Better access to finance for poor people
The world’s poorest usually lack access to the banking services most Europeans take for granted. However, if individuals are to become self-sufficient, they also need access to finance. That is why microfinance is part of the EU’s development policy.
Microfinance is the supply of small loans and other basic financial services to the poor. It is increasingly recognised that poor people, like everyone else, need these services (loans, savings, insurance and money transfer services).
Microfinance has proven to be a powerful instrument for sustainable poverty reduction, enabling the poor to accumulate assets, boost their incomes, and reduce their economic vulnerability. It can also help to combat the temporary poverty generated by crisis situations.
The mechanisms of microfinance
Several high-performing microfinance institutions – including NGOs, co-operatives, credit unions, finance companies and banks – have developed innovative methodologies to extend credit, savings and other services to poor clients. Whereas microcredit a few decades ago was mostly the domain of NGOs, nowadays a number of domestic and international private commercial banks and other institutions with nationwide distribution systems are beginning to take an active interest in reaching poorer clients. Advances in information technology offer the opportunity to lower the cost and risk of providing microfinance to the poor.
Microfinance clients include female heads of households, self-employed individuals or small businesses, pensioners, displaced people, retrenched workers and small farmers, all of whom are generally excluded from the traditional banking system and rely on informal delivery systems for their financial services. According to some estimates, as many as 3 billion people still lack access to formal financial services.
The European Commission’s role
The role of the Commission, as a public donor, should be to complement available commercial sources for microfinance. Lack of institutional and technical capacities, especially at the level of retail microfinance financial institutions (MFIs), is considered to be one of the main bottlenecks for developing domestic financial systems that serve the poor. By focusing its support on institutional capacity building, the Commission and other grant donors can respond best to the needs of the sector.
Building the necessary institutional capacity to absorb more commercially oriented funding is an important role the Commission can play. With its grant funding, the Commission can support microfinance institutions by taking on risks that other (more commercial) funders would not take, enabling them to push farther the frontier of poverty outreach and extend the supply of financial services to people in remote areas.
This implies boosting capacities at the level of the retail financial institutions, technical service providers, payment systems, credit bureaus, auditors, etc., as well as ensuring an enabling environment with a sound legal and regulatory framework at the macro level.
Beyond funding for capacity building, the Commission may provide grants of capital funding if credit is a constraint and there is a lack of alternative resources in a given market. Such funding will, in principle, only be through established international financial institutions, like the European Investment Bank. In certain cases, the Commission may also provide grants for microfinance to specialised NGOs active in this area through the thematic programme for non-state actors, for example.
- Consultative Group to Assist the Poor (CGAP) is a consortium of 33 public and private funding organisations working together to expand poor people's access to financial services. It functions also as a microfinance resource centre that incubates and supports development of innovative products, cutting-edge technology, novel mechanisms for delivering financial services, and concrete solutions to the challenges of expanding microfinance. CGAP provides advice, share good practices, organize training and set standards aimed at increasing access to financial services for poor households through financially sustainable institutions.
- Microfinance Gateway developed by CGAP is a comprehensive source of information on microfinance. It lists publications, provides summaries and reading recommendations for selected documents, and features glossaries and information on upcoming events. It also provides links to relevant implementers, consultants, research and donor institutions, journals and publications.
- European Investment Bank (EIB), the European Union's financing institution, implements the financial components of agreements concluded under European development aid and cooperation policies, such as the Cotonou Investment Facility. The EC and EIB play complementary roles: the EC largely provides grants for capacity building; the EIB supports the capitalisation of microfinance institutions, mainly through specialised microfinance investment funds.