Media Center

printer friendly version

"Pushing The Frontiers: Towards A More Inclusive Financial System"

Speech By
Haruhiko Kuroda
President
Asian Development Bank

At the Empowering the Grassroots Economy: Microfinance for Growth and Happiness International Conference

24 November 2005
Bangkok, Thailand

I deeply appreciate the invitation from the Government of Thailand to address you today. This conference deals with an important subject, and its objectives are much in line with what the Asian Development Bank is trying to achieve. Let me commend the conference host, the Government Savings Bank of Thailand, and the co-sponsors, namely the Secretariat of the Prime Minister, the Ministry of Finance and other Thai Government ministries and agencies, for this initiative.

Asia has made remarkable progress in the fight against poverty, but despite this dazzling performance our region is still home to the majority of the world's poor. Poverty is simply and obviously our most pressing problem. And poverty reduction is ADB's overarching objective.

Although it is not a magic bullet, we, at ADB, firmly believe that microfinance can play a significant role in the fight against poverty, within an appropriately designed, integrated approach. History shows that economic growth is the most effective way to reduce poverty. Between 1990 and 2003, rapid economic growth helped lift 300 million Asian people out of poverty. However, economic growth can still leave many people in persistent poverty if they do not have the necessary capacity to participate in and benefit from the growth process.

Many studies on poverty indicate that the reason poor households are unable to participate in the development process is their exclusion from the financial system. This is the fundamental flaw of our conventional formal financial systems. In a typical developing economy in our region, the formal financial system at best serves no more than 20% to 30% of the population, and excludes 70% to 80%, the vast majority of whom are poor. As a result, these households find it extremely difficult to take advantage of economic opportunities, build assets, finance their children's education, and protect themselves against external financial shocks. One could argue that financial exclusion not only pushes them but also tightly binds them into a vicious circle of poverty.

Fortunately, visionary social entrepreneurs like Professor Muhammad Yunus, the pioneer of the Grameen Bank of Bangladesh, have shown the world that financial exclusion is simply unacceptable, its underlying premise that the poor people are not bankable is simply incorrect, and that there are effective ways to address the exclusion. I hope Professor Yunus will elaborate on the achievements of the Grameen Bank and the lessons that we can learn from its experience. So, let me just make few general points.

The microfinance industry in our region has grown significantly over the last two decades. Twenty years ago, I am sure most of you will agree with me, only a very small number of poor people had access to financial services from semi-formal or formal sources. Most had to rely on either informal sources or self-finance. Thus, the poor were compelled to suffer from the financial market failure and to persist in poverty.

Today, the number of poor households with access to formal or semi-formal sector financial services exceeds 100 million, according to some estimates. In some countries, notably Bangladesh, Indonesia, Cambodia and Mongolia, the microfinance industry has made great strides in providing poor people with access to financial services.

A wide range of institutions have taken part in this effort. They include nongovernment organizations, private sector commercial banks, specialized microfinance banks, state-owned commercial banks, development banks, savings banks like the Government Savings Bank of Thailand, and member owned co-operatives.

Today, the region is home to some of the most outstanding microfinance institutions in the world. I mentioned the Grameen Bank, well known for its pioneering efforts in showing that the poor are bankable. The Bank Rakyat Indonesia is similarly noted for its outreach, profitability and success in deposit mobilization. The Association for Social Advancement in Bangladesh, is known for its efficiency, profitability and massive outreach to the poor. BRAC in Bangladesh, is well known not only for its integrated approach to financial services to the poor, but also for its innovative programs to deepen the services to the poorest. And ACLEDA Bank in Cambodia has had remarkable success in building commercial microfinance in a country that still suffers from the legacy of over 20 years of civil unrest.

This institutional diversity is critically important to better serve the poor, whose needs are also diverse. No one institutional model fits all.

Along with diversity of institutions, there is tremendous diversity in approaches to providing the services. Some institutions provide services directly through their own branch networks. Others rely on a multi-pronged approach and partnerships with other institutions to reduce transaction costs. An increasing number of institutions have integrated new technologies to reach the poor more effectively.

Although these achievements are remarkable by any measure, we should not be complacent. The stark reality, as I noted at the outset, is that majority of the poor households do not have access to financial services from any semi-formal or formal source.

Today, most microfinance industry clients are very near the poverty line. The industry has not as yet paid adequate attention to pushing the frontier of services to include the poorest. In most countries, microfinance does not reach many remote areas or poorer states or provinces. In India, for example, most outreach is concentrated in three or four southern states, while states with a much higher poverty incidence have not benefited from the industry's growth. With few exceptions, microfinance is heavily credit biased. Demand-driven deposit services, micro-insurance and domestic money transfer services are yet to become a major component of the industry's scope of services.

We need to address these issues. Only by enabling the poorest to access financial services, reducing the unevenness in the industry growth pattern, and broadening the scope of services will we make the financial system inclusive in the true sense of the term.

How can this be accomplished? There are no simple solutions, but let me offer a few thoughts that may help you in your deliberations.

First, we must recognize the pivotal need to bring down the high cost of semi-formal and formal microfinance. For example, some institutions in the region charge effective annual interest rates in the range of 40% to 80% on microcredit. Many poor people borrow at these rates because the alternative source of credit for such people is the informal markets where the rates are much higher and usurious. However, we need to recognize that there are many millions of poor people who are unable to access the services of semi-formal and formal sources partly because the prices charged on the products and services are high and beyond their ability to pay.

While charging cost recovery interest rates is important for financial viability, profit and growth of the institutions, it is also essential to improve efficiency and reduce costs so that interest rates do not have to be exorbitant. This would enable the industry to serve an increasing number of poorer people in particular. I am emphasizing this point because I feel that adequate attention has not been paid to the importance of improving efficiency and reducing high costs in the industry. The answer to high costs and high interest rates, however, is neither subsidies nor interest rate caps on loans to the poor because both would reduce, rather increase, poor people's access to financial services, and thereby eventually hurt them.

Some industry promoters assume that the demand for microcredit is inelastic. If this is true high prices do not matter. A recent study by the Asian Development Bank Institute in Tokyo challenges this elasticity assumption. The study shows that poor people are, in fact, very sensitive to interest rates. International forums like this must discuss this issue also with a view to encouraging more attention to it. In this context, I am delighted to see Nobel laureate Professor Joseph Stiglitz's name in the program. With his extensive work on moral hazard and adverse selection problems in credit markets, Professor Stiglitz is undoubtedly one of the most qualified economists to discuss the issues of high interest rates in credit markets.

Second, it is crucial for governments to pay more attention to creating an enabling environment for profitable investment opportunities for the poor. For this, rural infrastructure and other facilities must be improved. Such investments will reduce risks and transaction costs for both clients and the microfinance institutions, and thereby help expand the industry in a more equitable and sustainable manner. ADB has recognized the importance of infrastructure for poverty reduction and is increasing its assistance for infrastructure development.

Third, governments have a critical role to play in building inclusive financial systems that serve the poor. However, this role needs to be carefully carved out depending on the country context, and efficiently and effectively executed. In general, governments need to avoid inappropriate interventions such as the interest rate ceilings that hurt industry growth. But adopting sound policies that promote finance for the poor, and supporting capacity development of retail institutions are most definitely within their purview. ADB has been assisting governments in these tasks and will continue to do so.

Let me conclude my remarks by saying that a financial system that serves only a minority of a country's people is unacceptable. Building inclusive financial systems that serve the majority should be made a central goal of every developing country. I wish to assure you of ADB's strong commitment and support to promote this goal and build inclusive financial systems in the region. I look forward to hearing the results of your deliberations.

Thank you.