Microfinance is the big idea that can help to end poverty

Monday, November 5, 2007

By Mervyn Davies, CEO of Standard Chartered

Small credit projects in the developing world are not new ? but they are the best route to sustainable growth.

The world should be pro-growth. The answer to the future is economic growth; it is not protectionism, or putting in place barriers so that the world shrinks.

Each company should focus on sustainable development and growth. At the end of the day the world should focus on getting individuals and countries out of poverty. Therefore, inevitably, as we push for this we will face challenges on climate, on pollution and on access to water.

Before becoming chief executive of Standard Chartered in 2001, had I said that in the coming years we would see events such as 9/11, Sars and the tsunami, people would have had me locked up. Unexpected events happen, We must not overreact to situations, but nor must we underreact. We need pragmatism and balance.

There is one issue that we all need to focus on with great urgency and that is financial inclusion. By this I mean the provision of financial services to poor people who would not normally have access to finance.

As the chairman of Standard Chartered, I am fortunate enough to travel frequently. I have seen the catastrophic effects of poverty. No individual, global company or national government is insulated from the devastating impact of poverty.

Many people think financial inclusion came about as microfinance in Bangladesh 30 years ago. This is just not true. Financial inclusion is not a new concept. No one quite knows where it really began. Examples include the Chit funds in India, the Susus of Ghana and the credit institutions of the 19th century in Europe.

So if microfinance has been around for centuries, am I crazy to talk about financial inclusion as a new, innovative business idea that will change the way we live our lives?

The world is changing in a way that we can?t predict. But I think that makes life, and our lives in particular, very, very exciting.

Countries in Asia, such as India, Indonesia and China, are booming. I believe that in the future there will be 25 world cities that really matter, and more than half of these cities will be in Asia. For example, the current population of each of Shanghai and Bombay is greater than that of the entire population of the Netherlands.

The strengthening of China and India will have an impact on the way we all live our lives. As China opens up, we will see a repositioning of global brands to sell into China. We see increasingly frequent examples of investment into Europe by Indian, Chinese and other Asian companies alike. But what is clear is that this growth needs to be sustainable, and this is where financial inclusion is vital. It means not just the provision of loans but also of current accounts and insurance and other banking products. The success of these countries is being driven by emerging middle classes and a strong entrepreneurial spirit.

China recently announced that it is encouraging rural finance in six provinces by inviting financial institutions to apply for licences to provide microfinance products to farmers. This is a great step in ensuring the sustainability of China?s growth. However, there is a long way to go. Fewer than 20 per cent of people in many African countries have access to bank accounts, something that most of us take for granted. It has been shown that a 10 per cent change in the ratio of private credit to GDP can lift 3 per cent of the population out of poverty. This in turn can be the catalyst in creating and bolstering the economy, boosting the middle classes.

In 2005 I had a conversation with the Indian Minister of Finance, Sri Chidambaram. In Mr Chidambaram, India has a Finance Minister who is not only guiding one of the fastest-growing global economies but is also a passionate champion of the poorest and most vulnerable members of Indian society. The minister talked to me about the central role that financial inclusion was playing in his efforts to reduce poverty and increase financial participation. We were of the same view. We both see financial inclusion as a tool to ensuring that economic growth is broad-based and sustainable.

The difference today is that financial inclusion is a commercially viable proposition. Whether it is banking microfinance institutions in Africa, or injecting capital into the rural microfinance centre of Nepal, this is a business like any other part of a commercial portfolio: it is based on economic common sense, it has experienced international business managers driving it and, most importantly, it makes a profit.

I?m always frustrated by the criticism levelled at international companies operating in developing countries simply because they make a profit. You can today make profit with principles. Profit can equate to sustainability, and part of being a sustainable business is making profit.

Financial inclusion offers the ability to alleviate poverty at a profit for its financiers, and its widespread acceptance is already lifting millions out of poverty. This paradigm shift offers the chance to unlock the full economic potential of some of the world?s most exciting markets, and the effect of this cannot be underestimated.

Take Kenya ? a country which receives millions of dollars of aid money every year to fight poverty. Yet despite the donor efforts, little trickles down to the small-scale traders unless they have collateral. In Asia, more than 100 million people have obtained small loans thanks to the rapid growth of financial inclusion. In Kenya, as in Asia, the commercial viability of financial inclusion has been matched by progressive governance.

Across Asia and Africa, access to finance is rightly being seen as the key to unlocking sustainable economic growth. The work of microfinance institutions and development organisations is essential in helping the poorest in society. Financial inclusion offers a door to the mainstream economy. Large organisations have a role to play alongside governments and microfinance institutions to catalyse the development of small enterprises.

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Source: TimesOnline (link opens in a new window)