Building Inclusive Financial Sectors for Development

Presentation to the European Parliament Development Committee

5 November 2007

Jomo Kwame Sundaram

Assistant Secretary-General

Department of Economic and Social Affairs

United Nations

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• Uneven access to finance

• Leveling access to finance

• Inclusive finance: priority in UN agenda

• 2005: International Year of Microcredit and “Blue Book”

• The “Blue Book” project

• Preparing the “Blue Book”

• “Blue Book” contents

• UN follow up

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Uneven access to finance• In most developing countries,

mainstream financial service providers largely exclude lower segment market - small and medium enterprises (SMEs) and poorest households.

• Some retail financial service providers serve some SMEs and poor but reach uneven.

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Leveling access to finance

• Financial access can empower individuals.

• Emergence of microfinance - poor clients served despite high cost of small-scale transactions reduced by peer-monitoring.

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Inclusive finance: priority in UN agenda (1)

• 1998: UNGA designated 2005 as International Year of Microcredit to give impetus to microfinance programmes throughout world.

• 2002: Monterrey Consensus recognized: “Microfinance and credit for small and medium enterprises, including in rural areas, particularly for women, …are important for enhancing the social and economic impact of the financial sector” (para. 18).

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Inclusive finance: priority in UN agenda (2)

• 2005 World Summit Outcome: recognized “the need for access to financial services, in particular for the poor, including through microfinance and microcredit” (para. 23-i).

• 2006: UNGA resolution 61/214: “The role of microcredit and microfinance in the eradication of poverty” called upon “Member States, the United Nations system and other relevant stakeholders to fully maximize the role of microfinance tools, including microcredit, for poverty eradication and especially for the empowerment of women, and to ensure that best practices in the microfinance sector are widely disseminated” (para. 5).

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The “Blue Book” project

• UN Department for Economic and Social Affairs (UNDESA) and UN Capital Development Fund (UNCDF) collaborated on “Blue Book” to analyze obstacles to financial inclusion and how to overcome them.

• Work supported by multilateral agency group: World Bank, IMF, IFAD, ILO.

• Other collaborators included: Advisors Group of the International Year of Microcredit, Group of Friends of the Year of Microcredit.

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Preparing the “Blue Book”

• Multi-stakeholder consultations in ME, Asia and LA, involving governments, international organizations, financial institutions, private sector and civil society.

• May 2005: culminated in Global Meeting on Building Inclusive Financial Sectors in Geneva.

• “Blue book” published in 2006 in English, French and Spanish. Chinese translation by People’s Bank of China.

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“Blue Book” contents

• “Blue Book” as aide• Inclusive finance• Limits to financial access• Retail financial institutions to serve poor• Financial market access• Public sector role and policy • Legal models, regulation and supervision• Policy options• Dialogue as prelude to action

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“Blue Book” as aide

• Areas of consensus but also divergent views and different solutions in various countries.

• Policy options for building inclusive financial sectors in particular country contexts.

• Guide for policy makers and national dialogues.

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Inclusive finance (1)

• Goal: sound policy, legal and regulatory framework for continuum of financial institutions to offer appropriate products and services to all segments of population.

• Strategy: complementarity between poverty reduction and financial sector policies in national development strategies.

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Inclusive finance (2)

• Characterized by: – access at reasonable cost,

– sound institutions,

– financial sustainability,

– varied cost-effective institutions and instruments.

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Limits to financial access• Reluctance of potential customers to seek financial

services.

• Reluctance of financial institutions to provide services.

• Personal and cultural characteristics – gender, ethnicity, legal status, literacy, geographical location – can affect demand and access to services.

• Many groups -- e.g. poor, economically inactive, agricultural workers and new entrepreneurs -- face particular barriers to access.

• Negative experiences of customers or lack of confidence in institutions can limit demand.

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Retail financial institutions to serve poor

• Profitable institutions can more effectively reach large numbers of clients on a sustainable basis.

• Reaching scale critical to profitability by reducing average cost, increasing range of products offered and raising revenue.

• Financial services to poor increasingly provided by larger institutions because of scale-profitability-outreach linkage.

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Financial market access• Microfinance institutions (MFIs) tend to

lack access to mainstream financial markets for capital, due to generally underdeveloped financial markets and lack of confidence in financial strength of MFIs.

• Offering savings services can give MFIs access to low-cost source of funds.

• Savings mobilization requires considerable institutional capacity development.

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Public sector role and policy • Often lack of coherent policy stance in developing

competitive financial sector and increasing financial access.

• Interest rate liberalization impacts inclusive finance.• Indirect/direct government involvement in providing

financial services. Direct government role to better serve poor?

• No consensus on whether and how to organize and monitor public subsidies.

• Public and private sectors should provide financial infrastructure for risk mitigation, transparency, efficiency and innovation.

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Legal models,regulation and supervision

• Need to balance protecting financial system and customers, and need for financial inclusion.

• Should Government regulate microfinance?

• Regulatory risks: – limit market entry and growth, – disincentive for innovation, – excessive private and public regulatory costs.

• Supervisory capacity needed.

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Policy options1) Government intervention in financial services –

how much? what kind? where? when?

2) Achieving sustainable and affordable interest rates.

3) Financial infrastructure for inclusive finance.

4) Appropriate regulatory and supervisory measures to foster financial inclusion.

5) How to promote consumer protection?

6) How much diversity in financial institutions?

7) How should governments be organized to formulate and implement effective inclusive finance policies?

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Dialogue as prelude to action

• Build shared vision of inclusive finance and appropriate national policies.

• Bring together broad range of national stakeholders – government ministries, central bank, regulatory and supervisory authorities, financial institutions, academic experts, civil society, private sector.

• Central role for finance ministry and central bank, with support from political leadership at highest level.

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UN follow-up (1)• UNDESA project on “Regulation of

Microfinance: Access and Sustainability”:– Convened expert panels in New York and

Geneva on issues and experiences. – Convening multi-stakeholder consultations

and undertaking regional studies to identify best practices in regulation of microfinance, in partnership with WSBI, World Council of Credit Unions and PlaNet Finance.

– Policy inputs for International Review Conference on Financing for Development (FFD) (Doha, 2008).

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UN follow-up (2)

• UNDESA - member of the UN Advisors Group on Inclusive Financial Sectors:– Established in 2006 for 2-year term to advise

UN system and interested Member States on inclusive finance issues.

– Focus on: research and public policy; advocacy, policy and regulation; private sector engagement.

– Convene international/regional conferences targeting high-level public and private sector policy-makers.

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UN follow-up (3)

• European Commission contributed substantially to UNDESA expert panel on microfinance in Europe in Geneva in May 2007 in collaboration with UN Economic Commission for Europe.

• UNDESA knows European Commission work in area of inclusive finance and looks forward to finding areas of common interest for collaboration.

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Thank You

• Thank you very much for opportunity to discuss the “Blue Book” and UNDESA’s work in Building Inclusive Financial Sectors for Development.

• I want acknowledge WSBI’s facilitation of my participation in this meeting.

• I also want to thank Ann Orr of the Financing for Development Office in UNDESA for her help in preparing this presentation.

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“Blue Book” and FFD Doha

More about the “Blue Book” and 2008 International Review Conference on Financing for Development (Doha):

http://www.un.org/esa/ffd/

DESA Working Papers United Nations Development Agenda and

NDS Policy Notes available at: http://esa.un.org/