9 November 2005
Importance of Inclusive Financial Sector for Poverty Reduction Underlined, as Chair of Advisors to International Year of Microcredit Closes Forum
NEW YORK, 8 November (UN Headquarters) -- Closing the United Nations International Forum to Build Inclusive Financial Sectors today, Stanley Fischer, Chair of the Advisors Group to the International Year of Microcredit 2005, said that an inclusive financial sector, where even the poorest people could have access to credit and other financial services, should be emphasized further as one of the driving forces of economic development and poverty reduction.
Mr. Fischer, who is also Governor of the Bank of Israel, said that recent empirical analysis by the World Bank had shown that increased access to finance helped reduce poverty, rather than the opposite argument -- that greater financial access was merely a consequence of reductions in poverty. Although numerous examples showed the transformative effect of microfinance on the lives of the poor, it must be more far-reaching, especially to those in rural areas. And for that to occur, the private sector must play a bigger role, while Governments became enablers.
He said Governments often imposed caps on interest rates so as to appear as though they were ensuring cheap credit for poor people. In practice, such caps resulted only in reducing the supply of credit, especially for the poorest would-be borrowers, who were then driven to borrow from illegal moneylenders with even higher rates and notorious collection methods. A far more effective way for Governments to ensure that interest rates were not excessive was to foster more competition within the financial sector.
In addition, regulations designed to protect the public from bank failures inadvertently made it costly for microlenders to collect deposits and prevented clients from opening savings accounts, he said. Financial-sector authorities should, therefore, devise rules allowing microfinance providers to accept deposits. As a first step, it was essential to train bank regulators, accountants, auditors, lawyers and credit-raters in poor countries, with help from countries that already possessed such expertise.
To speed up the creation of an inclusive financial sector, Governments and others should restrict subsidized capital for microfinance and deploy it to encourage commercially-driven capital in the sector, he said. They might more usefully develop regulatory infrastructures for microfinance to thrive, seed new microfinance institutions and technologies to speed the increase in financial access, and provide relevant education and training to users and providers of microfinance.
He pointed out that a growing number of microfinance institutions were willing to consider possible partnerships with established commercial financial institutions, scrutinize loan portfolios, retail insurance policies underwritten by commercial insurers, and even to make profits and perhaps become listed public companies. Some of the best institutions were now reducing their dependence on donor-financing, exposing their operations to critical ratings agencies, and hunting out private capital.
Expressing concern that much commercial capital that was available to microfinance providers came from foreign sources and carried significant exchange-rate risk, he recommended that foreign suppliers of capital to microfinance institutions provide such funding in local currencies. Moreover, multilateral and other donors who wished microfinance to remain subsidized directly through cash contributions or indirectly through technical assistance, as well as subsidized financing, should consider seriously how they could use those resources more effectively to develop commercially sustainable microfinance.
He said that because of improving data on microcredit and related issues, the International Monetary Fund (IMF) and the World Bank should include "financial access" as a key indicator of the efficiency of a given country's financial sector. Meanwhile, national Governments, their regulators and supervisory institutions should use available data to assess the breadth, depth and inclusiveness of their financial sectors, while donors supported Governments in that effort.
The Advisors Group included central bankers, leading economists and statisticians from the United Nations, the World Bank, IMF, the United Kingdom's Department for International Development, and the Central Bank of West Africa, as well as the private and non-government sectors. Their aim was to develop common measures of financial-sector inclusion and to answer central questions about the number of poor people with access to what kinds of financial services, as well as the quality and impact of those services.
In his closing remarks, Third Committee Chairman Francis K. Butagira (Uganda) noted that the two-day Forum, a joint informal event of the General Assembly's Second Committee (Economic and Financial) and Third Committee (Social, Humanitarian and Cultural), had brought together more than 700 high-level representatives from Governments, the private sector, academia, civil society, multilateral agencies, donors and the microfinance community. Its 10 panels had addressed a wide range of topics, including the role of public and private sectors in extending microfinance in post-disaster and post-conflict countries; the role of technology in delivering microfinance; and migration as a factor in changing the landscape of banking.
In addition, participants had heard the stories told by microfinance clients and seen their products on display, illustrating how access to microfinance could make a real difference in the lives of 2.8 billion people living on less that $2 a day. Microfinance could empower the poor, especially women; tap their entrepreneurial spirit; generate a source of income and employment; and allow them to make essential investments in their children's future by facilitating access to basic social services such as education, health care, safe water and sanitation.
* *** *