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State of the Microcredit Summit Campaign Report 2002

Plenary Session: Policies, Regulations and Systems That Promote Sustainable Financial Services to the Poor and Poorest

Asia/Pacific Regional Microcredit Summit Meeting of Councils

Poverty Targeting Trainings Begin in Asia

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Plenary Session: Policies, Regulations and Systems That Promote Sustainable Financial Services to the Poor and Poorest

Remarks by Nancy Barry

We believe based on experience globally that building policies, regulations and legal structures that work for microfinance needs to be rooted in what poor women want. Our surveys and focus groups indicate strongly that poor women are not only the managers of their businesses but also have a major role as the managers of their economic households. What poor women want is first rapid access, convenient access, respect, and recognition. What they are saying is that they want smaller loans that grow flexibly over time. What poor women want is over time to be able to migrate from group lending to individual lending. We all recognize that particularly in places like Bangladesh and India, groups have a very important value in building social capital, in building a sense of connection and confidence in poor women. Over time poor women want access just like you and I do to individual loans. Poor women don’t have collateral and therefore it is important that financial institutions do not require that lenders take collateral. Poor women want a diversity of products; in lending they are looking not just for business loans, but housing loans, education loans and lending and saving products that reflect their lifestyle. And probably most important, when we ask poor women what they want they are looking for asset building and risk mitigation instruments: savings, short-term/long-term pension type products and they are looking for health and life insurance. So, as we look at how to build policies and financial systems, it needs to look at and reflect what poor women are saying they need in the financial systems that will serve them.

The experience globally demonstrates that regional country patterns vary; there are certain key principles that prevail in strong financial systems and policy for microfinance. The first core principle is that you need a range of institutions—you need commercial banks, finance companies, both regulated and unregulated microfinance institutions, credit cooperatives and grassroots groups. Another key is there needs to be a strong shared performance culture where all actors, regardless of legal structure, are reporting in a consistent way on key indicators that are related to outreach, efficiency and profitability, integration into the financial system and impact. And finally those institutions that are always operating at different stages of development need a pro-poor, microfinance friendly policy regulatory environment. They need a system that has financing available that fits the stage of development of the institution, and those institutions that demonstrate prudential standards need to be in the position to mobilize savings, not just from borrowers but from the general public.

There are really four pillars in building financial systems that work for the poor majority. The first is building transparency, shared performance indicators, definitions that everyone shares and is willing to report against. Secondly, rather than thinking about just regulated microfinance institutions, it is very important that supervisors and regulators develop a class called microfinance and create the rules of the game that work not for corporate finance or consumer finance but that actually fit the reality of microfinance. Third, there will be small but important group of microfinance NGOs that seek to become regulated financial institutions, and major adjustments are often needed in legal structures to avoid forcing regulated microfinance institutions to move out of the poor and up market. So creating those structures is key. And finally there is a whole set of things that do not look like policies but really look like creating the institutional infrastructure so that a robust, responsive and sustainable microfinance sector can develop. That includes wholesale finance, the buildup of microfinance associations and networks and it includes rating agencies that can help support the buildup of both concessional and commercial finance for microfinance organizations.

…A few dos and don’ts [concerning the role of government]. Government has an important role to play in microfinance. What we have seen as key roles of government is to promote microfinance as a key vehicle for poverty alleviation and as a vital part of the financial system. A key role of government is to create policies, regulations and key legal structures that work for poor women and the institutions that serve them. A key role of government is to support the creation of autonomous, wholesale, apex structures for microfinance. A real don’t for government is don’t get directly involved in the provision of retail finance. What we have seen is that many well-intentioned governments, seeing that microfinance is the buzz, want to be a part of this action, want to serve. As we know, most of these programs are heavily subsidized, they are viewed as political patronage, people don’t repay and they die out. But in the meantime, they can actually wreck markets for serious MFIs.

Secondly, governments need to encourage a range of legal structures and methodologies. We have seen in some countries where all but one kind of a particular cooperative bank is made illegal. We have seen other countries where the government has decided that all NGOs have to become a bank or kill themselves. What is very important is to recognize that there are an array of structures that, over time, are actually targeting different segments of the market, all with different roles to play. So don’t back one model. Encourage competition, capacity building and innovation as a way of pushing down transaction costs in microfinance. But do not put ceilings on interest rates or MFIs cannot develop sustainable services…

Finally external actors, donors and others, have major roles to play in supporting the build up of appropriate policies, in providing performance-based funding that fits the stage of the institution, and in encouraging savings, financial linkages and the mobilization of domestic capital.

Read remarks by Vani Sharma