Banks are beginning to realise that financial services for poor people can be commercially viable. The Year of Microfinance is an opportunity for them to play a greater role in alleviating poverty.
This year has been designated the Year of Microfinance, a global effort to increase the role of commercial banks in providing financial services to the poor. Banking the unbanked is an enormous task: the World Bank-based Consultative Group to Assist the Poor (CGAP) estimates the potential market for microfinance is up to three billion people.
Unlike private banking, which is focused on the world’s richest people, the world’s poorest people have rarely been regarded as a financially attractive group. But in the past two decades, microfinance has proven that a viable, sustainable market in financial services for the poor can be provided.
CGAP notes that 124 reporting microfinance institutions (MFIs) are offering credit to 80 million clients. And the head of the United Nations Development Programme, Mark Mallock Brown (see Viewpoint p12), and many other practitioners (see p82) are adamant that profits can be made and sustained.
What can be done to strengthen and broaden the process? Major institutions, like Citigroup and ABN AMRO, have already shown that wholesale lending, supporting bond issues and securitisation are already part of the growing relationship between commercial banks and MFIs. The salient issue is how these relationships can be deepened.
In many emerging economies, women have shown the way, and their commitment to repayment and low non-performing loan rates have largely made the microfinance model viable. But more can be done.
Bankers are only just realising that the poor have financial needs just like anyone else and that giving them the opportunity to help themselves not only works, but also can open up the global financial markets to an entirely new customer market and asset class. And by bringing regulated financial institutions to the poor, the impact of usurious, unregulated money lenders and the like can be limited.
Although aid, debt freezes and forgiveness all have their place, the ability of commercial banks to use their financial muscle to provide guarantees and creative products to support MFIs has not yet been fully utilised. Alleviating poverty cannot be achieved by aid and governments alone. Banks can play a greater role by making their infrastructure more accessible to the poor and extending their reach. A start has been made through microfinance; there is a long way to go.
