RNW video of Dutch Development Cooperation Minister Bert Koenders's speech at the meeting on Microfinance - Who profits? The full text of his address to the gathering is printed below.
Speech by Minister for Development Cooperation Bert Koenders on microfinance - given at the Peace Palace in The Hague, 25 January 2010
Your Royal Highness, ladies and gentlemen,
I would like to thank Radio Netherlands Worldwide for inviting me to speak to you all this afternoon about microfinance. Access to finance is a central building block of development. For many people, this building block is already in place; for at least as many others, however, it isn’t yet.
I am pleased that Radio Netherlands has taken the initiative to put microfinance in the spotlight. With all the languages you broadcast in, you are ideally positioned to explain what an amazing instrument microfinance can be and stimulate both supply and demand, everywhere your programmes reach: from Chile to Indonesia, from Rwanda to Afghanistan. Everywhere you are heard you speak the language.
Let me begin by telling you what the Netherlands is doing in the field of microfinance. Here are a few highlights. We are supporting the MASSIF fund for financial sector development in micro-, small and medium-sized enterprises. MASSIF, managed by the Netherlands Development Finance Company (FMO), works in no fewer than 90 countries.
Another big project is the World Bank Group’s IFC partnerships programme, which focuses on supporting the private sector in developing countries worldwide. Finally I would like to mention a small project: the Schokland Oikocredit programme. I’m proud that the Netherlands now has a strong Oikocredit branch.
Ladies and gentlemen, there are different ways to look at microfinance. We can begin with the thing itself and its role in poverty reduction. Microfinance plays a social role as well as an economic one, by helping to equalise opportunity. It gives people new opportunities and a sense of security. It expands their horizons and makes people responsible for their own future. That said, it is important to realise that it is not a panacea, as Ms Flores has already explained.
My policy letter ‘Our Common Concern’ sets out several policy priorities, including growth and equity. In many of our activities, we begin with growth and then try to guarantee equity. Microfinance is exceptional because its strength lies in its emphasis on distribution. Loans that are tailored for small-scale enterprise, secure savings and simple insurance policies can benefit almost anyone who has to get by with few or no financial reserves. This includes millions and millions of people. So microfinance is from the outset a form of redistribution.
A second way to look at microfinance is to consider its meaning for economic development more broadly. This is where the growth side of growth and equity comes into play. Microfinance has only limited significance for growth; on its own, it is not enough to develop companies and create employment. Much more is needed to ensure growth and prosperity.
Microfinance is not really suitable for large numbers of people who are all producing the same thing, or firms that are dependent on big market players, or people without access to the services that facilitate continued growth. This will come as no surprise, even if we don't often say it out loud. Studies show for example that it’s hard to measure the contribution that microfinance makes to attaining Millennium Development Goal 1.
This brings us to the perspective that Radio Netherlands Worldwide has chosen: it means taking off the rose-coloured glasses through which people often see microfinance. I welcome this attitude. It can help us look realistically at this instrument and the expectations inspires. And it shows that microfinance has come of age.
That becomes even clearer if we take another angle of approach, and look at the performance of the microfinance sector. Who is providing these financial services? On the one hand, there are financial institutions that take their cues from the clients. These institutions know their clients, know what their clients need and are capable of. These institutions also provide non-financial services. They care about making profits simply because profits ensure continuity. On the other hand, there are more and more institutions that provide microfinance because they see it as a lucrative market. These institutions are out to earn quick returns for their remote shareholders. For them, making a contribution to development is less of a concern.
In between these two groups is a sizeable group of institutions that are out to make a profit but also care about development and think long-term. I believe that diversity of financial service providers helps strengthen the financial sector; so I welcome the broad interest in microfinance. Clearly, however, we need guarantees that service providers will really make a contribution to development. This concern is expressed concisely in the question we are being asked today: who profits?
One relevant issue here is client protection. In the past few years this issue has been tackled internationally through the Client Protection Principles in Microfinance, which were mentioned earlier. These Principles should help ensure that it is the client who profits.
This is the backdrop to the problem that Princess Máxima just raised: fair pricing. By its nature microfinance is an expensive form of credit to provide, and its price is correspondingly high. We don’t want government interfering with interest rates by setting ceilings, because that undermines business management. But we want even less to see business making profits at the expense of the poor.
Another issue that the Princess raised is savings as a major component of banking services for the poor. There is great demand for savings opportunities; this is one of the main causes of the growth of microfinance institutions, and one of the main avenues for strengthening the financial sector in developing countries.
Since the dangers of credit provision were one of the main reasons for drawing up the Client Protection Principles, the Netherlands has proposed adding one more principle, to protect savings. Discussions on this proposal are in progress.
Let me share a success story with you: the ACLEDA Bank in Cambodia. Originally begun as a UNDP project meant to help reintegrate ex-soldiers into society, ACLEDA has now grown, thanks in part to our help, to be the biggest bank in Cambodia. The MASSIF fund, financed from the development cooperation budget, has already been able to sell its shares at a profit. That’s a marvellous achievement.
Ladies and gentlemen, your panel will shortly be given a set of propositions to respond to. I got to take a peak at the propositions, but I won’t give them away. What I can tell you is that I think they’re all significant. I think they will stimulate and inform the debate about what constitutes good microfinance.
In conclusion, I would like to return to your main question: who profits? I assume we can all agree that our aim is primarily to improve the lives of the poor people for whom microfinance was developed in the first place. This means not only giving them more economic capacity, but also enhancing their social resilience and ensuring equal opportunities.
Microfinance does not automatically contribute to development. It is a complex, costly, labour-intensive instrument. So it is vital that it be used skilfully. In recent years a broad spectrum of institutions have grown up – big and small, domestic and international – that are active in the field. I don’t object to the loan brokers making profits, as long as their underlying aim is to be reliable financial service providers.
As it is, the business case is gradually becoming so attractive that the players are bit by bit giving the goal of development a lower priority, or new players that see only a promising market are entering the field. So we have to be vigilant. Funders, governments and supervisory authorities all need to stay focused on the objective of development. And the public needs to be equally vigilant. This is the core business of Radio Netherlands Worldwide. I sincerely hope that more people around the world will engage in dialogue with you about what constitutes good microfinance, how it works, and how to maintain quality.
What next? I’ll count down three key points. Number three: improve the quality of the services provided. Number two: offer more financial services. And number one: increase access to financial services for the poor in remote areas. I will be working towards these goals in the time to come.