Building Inclusive Financial Sectors

Commission for Social Development

Side Event
9 February 2004, New York

Panel on "International Year of Microcredit: Building Inclusive Financial Sectors - the Role of an Effective Public Sector"

Organized by the Department of Economic and Social Affairs and the United Nations Capital Development Fund (UNCDF

Venue:  Conference Room 4, United Nations, New York

Time: 1.15 to 2.45 p.m.

In recognition of the forthcoming International Year of Microcredit, 2005, a panel discussion on the topic "International Year of Microcredit: Building Inclusive Financial Sectors - the Role of an Effective Public Sector" was organized by the Division for Social Policy and Development, Department of Economic and Social Affairs, and the United Nations Capital Development Fund (UNCDF). The purpose of the panel discussion was to create awareness of the International Year of Microcredit and highlight the important role microcredit and microfinance can play for achieving the Millennium development goals, especially the goal to halve extreme poverty by 2015.

Investors from two leading financial institutions, Alliance Capital and Deutsche Bank, as well as two international experts in the field of microfinance from ACCION International and Finca International, shared their views on how the public sector can become more effective at deepening financial sectors. Private and public sector experts agree that the more inclusive financial sectors are, the more people participate productively in economies, and contribute to the growth and strength of their country’s economies.

The question posed to the panelists was: how can public institutions most effectively contribute to building the architecture, and regulatory and supervisory frameworks that promote inclusive financial systems?

The Panel Discussion was chaired by Mr. Donald Lee, Chief, Poverty Eradication and Employment Section & Focal Point, Youth Employment Network, Division for Social Policy and Development, Department of Economic and Social Affairs.

The following experts on microcredit and microfinance participated in the Panel:

Ms María Otero, President & CEO, Accion International;

Mr James Barrineau, Senior Vice President, Global Economic & Risk Research, Alliance Capital;

Ms Deborah Burrand, Director of Capital Markets, FINCA
International;

Mr. Asad Mahmood, Director, Community Development Group and General Manager, Microcredit Development Fund, Deutsche Bank

Summaries

María Otero, President and CEO of Accion International, stressed that viable and sustainable institutions that can cover their costs should be able to reach a large number of poor people. To achieve an environment conducive to banks serving a range of clients and not just elite clients, the public sector must address a country’s regulatory framework by constructing a real ability to operate without the restrictions imposed by interest rate ceilings. To create conditions favorable to building inclusive financial sectors, government should not engage in lending to the poor itself but instead should be guided by long-term goals that are based on sustainable solutions. Keeping in mind that viable institutions are the “point of departure” for poor and low-income clients, Ms. Otera says that governments should concentrate on building capacity at the local level as chief differences between traditional banking and microfinance are technology and the methods of delivery of services.

Asad Mahmood, Director of the Community Development Group and General Manager of the Microcredit Development Fund at Deutsche Bank, concurred with many of Ms Otero’s conclusions about the role of the public sector. He suggests that microfinance be regarded as a business that fulfills many of the social objectives of development; this outlook should direct the decisions made concerning the provision of financial services. He described instances where the NGO sector and smaller microfinance institutions have been successfully linked to banks, particularly in India. Government money can leverage these linkages while reducing the risk of the private sector so that more people have the opportunity to deposit money and obtain loans with trustworthy institutions.

Deborah Burand, Director of Capital Markets at FINCA International, framed her talk by describing the three areas that should be most important to government in the provision of microfinance. She first underscored the development of the “market” for microfinance by saying that the industry can only be as healthy as its customers. If there are individuals that will benefit from financial services and be an economically active apart of the population, there must be what Ms. Burand calls a “neighborhood” that is amicable to microfinance; the neighborhood should be characterized by the removal of barriers common to the provision of financial services including interest rate caps. A consistent rule of law and an economic system that is not subject to the capriciousness of government also helps to build the trust of a country’s citizens. Underscoring the well-documented relationship between national growth and the stability of institutions, she highlights the capacity of these institutions to create an environment in which resources may best be used. She also mentions “fuel” to illustrate the need for public resources to be tapped as well as the need to develop the skill base to support the human resources. She concludes that effective products in the appropriate “neighborhood” will promote a real middle class that in turn will support regional political and economic stability.

James Barrineau, Senior Vice President, Global Economic & Risk Research at Alliance Capital, noted that because mainstream banks have not yet invested in microfinance and therefore suggests that steps must be taken by the public sector to get them involved. First, governments need to take measures to aggregate small loans into a package that can be invested in as a single product with liquidity and a secondary trading market. This package could be a way to give international investors an exposure to a country without the volatility that traditional sovereign debt has since microfinance customers ultimately are less affected by external shocks on a country's capital markets. In turn, the cost of funding should go down for microfinance institutions and will ultimately be passed on to customers. Standardizing the aggregation of loans would bring in additional investors who would then presumably drive down the cost of funding further. By promising favorable conditions for the traditional packaging of sovereign debt if investment banks contribute to the promotion and development of a country’s microfinance institutions, the public sector could engage them in exploring the packaging of microfinance loans in ways similar to loans in developed markets.

General Assembly resolution on the International Year of Microcredit, 2005
(For information only)

22 February 1999

RESOLUTION ADOPTED BY THE GENERAL ASSEMBLY
[on the report of the Second Committee (A/53/613)]

53/197. International Year of Microcredit, 2005

The General Assembly,

Recalling its resolution 52/194 of 18 December 1997 on the role of microcredit in the eradication of poverty,

Recognizing that microcredit programmes have successfully contributed to lifting people out of poverty in many countries around the world,

Bearing in mind that microcredit programmes have especially benefited women and have resulted in the achievement of their empowerment,

Recognizing that microcredit programmes, in addition to their role in the eradication of poverty, have also been a factor contributing to the social and human development process,

Bearing in mind the importance of microfinance instruments such as credit, savings and related business services in providing access to capital for people living in poverty,

Noting the support to microcredit in the outcomes of different summit and high-level meetings, including the Twelfth Ministerial Conference of the Movement of Non-Aligned Countries, held at New Delhi on 7 and 8 April 1997, the Ninth Summit of the South Asian Association for Regional Cooperation, held at Male from 12 to 14 May 1997, the Assembly of Heads of State and Government of the Organization of African Unity at its thirty-third ordinary session, held at Harare from 2 to 4 June 1997, the statement on economic and financial issues of the Group of Seven, issued at Denver, United States of America, on 21 June 1997, the substantive session of 1997 of the Economic and Social Council, held at Geneva from 30 June to 25 July 1997, the meeting of the Commonwealth Heads of Government, held at Edinburgh from 24 to 27 October 1997 and the Thirteenth Ministerial Conference of the Movement of Non-Aligned Countries, held at Cartagena de Indias, Colombia, on 19 and 20 May 1998.

Noting also that 2005 is the final year of the campaign of the Microcredit Summit, which was held in Washington, D. C., from 2 to 4 February 1997 and which, through its Declaration and Plan of Action, endorsed a global campaign to reach 100 million of the world’s poorest families, especially the women of those families, with credit for self-employment and other financial and business services, by that year,

Noting further that the international community is observing the period 1997–2006 as the first United Nations Decade for the Eradication of Poverty,

1. Proclaims the year 2005 as the International Year of Microcredit;
2. Requests that the observance of the Year be a special occasion for giving impetus to microcredit programmes throughout the world;
3. Invites Governments, the United Nations system, all concerned non-governmental organizations, other actors of civil society, the private sector and the media to highlight and give enhanced recognition to the role of microcredit in the eradication of poverty, its contribution to social development and its positive impact on the lives of people living in poverty;
4. Invites all involved in the eradication of poverty to consider taking additional steps, including the strengthening of existing and emerging microcredit institutions and their capacities, so that credit and related services for self-employment and income-generating activities may be made available to an increasing number of people living in poverty, and to develop further, where appropriate, other microfinance instruments;
5. Invites the Secretary-General to submit to it at its fifty-eighth session a report containing a draft programme of action for the effective observance of the Year, in consultation with all relevant actors including United Nations bodies, under an item entitled "First United Nations Decade for the Eradication of Poverty (1997-2006)" to be included in the provisional agenda of that session.

91st plenary meeting
15 December 1998