Having a bank account and credit card seems normal to many people, but for more than 2.5 billion people in the developing world, it is almost unimaginable. Excluded from the formal financial sector, they have no access to savings or current accounts, credit or other basic types of financial services.
Ending this exclusion has long been seen as a way of lifting the poorest people out of poverty. Microfinance took off around 30 years ago with the launch of Grameen Bank in Bangladesh, founded by the banker, economist and Nobel peace prize winner Muhammad Yunus, and was based originally on the idea of providing small loans to poor people to enable them to invest in their own livelihoods.
The concept of microfinance has gained widespread support among policymakers, and been lauded for its potential to transform lives. But it has also come under closer scrutiny in recent years, with some questions raised about the effectiveness of microloans in particular as a way of combating poverty. A Guardian roundtable discussion, held in association with Barclays, provided an opportunity to debate these issues, examining the role of microfinance as we move towards a post-2015 development agenda and addressing some fundamental questions about its purpose, the forms it should take, and how it can be scaled up.
Participants at the roundtable included representatives from Barclays, Plan International and CARE International, who joined forces in 2009 to form Banking on Change, an initiative to expand financial inclusion in Africa, Asia and South America by increasing participation in village savings and loans associations (VSLAs). These grassroots, community-managed schemes enable people to save as a group, accumulate funds, and borrow from the fund at rates of interest agreed by the group. They help individuals smooth over any financial bumps, making them more resilient to emergencies and eventually paving the way for many to enter more formal financial services.
Expanding financial services
NGOs and large banks are not obvious stablemates but, as this alliance has shown, they can work together successfully where they share a common interest. In fact they need to because, as the roundtable heard, no single institution has all the skills and capacity required for a project as ambitious as expanding financial services to several billion new people around the world.
"With 2.5 billion still excluded, we can't broker every deal one by one," said Christine Svarer, head of private sector engagement at CARE International UK. "We recognise that a global bank like Barclays has expertise that we haven't. Ten years ago, profit was a dirty word for NGOs like CARE. We're certainly different, and partnership is something you need to work at, but we have commonalities."
Another difference now compared with 10 years ago is a greater diversity of views of what microfinance should do. The debate heard how many experts now think the assumption that poor people in developing countries want to invest their way out of poverty made a convenient business case for microfinance, but was misguided because it potentially exposed people to debt they couldn't repay – and not everyone can be an entrepreneur.
These days, microfinance is increasingly diversifying into other instruments such as savings-based vehicles, which better suit the risk-averse. This signals a maturing of the industry, and a move towards a greater number of business models to create what Tom Sanderson, UK director of the charity Five Talents, described as the "financial fabric" of developing countries, where there still isn't much intertwining of financial products. But it also means that the players in this sector increasingly need to find their own place in a more diverse landscape. One theme discussed at the roundtable was the need for institutions to ask themselves some fundamental questions about what they offer, and how it improves on any existing community-based models.
"One implicit assumption is that external institutions can add value," said Hugh Allen, CEO of VSL Associates, a consortium of microfinance practitioners specialising in VSLAs. "Community-based systems have the advantage of speed and accessibility. They're based on sensitive, deep understanding of their clients. They know each other. Unless as a financial institution and partner you can compete on those grounds, you aren't going to go far."
This is a challenge for big players, and the roundtable heard via an internet video link from Michael Kaddu, head of corporate affairs at Barclays Bank of Uganda, that this is why the bank's approach has been to work through VSLAs as a more relevant form of support.
"We give the group access to money but they manage it themselves," he explained. "If individuals are ready to graduate from that, they'll have greater financial literacy. They are the risk managers and they approve the loans. It helps them understand how the financial sector can be open and transparent."
But what is the ultimate objective of microfinance? There's a certain tension between the need for providers to make a return – the financial sustainability – and the good they ostensibly do by offering services to the poor. Kaddu emphasised that Barclays' motivation is to create sustainable change, working with communities for their benefit but also with a view to a return on investment. Those two objectives are not always clearly reconciled all over the industry.
Anton Simanowitz, social performance management specialist at Oikocredit, gave the example of microfinance providers in Nigeria focusing on entrepreneurs in Lagos, because that was more profitable, even though there are huge numbers of people in rural areas who might benefit from those services. Financial inclusion and social change don't always go together, he pointed out, but if you start from the social goals you want to achieve you can look more clearly at where to add value, and how.
In other words, just offering small loans or savings accounts to whoever wants them isn't enough: the financial service element needs to be bound up within a social programme if it is to achieve lasting positive change. The charitable microfinance organisation Finca, for example, has provided microfinance in the form of "micro-energy" loans, where people in Uganda were able to buy solar-energy systems for their homes, which enabled children to study at night and also helped people to start new business lines, such as mobile-phone charging.
Embedding financial services into specific social benefits like this can deliver positive results faster and on a larger scale than isolated credit is likely to do. Microfinance on its own may not have any explicit social benefit at all: a loan can be just a loan, and nothing more.
"There are some very different players, with different motives," agreed Steve McGuire, vice president and chief financial officer at Finca. "You can't just focus on providing financial services; you have to champion financial inclusion within a social programme for your clients. We're very focused on the double bottom line of financial sustainability and social benefits."
Serving communities
The roundtable participants agreed that developing a diverse microfinance sector would require more collaboration – and in some cases, a willingness to step back and let someone else do it.
"Segmentation is important," said Bob Annibale, global director of microfinance at financial services firm Citi. "It's about looking at which institutions and models are serving communities well. It's important to look at local banks, co-operatives and credit unions. They go deeply into rural areas. We bring a certain experience, but it's about bringing in the fuller banking sector and technology from other sectors like mobile phone companies to complement it."
With the UN's 2015 target to free people from extreme poverty and multiple deprivations – known as the millennium development goals (MDGs) – fast approaching, the roundtable went on to discuss how best to harness the transition into the MDG's successor, which are known as sustainable development goals (SDGs), and create a space for microfinance within those goals. Microfinance is a cross-cutting theme, taking in issues of education, livelihoods and gender, the roundtable was told. As such, it can be woven through the SDGs, but some predicted challenges in getting it on the table.
"I think it will only be possible to get a couple of large-scale ideas into the mix," said Graham Baxter, senior adviser on inclusive business at the International Business Leaders Forum. "You need quite a big chunky idea, but I think there should be a place for the concept of financial inclusion."
Others saw potential for pushing microfinance within a jobs and livelihoods agenda, or education. But whatever place it finds within the next round of development goals, everyone at the roundtable agreed that this was an important and exciting time for the sector. For some, that excitement was about the diversity of financial services that the sector could go on to provide in developing countries; for others, it was the prospect of real social change among disempowered people.
"It means we can move away from a victim-based view of the world to an opportunity-based view," said Allen. "We've been talking about self-reliance forever, and I think now we have the opportunity to achieve it."
Key discussion pointsAround 2.5 billion people lack access to formal financial services. Microfinance has been held up as a way to lift people out of poverty, and initially it focused on providing small loans to allow people to invest in their own livelihoods.
As we head towards a new set of development goals in 2015, there's an ongoing debate about what microfinance should look like. The sector is diversifying beyond microcredit, notably with more savings-led approaches to help the poorest people build up assets. New cross-sectoral partnerships are also emerging, offering the potential to deliver more innovation and greater scale.