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“Expanding the Frontiers of Commercial Microfinance”

Opening Remarks
By
G.H.P.B. van der Linden
Vice-President, Knowledge Management and Sustainable Development
Asian Development Bank

At the Regional Conference on Microfinance

ADB Headquarters, Mandaluyong City
14 March 2005

Introduction

Let me first join with President Kuroda in welcoming all of you to this conference. This is the inaugural event of ADB’s Microfinance week. Over the next few days, we will also join with our partners from the United Nations to host a regional multistakeholder dialogue on “Building Inclusive Financial Sectors for Development.” And, we will hold a training session for staff at ADB and other funding agencies on the role of governments in microfinance.

As President Kuroda noted, ADB is keenly interested and active in this important area. We are encouraged by recent developments in the microfinance industry, and look forward to working with you to take our mutual efforts to the next level.

Industry has Evolved, But Challenges Remain

The evolution of microfinance has certainly been impressive. From its beginnings as a social mission driven by nongovernment organizations, the industry has rapidly diversified, both in the kinds of institutions providing service, and in the array of services it provides.

In the early 1980s, poor and low-income households in countries such as Bangladesh, Cambodia, Indonesia and Mongolia, just to name a few, had virtually no access to formal or semiformal financial institutions.

Today, over 200,000 poor and low-income Cambodian households have permanent access to financial services. In Bangladesh, microfinance giants such as the Bangladesh Rural Advancement Committee, the Association for Social Advancement and the world famous Grameen Bank provide microcredit facilities to millions of poor households. And, a number of state-owned financial institutions, including the Unit Desa system of the Bank Rakyat Indonesia and the Agricultural Bank of Mongolia, have been successfully reformed and transformed into dynamic, profitable microfinance service providers. You will hear the details of some of these success stories, and the lessons that we can draw from them, over the course of the next two days.

Yet, despite this progress, most of the Asia and Pacific region remains woefully under-serviced. In India, while the microfinance industry has begun to evolve, market penetration of service providers remains extremely low. Across the region as a whole, we believe that the entire financial sector—including NGOs, rural branches of commercial banks, agricultural development banks, rural development banks and cooperatives—reaches no more than 30% of the rural population with microcredit. Even fewer have access to “frills” such as insurance, payment services, money transfers and safe, convenient, reliable deposit services. In most Asian countries, the poorest households rely largely on social safety nets, informal markets, and self-finance for their requirements.

Setting the Stage for Growth

Given the large and growing demand, the only way to sufficiently increase the supply of microfinance is through commercialization. And to do this, we must address a number of key challenges—among them, establishing a climate conducive to commercialization, attracting private sector investment, and putting microfinance institutions on a more sustainable footing.

How can this be achieved? The solutions are not simple, but let me offer a few thoughts.

First, to encourage established private sector financial institutions to enter the market, financial systems must be made more competitive. ICICI’s entry into microfinance has set an example in India, but most countries in Asia will need to attract many banks, not just one, to respond to the large unserved and underserved markets.

Second, governments have a critical and constructive role to play. Experience shows that financial services for the poor expand rapidly when governments develop sound policies and legal frameworks, ensure macroeconomic stability, and encourage competition in financial markets. Government interventions through direct service provision and interest rate caps reduce the attractiveness of microfinance to the private sector and nongovernment organizations. Governments should focus instead on ensuring that the basic economic, social, and physical infrastructure is in place to allow the industry to grow. This includes services like health and education, as well as rural infrastructure to reduce both transaction costs and the financial risks of entering rural markets.

The governments of Bangladesh, Indonesia, Cambodia, and the Philippines did not impose interest rate caps. This helped tremendously in the growth of the industry in these countries. Some other countries that did impose such caps have failed to see rapid growth. This is an important lesson.

Third, donors can make an important contribution by discouraging inappropriate government interventions, and by helping countries strengthen their legal frameworks, regulatory systems, and supervisory ability. Donors can also ensure that grants for industry development are performance-based, with indicators for monitoring and measuring success, and that their assistance will not discourage private sector entry into the industry. All too often in the past, donors have played a counterproductive role in the sector by creating a dependency on concessional funds. Donors need to adjust their role in response to industry changes.

Finally, many alternative financial institutions, such as state-owned agricultural and rural banks, national savings banks, postal savings banks, and savings and credit unions are not harnessing their potential to serve the poor on a large scale, on a profitable basis. For those with large branch networks or service delivery points, this potential is significant, particularly in reaching rural and remote areas. But in most cases, these institutions require substantial reforms, if they are to be transformed into dynamic service providers.

Experience has shown that such reforms are feasible, even in countries with difficult operating environments. The Agricultural Bank of Mongolia, which is represented here, will no doubt provide further information on its program of reform and the results it has achieved.

Conclusion

Ladies and gentlemen, UN Secretary-General Kofi Annan states that “Sustainable access to microfinance helps alleviate poverty by generating income, creating jobs, allowing children to go to school, enabling families to obtain health care, and empowering people to make the choices that best serve their needs. …The great challenge before us is to address the constraints that exclude people from full participation in the financial sector.”

I couldn’t agree more. A financial system that serves only a minority of a country’s people is unacceptable. Inclusive financial systems that provide access for the majority should be made a central goal of every developing country.

The development community must stand together to support governments to achieve this goal. As the President outlined, ADB has supported the development of financial systems for the poor in the past and we will continue to do so in the future, in close cooperation with the other funding agencies.

Thank you, and best of luck in your deliberations.