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Microfinance and Financial Inclusion

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At a Glance

 

There are an estimated 2.5 billion financially excluded adults today, with almost 80 percent of those living under $2 per day having no accounts at formal financial institutions.[1]  This holds back the fulfillment of the World Bank Group’s goals of eradicating extreme poverty by 2030 and increasing the share of income held by the bottom 40 percent of the population. 

 

The World Bank’s Global Financial Inclusion Database (Global Findex) reports that three-quarters of the world’s poor lack a bank account because of poverty, costs, travel distances and the often burdensome requirements involved in opening an account. Only 25 percent of adults earning less than $2 a day have saved money at a formal financial institution. Being “unbanked” is linked to income inequality: The richest 20 percent of adults in developing countries are more than twice as likely to have a formal account.

 

Improving access to responsible finance has a positive impact on:

 

·         Household access, which helps families build assets, manage risks, and smooth consumption. An increasing body of evidence shows that when the appropriate service is matched with the needs of poor clients, financial services can lead to increased income and improved health and education, allowing children to have more days in school and allowing families to have more regular meals.

·         Micro, small and medium-sized enterprises (MSMEs), which are, collectively, the largest employers in many low-income countries. Yet their growth is often stifled by a lack of access to credit and savings services that would enable them to invest in fixed capital, increase their turnover and employ more people. Savings, insurance and payments services are also needed for firms to better manage risks and make new investments. About 200 million formal and informal businesses in developing countries lack the financing they need to grow, with a financing gap of $2.1 trillion to $2.6 trillion for MSMEs in developing economies. That sum is about one-third of the current outstanding MSME credit.

·         Spurring growth and reducing inequality, which is aided by integrated and universal financial systems. The G-20 has made financial inclusion a permanent policy priority by establishing the Global Partnership for Financial Inclusion (GPFI), which includes the World Bank (WB), International Finance Corporation (IFC), and the Consultative Group to Assist the Poor (CGAP). The Alliance for Financial Inclusion and the Organisation for Economic Co-operation and Development (OECD) have been designated as implementing partners.

 

Over the last few decades, different types of financial-services providers for poor people have emerged to offer new possibilities: 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.

 

Financial delivery systems can improve the efficiency and reduce the costs of public policy interventions. For example, Brazil’s Bolsa Familia shifted its government payments onto one electronic benefit payment card. As a result, transaction costs fell by 12.1 percent, resulting in billions of dollars in savings. Mobile money – financial services, such as payments and savings, delivered through cellphones – is promising as a means to dramatically reduce costs. It enables greater outreach to more people in isolated areas and can be safer and more convenient.

 

What We Do

 

Within the World Bank Group, different institutions work together towards responsible financial inclusion:

In line with President Jim Yong Kim’s vision of achieving universal access by 2020, the World Bank works with governments and regulators on providing policy advice, data and diagnostics, technical assistance for legal and regulatory reforms, institutional development, risk-sharing, and financing. Taking a comprehensive approach to promoting financial inclusion among the 2.5 billion adults who lack access to formal financial services, World Bank support includes policy advice, data and diagnostics, technical assistance for legal and regulatory reforms, institutional development, risk-sharing, and financing. The World Bank has an active lending portfolio for financial inclusion of $4.3 billion - with approximately $2.9 billion in IBRD and $ 1.4 billion in IDA funding- 117 lending projects in more than 70 countries. In addition, The World Bank has technical assistance projects in more than 100 countries, including technical assistance and advice for reforms, institutions and capacity-building, systems development, analytical reports and data, and knowledge sharing.   

 

Led by the Financial Inclusion and Infrastructure Global Practice and its international network of over 170 financial specialists, the World Bank takes a comprehensive approach to working with governments and regulators towards creating financial inclusion.

 

The World Bank supports increased access to a range of financial products and services through: i) policy and regulatory reforms for micro and SME finance; ii) the development of sound and efficient financial infrastructure for payments, supply chain finance, credit information, and collateral frameworks; iii) innovations to reach poorer households, including through Government to Person payments linked to financial accounts; and iv) responsible finance, through financial capability and consumer protection. The World Bank also partners with countries to support national strategies for financial inclusion and provides data, technical assistance, financing, and capacity building to support the implementation and sustainability of these strategies.

 

The World Bank also supports policy and regulatory reforms, financial infrastructure development, and other measures that catalyze private sector financing, knowhow and innovation, and the use of digital delivery mechanisms, resulting in a broad range of financial services – including payments, savings, insurance, credit - being used by low income households and micro/small enterprises that are currently un-banked or under-banked to accelerate financial inclusion through enabling country commitments under its Financial Inclusion Support Framework (FISF) which was launched with Managing Director Sri Mulyani Indrawati announcing it at the WB/IFC/G20 “Women and Finance” event during the World Bank/IMF Spring Meetings.

 

The World Bank’s global surveys provide data and insights on financial inclusion, including the Global Financial Inclusion Database (Global Findex), a Bill and Melinda Gates Foundation funded survey of 150,000 people in 148 countries, implemented with Gallup, and the Global Payment Systems Survey (which covers financial infrastructure related to payments and mobile money, in 142 countries). Country-level diagnostics and surveys on financial sector development, Small and Medium Enterprises finance and consumer protection are conducted globally, with World Bank support.

 

IFC

 

IFC’s goal for microfinance is to scale up access to a range of high-quality financial services for underserved populations, maximizing development impact and ensuring institutional sustainability. IFC achieves this goal by effectively combining investment and advisory services to a range of financial intermediaries. IFC is the World Bank Group’s main investor in microfinance, working with 314 microfinance institutions (MFIs) and SME-focused financial institutions, which provide micro loans in 90 countries.  IFC is one of the leading global investors in terms of volume. In fiscal year 2013, IFC committed $402 million in 51 projects with MFIs. IFC cumulative investment portfolio in microfinance exceeded $3 billion, with outstanding commitments of $1.45 billion. In fiscal year 2013, IFC advisory services comprised $66.2 million, representing advisory assistance for 73 projects.

 

IFC’s development reach has been notable in calendar year 2013. IFC reached 41 million microfinance and over 1 million small and medium enterprise clients. IFC’s investment and advisory services facilitated an estimated 11.6 million microfinance loans; 210,000 housing finance loans; and 2.7 million small and medium enterprise loans, for a total of $11.4 billion, $7.3 billion, and $91.3 billion outstanding, respectively.


IFC also helps improve financial inclusion by improving financial infrastructure. IFC takes an active role in advising microfinance institutions and building or strengthening comprehensive and robust credit reporting systems such as credit bureaus, which are critical to avoiding over-indebtedness and supporting responsible lending practices. Through its Global Credit Reporting Program, IFC has created or significantly improved credit reporting systems in over 30 countries and advocated for relevant laws in 33 countries.

 

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.

 

The Consultative Group to Assist the Poor (CGAP) works toward a world in which everyone has access to the financial services they need to improve their lives. CGAP develops innovative solutions for financial inclusion through practical research and active engagement with financial service providers, policy makers, and funders. Established in 1995 and housed at the World Bank, CGAP combines a pragmatic approach to market development with an evidence-based advocacy platform to advance poor people’s access to finance. Its global network of members includes over 30 development agencies, private foundations, and national governments that share a common vision of improving the lives of poor people with better access to finance.

 

CGAP is widely recognized as a leading global knowledge resource for financial inclusion, offering vital information through its renowned publications and online knowledge resources that include the Microfinance Gateway and the CGAP Blog.

 

CGAP projects cover a wide range of topics on financial inclusion and microfinance. Focus areas include developing new business models for mobile banking and promoting effective policy frameworks for branchless banking. CGAP also leads an innovative global program to understand how safety nets, livelihoods, and microfinance can be sequenced to create pathways for the poorest out of extreme poverty.

 

Media Contacts

Nicole Frost, World Bank; (202) 458-0511; nfrost@worldbank.org
John McNally, IFC Investment Services; (202) 458-0723; jmcnally@ifc.org
Sona Panajyan, IFC Advisory Services; (202) 473-9751;
spanajyan@ifc.org

Sue Pleming, CGAP;  (202) 473-3136; spleming@worldbank.org

Updated March 2014



[1] Global Findex, defined as not having a savings or credit account with a formal financial institution

 

 

 




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