By SVMN Volunteer Esther Alcaina
On Thursday, February 21st, SVMN hosted the event “Microfinance in 2013: Where are We Now?”. Featured speaker Tilman Ehrbeck presented his view on where the sector is today and what opportunities are ahead of us. We were extremely honored to have Mr. Ehrbeck, CEO of CGAP, the world’s leading policy and research center focused on advancing financial inclusion for the poor. Housed at the World Bank and supported by over 30 development agencies and private foundations, CGAP is the definitive authority for governments, financial service providers and investors seeking objective information, expert opinion and innovative solutions for microfinance.
Mr. Ehrbeck started his presentation commenting on the different meanings microfinance has for different people. Some identify it with microcredit, which accounts for a narrow view. Microfinance should include a broader range of financial services that helps poor people to improve their lives. Otherwise, we risk missing the whole picture. He then introduced the three key parts of his presentation: 1) Why financial access matters for the poor, 2) The increasingly robust impact evidence of microfinance, and 3) Progress and opportunities going forward.
So, why does financial access matter for the poor? First of all, poor families have aspirations and these need to be taken in consideration before any financial product is offered and used. Mr. Ehrbeck gave the example of ten pilot projects that have been applied in 10 different countries and where the first step has been to get the families to describe their aspirations (e.g. “Proyecto de vida” in Perú). Using Microcredit to pay private school fees, for instance, is not a good idea. Once the public school system has failed, which is the case in some Latin American countries, families should save up for their children’s education instead of requesting a loan to cover school expenses.
Secondly, poor families are vulnerable and the less formal job protection they have (pension, insurance, etc.), the more they need formal financial products. These families also have very active financial lives, although they tend to use products that are unreliable and expensive. Our speaker gave the example of a family in Bangladesh that used thirty different products, three of which came from formal institutions. The rest were informal loans from friends and family.
To wrap up the discussion on the importance of financial access for the poor, Mr. Ehrbeck pointed out that half of the working-age adults globally are unbanked. Whereas 89% of adults in the USA and Canada have an account at a formal institution, only 39% have one in Latin America and the Caribbean, 18% in the Middle East and North Africa, and 24% in Sub-Saharan Africa. Overall, 77% of the poor are unbanked, with the women, the younger and the older working-age adults being disproportionally excluded.
An increasing number of studies in the field has provided evidence of microfinance’s positive impact in terms of household welfare and social policy effectiveness. The fact that credit helps for entrepreneur activity has been backed up by five studies, and that savings help for household welfare (e.g. school fees) has been demonstrated in another four. Mr. Ehrbeck gave an example from Kenya, where a group of female vendors increased their daily turnover by 45% once they had access to a savings account. With regards to policy effectiveness, we discussed the example of “Bolsa Familia”, a program in Brazil that reduced costs by 82%(from $14.7 bn to $2.6 bn) with electronic delivery of grants. From a macro perspective, there is a correlation between the depth of financial services adopted and growth, reducing inequality in poor economies.
With all of the above in mind, what are the opportunities in microfinance going forward? As a first step, it is important to have a better understanding of what an economy’s different segments demand (microentrepreneurs, fishermen, unemployed, casual laborers, small-holder farmers, etc.). This is the only way towards a product innovation movement that will meet specific needs which, in fact, is already happening. Life insurance in Ghana, health insurance in Jordan, commitment savings in Philippines or M-PESA in Kenya are just some of the existing examples. M-PESA International Money Transfer is an innovative way to send money in real time to someone in Kenya from abroad and, following its success, it is now being replicated in other countries such as Tanzania, Pakistan or Uganda. Another innovation is the micro-insurance plans by Kilimo Salama (“Safe Agriculture”), designed for Kenyan farmers to insure their farm inputs against drought and excess rain and that allows for mobile phone registry and electronic payments with low transaction costs. Elsewhere, Grundfos LIFELINK provides a prepaid water card that allows rural communities to access safe water. Individual customers’ water use is controlled and is paid for remotely. Cell phones are incredibly powerful in microfinance innovation and advancement. In fact, one million people who do not have access to credit have a cell phone.
Thirty-five countries representing 1.7 bn people have undertaken commitments to make financial inclusion a reality. They include the following: expanding access and facilitating market innovation, gathering financial inclusion data and measurements, protecting consumers, facilitating regulatory reforms and coordinating bodies, and providing financial education. These commitments show the impressive development of the microfinance field since its inception in 1995 with the “microcredit” concept, all the way through its professionalization and broadening of services in the early 2000’s, its lower costs to facilitate financial access in the late 2000’s, and its financial inclusion perspective in the early 2010’s. Microfinance is seen today from the point of view of the benefits provided instead of the products themselves. Microfinance is the means towards financial inclusion.
To the question about the rumors around the death of microcredit, Mr. Ehrbeck highlighted how the field has continued to grow and how its impact has been proven. He pointed out that microfinance defined only as microcredit is already at a mature stage, and that there needs to be a whole ecosystem of providers to satisfy the needs that microcredit does not meet. A lot has been achieved in microfinance over the past nearly 20 years, which is something we should be very proud of. But so much is still to be done. Microfinance could not be more alive today and definitely could not have a more exciting future.