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The Importance of Microfinance

February 14, 2006 6:00 PM
By Annette Brooke MP in Westminster Hall

Annette Brooke (Mid-Dorset and North Poole) (LD): I am very pleased to have the opportunity to speak on the importance of microfinance. I have had a great deal of correspondence on this subject with the Minister since he took up his position in the Department for International Development, and I am confident that he shares my high regard for microfinance and for the organisations involved in it, both in the United Kingdom and in developing countries.

I established the all-party group on microfinance/microcredit way back in the summer of 2002, having been approached at one of my local surgeries by a constituent who was an active local member of RESULTS UK, a national charity with a particular interest in microfinance. The all-party group has developed relationships with a number of national and international organisations that have been involved in promoting and raising awareness of microfinance in Parliament and nationally, and I should like to use this occasion to thank them for their ongoing support. They include Opportunity International and PlaNet Finance and individuals such as the chief executive of Cobra Beer and the actress Natalie Portman.

The United Nations designated 2005 the international year of microcredit. Its aim was to increase awareness of microfinance among individuals and international development organisations and to increase interest in microfinance throughout the banking and corporate sector, not to mention Government. The United Kingdom national committee developed out of that partnership between the all-party group, non-governmental organisations, corporates and DFID. As the Minister knows, in September 2004, the United Kingdom national committee received official recognition from the Secretary of State for International Development, with the request that it widen its membership in the corporate sector. By October 2005, the committee's membership included six NGOs, eight corporates, representatives from DFID and myself as the chair of the all-party group. The corporates included Clifford Chance, Citigroup and HSBC. The UK national committee represents a unique partnership, focusing on advocacy and tackling specific projects to improve the profile of microfinance and its role in assisting the achievement of the millennium development goals.

I should like to mention just some of the initiatives undertaken by the UK national committee during the past year. Professor Muhammad Yunus spoke to corporate representatives and Government and NGO leaders in London in a call to action in the United Kingdom for the 2005 year of microcredit. The launch of the Microfinance Club of London was followed by six events in 2005 and two events by a microfinance student society; more than 60 individuals attended each event. The opening of the London Stock Exchange by Alice Jere was a memorable occasion: Alice is a chicken farmer who started her business with a loan and purchased 20 chickens, and there she was, alongside the chairman of the LSE.

The UK national committee made its own submission to the Commission for Africa. It was involved in a major consultation of more than 50 stakeholders at HSBC's group headquarters, and it went on to make a submission to the United Nation's blue book on financial inclusion. Our committee was the only national committee of a northern country to make a presentation of its stakeholders' consultation to the United Nations conference on microfinance and financial inclusion in Geneva in May 2005. We have also arranged a briefing for NGOs at the House of Commons. In summary, the United Kingdom national committee has used a variety of methods to reveal the lack of awareness among opinion formers and the wider public about microfinance as a sustainable tool for development.

There can be no doubt that the events of 2005 have served to raise awareness of microfinance and to bring together stakeholders. We have plans to take forward the excellent work that has been accomplished through a new collaboration of NGOs, corporates and government. The year culminated in the committee receiving an award for excellence from the United Nations and CGAP-the Consultative Group to Assist the Poor. I sincerely hope that ongoing consultation with national committee members will form a longer term organisation for the development of a national strategy beyond 2005, through 2006 and onward. That will need ongoing support from DIFD. Much of the energy, passion and commitment needed to organise and arrange the committee came from its co-ordinator, Dr. Phyllis Santa-Maria, whom I thank for all her effort.

The importance of microfinance was recognised last year in the Commission for Africa report, which was published in March. In chapter seven, there were many references to enterprise and access to finance. For example, the report pointed out that

"Access to credit and other financial services is important to growth and investment, yet few small businesses or individuals are able to get the access they need.

Poverty reduction through growth requires a focus on the indigenous private sector, which in sub-Saharan Africa is composed of a myriad of micro, small and medium enterprises . . . they are the primary source of jobs and economic opportunities.

Micro-finance institutions (MFIs) . . . have grown under the pioneering work of non-government organisations. But much more needs to be done in this area."

The report also says:

"Levels of financial exclusion-the number of people without access to bank accounts-can run as high as 90 per cent in some African countries."

That is indeed a daunting figure. Governments should encourage the development of a variety of financial intermediaries that serve poor people with diverse financial services, not just loans.

Following on from the Commission for Africa report, and with Britain placing Africa at the top of the agenda for its chairmanship of the G8, the importance of microfinance was also recognised in the communiqué published after the summit of G8 leaders at Gleneagles in July 2005, which stated:

"African countries need to build a much stronger investment climate: we will continue to help them do so . . . through the promotion of a stable, efficient and harmonised legal business framework . . . and increased access to finance including strong support for the development of micro-finance in Africa."

The communiqué concluded:

"Partnership between the public and private sectors is crucial."

At the United Nations General Assembly in September last year, 151 Heads of State from around the world gathered. The summit was the first opportunity for world leaders to review the progress in reaching the millennium development goals, whose primary aim is to eradicate extreme poverty by 2015. I was pleased that microfinance was prominent on the agenda of that historic gathering. Significantly, the importance of microfinance was recognised in the summit's outcome document, which stated:

"We recognize the need for access to financial services, in particular for the poor, including through microfinance and microcredit."

The links between microfinance and the millennium development goals are very important. The impact on hunger and poverty-goal No. 1-is perhaps strongest of all, but microfinance has also been shown to widen access to education, improve women's and children's health and empower individuals, particularly women. Microfinance contributes directly to the achievement of at least half of the goals.

I wish to stress the impact on women. The timing of this debate is not quite perfect; it would have been nice to have had it closer to international women's day on 8 March, but it is close enough to make these points. The ability to borrow a small amount of money to take advantage of a business opportunity, to pay for school fees, or to bridge a cash-flow gap can be a first step in breaking the cycle of poverty which helps toward the achievement of millennium development goal No. 1. There are just so many examples of this, and I love them because they remind me of the colour and activity that I have seen when visiting projects. They sound rather dry just going through them, but I shall touch on a few.

A study of borrowers on the island of Lombok in Indonesia reports that the average incomes of clients increased by 112 per cent., and that 90 per cent. of households moved out of poverty. Millennium development goal No. 2 deals with education. All over the world, one of the first things that poor people do with new income from micro-enterprise is invest in their children's education. That might be because a high proportion of women are involved in educating children and it is one of their highest priorities. Studies show that children of microcredit clients are more likely to go to school and to stay there longer than other children-student dropout rates are much lower in microcredit households. A study of a BRAC-formerly the Bangladesh Rural Advancement Committee-area in Bangladesh found that basic competency in reading, writing and arithmetic among 11 to 14-year-olds in member households had increased from 12 per cent. at the start of the programme in 1992 to 24 per cent. in 1995, and there are many other stories about the tremendous rate of progress in such matters.

I turn now to the impact on gender equality and female empowerment. Microcredit programmes have generally targeted women as clients because women's performance on repayment often proves to be better than men's. They are also more likely to invest increased income in the household and in the family's well-being. Most important, microcredit can empower women to become more assertive, which is a good thing. Women are then more likely to be participate in family and community decisions. The women's empowerment programme in Nepal found that 68 per cent. of its members were making decisions on buying and selling property, sending their daughters to school, negotiating their children's marriages and planning their families-all decisions that have traditionally been made by husbands.

Millennium development goal No. 4 relates to the impact on child health and mortality rates. Microcredit clients' households appear to have better nutrition, health practices and health outcomes than non-client households. Increased earnings allow clients to treat health problems promptly, rather than wait for conditions to deteriorate. A study in Ghana found that Freedom from Hunger clients had better breast-feeding practices and that their one-year-old children were healthier than non-client children in terms of weight for age and height for age.

That list of achievements is quite impressive, but there is so much more to do. We need to focus on the importance of microfinance in alleviating poverty and meeting the millennium development goals. There is still a significant belief among NGOs that Governments are not supporting microfinance to the extent that they could. DFID is increasingly moving away from direct support for microfinance institutions toward budget support for national Governments, and there might be moves to focus more on the formal banking sector than on microfinance institutions in extending financial services to the very poor. I have a real concern about that. Will such a move have a negative impact on the grass-roots organisations that deliver microfinance projects through specialist MFIs with local and country expertise? Surely, we need an holistic approach, with specialised microfinance programmes that work, that make use of local expertise and that have strong records of success running alongside the work that is done directly with national Governments. My own visits to a project set up by an NGO illustrated the importance not only of banking, but of the training that goes alongside that. There is real fear about what will happen to the training that NGOs traditionally provide, which deals not only with business issues, but with the wider health aspects and other issues that are important for the individual's and the community's quality of life.

DFID's own paper "Meeting the challenge of poverty in urban areas" recognises the role that NGOs and the private sector play in providing pro-poor services. In particular, it recognises NGOs' comparative advantage in reaching poor people and their capacity to work at micro-level. Clearly, DFID is saying the right things, but I still have concerns. There is a discernible move by DFID and other international agencies to invest almost exclusively in strengthening and widening the financial sector in developing countries, and that is a worry. Although the need for an holistic approach to poverty reduction and access to financial services is recognised, I do not want that to be to the detriment of the world's poorest people or to result in their exclusion. My first question to the Minister, therefore, is: why is DFID concentrating solely on widening the financial sector in developing countries, to the exclusion of targeting the very poorest?

There are concerns about commercialisation. The move towards strengthening the financial sector as a whole increasingly brings international and commercial banks into microfinance. That move must be commended, and I do not criticise it, but we must ask whether commercial banks will target the very poorest. Indeed, microfinance institutions such as the Grameen bank in Bangladesh, Opportunity International and the Foundation for International Community Assistance came into existence to meet the needs of clients whom commercial banks were unwilling or unable to assist. How will DFID ensure that a move towards commercial banking does not equate with a move away from providing access to microfinance to the poorest-those who live on less than $1 a day?

By maintaining a focus on the poorest, DFID and other donors can have a tangible impact on reducing poverty and, in particular, on meeting MDG No. 1-to halve extreme poverty and hunger by 2015. However, if we do not measure the number of people living in or graduating from poverty, the effectiveness of any investment will remain opaque. We need poverty measurement tools so that an agency can measure clients' poverty before they enter a microfinance programme and then monitor their progress towards leaving extreme poverty, which is defined as living on less than $1 a day. Why is DFID not part of the effort to develop cost-effective poverty measurement tools to monitor $1-a-day poverty? Surely, the Department must recognise that we need to target microfinance at the poor and to measure their poverty and their progress out of poverty if we are to know whether we are achieving MDG No. 1, which is surely our greatest objective.

My main question is this: is the potential role of microfinance in meeting the millennium development goals being undermined by DFID's current focus? My fear is that we will fail to prioritise the world's poorest people. To ensure that we make real progress towards reaching them, DFID needs to do a number of things, and the Minister will not be surprised that the first one is to increase funding for microfinance programmes. The Department also needs to increase its involvement in capacity-building in respect of MFIs, and UK organisations could perhaps work in the field. DFID must also dedicate at least 50 per cent. of resources to the poorest clients and invest in and use cost-effective poverty-measurement tools. Finally, I would like an annual report on progress, which could perhaps be laid before Parliament. In particular, it could set out the percentage of the poorest people who are being reached. So much has been achieved, but we all know that there is so much more to do.

The Parliamentary Under-Secretary of State for International Development (Mr. Gareth Thomas) : I begin by congratulating the hon. Member for Mid-Dorset and North Poole (Annette Brooke) on securing this valuable debate. I welcome the opportunity to discuss microfinance with her again. I also congratulate her on the leadership that she has shown. I pay tribute to the many organisations that she listed that helped to make the UK national committee's work during the United Nation's international year of microcredit so successful, and I congratulate the committee on its excellent work last year and on its well deserved reward from the United Nations.

I was particularly delighted to hear the hon. Lady refer to Professor Muhammad Yunus from the Grameen bank. He is one of the great microfinance innovators and his inspiration led to the bank's creation. I am also grateful to the excellent Dr. Ian Haynes from Birkbeck college for bringing my attention to the work of Professor Yunus two years ago.

Let me begin with a word of reassurance to the hon. Lady. We recognise the need to do more in relation to microfinance. The development of the financial sector is not the sole focus; there is clearly a role for dedicated microfinance institutions. Expanding and helping to develop the role of the financial sector and supporting microfinance institutions go hand in hand, as I shall demonstrate in the course of my remarks.

On the annual report, the hon. Lady will be aware of the private Member's Bill that my right hon. Friend the Member for Coatbridge, Chryston and Bellshill (Mr. Clarke) is taking through the House, which will provide much more information for hon. Members and the NGOs that campaign on development issues. I hope that that will be a powerful way of checking on the progress of efforts to help the poorest people.

The hon. Lady might be aware of the final statement of the UN year of microcredit, which underlined her fundamental point that much more work needs to be done. In particular, it mentioned the need to gather good data about the poor people's access to financial services, so that inadequate data will soon cease to be a factor in the slowness of the spread of microfinance. My Department and the World Bank have taken a lead in this area, working to agree on headline indicators for access to finance, as well as the methods used to generate those indicators. Last year, high-level consultations were organised in Paris and London with representatives of civil society, governments and regulators by the Department and the World Bank. We now plan to roll out those indicators, encouraging uptake in developing countries to help with the more general take-up of microfinance. I hope that I have provided reassurance on that point. I shall come to the hon. Lady's other points in due course.

The hon. Lady is absolutely right to highlight the important role that microfinance can play in helping to reduce poverty, its importance in the G8 discussions last year, and the way in which poor households use microfinance to raise their income and build up their assets so as to protect themselves against the unexpected. She is right to say that microfinance is about much more than loans. Poor households use a variety of other financial services, such as savings and remittances. She is also right about the central importance of microfinance to the empowerment of women. It has been estimated that eight out of every 10 microfinance clients are women. One of the microfinance programmes that my Department has been delighted to support has given funding to the Kashf foundation in Pakistan, which will help it to increase its outreach from some 75,000 to some 300,000 poor women over the next five years.

I do not take issue with the main thrust of the hon. Lady's speech-the need to scale up access to microfinance more dramatically. She is absolutely right. She is also right to highlight the excellent role that microfinance NGOs have played in demonstrating what is possible. In particular, they have shown that poor people are good credit risks and that cost-effective techniques to provide financial services can be developed to offer them long-term sustainable growth.

CGAP, a World Bank-hosted, multi-donor initiative to increase access to financial services to poor people, has estimated that some 2 billion low-income people in the developing world still do not have access to bank accounts or financial services, and as much as 90 per cent. of the population in many African countries has no access to banking services. Microfinance NGOs cover only a fraction of the total number of low-income people who need financial services: it is estimated that about 2 billion clients need access to microfinance but only 80 million are covered-again underlining the hon. Lady's point that all of us need to do much more.

Whether we should broaden and develop the financial sector or support microfinance institutions is not an either/or question, as both have a role to play in increasing access for the poorest to financial services. I assure the hon. Lady that many of our country programmes still support NGOs-for example, six of our country offices have funding programmes for both NGOs and for banks, to encourage them to enter the field. Some banks-Citigroup for example, and ICICI in India-are also financing NGOs to help them to develop relevant products. The two sectors can come together.

The country that stands out as a beacon in terms of access to microfinance and that demonstrates its potential is Bangladesh. Perhaps that is because of the power and inspiration of Professor Yunus and the Grameen bank. We need to continue to remind people of the success that has been achieved in Bangladesh and to urge all donors, not just the UK, to do more than has been done so far.

Let me try to give the hon. Lady some additional reassurance by highlighting some of the support that the UK offers through the Department for International Development and its country programmes. We contribute some £30 million a year directly to microfinance or financial sector development programmes. We also support various international microfinance funds and we have funded microfinance institutions, most recently in Afghanistan, Pakistan and Uganda. The hon. Lady mentioned the excellent work of BRAC, which is one of the microfinance institutions that we have supported. With some 4 million members, BRAC has disbursed some $350 million in loans in the past year and provides a powerful example of the success of microfinance institutions. We are delighted by its recent decision to extend its operations into Afghanistan. That is an exciting innovation.

We have financial sector programmes in six African and two Asian countries that provide direct funding to microfinance and give technical and policy assistance to governments and regulators to help them to take advantage of the opportunities that microfinance provides. Our financial deepening challenge fund has provided some £15 million in grants to financial sector organisations, helping to catalyse some £24 million in new private sector investment directed at the poor.

The hon. Lady will be aware of the importance of remittances as another key form of microfinance. Last November, with my hon. Friend the Economic Secretary to the Treasury and representatives of the private sector, I was delighted to host the launch of a private-public sector working group report on how we can extend access to microfinance. We have remittance country partnerships with Nigeria, Ghana and Bangladesh, and another is being developed in Pakistan.

I hope that I have helped to give the hon. Lady some reassurance that the progress that we made last year through the G8 in terms of the attention that is given to microfinance will not be lost. Microfinance continues to be of huge importance to my Department. I have no doubt that the hon. Lady will continue to champion its cause in this House, and I look forward to her doing so.

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