Financial Sector Development Crucial For Millennium Development Goals
Banks in the developing world should target the poor and 'unbanked' as potential clients. This 'banking the poor' is the only way to provide a sustainable client base that is capable of pulling itself out of the vicious circle of the poverty trap.
Well functioning financial systems leave countries least vulnerable to major swings in international capital flows and donor sentiment.
This call for financial sector development comes from NFX, a platform of Dutch government and Dutch commercial financial institutions, that aims to stimulate financial sector development.
A strong financial sector is an essential condition for poverty alleviation in developing countries. However, the role of financial sector development is hardly recognized by Jeffrey Sachs, in his report 'Investing in Development: A Practical Plan to Achieve the MDGs'. The report focuses heavily on the investment push that donor country governments need to make to help developing countries escape the poverty trap and offers only a supporting role to the private sector. As opposed to Jeffrey Sachs, NFX believes that poverty alleviation is driven primarily by the private sector, and that the financial sector has an important role in that.
Not just microfinance
In the past years, a lot has been achieved by microfinance. But microfinance is not the only way to reach the 'unbanked'. Banks in developing countries frequently use a 'one size fits all' concept when it comes to their product range. They can reach more people, including those at the base of the market, by developing different products for different client groups. If more people have access to a bank account, local savings become available. They can be turned into into productive investments. Local savings are the most important and most sustainable source of investments in any country, even the poorest ones.
Guidelines for 'banking the poor'
NFX presents some simple principles for successful developments of rural underserved markets at the World Bank Annual Bank Conference on Development Economics in Amsterdam today. The principles are outlined in the NFX position paper, and are illustrated by a few cases that show how public private partnerships between banks and governments contribute to financial sector development and alleviation of poverty.
The principles are:
Recognize the market potential of the poor. Private financial institutions need to recognize the market potential of 'banking the unbanked'. They need to understand the needs and characteristics of consumers and small businesses within these segments and develop products and delivery mechanisms.
Go beyond micro-finance. In addition to micro-finance, there are many other mechanisms to deliver financial services to the underprivileged. For instance, postal banking and cooperative banking can open up new market segments in difficult environments in developing countries.
Apply proven banking concepts. NFX believes that the experience of international banks can be significant for the developing world. Decennia of experience put international banks in an excellent position to assist in setting up financial systems in developing countries.
Reduce risk through cooperation with development banks and donors. Donors and development banks should primarily be active in "difficult" markets and market segments that cannot yet be reached on a strictly commercial basis. They can reduce risk of commercial and/or political nature. Once the market is ready, the donors should withdraw, and let commercial banks take over.
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NFX The Netherlands Financial Sector Development Exchange (NFX) is a public-private platform that combines the financial expertise of several Dutch commercial and development banks (ING, ABN Amro, Fortis, Rabobank, Triodos Bank, FMO), with the network and policy-making force of the Dutch Ministries of Finance, Economic Affairs and Foreign Affairs (Development Cooperation).
