keynote address was given by Marilou Uy, Director, Financial Sector Operations and Policy Department, The World Bank. Excerpts of her
The conference today is entitled, "Expanding the Frontier
onMicrofinance," and I would like to associate it broadly
with building financial systems that work for all members
of society. This may resonate better with economists and
business people, but I will explain why there is a closing
of the gap between specialized microfinance and financial
systems and formal financial systems.
Before doing so, let me put in perspective an important
goal that many policymakers in developing countries and
international financial institutions like the World Bank pursue.
This year, with only 10 years to go, we will meet at the
United Nations to review the achievements of the 2015 Millennium
Development Goals, adopted by the International
Financial Community to improve the lives of the poor.
overall goal of cutting poverty by half will be met, thanks to very strong
performances from India and China,
but many other countries will still be left behind. To meet
these goals, it is necessary to learn how to effectively scale
up efforts that promote development and eradicate poverty.
Last year, we also met in Shanghai with policymakers,
development practitioners, and academics to share experiences
and learn from each other regarding initiatives that
might have the possibility of being scaled up to reach the very
poor. A good number of case studies on microfinance were
presented, including experiences in the scaling up of microfinance
models that were integrated into countries' financial
systems. Such financial systems that work for the poor can be
very powerful in fighting poverty.
the World Bank's empirical research, which looks
at financial sector development, poverty reduction, and
growth, shows a very strong association between growth
and financial sector development, and growth and poverty
reduction. There is a causation going from financial sector
development to growth, financial sector development to
poverty reduction, and financial sector development to
better income distribution.
So, if one sees empirical research and the compelling
evidence behind the role of finance and poverty reduction,
then one can conclude that building inclusive, well-developed
financial systems that work for the majority of the
population is critical to complementing two pillars of a
development strategy that creates a favorable business
climate and invests in people, as an inclusive financial
system gives people opportunities to capture the benefits
of this investment climate and investments in people.
area that has clearly contributed to a more inclusive financial sector has
been the development and growth of microfinance over the past 30 years. When
I first got
involved with microfinance ten years ago, microcredit was
viewed by many as a niche. It is now well-accepted that a
diverse array of financial services can be used by poor people
to smooth their consumption, manage their risks, build
assets, and improve their lives. It's also well accepted that
financial institutions can tailor financial services to fit the
needs of the poor.
Now these financial
services are what we would call "microfinance"-the intermediation of deposits
and various types of credits, and the many related activities that lower
the risk of financial intermediation. It is also well accepted that
serving poor people with financial services can be profitable.
Indeed, microfinance today looks very different from its
very early days. We are rapidly moving from a narrow perspective
in which microfinance was seen as special loans to help
the poor build small businesses, to a broader vision of creating
financial systems that actually work for the poor. While microfinance
has started to reach a greater proportion of the poor
in a few countries, there is still a very long way to go.
The important question that is being posed in this
conference is: What role can business play in transforming
the microfinance industry to help it achieve greater scale,
growth, and impact?
Let me give you
an overview of what's been happening
in the microfinance landscape over the past few years.
Real integration of microfinance with mainstream financial
systems is occurring at a fast pace in a number of markets.
In some places, the reach of microfinance providers is
poised for a large increase, not just in terms of branches,
but also in virtual ways.
This trend is occurring in three ways. Banks and other
institutions with significant branch infrastructure are going
down market, driven by competition and cost saving technologies
that allow them to deliver smaller credit at lower costs.
We have observed these trends in many countries including
India, South Africa, Brazil, and Egypt. On the other side
are the microfinance institutions that are scaling up and
building branch networks. This trend is particularly evident
in South Asia, Latin America, and some countries in Africa.
Many microfinance institutions also are transforming
into banks. With more commercial funding from these institutions,
there is greater imperative for professional standards,
such as financial
reporting and rating, and
a trend toward the professionalization
of the industry.
A third trend is the
strong partnerships that are
being built between socially
oriented microfinance institutions
and banks. There are
financial and nonfinancial
organizations with large
infrastructures, and these
partnerships are being forged to leverage each other's comparative
Over half of the microfinance institutions in East Asia
and Central Asia, according to a survey by the Consultative
Group to Assist the Poor (CGAP), had contractual relations
with a bank. CGAP has counted 280 such partnerships
worldwide. It seems that the commercial financial sector and
the microfinance sector are both building out and meeting
somewhere in the middle. Indeed, this integration seems
to be a path towards inclusive financial systems, which we
view as a very important part of financial sector strategies
of countries and businesses.
How can one support the fast and continuous development
of inclusive financial systems? First, policy and institutional
foundations are critical. By this we mean that
governments can ensure that regulatory policies foster the
development of the sector. One example is the regulation of
microfinance institutions that transform into banks. Regulators
do have to learn the business of microfinance in order to
regulate them properly.
Microfinance will thrive if interest rate policies are not
restrictive, and if governments themselves do not engage in
highly subsidized credit programs. Financial infrastructure
provides the foundation for good financial systems via
policy and institutional foundations. For example, the
availability of credit information can help people with no
physical assets to develop reputational collateral that can
facilitate access to finance.
Bank and IFC are very strongly promoting and working with countries to put
in place credit reporting systems,
including credit bureaus. Yet, another example is good
financial reporting of microfinance institutions-a trend
which CGAP is also promoting.
Second, we need to strengthen financial institutions serving
the poor far beyond the classic microfinance institutions,
including savings banks, cooperatives, and rural banks.
Many of these institutions offer distribution systems that can
reach underserved areas of society, particularly in the rural
parts of a country. There is a need to continuously seek new
and effective ways to deliver financial services to the underserved,
and here, technology can play a role, as can alliances
with those that have more basic infrastructure, such as post
offices and rural credit cooperatives. For example, Correspondent
Banking in Brazil has taken root where banks have
a partnership with post offices, which could be the basis for
expansion in rural areas.
One other factor that could push inclusive financial systems
is competition. Competition enhances experimentation,
which has characterized the industry in the past few
decades. Competition also can push banks to go down market
and accept the idea that taking informed risks by lending
to entrepreneurs and households rather than only to governments
and big corporations can be rewarding and a way to
Competition can come from many places. It can come
from the development of securities markets that can then
push banks to pursue customers other than big corporations.
It also can come from the scaling up of microfinance institutions
that achieve sustainability and become part of a more
dynamic financial system. The World Bank Group, CGAP,
and many of our partners are actively supporting promising
institutions to achieve this goal. The overall vision draws on
many advantages of policies that facilitate access to finance.
Many of these are familiar to you: competition, technology, dissemination of practices, to name a few, which leaves
room for a multiplicity of institutions and national models.
Before closing, let me address the significance of holding
a microfinance conference at a business school. What is the
role that MBA students like you can play both now and in
the future in bringing together business objectives with
social economic development objectives?
We are pleased to see schools of the caliber of the University
of Chicago Graduate School of Business, the Harris School
of Public Policy, and the Kellogg School of Management taking
such a keen interest in microfinance. Such interest is critical
to encouraging research and development of new ideas and
It also means we look to students like you as future
leaders, potential policymakers, and entrepreneurs who
can make a difference in pushing the frontiers of inclusive
finance, meshing what one would call hard business decisions
with social goals such as reaching poor households
Business school students have tremendous knowledge
and opportunity to innovate, be entrepreneurs, be social
entrepreneurs, lend your expertise to figuring out how
financial services can function more efficiently, or how
systems can function more efficiently and reach a broader
spectrumof society.Microfinance does not only need
money; in fact, in many countries where we work, money is
not an issue. What is needed is research, ideas, technology,
good policies and institutional foundations, good laws, and
champions perhaps like you.
In closing, let me reiterate our commitment and support
toward building inclusive financial systems with diverse
products that fit the needs of the poor. There is still a long
way to go in making finance reach the great majority, and we
do have a large role to play to reach the billions of people
who can still benefit from financial services to smooth their
consumption, manage their assets, build assets, manage
their risks, and ultimately, improve their lives. Thank you