Speech by Princess Máxima
New York, USA, 22 September 2008
UN High Level Panel on "Microcredit, Microfinance, Inclusive Finance: Building on Success for Innovative Solutions for Poverty Eradication in Africa"
First of all I would like to thank UNCDF for organizing this panel: "Microcredit, Microfinance, Inclusive Finance: Building on Success for Innovative Solutions for Poverty Eradication in Africa."
It is an honor and privilege to be here with you today, as a member of the United Nations Advisors Group on Inclusive Financial Sectors, to discuss how inclusive finance may - over the short and long term - work toward the critical end-goal of eradicating poverty in Africa.
While we all know that it is not a panacea, we do know that truly inclusive financial services - if designed and executed transparently and effectively -- can fundamentally transform people's lives and empower them to become their own economic agents and Africa's true development champions.
During the International Year of Microcredit, the United Nations asked me and 24 other distinguished colleagues from a variety of professional arenas including finance, academia, development, government and the regulatory community, to become a part of a new Advisors Group on Inclusive Financial Sectors.
Our task was to identify and define the key issues limiting access to financial services and advise the United Nations and its member states on strategies and concrete steps to remove these constraints - a task we gladly took on.
"Inclusive finance" is so much more than microcredit. There are more than 2.1 billion "unbanked" people around the globe - people who do not have access to even the most basic types of financial services that we often take for granted: bank accounts, insurance, savings, mortgages, money transfers and - yes-credit.
Anywhere from 50-80% of people in the developing world do not have a bank account. They either cannot get to the bank because it is too far way; they lack simple documentation or they cannot meet the minimum deposit requirements.
In Africa, the situation is especially stark since only one in every five households has access to basic financial services. That means that the other four are stuck with less advantageous economic options for their families, their communities and for all of Africa's economic development.
Of all the products encompassed by inclusive finance, there is one that deserves special attention and that is savings. For a variety of reasons, savings has not received the same level of attention or resources as credit, but research shows that it is equally as important -- if not more so. Debt instruments may not be optimum vehicles for everybody. Savings, on the other hand, affords a debt-free way to buffer against life's risks, build assets and provide opportunities for the next generation. Despite the important role of savings, only 20% of the world population has a formal savings account.
We have a lot to learn about savings and much data to gather. What we do know at this point is that when people have access to savings they take advantage of it and use it wisely. For instance, in Uganda, one study found that those with access to formal savings in banks saved three times as much as those who had only informal savings available. And, in Rwanda, more than half a million small savings accounts drew $40 million into circulation in 2001, money that would otherwise have stayed underneath mattresses. These two examples illustrate the potentially huge impact that savings can have on poor households. I urge all of us here today to give "access to savings" the time and attention it deserves.
As we focus on the potential impact of savings, we will need to leave behind the myth that poor people cannot save. We know that poor people can and do save, though often not in formal saving accounts. Instead, they put money under their mattress, or are forced into risky, unsecured, illiquid investments such as livestock or building materials, and as a result can see all of their assets - and dreams - wiped out in an instant by an illness, fire, flood or drought. So it is our duty to offer them the opportunity to save safely!
Just this month, we learned that the number of Kenyans choosing to open bank and savings accounts tripled --- from 3.3 million to 10.1 million - over a one year period, thereby clearly demonstrating that there is a huge need for saving products in Africa.
This demand is not at all surprising since financial services - when available - have a profound and measurable impact on people's lives.
Studies have shown that poor families with access to financial services are more likely to send their children to school, and the children stay in school longer.
In Kenya, farmers who have access to formal savings products are more likely to save after harvest and invest in fertilizer, which in turn increases their crop yields and annual income.
So Ladies and Gentlemen, the evidence is clear: people need to save in a secure and accessible way. And more savings in a country will lead to more supply of credit at a more sustainable and affordable manner, all resulting in more robust development of the country's financial sector. This is the financial sector that will eventually accompany sustainable pro-poor growth.
We are at a crossroads. This year marks the halfway point to 2015, and yet we face serious challenges in meeting the Millennium Development Goals. We are also experiencing global food and energy crises. Given the high stakes and the impending urgency, we must muster the political will necessary to take advantage of every tool we have at our disposal. And since we know that inclusive finance actually works-savings, as well as credit, insurance and remittance services-- we need to figure out exactly what needs to be done to make it a reality for those who need it.
The UN Advisors Group on Inclusive Financial Sectors has set out to do just that. For the last two years we have systematically evaluated each sector - governments, regulatory regimes, development structures and private sector environments-- to identify the most commonly encountered barriers to financial access, as well as best practices and success stories.
This consultation process has helped us sketch out a general road map for inclusive finance. We found that with a few straightforward steps, longstanding and entrenched obstacles to access to finance can be removed, and the global mandate set forth via the Millennium Development Goals of halving poverty by 2015 can become closer to reality. In the interest of time, I am not going to go through them one by one. However, I would like to address those directed to governments and regulators, given that most of the people here today are government representatives.
Firstly, please engage in establishing a national strategy plan on Financial Inclusion. In creating this plan, please include yourself, the country's regulators and supervisors, microfinance institutions (banks and/or NGO's) and even telecommunications providers and retailers!
In this plan, determine the rules and regulations that act as barriers to access to finance and evaluate how to remove those. Examine potential ways to streamline processes and create effective tax structures. Establish what are the legal vehicles needed to promote growth in the sector and when is the right time to establish them.
Look into your payment systems; this is an essential instrument. Embrace the new technology available today and use it to leap frog the traditional systems of payments, achieving a faster, safer and cheaper means of payments. There are over 2.5 billion mobile phones worldwide, so imagine the effect on your country if everybody on every corner could get paid just by sending a phone message. Think about demilitarization. Think about rural development. And think about the safety of your citizens who do not have to carry cash anymore!!!
Please consider the creation of an all-inclusive credit bureau to which utilities, banks, MFI's, retailers and phone companies can have access. This will not only reduce the costs of giving credit but more importantly, in the long term, it will discourage over-indebtedness.
Something that is very important is the promotion of financial literacy and consumer protection. The smarter and better equipped a consumer is, the wiser his/her economic decisions will be. Microfinance industry leaders recently came together to recognize the importance of this and to set the stage for the creation of global consumer protection standards.
Finally, avoid doing the lending yourselves. Experience tells us that politics almost always gets in the way and in the end, the actual micro-entrepreneur or business owner is not the end user of the loan. Instead, opt for supporting local financial institutions, as they do very much need it. By strengthening those, you will achieve the sustainability you seek.
Please allow me to touch upon a subject that has been the subject of discussion for the last three months (or actually for the last three years), namely the sticky question of interest rates and who the right players in microfinance may be. We know that the costs entailed to extend credits in small amounts -- and sometimes to clients that are far away -- are very high. In order to have a sustainable provision of this credit, the price of the product will have to be higher.
Now, how high is high? We all tend to make comparisons across the board to finally realize that it is not comparable. Because every continent is different, every country is different, every region is different and even every MFI is different. So when discussing this issue in your country, we would like to urge you to promote transparency in the system so that consumers can make better choices and healthy competition among providers can be stimulated. And in doing that, do not limit it to a single indicator (which would be the effective interest rate) but to other indicators such as cost of funds, operational efficiency, loan loss reserves, etc. Also, do support social reporting according to the many standards that already exist.
It is very important that governments refrain from imposing interest rate ceilings. While consumer protection is paramount, it is important to remember that interest rate caps are not the answer to protecting the poor. In fact, they do just the opposite by limiting the supply of credit, its price and the transparency of the terms offered to borrowers.
Whether it is commercial banks, NGO's, for profit or non-profit, everybody has their role to play, and each player should be allowed to seek out their added value and respective niche. Some institutions are better positioned to reach scale and achieve optimum efficiency; others are better equipped to serve remote and complex markets, such as rural areas. Either way, every player must keep in mind that the well being of the end user is paramount, and transparency is imperative. The diversity of providers will ensure that all customers have different products according to their needs and at the same time enable competition.
I would like to close my comments with a rather obvious admission. The UNAG does not know all the answers to what will make financial services available for all. We draw upon research and evidence to suggest concrete actions that we believe will lead to expanded financial access. We sincerely hope that you will consider these actions as a demonstration of your commitment to building an inclusive financial a sector and a more peaceful and prosperous world.