United Nations Capital Development Fund

1
Meeting the Challengeof Financial
Exclusion Microfinance at a Crossroads Challenges,
Opportunities and the Path Ahead University of
Chicago Gleacher Center April 21, 2006
United Nations Capital Development Fund
Richard Weingarten, Executive Secretary
2
Presentation Overview

• UNCDF Investing in the Least Developed
  Countries.
• Global Trends Affecting the Least Developed
  Countries.
• The Challenge of Financial Exclusion.
• What Limits Access to Financial Services?
• The Role of Microfinance A First Step Toward
  Access to Financial Services.
• From MFIs to Commercial Banks and International
  Investment Funds Access Evolving.
• Building Inclusive Financial Sectors Remaining
  Challenges.

3
UNCDF Investing in the LDCs

• UNCDF makes investments in the Least Developed
  Countries
• Currently working in 28 Least Developed
  Countries.
• 14 are also landlocked or small island countries.
• 18 are also Post-Conflict countries.
• Total population approximately 625 million.
• Average GDP approximately US 317 per person per
  year.
• Current investment portfolio about 125 million.
• Our Mission Reduce poverty in these countries
  and help them achieve the Millennium Development
  Goals (MDGs).
• Our Method Investing in human and institutional
  capacity at the local and national levels and
  funding and supporting Local Development
  Programmes and Microfinance Institutions (MFIs).
• Our Approach Long-term outlook seeking local
  and national capital formation and human
  development.
• Our Capital Flexible, high risk and innovative.

4
UNCDF Investing in the LDCs
5
Global Trends Affecting Least Developed Countries
Globalization

• Global integration forging deeper
  interconnections between countries.
• Trade, technology and investment drivers of
  globalization.
• Sustained increase in the share of developing
  countries in world manufacturing exports.
• However, structural inequalities have persisted
  and in some cases widened
• For example, sub-Saharan Africa increasingly
  marginalized.
• With 689 million people, Africas share of world
  exports dropped from 3.5 in 1970 to less than 2
  in 2003.
• Reasons for regional weaknesses include
• Weak basic market institutions.
• Inadequate infrastructure.
• Poorly performing customs and trade-related
  services.
• Constrained access to finance.

Source Meeting the Challenge of Africas
Development A World Bank Group Action Plan. Sept
2006.
6
Global Trends Affecting Least Developed Countries
Global Insecurity

• Interaction between poverty and violent conflict
  in many developing countries destroying lives on
  an enormous scaleand hindering progress towards
  the MDGs.
• Conflict undermines nutrition and public health,
  destroys education systems, devastates
  livelihoods, slows prospects for economic growth.
  
• Of the 32 countries in the low human development
  category as measured by the HDI, 22 have
  experienced conflict at some time since 1990.
• 40 of sub-Saharan African countries experienced
  at least one episode of civil war over the past
  40 years.
• Manufacturing production declined by 13 per year
  between 1993 and 1997 because of war in Burundi.
  Gross investment declined from 17.5 of GDP in
  1990 to 5.6 in 1998.
• In Liberia, employment in the formal sector was
  cut in half during the civil war of the1990s.
  Employment in the diamond mines fell from 60,000
  to fewer than 6,000.

Source Economic Report on Africa 2005. UNECA
Nov. 2005.
7
Global Trends Affecting Least Developed Countries
HIV/AIDS Pandemic

• Sub-Saharan Africa has just over 10 of the
  worlds population, but is home to more than 60
  of all people living with HIV25.8 million.
• In 2005, an estimated 3.2 million people in the
  region became newly infected, while 2.4 million
  adults and children died of AIDS.
• Of the 14,000 new infections every day in 2005,
  more than 95 were in low and middle-income
  countries.
• Inflicted the single greatest slow-down in human
  development progress.
• Greatly slowed the convergence of life expectancy
  statistics between rich and poor countries
• 20 years ago, someone living in sub-Saharan
  Africa could expect to live 24 years less than
  someone in a developed country.
• Today the gap is 33 years.

Source UNAIDS Epidemic Update 2005.
8
Global Trends Affecting Least Developed Countries
Widening Gap between Developed and LDCs

• Income Inequality
• Richest 500 individuals richer than poorest 416
  million.
• 2.5 billion live on under US2 a day (40 of the
  world earns 5 of global income).
• Richest 10 of global population accounts for 54
  of global income.
• Incomes in sub-Saharan Africa today are lower
  than they were in 1990.
• 1990 average American was 38 times richer than
  the average Tanzanian. Today average American
  is 61 times richer.
• Child mortality
• More than 98 of the 10 million children who die
  each year from preventable deaths die in poor
  countries.
• Sub-Saharan Africa child mortality growing.
• Sub-Saharan Africa accounts for 20 of births but
  44 of deaths.

Source UNICEF
9
Global Trends Affecting Least Developed Countries
Widening Gap between Developed and LDCs

• Education
• Globally 115 million children are denied basic
  primary education.
• Today a child in Mozambique averages four years
  of education, while a child in France averages
  fifteen years.
• Life expectancy
• Average life expectancy gap between a rich and
  poor country is 19 years.
• Average Japanese lives 35 years longer than
  someone from Burkina Faso.

10
Global Trends Affecting Least Developed Countries
The Pervasiveness of Poverty

• Trend poverty is decreasing from 28 of global
  population in 1990 to 21 today.
• But global poverty reduction largely been driven
  by the vast economic growth in East Asia,
  particularly China and India
• Sub-Saharan Africa has 100 million more people
  living under US1 a day in 2001 than in 1990.
• Latin America and the Middle East registered no
  reduction of the incidence of poverty.
• South Asia reduced the incidence of poverty, but
  not the number of poor people.
• Central and Eastern Europe experienced a sharp
  increase in the amount of poverty The number of
  people living under US2 a day went from 5 of
  the population in 1990 to 20 in 2001.

11
Global Trends Affecting Least Developed Countries
The Pervasiveness of Poverty

• Poverty in the 50 Least Developed Countries
  remains severe.
• Poverty is particularly severe in the 34 African
  LDCs, where the share of the population living on
  less than 1 a day rose from 56 in the second
  half of the 1970s to 65 in the second half of
  the 1990s.
• In the second half of the 1990s, almost nine out
  of 10 people in African LDCs were living on less
  than 2 a day. Their average consumption was just
  86 cents a day, as compared with 41 a day in the
  United States.
• Niger, ranked lowest on the Human Development
  Index (2005) has 63 of the population below the
  national poverty line.
• In Zambia, 72.9 of the population is below the
  national poverty line.
• The number of people living on less than 1 a day
  in the LDCs will reach at least 420 million by
  2015 if current economic trends continue.

Source UNCTAD, The Least Developed Countries
Report 2002.
12
Global Trends Affecting Least Developed Countries
Achieving the Millennium Development Goals
Goals and Targets Sub-Saharan Africa Southern
Asia
MDG 2005 Progress Chart
GOAL 1 Eradicate extreme poverty and hunger
very high poverty
high poverty
Target already met or close to being met
Reduce extreme poverty by half
very high hunger
high hunger
Reduce hunger by half
Target is expected to be met by 2015, or the
problem that this target is esigned to address
Is not a serious concern to the region
GOAL 2 Achieve universal primary education
low enrolment
moderate enrolment
Universal primary schooling
GOAL 3 Promote gender equality empower women
Target is not expected to be met by 2015, if
prevailing trends persist
Equal girls enrollment in primary school
far from parity
far from parity
GOAL 4 Reduce child mortality
Reduce mortality of under- five-year-olds by two
thirds
very high mortality
high mortality
No progress, or a deterioration or reversal
GOAL 5 Improve maternal health
Reduce maternal mortality by three quarters
very high mortality
very high mortality
GOAL 7 Ensure environmental sustainability
Halve proportion without improved drinking water
low coverage
high coverage
Halve proportion without sanitation
very low coverage
very low coverage
13
Global Trends Affecting Least Developed Countries
Achieving the Millennium Development Goals
While East, South-East and South Asia and North
Africa are broadly on track to meet the
Millennium Development Goal of halving poverty by
2015, there has been no progress in sub-Saharan
Africa towards achieving this goal.
1 a day poverty headcount, by region, 1980-2003
( of pop)
2003 estimated
Source Economic Report on Africa 2005. UNECA
Nov. 2005.
14
The Challenge of Financial Exclusion

• Access to a broad range of financial services
  virtually unknown outside of developed countries.
• Current supply of financial services reaches only
  a small fraction of the six billion people in the
  world
• In Zambia, only 5 of the population has a bank
  account.
• In Tanzania, 6 of the population has a savings
  account, and only 0.6 has taken out a loan.
• Ethiopia, Honduras, and Madagascar have less than
  1 bank branch per 100,000 people, while Austria,
  Belgium, and Spain have more than 50.
• Nepal and Guyana have fewer than 0.26 ATMs per
  1,000 square kilometers, while the countries like
  Bahrain, and Japan have more than 250.

15
The Challenge of Financial Exclusion
continued
Source Emerging Market Economics, LTD (2005).
P.20.
16
The Challenge of Financial Exclusion
continued

• Only 4 of the total population in Africa has a
  bank account, compared to 18 global average.
• Number of deposits amongst the African population
  is well below other regions

Number of Deposits per 1,000 population
Madagascar
Venezuela
Thailand
Greece
Austria
Source Demirguc-Kunt, Asli, World Bank, 2005.
17
The Challenge of Financial Exclusion
continued

• Only 1 of Africans have a loan or credit
  facility with a formal financing institution.
• Frequency of lending in Africa is far below other
  regions

Number of Loans per 1,000 population
Madagascar
Venezuela
Panama
Greece
Austria
Source Demirguc-Kunt, Asli, World Bank, 2005.
18
The Challenge of Financial Exclusion
continued

• Minimums and fees required to open checking
  accounts in Africa are significantly higher than
  other regions

Minimum Amount to Open Checking Accounts (of GDP
per capita)
Uganda
Malawi
Ghana
Bolivia
Bulgaria
Source Demirguc-Kunt, Asli, World Bank, 2005.
19
The Challenge of Financial Exclusion
continued
Regional Breakdown of Access to Microfinance
38 Coverage
No. of Poorest Families (millions)
8.5 Coverage
59.9
11.6 Coverage
5.2
1.4
Source State of the Microcredit Summit Campaign
Report 2005.
20
What Limits Access to Financial Services?

• Personal and social factors influence access to
  financial services.
• Cultural norms matter.
• Gender matters.
• Age matters.
• Legal identity matters.
• What you have learned matters.
• Where you live matters.
• Level of income matters.
• Type of occupation matters.
• Types, attractiveness and availability of
  financial products influence and limit consumer
  choices.
• Inadequacy of financial infrastructure and
  weaknesses of financial sectors can limit access.

Source Building Inclusive Financial Sectors for
Development. UNCDF/UNDESA 2006
21
The Role of Microfinance

• Microfinance is well established.
• Microfinance in place in all regions of the
  world, reaching about 90 million clients.
• More than 3,000 microfinance institutions.
• More than 1,000 international NGOs, private
  foundations and international agencies.
• More than 200 formal financial institutions
  serving the microfinance market.
• Some 750 million accounts have been recorded in
  savings banks and post office banks of developing
  countries.
• 50 countries, governments or central banks are
  implementing policies for microfinance
  institutions (MFIs) and a dozen financial
  agencies are now rating them.

22
The Role of Microfinance
continued
3,164 institutions report reaching 92.2 million
clients (including 66.6 million classified as
poorest) by the end of 2004
No. of programmes reporting
No. of clients reached (millions)
No. of programmes reporting
Source State of the Microcredit Summit Campaign
Report 2005.
23
The Role of Microfinance
continued

• Microfinance reduces poverty and supports
  economic growth.
• Microfinance is among the best tools for reducing
  poverty among the very poor.
• Based on a 14-year study in Bangladesh, for
  example, the World Bank found
• Moderate poverty in all villages declined by 17.
• Poverty declined by more than 20 for
  microfinance borrowers.
• Impact was greater on extreme poverty than
  moderate poverty.
• Measurable spillover effects for
  non-microfinance borrowers in terms of greater
  village economic activity.
• In Uganda, 95 of microfinance clients engage in
  improved health and nutrition practices for their
  children.
• Bolivian microcredit loan clients doubled their
  income in two years.

Source State of the Microcredit Summit Campaign
Report 2005.
24
The Role of Microfinance
continued

• When MFIs that serving lower end markets become
  sustainable, they reach, on average, 1½ times as
  many borrowers as other MFIs.
• Larger, sustainable MFIs have proven more
  efficient and more effective than smaller MFIs.

Sources CGAP and Building Inclusive Financial
Sectors for Development. UNCDF/UNDESA 2006
25
From MFIs to Commercial Banks and International
Investment Funds Access Evolving
Gradual evolution from microcredit to capital
markets

• Microfinance largely undeveloped before the
  1970s.
• 1970s Microcredit enters development lexicon
  to refer to initiatives aimed at bottom end of
  the financial market most Microfinance
  Institutions (MFIs) are NGOs with social
  motivation.
• 1990s Microfinance emerges, providing
  financial products for the poor, to supplement
  loans and lines of credit. Many MFIs begin to
  grow significantly and to attain sustainability.
• International commercial banks begin to expand
  activities into the microfinance sector.
• Some MFIs transformed from NGOs into licensed
  banks.
• Since mid-1990s Domestic commercial banks begin
  to have significant influence on microfinance.
  International Investment Funds established to
  support MFIs.
• 2000 More and more international commercial
  banks, investment banks, funds and other
  financial services companies getting involved.

Source A Billion to Gain? A study on global
financial institutions and microfinance. ING
February 2006
26
Access Evolving
continued
Many financial institutions are now involved

• Alternative Financial Institutions including
  traditional MFIs, postal banks, state banks,
  rural banks, co-ops and credit unions.
• Postal banks account for more than 50 of savings
  accounts, with state banks and MFIs accounting
  for 20 each.
• State banks account for 62 of lending, with MFIs
  making up 33.

Microcredit in Latin America, 2004
Source ACCION, 2005
27
Access Evolving
continued
600
500
Postal banks
400
State banks
Rural banks
Co-ops credit unions
Millions
300
MFIs
200
100
0
Savings accounts
Loans
Source CGAP 2004.
28
Access Evolving
continued
Commercial banks are increasingly active in
microfinance

• Primary aims and motivations often have a dual
  purpose corporate citizenship commercial
  motivation.
• Commercial motivation includes market expansion
  and serving existing clients.
• A variety of activities and products include
• Wholesale Loans to MFIs guarantees
  securitization equity stakes provision of bank
  accounts technical assistance credit, risk
  management and IT systems entry to banking
  networks and platforms.
• Retail Provision of bank accounts individual or
  group loans savings insurance remittances
  business services for SMEs.
• Particular roles of commercial banks include
  offering technical assistance to
  microentrepreneurs and to MFIs, offering retail
  and wholesale loans, coordinating remittances,
  taking equity stakes in MFIs and sponsoring
  Microfinance Investment Funds.

Source Building Inclusive Financial Sectors for
Development. UNCDF/UNDESA 2006
29
Access Evolving
continued
Microfinance focus of select commercial banks
Source A Billion to Gain? A study on global
financial institutions and microfinance. ING
February 2006
30
Access Evolving
continued
Since the mid-1990s, international investment
funds specialized in microfinance have developed

• Investment opportunities offered to private
  investors and institutions.
• Many funds are privately funded.
• Most funds offer hard-currency MFI debt.
• Some funds invest in MFI equity.
• Some funds offer local currency loans.
• Some funds partially guaranteed by multi-lateral
  financial institutions or national development
  agencies.

Source A Billion to Gain? A study on global
financial institutions and microfinance. ING
February 2006
31
Access Evolving
continued
Selected international investment funds focused
on microfinance
projected
Source A Billion to Gain? A study on global
financial institutions and microfinance. ING
February 2006 (2005 data)
32
Access Evolving
continued
But financial inclusion has far to go

• Penetration is still limited 66.6 million out of
  2.5 billion people who live on less than 2/day
  have access to microcredit.
• Lending volume is still well below what would be
  required to lift all the poor from poverty.
• Commercial activity is just beginning and is
  still inconsequential in amount.
• Many countries, especially those in Africa, lag
  far behind.

33
Building Inclusive Financial Sectors Remaining
Challenges
Inclusive Financial Sectors are those
characterized by

• Access at a reasonable cost of all bankable
  households and enterprises to the range of
  financial services for which they are
  bankable
• Sound institutions, guided by appropriate
  internal management systems, industry performance
  standards, and performance monitoring by the
  market, as well as by sound prudential
  regulations where required.
• Financial and institutional sustainability as a
  means of providing access to financial services
  over time.
• Multiple providers of financial services, so as
  to bring cost-effective and a wide variety of
  alternatives to customers.

Source Building Inclusive Financial Sectors for
Development. UNCDF/UNDESA 2006
34
Remaining Challenges
continued

• Inclusive Financial Sectors must be supported
  by a sound policy environment, with a continuum
  of financial institutions that, together, offer
  appropriate products and services to all segments
  of the population.

• Appropriate products and services should
  include
• Savings.
• Loans.
• Insurance.
• Remittances.
• Other financial services products.

Source Building Inclusive Financial Sectors for
Development. UNCDF/UNDESA 2006
35
Remaining Challenges
continued

• Inclusive Financial Sectors is a critical
  economic and development issue.
• "The great challenge before us is to address the
  constraints that exclude people from full
  participation in the financial sector.
• Kofi Annan, UN Secretary General
• At the most basic level, the key to ending
  extreme poverty is to enable the poorest of the
  poor to get their foot on the ladder of
  development. The ladder of development hovers
  overhead, and the poorest of the poor are stuck
  beneath it. They lack the minimum amount of
  capital necessary to get a foothold, and
  therefore need a boost up to the first rung.
• Jeffrey D. Sachs, The End of Poverty

36
Remaining Challenges
continued
Principle remaining challenges

• Building national visions of inclusive finance
  and implementing national action plans that make
  inclusive finance a national priority and reality.

Building blocks for domestic financial markets
that work for the poor majority
Source Building Domestic Financial Systems that
Work for the Majority. Womens World Banking 2005
37
Remaining Challenges
continued
Principle remaining challenges

• Creating enabling policy, legal and regulatory
  environments and removing constraints to
  financial inclusion.
• Using capital and technology to extend the reach
  of financial service providers to the poor and to
  SMEs.
• Bringing more capital and capacity to financial
  service providers serving the poor and SMEs.
• Increasing financial literacy so that the poor
  can better understand and utilize financial
  services.
• Broadening the types of financial products and
  services offered to the poor to include
  micro-insurance and micro-health and better
  utilization of remittances,all of which can
  improve the social safety net and reduce
  vulnerability of the poor to unexpected economic
  shocks.
• Increasing participation of the private sector as
  an important player and partner in providing
  financial services to the poor and to SMEs.

38
Remaining Challenges
continued
Thus, to meet the challenge of financial
exclusion, much remains for us to do!
Thank you.
39
Meeting the Challengeof Financial
Exclusion Microfinance at a Crossroads Challenges,
Opportunities and the Path Ahead University of
Chicago Gleacher Center April 21, 2006
United Nations Capital Development
Fund www.uncdf.org info_at_uncdf.org Tel 212
906-6119 Fax [phone]