The World Bank Group is the world's largest microfinancer, with lendings of around 1.2 billion USD.

At the conclusion of the Microcredit Summit 2006, Elizabeth Littlefield, Director of the Consultative Group to Assist the Poor (CGAP), discusses what's next for microfinance.

Q: We have heard critiques that the World Bank is not spending enough on microfinance. The figure of 'only' one percent has been recently cited. What's your view on this?

The one percent figure cited refers to a very narrow number that includes only money directly on-lent to microcredit, not the broader efforts to improve access. If you look at all of the Bank's work in microfinance including credit lines, and the far more powerful policy work--on financial sector advice aimed at improving access, the total is more like 1.2 billion USD of IBRD/IDA lending in fiscal 2005, or 6 percent. To this add investments from IFC (421 million USD by June 30 of FY06).

This makes the Bank Group the world's largest microfinance donor. But the main issue is that money is not the key bottleneck in microfinance, nor is it the World Bank's most potent instrument to enhance poor people's access to finance.

Why isn't money the key constraint?

Much of the estimated 2 billion USD spent every year on microfinance money is not effective, or is duplicative and sometimes destructive of local markets. It is much more important to improve the effectiveness of that aid rather than doubling it.

In essence, microfinance is about building domestic financial markets that serve their poor majorities. What microfinance needs is better aid, not more aid. Building domestic markets and local intermediation capacity between savers and borrowers requires more technical and managerial inputs than financial ones.

We estimate that nearly 2 billion USD is spent every year by donors, International Financial Institutions and investors in microfinance. Much of this money is not effective, or is duplicative and sometimes destructive of local markets. It is much more important to improve the effectiveness of that aid rather than doubling it.

What is the role of microfinance in the 21st century?

It has been clear for many years now that microfinance is becoming increasingly integrated in the much broader world of mainstream markets and financial systems. The aim for the future is the development of deep domestic financial markets with sound and healthy financial institutions that serve the majority of the poor population. Future sources of funds will be mainly domestic savings, and the role of financial intermediaries is to provide critically important deposit services, recycling these savings into productive loans for the poor.

How can we anticipate and adapt to the forces that will influence financial systems in poor countries?

First, we need to understand who the future clients will be. Given the staggering numbers of young people growing up in developing countries and the aging populations of the developed nations, our client base of the future will be very different than that of today. Two and a half billion of today's world population are children and teenagers who will become adults during the next decade or two.

These clients will be technologically savvy, connected, informed, and mobile. And they will be urban: a majority of the world's population will be urban for the first time in 2009. But huge numbers will be unemployed and looking for work at home and abroad. This has major implications for the financial services that will be needed.

What other factors will be in play?

One thing overwhelms all others: wireless technology. Among all new technologies, it promises to radically reduce transaction costs and the possibility of anytime, anywhere access by even very poor and remote clients. The two-billionth cell phone has now hit the market. It took 12 years to reach the first billion, but only two and a half years to reach the second. And 82 percent of the second billion went to developing countries.

The aim for the future is the development of deep domestic financial markets with sound and healthy financial institutions that serve the majority of the poor population.

This means that in the coming wireless world, corner grocers, petrol stations, and lottery outlets with cell phones can become points of sale for financial and other services. In the Philippines, Senegal, South Africa, and Kenya, experiments using cell phones for financial transactions among previously excluded populations are already showing positive results.

The use of wireless technology could mean sudden, massive access opened up for poor, low-income, and remote people. Alternatively, technology could become the principal fad and focus of microfinance and donors, leaving some people behind. A new digital divide, at a lower level of poverty, could be created that is even more intractable than today.

Q. How will the role of governments in developing countries change?

A small group of emerging market countries known as the BRICs--Brazil, Russia, India, and China--are shifting the balance of power because of their size and growth prospects. They account for 40 percent of the world's people, are already among the largest 10 economies measured by purchasing power parity, and they hold more than 30 percent of the world's foreign exchange reserves.

These governments are more assertive than they were. They listen less to policy prescriptions of the West. They have the means and the will to tackle their own poverty problems in their own way. We need to work with these governments on access to finance issues in very different ways in the future.

How has the international donor community changed, and what is the impact on microfinance?

The actors financing microfinance are rapidly shifting. International Financial Institutions and more than 60 new investment funds now have invested over 2 billion USD in microfinance in loans and equity. The IFC's portfolio in microfinance is growing at 50 percent a year and now stands at over 400 million USD.

A small group of emerging market countries known as the BRICs - Brazil, Russia, India, and China - are shifting the balance of power because of their size and growth prospects. These governments are more assertive than they were and listen less to policy prescriptions of the West.

Fortunes made in business, and especially in technology, in the west are now being deployed in grant form to solve some of the problems of development, like access to finance. Warren Buffett's spectacular 31 billion USD contribution makes the annual budget of the Bill and Melinda Gates Foundation bigger than the GDP of over 40 countries.

A key uncertainty will be the extent to which these new funders, many of them enormously successful in making money, will learn from the traditional donors' many years of successes and failures in spending it. The new private sector investors will need to resist the pressure to commit large funds, the temptation of quick fixes, and the notion that money can alone solve problems.

What is the bank doing to promote further access to financial services?

The Bank's work on policy advice to governments is critically important for access to finance. Low interest rate ceilings, subsidized lending, and inappropriate or anachronistic legal and regulatory systems can thwart access to finance by poor people severely. The Finance and Private Sector Development network's work on building local market infrastructure--credit reporting systems, payment systems, local currency markets--is also critical.

CGAP, founded and housed by the Bank, also makes a major contribution to the field as the principal industry organization in microfinance, setting best practice and reporting standards, offering advisory services, carrying out action research, and serving as a resource center.




Reprinted with permission from The Microfinance Gateway.

To read another Global Envision article about microfinance, see The History of Microfinance.



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