25 November 1999
Ana Marr, Overseas Development Institute.
Guy Palmer, New Policy Institute.
This event looked at issues around financial exclusion from both a developed and developing country perspective.
- A discussion on social exclusion and finance was introduced by Ana Marr of ODI and Guy Palmer of the New Policy Institute.
- Ana Marr reminded the meeting that micro-finance was intended to increase access to finance by the poor, building on existing social institutions, that there was usually an emphasis on sustainability, and that the ultimate objective was to reduce poverty and vulnerability, often especially for particular groups, like women. Micro-finance was widely praised as a tool for poverty reduction, but it was not a panacea. Indeed, her research showed that it could conspire to exclude the poor.
- She then presented findings from her own work in Latin America. In Peru, Bolivia and Colombia, there had been a trend for micro-finance organisations to transform themselves into formal sector institutions. This had three unfortunate effects. First, the institutions were tempted to 'cherry-pick' the best clients and to limit their services. Poor clients were less well served, the availability of non-financial services like training declined, and the whole enterprise became more market oriented. Secondly, the formalisation of micro-credit institutions led to a process of self-exclusion, either because the poor dropped out of their own accord, or because poor participants excluded other poor people. Thirdly, there was institutional exclusion, because of changes in products, delivery techniques, or social relationships.
- Ana Marr thought there were important lessons to draw from this experience. If micro-finance institutions were to continue to serve the needs of the poor, then the poor needed a voice in management. There was no evidence that formalisation had contributed significantly to financial stability. There were also strong implications that formalisation undermined the social ties on which traditional NGO-type micro-credit initiatives had depended.
- Guy Palmer then picked up the story from the perspectives of developed countries. He began by broadening the debate. Financial exclusion was not just about credit, there were wider issues (at least in the UK), to do with money transmission, the availability of pensions, and insurance. Rapid changes in all these sectors had led to worse access for the poor, increasing cost, and to the erosion of traditional methods of carrying out transactions, associated with very rapid technological change. Perhaps most important from a social exclusion point of view, the poor were increasingly excluded from the mainstream (for example, because they did not have bank accounts, or were excluded from new technologies, such as telephone or internet banking).
- It was important to understand why the poor were excluded. Low income was one reason, but not the only one. He observed that there was a certain amount of apathy about remedying the exclusion problem, both by consumers themselves, and by the industry. There was also a real challenge ahead in designing financial products that would be appropriate for the poor.
- This led to a discussion about solutions. Guy Palmer talked about the need for a change in the industry mind set, in order to deliver new products. He also talked about the need for consumer education and empowerment, and about the scope for new partnerships between the public and the private sectors. He emphasised the need for mainstream solutions, not specialist solutions.
- The current Government had taken financial exclusion seriously, as a recent action team report had demonstrated. It had recognised its own responsibility to lead in the area, but had also helped to change industry rhetoric, encourage the innovation of simpler products, and introduce better monitoring, including league tables.
- Guy Palmer thought there were some important lessons to learn from the UK experience. The Government could influence the debate, but needed to ensure that financial exclusion was addressed by mainstream financial institutions as well as via specialist solutions. He thought that specialist solutions (e.g. credit unions) had a role to play, but were often on too small a scale to tackle all of the problems: the private sector was also key.
- An extended discussion followed on these issues:
- First, there was recognition that it was useful to broaden the debate beyond micro-credit, to look at a range of financial sector needs and products - this was true even though poverty and isolation were much greater in developing countries, and the financial sector less well developed;
- Second, there was recognition that there was an important role for NGO-type activities, partly for their own sake, but also partly as a vehicle for innovation and experimentation;
- Third, finance, in the broadest sense, had multiple roles to play, both for consumption smoothing and for investment. In this connection, there were other interesting lessons to look at in the UK, for example the experience of the Social Fund.
- Fourth, there were clear issues about whether the formalisation of micro-finance institutions would lead to the exclusion of the poor. In some cases, it clearly did. However, a number of participants were supportive of the idea of professionalising micro-credit, and wondered whether it was in the end such a bad thing if training and other non-financial services were provided separately.
- Fifth, on sustainability, there was a debate about whether or not it was possible and legitimate for micro-finance institutions to be sustainable, especially given high transactions costs. Some thought that marginal costs were very low compared to average costs, and that sustainability was a legitimate objective. Others thought that it would be more difficult to achieve, and that there was a strong moral case for subsidising this kind of anti-poverty intervention.
- Finally, it was necessary further to discuss the question of the contribution micro-finance could make to poverty reduction. There was no clear evidence on this score.