Source The Guardian
Access to financial services could pull millions of people out of poverty, so where does microfinance fit in?
With 2.5 billion people around the world still excluded from the formal financial system, there is growing interest in how to extend financial services to the "unbanked", many of whom live in extreme poverty in developing countries. Their exclusion from formal financial services forces them to rely on risky and expensive alternatives, which stifles both individual and macro-level economic development.
It has been decades since the first microcredit schemes emerged as one way to try and resolve the problem. But exclusion persists, and with the debate rising further up the agenda in recent years, a more holistic understanding of financial inclusion is emerging, one which focuses on savings as well as credit, and financial literacy as well as access to services.
As this fuller financial architecture starts to take root for the world's poorest, questions inevitably are being asked about how exactly it should be done, what the roles of different stakeholders should be, and how to ensure that this new financial ecosystem actually works well for everyone in the long term.
These issues, and others, were addressed by a panel of experts and an invited audience at a Guardian seminar, held in association with Barclays, earlier this month. The recent completion of the first three years of banking on change – a financial inclusion scheme run jointly by Care International UK, Plan UK and Barclays in 11 countries, mostly in Africa – acted as a springboard for a wider discussion on what a system of financial inclusion should look like.
The seminar heard how banking on change has used savings-led community finance groups in the very poorest communities to help people save, build up assets, access loans from the community "pot", develop financial literacy and then eventually link into more formal services where appropriate on a group basis. What the scheme showed is that even among the very poorest people there is a real demand for robust savings products.
"Poor people do use financial products and lead very complex financial lives," said panellist Claire Innes, policy adviser in the Department for International Development's private sector department. "The reason for that is they have erratic incomes and expenditures. They are extremely sophisticated risk managers. While credit is important, it doesn't necessarily have a beneficial impact in all cases, and in some cases can do harm." Evidence also shows that people want savings, and demand for savings accounts outstrips demand for credit in sub-Saharan Africa, Innes added. "The formal financial sector provides a lot more protection: in the informal sector, 99% of poor people have lost savings, compared to 15% in the formal sector. And poor people are likely to save three times as much when they're using the formal sector," she said.