At a Glance · An estimated 2.7 billion people in the world have no access to formal financial services. · As a result, poor people have to rely on informal financial services that are generally more costly and less reliable than formal savings and loan accounts, insurance, and payments services. · Access to formal financial services allows progress for families and for the economy as a whole. Microenterprises are, collectively, the largest employers in many low income countries. Yet, their growth is often stifled by lack of access to formal finance that would enable them to make the necessary investment in fixed capital, grow their turnover, and employ more people. · Improving access to finance has a positive impact at three levels: o At the household level it creates a positive impact on households’ welfare by helping families to build assets, manage risks, and smooth consumption. There is an increasing body of evidence that shows that when the appropriate service is matched effectively with the needs of poor clients financial services can lead to increased income, and improved health and education outcomes, allowing children to spend more days in school, and families to eat more regular meals. A study conducted in Kenya shows that access to savings accounts for female market vendors allows for higher business inventory and therefore higher incomes. A study conducted in Ghana provides evidence that crop insurance helps farmers shift from subsistence to cash crops, use more fertilizers, and more land, which results in higher incomes, and ultimately fewer meals missed for the family.
o Better financial delivery systems play an important role in improving the efficiency and reducing the costs of other public policy interventions. For example, Bolsa Familia in Brazil decided to shift its government payments onto one electronic benefit payment card. As a result, they went from a 14.7 percent cost to 2.1 percent cost of transaction cost—12.7 percent savings on billions of dollars. o At the macroeconomic level there is evidence that deeper financial systems increase growth and reduce inequality. The G20 has therefore made financial inclusion a permanent policy priority by establishing the Global Partnership for Financial Inclusion (GPFI) and committing to the ‘Principles of Innovative Financial Inclusion’, which are intended to serve as a basis for action to improve access to financial services for the world’s unbanked. o The World Bank Group actively supports the GPFI agenda on SME finance, women in finance, Agrifinance, standard setting bodies, and data, with the IFC and CGAP as implementing partners, and the Bank providing expert inputs. Bank Group advice and contributions have already been requested by Mexico for a potential Financial Inclusion theme for its 2012 presidency of the G20, and the new World Bank Financial Inclusion Practice is coordinating this dialogue with CGAP, the IFC, and the International Policy and Partnerships Group in the World Bank. o Over the last few decades different types of financial services providers for poor people have emerged—non-government organizations; cooperatives; community-based development institutions like self-help groups and credit unions; commercial and state banks; insurance and credit card companies; telecommunications and wire services; post offices; and other points of sale—offering new possibilities. o Mobile money--financial services such as payments and short-term savings--delivered through mobile phones is particularly promising as a means to dramatically reduce costs. It enables greater outreach to more people living in isolated areas, and can be even more convenient and safer. The Bank Group is committed to supporting equitable local financial markets and building a strong microfinance sector in developing markets. Within the World Bank Group, different institutions play complementary roles in achieving our goal of universal access to finance. The World Bank: International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA), the Banks fund for the poorest, assists governments in supporting financial intermediation for poor households and micro and small and medium enterprises (MSMEs). This support can take the form of policy advice, legal and regulatory reforms, institutional development, and financing. As of June 2011, IBRD and IDA have an outstanding portfolio of $4.9 billion in support to MSME finance, and $6.1 billion committed. This support, through over 70 active financing projects in 45 individual countries, as well as several regional projects, enables financial institutions to provide services for poor households and smaller enterprises in order to help them manage their financial needs, run their businesses, and build assets.
IFC is the World Bank Group’s lead investor in microfinance, and it is one of the leading multilateral investors in terms of outreach to microfinance institutions, working with 110 institutions in over 50 countries. As of June 2011, IFC’s investee clients had an outstanding portfolio of nearly 8 million microloans, worth nearly $12.6 billion.
CGAP (Consultative Group to Assist the Poor), is a global policy and research center dedicated to advancing financial access for the world's poor. As a multi-donor partnership housed at the World Bank, it is supported by over 30 development agencies and private foundations who share a common mission to alleviate poverty. CGAP promotes standards, funds and develops innovations, and shares knowledge and best practices. It also offers advisory services to governments, financial service providers, donors and investors. In response to the recent crises, CGAP released Andhra Pradesh 2010: Global Implications of the Crisis in Indian Microfinance and engaged with stakeholders in a blog series on Andhra Pradesh and the India Microfinance Bill.
The World Bank Group’s work in microfinance The Bank Group is a key investor, advisor, innovator, and researcher on issues relating to financial inclusion for poor people. IBRD/IDA IBRD and IDA funds development policy loans to governments to support policy and regulatory changes that can facilitate increase in access for the poor and small enterprises, technical assistance to regulators to build capacity and promote responsible finance. IBRD and IDA also fund the needed financial infrastructure to promote financial inclusions such as payment and credit information systems. Finally, IBRD and IDA provides financing for MSME or poor households via wholesale or retail institutions with government guarantees; technical assistance is sometimes offered to financing institutions to strengthen their operations and effectiveness in expanding access. The Bank’s support for MSME finance takes many different forms and reaches a wide variety of end users: for example, it provides large lines of credit through the formal financial sector to SMEs in Turkey, and supports hundred-dollar loans to poor households in Afghanistan through non-governmental organizations.
World Bank support to poor households or small enterprise finance may include any one of the following types of operations:
Ø Development policy loans or technical assistance funds to support policy, legal or regulatory changes that increase access, to strengthen the ability of financial authorities to regulate financial institutions serving poor households or small enterprises, or put in place institutions that can facilitate access (e.g. payment and credit information systems). Ø Lines of credit or risk sharing mechanisms via wholesale or retail financial institutions to increase credit to MSMEs. Ø Technical assistance funds for institutional development of financial institutions to build their capacity to expand outreach, develop products for the MSME market, and improve their financial sustainability IFC IFC’s focus is on creating and supporting commercially viable microfinance institutions that can attract the private capital needed to scale up and respond to unmet demand. IFC is playing an important role by demonstrating the business case for commercial microfinance and promoting it as an asset class to private institutional investors. Since pioneering commercial microfinance in the early 1990s, IFC has continued to lead innovation in microfinance, using developments in technology, financial products, and policy to help financial institutions reach a greater number of people in a more cost-effective way. Project examples: Bandhan: IFC has invested equity of up to $35 million in Bandhan, the fourth largest microfinance institution in India. Bandhan operates in 18 Indian states in the northern and eastern parts of the country, including some of the poorest states, where population density is high and microfinance penetration is low, such as Chhattisgarh, Jharkhand and Tripura. This project will help promote a more balanced growth of microfinance in India as most of the MFIs are concentrated in southern India. Bandhan focuses primarily on providing microloans to women micro-entrepreneurs in rural and urban areas through its network of 1,553 branches and the project is expected to have a significant impact on poverty reduction and employment creation in these underserved areas. Bandhan currently has 3 million borrowers, all of whom are women, and this is expected to grow to 12 million by 2016. As well as its investment, IFC is working with Bandhan to strengthen its management capacity and operations in a sustainable and efficient manner, and introduce international best practices in environment and social policies, corporate governance and risk management.
FINCA: IFC has joined with partners including KfW, the German development bank, and FMO, the Netherlands development bank and others to create a three capital investment in FINCA Microfinance Holdings (FMH), to which IFC will contribute up to $35 million. FMH is expected to help FINCA nearly double its client base to 1.5 million people across its network of 21 programs in Africa, Latin America, Eurasia and the Greater Middle East, 15 of which are IDA countries. It will extend financial services to conflict affected countries such as Kosovo and Haiti as well as rural and frontier areas of the countries it operates in. Crucially, more than 70 percent of FINCA’s existing clients are women, a group IFC is committed to helping. The investment will help these clients build assets, improve their standard of living and create jobs.
The Consultative Group to Assist the Poor (CGAP) Today CGAP is widely recognized as the leading resource for financial inclusion, offering vital information through its renowned publications and online knowledge resources that include the Microfinance Gateway (www.microfinancegateway.org), the CGAP Microfinance Blog and the CGAP Technology Blog. CGAP project examples: New delivery technologies such as mobile phones to improve efficiency and reduce costs. Many large microfinance institutions and banks serving the poor now use technology such as ATMs, credit cards, and mobile phone banking, enabling customers to make payments, transfers, and cash withdrawals outside of branch offices. With backing from the Bill & Melinda Gates Foundation and the UK Department for International Development (DFID), CGAP has committed $15.4 million to 17 initiatives in 12 countries, working with microfinance institutions, banks, mobile network operators, and payment system providers targeting millions of poor, “unbanked” people to test new, technology-driven channels in extending financial services to poor households, especially in rural and remote areas. Project examples include working with the Society for the Elimination of Rural Poverty in Andhra Pradesh, India, to enable real-time accounting for 800,000 informal savings and credit groups and build credit profiles for their 9 million members; supporting OXXO, the largest chain of convenience stores in Mexico with 7,600 locations, to become a shared agent network for six banks; and partnering with WIZZIT, South Africa’s first mobile phone-based bank, to test the adoption of mobile banking in rural areas of South Africa. Through these projects and its own research, CGAP has helped advance knowledge about branchless banking as a low-cost channel for reaching poor people. CGAP also works with policymakers to build coherent policy and regulatory frameworks that balance customer needs with concern for security and prudential regulation.
Reaching the Poorest. Microfinance generally does not reach people living on less than $1 a day. For chronically destitute people who are without regular income, other forms of assistance are needed–such as access to food, clean water, basic infrastructure, housing, and income-generating activities. Safety net programs in the form of cash transfers, food aid, or guaranteed employment schemes can help meet the immediate consumption needs of the poorest people. However, microfinance can help develop income-generating activities or build assets to move people out of poverty in the long-term. Launched in 2006, the CGAP-Ford Foundation Graduation Program explores how safety nets, livelihoods, and financial services and financial education can be sequenced to create pathways for the poorest out of extreme poverty, adapting a methodology developed by BRAC in Bangladesh. The CGAP-Ford Foundation Graduation Program is helping to implement ten Graduation Pilots in eight countries including Haiti, India, Pakistan, Honduras, Peru, Ethiopia, and Yemen, in partnership with local organizations. Four pilots have reached completion with: an average 93 percent of participants moved out of extreme poverty, based on their having reached context-driven criteria such as food security, stabilizing income, accessing healthcare, and having a plan for the future. The pilots are implemented through partnerships between financial service providers, NGOs, and government social programs. Several of the pilots are currently measuring the program’s effects on participants’ lives through randomized impact evaluations and qualitative research.
Media Contacts
Jeanette Thomas (CGAP), (202) 744-4829, jthomas1@worldbank.org Douglas Pearce (World Bank, FPD), (202) 458 4343, dpearce@worldbank.org John McNally (IFC) (202) 458-0723 Jmcnally@ifc.org Updated August 2011 |
