The promotion of microfinance has long been an important element of DFID’s wider strategy to increase access to formal financial services for the poor and to support the development of strong financial sectors that are able to contribute to growth and to poverty reduction.
Evidence increasingly shows that access to formal financial services (including, without limitation, credit, savings, insurance and remittance services) can enable the poor to better withstand shocks, build assets and link into the wider economy.
Nevertheless, “access to finance” forms part only of the wider development “jigsaw”. Unless other fundamental challenges including conflict and state fragility, environmental sustainability, climate change, lack of education, child mortality, maternal mortality, and the threat of HIV, malaria and other diseases are addressed simultaneously then the full impact of improved access to financial services cannot be realised.
The scale of the access to finance challenge remains huge: it is estimated that approximately 2.7 billion people in the world currently have no access to formal financial services and in many low income countries, fewer than 20% of the population (even fewer in many countries in Sub-Saharan Africa) has access to formal financial services.
Microfinance is just one element of the wider “financial access” challenge. It is estimated that approximately 150 million people worldwide have been reached by microfinance services to date. This is an impressive figure but one which clearly represents only a small fraction of those lacking access to formal financial services.
The key question therefore remains how best to enable formal financial services to reach the un-banked swiftly and at scale.
Key barriers preventing wider access to formal financial services for the poor include the following:-
In recent years, DFID has supported broad financial sector development programmes (where microfinance is just one component) throughout the developing world which seek to overcome these barriers, to encourage the entry of financial institutions into the microfinance sector and to assist governments to improve the regulatory environment for financial institutions to serve the poor.
The rationale for DFID’s broader financial sector approach is illustrated by the example of DFID’s work on branchless banking. One of the key strands of DFID’s financial sector policy is the promotion of new technology channels such as mobile telephones and card-based networks as a means of increasing access to formal financial services (known as branchless banking) at a greater scale and at a significantly lower cost than conventional “bricks and mortar” banking models. The potential of branchless banking is well illustrated by the fact that there are over 1 billion people in the developing world today who do not have access to a bank account but who do have access to a mobile phone. The DFID/CGAP “Scenarios for Branchless Banking in 2020” exercise launched in November 2009 considers that branchless banking has the potential to increase financial inclusion by as much as 40% by 2020. But such potential can only be realised with sustained input from private sector investors, banks and technology providers; with governments striking the appropriate balance between prudential regulation and allowing innovative business delivery models to flourish; and with a clear understanding of the needs of the poor.
In turn, branchless banking can provide a huge opportunity both for microfinance institutions (by reducing traditional constraints such as prohibitive operating costs in reaching rural communities; lack of management information systems; lack of suitably trained manpower; and helping in the process of building credit histories for their clients) and their clients (in helping recipients of microfinance services to transact more frequently and more flexibly) and also for commercial banks to reach down into the microfinance sector on a viable and sustainable basis.DFID has supported microfinance and financial sector development projects in over 25 countries and has contributed approximately £200m to fund such projects, mainly in Asia and Africa.
DFID has in the past provided direct funding to fund the growth of microfinance institutions (MFIs) and microfinance funds. However as the microfinance sector has matured during the course of the past few years and has started to attract significant levels of commercial funding, DFID has tended to scale back its direct funding support to MFIs. DFID wishes to ensure: first, that private sector capital, which is so key to the sustainable development of the microfinance sector, is not “crowded out” of the sector by donor capital; and secondly, that DFID’s funding is applied where, and in the form in which, it is needed most in the sector in order to ensure that its impact in assisting the poor can be maximised (please see the references to DFID’s work on microfinance in the paragraph below).
Much of DFID’s work on microfinance has been delivered through country programmes and, as noted above, is frequently embedded in broader financial sector deepening programmes. These include:-
DFID is also a founding member and major contributor to the Consultative Group to Assist the Poor (CGAP) which is a leading think-tank on access to finance issues and which monitors the microfinance sector. CGAP’s 2009 survey of funders of microfinance has shown DFID to be one of the top five funders of the microfinance sectors both in South Asia and in Sub-Saharan Africa.
As noted in DFID’s White Paper from July 2009 entitled “Eliminating World Poverty: Building our Common Future”, DFID is also working with the World Bank to design and launch a Microfinance Capacity Building Facility for Africa which aims to address the following key impediments to increasing the growth and outreach of microfinance in Sub-Saharan Africa: the weakness of governance, management and staffing of MFIs throughout the region.
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