UN Advisors Group on Inclusive Financial Sectors

By Steve Barth

The United Nations Advisors Group on Inclusive Financial Sectors held its inaugural quarterly meeting in New York in June 2006. Formation of the Advisors Group was a key action item of the United Nations’ 2005 “International Year of Microcredit” and the UN’s Blue Book on Building Inclusive Financial Sectors for Development.

The power of microfinance to alleviate poverty and also to contribute to social stability was recognized by the awarding of the 2006 Nobel Peace Prize to Bangladeshi economist and microcredit pioneer Prof. Muhammad Yunus and Grameen Bank. Studies have shown that 48% of individuals and families who received credit from Grameen Bank over an eight-year period rose above the poverty line, compared to only 4% of a comparable control group.

Microfinance as a path to self-reliance

Microfinance is not only about grassroots-level programs for savings and credit, but also insurance, money transfers and other services that wealthy and middle-class populations take for granted. The lack of these services can prevent self-sufficiency for the working poor—by forcing them to rely on informal channels to borrow or transfer money that are so risky and/or expensive that they perpetuate debt and suffering. Microfinance is seen as a complementary—but more sustainable—approach compared to direct development aid or charity, while also building self-reliance and solidarity without encouraging the dependence sometimes seen with government and NGO handouts. The success of microfinance has attracted the attention of both governments worldwide and of philanthropists such as the Bill and Melinda Gates Foundation.

Since 1997, the Microcredit Summit Campaign has set and tracked international goals on behalf of thousands of microfinance institutions (MFIs) worldwide to reach the world’s poorest families with credit for self-employment. (Like others, they use the equivalent of US$1 a day or the bottom half of those under a nations poverty line to determine “poorest of the poor” which includes an estimated one billion people around the world.) By the end of 2005, 3,133 participating MFIs claimed to have reached 113.3 million clients. Overall, 72% were counted as among the “poorest” when they took their first loan; 84% of lending clients were women; and an estimated 410 million family members were helped. In other words, the Campaign tracked 978% growth in microfinance activities (about 34% per year).

It has been 30 years since Prof. Yunus founded Grameen Bank. Today there are more than 10,000 MFIs and best—and worst—practices in microfinance are continuously emerging and evolving. According to statistics compiled by the UNCDF, studies of the impact of microfinance programs demonstrate that it helps the poor to meet their basic needs and protect themselves against risks, while households see improvement in welfare and small businesses see increased viability and stability. In particular, microfinance helps to empower women. Meanwhile MFI’s prove their viability with an average of 97% repayment rates.

Nevertheless, significant challenges remain. So far, less than 2% of poor people worldwide have access to credit or savings services (other than moneylenders). And while we know MFIs can be profitable and financially stable, only about 1% of them are now.

We recognize that access to financial services is critical to alleviate the suffering of the poor, but we also understand that microcredit is not the answer to every problem in development. Microlending has to be part of a wider portfolio of microfinancial services and successful programs are always complemented by social, vocational and even health-related training and support.

Changing the paradigm to “financial inclusion”

The growing acceptance of the idea that financial services should be seen as a human right has also encouraged a view that microfinance is only part of a larger picture.

In 2002, the UN Capital Development Fund made a strategic shift to concentrate on building inclusive financial sectors, on the assumption that microfinance will gradually become an integrated part of the existing global financial system. The term “inclusive finance” is slightly different from “microfinance” because it places grassroots organizations into the context of a larger socio-economic value chain. The UN seeks to expand opportunities and resolve constraints that exclude the poor by deepening national and international financial systems in ways that guarantee sustainable access to financial services by poor and low-income people.

While development agencies such as the World Bank’s Consultative Group to Assist the Poor work to scale up the microfinance industry by connecting MFIs to global capital markets, they are also emphasizing that it’s vital to have healthy national (and international) regulatory environments that stimulate industry evolution, expand access and protect customers—a transparent regulatory environment that is fair to all players, but also recognizes the value of requisite variety.

This is the impetus for the creation of the United Nations Advisors Group on Inclusive Financial Sectors . The 25 Advisors represent governments, central banks, regulatory agencies, microfinance institutions and other financial services providers, private sector financial institutions, development agencies, donors, and academia from all over the world. The Advisors will use their expertise and connections to build inclusive financial sectors, raise public awareness, and mobilize support for the global effort to increase access to financial services.

GSB and Thailand: Benefits and Contributions

It is part of an Advisor’s responsibility to act as a channel of communication between the group and economic development stakeholders in his or her nation and region.

Government agencies and non-governmental organizations (NGOs) have operated microfinance programs in Thailand for many years. For example, the so-called “Village Fund” program introduced in 2001 is considered the world’s largest government-sponsored microfinance project.

The success of these efforts, underscored by the 2005 international conference “Empowering the Grassroots” hosted by GSB, have raised Thailand’s profile in the global microfinance community of practice. With such significant microfinance efforts under way, the Bank and the nation have a wealth of experience to share with MFIs in other countries. Likewise, continuous improvement of our own programs can greatly benefit from greater knowledge of the worldwide development of microfinance and financial inclusion.

The linkage between grassroots development agencies and world-class financial and technology companies promises to make microfinance more sophisticated, sustainable, efficient and effective. But the rapid evolution and intense entrepreneurialism of the microfinance sector is also teaching global corporations a thing of two about innovation and how to reach “the next billion customers.”

For more on UN Advisors Group on Inclusive Financial Sectors mandate, objectives, members and process, see the UNCDF website.

UNCDF press releases

16 Mar 2007: UN Advisors Group Releases Five Key Messages for Four Key Audiences

16 Nov 2006: United Nations Advisors Group Aims to Expand Access to Financial Services for the Poor and Micro Entrepreneurs

8 Nov 2006: United Nations Advisors Group to Meet in Halifax to Explore Innovative Solutions to Poverty Through Improved Access to Credit and Other Financial Services

28 Jun 2006: UN Advisors Group on Inclusive Financial Sectors Holds First Meeting to Seek Solutions to Poverty Through Improved Access to Financial Services

The GSB Work Spaces are related to Bank's consulting engagements with Reflected Knowledge. This is not an official or unofficial website of Government Savings Bank. Access is restricted to authorized personnel only except as determined by GSB. ©2005-2008 Government Savings Bank and Steve Barth. All rights reserved.