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Role of Financial Intermediaries for Poverty Reduction

The ADB Institute conducted a capacity-building seminar on the Role of Financial Intermediaries for Poverty Reduction in Singapore from 4 to 8 March 2002. The workshop was jointly conducted and sponsored by the Technical Cooperation Directorate (TCD), Ministry of Foreign Affairs (MFA), Singapore, the Colombo Plan Secretariat and the ADB Institute. The participants were middle- to senior-level officials of central banks and representatives from NGOs and the academia from Bangladesh, Cambodia, the People’s Republic of China, India, Indonesia, Lao PDR, Malaysia, Pakistan, Philippines, Sri Lanka, Thailand and Viet Nam.

Its primary objective was to provide a capacity-building opportunity to participants by strengthening their conceptual understanding of the evolving issues on the role of financial intermediaries for poverty reduction and sharpening their skills in this area. Presentations by prominent resource speakers expanded the participants’ knowledge base on this highly topical development issue. The seminar also provided the participants a forum to exchange views on their own country specific issues relating to poverty reduction. The knowledge and skills the participants gained during the seminar is expected to help them improve the effectiveness of their work in their own countries, especially in the context of poverty alleviation.

The following are the areas covered in the workshop:

  • conceptual issues on the role of financial Intermediaries in poverty reduction
  • operational issues on the role of financial intermediaries in poverty reduction
  • case studies on the role of financial intermediaries in poverty reduction
  • group work

During the opening ceremony, Mr. Tan Gim Kheng, Deputy Director, TCD, welcomed the participants and resource persons to the workshop. Tan pointed out that the workshop aims to provide a comprehensive overview of conceptual and operational issues related to the topic, along with country- specific case studies. This will provide the participants with a clear conceptual understanding of the potential and limitations of financial intermediaries in reducing poverty, along with an enhanced operational capacity to plan and implement policies in this area. Singapore’s own development experience clearly shows the importance of effective financial intermediation in poverty reduction and economic growth. In light of the large numbers of poor people still living in the Asia-Pacific region, finding innovative ways to provide financial services to the poor so that they can improve their productive capacity and quality of life remains an urgent task. Tan thanked the resource persons for sharing their invaluable expertise, and wished the participants a productive and pleasant stay in Singapore.

Mr. S. B. Chua, Director, Capacity Building, ADB Institute, speaking on behalf of Dr. Masaru Yoshitomi, Dean of the ADB Institute, welcomed all the participants and resource persons to the seminar. On behalf of the ADB Institute, he thanked TCD and the Colombo Plan Secretariat for jointly organizing and sponsoring the capacity-building seminar. Chua expressed his special thanks to TCD for making excellent arrangements for the conduct of the seminar. ADB Institute has collaborated with TCD in organizing many capacity- building and training activities for the past three years.

Notwithstanding the diverse development plans and programs to alleviate poverty for decades in many developing countries, the Asia and Pacific region is still home to a vast majority of the world’s poor, About one billion people still live in absolute poverty in the region. Most of the poor live in the rural areas, and are engaged in agricultural activities or a variety of micro-enterprises.

First, the poor are vulnerable to income fluctuations and hence are exposed to risk. Second, they are unable to access conventional credit and insurance markets to offset this. Most formal financial institutions do not serve the poor because of perceived high risks, high costs involved in small transactions, perceived low profitability, and most importantly, inability to provide the physical collateral generally required by such institutions. According to the ADB’s recent study, about 95 percent of some 180 million poor households in the region still have little access to institutional financial services. Most poor and low-income households continue to rely on meager selffinance or informal sources of finance.

Providing efficient micro-finance to the poor is important for many reasons, First, efficient provision of savings, credit and insurance facilities can enable the poor to smoothen their consumption, manage risks better, gradually build assets, develop micro-enterprises, enhance income earning capacity, and generally enjoy an improved quality of life. Second, efficient micro-finance services can also contribute to improvement of resource allocation, development of financial markets and system, and ultimately economic growth and development. Third, with improved access to institutional micro-finance, the poor can actively participate in and benefit from development opportunities.

For the past three decades, micro-finance services in the region have developed greatly both in terms of size and quality. They expanded their outreach from thousands in the 1970s to over 10 million clients in the 1990s. Also, the character of the industry changed from subsidy dependent to independently viable businesses. Empirical studies show that efficient micro- finance services in the region have significantly contributed to poverty reduction in diverse ways. Most importantly, micro-finance activities prove that poor households can and do save rather than borrow, and it is possible to successfully mobilize funds from poor households. Another important fact is that contrary to expectations, the poor are creditworthy and financial services can be provided to the poor on a profitable basis at low transaction costs without having to rely on physical collateral. Finally, micro-finance services contribute to the development of rural financial markets and to strengthening the social and human capital of the poor.

Notwithstanding all these remarkable achievements of micro-finance, there are many problems that should be resolved for its further development. First, policy environments in many developing countries are not favorable for the sustainable growth of micro-finance. In particular, interest rate ceilings and subsidized credit limit the ability of micro-finance institutions to provide services to the poor. Also, inappropriate and extensive intervention by governments in micro-finance undermines its efficient operation. Inadequate financial infrastructure is another major problem in the region. Financial infrastructure includes legal, information, and regulatory and supervision systems. In addition, most microfinance institutions do not have adequate capacity to expand the scope and outreach of services on a sustainable basis to potential clients. Specifically, they lack the ability to leverage funds, provide services compatible with the potential clients’ characteristics, adequate network and delivery mechanisms, and so forth.

Against this background, this seminar is organized for participants to discuss evolving policy issues and approaches relating to micro-finance, including conceptual and operational issues and policy recommendations for its sustainable development. Furthermore, some interesting and highly relevant case studies on credit unions, NGOs and state-owned banks providing micro-finance will be presented.

This seminar also provides the participants with a forum to exchange views on their own country specific issues. The knowledge and skills acquired in the seminar are expected to help the participants improve their work performance, particularly in designing and implementing policies to develop micro-finance institutions that will ultimately contribute to poverty reduction in their respective countries.

Chua next read on behalf of Colombo Plan Secretariat (CPS), a message from Dr. U. Sarat Chandran, its Secretary- General. In his message, Chandran expressed the pleasure of CPS in partnering with the ADB Institute and TCD in conducting the seminar. The provision of credit facilities to economic agents, both in the urban and the rural sector, is an important lever in triggering and sustaining economic growth. The Colombo Plan region is rich in experience of countries in building appropriate institutions for provision of timely credit to rural communities for their economic activities. The seminar would not only enable the participants to understand the theoretical and institutional underpinnings required to establish viable financial credit network aimed at development and poverty reduction, but also provide an opportunity for countries to share experiences of their own successful strategies in this regard. Chandran expressed his hope that all the participants to the seminar would find it highly useful and productive and that they will be able to carry with them some policy inputs to their own countries and organizations.

Download Executive Summary [ PDF 133.4KB | 20 pages ].





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