still not being reached by microfinance services.
In microfinance, the functions of the private and public sectors overlap. What are the challenges to the development of this field in the future?
As a general principle we believe that the role of government and the public sector in microfinance is twofold. One is to create an appropriate enabling environment so that financial institutions and technology providers can work. That generally involves legislation policy - the legal environment as well as the regulatory environment. Governments must create an environment where fair competition can take place on a level playing field and where there is accountability and transparency both on the public sector side and on the private sector side. In addition, governments can remove constraints, which the private sector players frequently see in terms of the regulatory environment or in the costs of doing business. On the other hand, governments should generally avoid extending credit directly to retail customers because that frequently becomes a political process and can also squeeze out the private sector if subsidies and other uneconomic activities are used for political purposes. That is not to say, however, that governments should never be involved in direct lending. Nor does it mean that governments cannot act ahead of the private sector, particularly where social problems need addressing and where purely commercial or purely private activities wouldn't be able to manage effectively. A good example is rural areas that are very difficult to get to, or encouraging agricultural activities that may not be economically viable for the private sector alone. These types of subsidies or interventions by governments should be few and far between, and generally governments should avoid participating directly, unless it is necessary to encourage or stimulate private sector activity. The government plays a very important role in encouraging financial services infrastructure, payments systems, settlement systems, money transfer systems, and telecommunications systems. In these areas a variety of economic models may be necessary to establish the infrastructure to allow microfinance to function smoothly.
How can we as average citizens and investors get involved? And what do you think about large institutions involved in microfinance on behalf of their clients?
There are large institutions, including Credit Suisse, who are providing vehicles for private individuals to put money into professionally managed funds, that will then lend those funds to microfinance institutions. This is probably the best way for individual people to get involved. I would caution individuals not to try to get involved in making microfinance loans directly or finding microfinance institutions on their own to support. It is a very difficult area, in which it is useful to have professional help. Diversification of microfinance institutions is a very important principle, so individual investors working through private money managers have an extremely good way of developing a diversified investment portfolio.
How has microfinance changed the communities in the areas where you have worked?
Historically, microfinance lending has been geared towards women. And when women are the recipients of loans they frequently utilize the funds that they receive for their families. Extra income that comes in usually goes on food and improving the nutritional condition of young children and also towards allowing children to attend schools. Consequently, those two benefits are also very important social benefits. Microfinance has managed to even out families' cash flow so that economic shocks or unexpected interruptions in cash flow are much more easily overcome. This has a very beneficial social and economic purpose: it makes life more balanced and it becomes easier to plan for the future. Generally, in the countries where we work, people are living on a dollar a day. If they get to two dollars a day as a result of microfinance, that is a very big improvement in their lives. And if people can get to three or four dollars, they have major improvements in their social conditions and the way in which they live with their families. So, it does not take much - that's one of the beauties of microfinance. A small amount of money can go a long way in making a great improvement.
What is the most interesting development in microfinance that you see today?
The most important innovation in microfinance is technology. It will reduce transaction costs and help to reach rural areas where there is none of the roads and other infrastructure necessary to tie people to the markets. There is excellent work being done in Latin America, as well as in Southeast Asia: technology facilitates access to a broader range of financial services and it also helps to reach illiterate people, because they can utilize those technologies to do financial services transactions even if they can't read or write. The most important innovations will take place in mobile telephony, providing cheap access for people in rural areas that otherwise would not have access to financial services. There is also a lot of room for innovation in the development of new products and services. A lot of interesting work is under way in microinsurance where new credit and savings products are being developed. Here, the private sector can play an important role. Another field of innovation lies in the area of remittances, in turning remittance flows into development products. Here again, the private sector might think of ways to take large flows of money moving between developed and developing countries and turn them into development tools, so that they can help with societal development, rather than simply being of benefit to individuals.
This article originally appeared in the Credit Suisse magazine, Global Investor Focus in June 2007.
