Address by Princess Máxima at the Egyptian Microfinance leaders meeting in Cairo

Speech | 27-10-2008

Excellencies, ladies and gentlemen,

It is a great pleasure for me to be able to address this special group of people today. I am here before you representing the UN Advisors Group on Inclusive Financial Sectors. And I welcome the opportunity to share some thoughts with you. I would first like to thank the Aga Khan Agency for Microfinance and Deutsche Bank for their kind invitation and for organizing this important event. Certainly in a moment in which financial inclusion is probably not the first thing on your minds. But still, a subject we should not lose sight of.

I do not think that I should dwell too much on the financial crisis that has been prevailing over the last months. We have really little insight in the real extent of its consequences but it will surely require our full attention for the short and medium term and long term. Something that I definitely have learnt from these past few months is how important it is to have and develop the sound financial inclusive system in a country that, not only promotes growth, but also gives their customers financial services they really need and can afford. Therefore safeguarding not only our people's savings, but also the financial system as a whole. That is why, it is imperative that we look into this subject today and bring in all the lessons learnt from this crisis.

Ladies and gentlemen, by now, research has convincingly shown that a sound financial sector is an essential part of the development process. Financial development and improving access to finance not only accelerates economic growth, but also reduces poverty and income inequality.

Access to a wide variety of financial services and products, such as loans, savings, insurance products and remittances can be a powerful tool to generate income, build capital and protect people against risk. However, as we all know, today world financial systems are still not inclusive today. Over 2 billion people are unbanked or underbanked. The 2008 National Impact Survey done by Planet Finance shows that the microfinance sector in Egypt is growing at a rapid pace, especially compared to other countries in the region. But potential demand estimated as high as 20 million, is still largely unmet.

The Advisors to the Year of Microcredit recommended in 2005 that the UN should appoint a group of experts to see the work they had begun through to completion. As a result, the UN Advisors Group on Inclusive Financial Sectors was established in June 2006. This advisory group, formed by a broad international group of experts from private and public sector, practitioners, NGOs, donors and academia, has advised and guided the UN and its member states on building financial sectors that enable wide access to a diverse range of financial services.

We developed plain and simple Key Messages for governments, regulators, development partners and the private sector. I would like to focus on these Key Messages given that they do contain the principles for the pathway to sustainable financial inclusion.

For Governments, we feel that their key role is to create a helpful policy environment to allow for the development of a financial system that enables all citizens to access the financial services they need. Governments should resist the temptation of becoming retail finance providers themselves. Through research we know that no government scheme has ever reached true sustainability and efficiency, and certainly has not assured greater access. When the government itself provides financial services, politics almost always intervenes. There are however great examples of enabling governments, providing the right environment and removing obstacles. Take the case of Bolivia, 10 years ago, the interest rates charged bij microfinance institutions were as high as 70%. Today, with increased competition, interest rates have fallen down to 16%, a level a lot of countries envy. As markets become more competitive, with a wide variety of financial service providers, governments are advised to promote, in an open competitive market, consumer protection, transparent pricing and financial education, subjects I will return to in a moment. We strongly advise governments to invest in a level playing field and consumer education rather than imposing an artificial interest rate.

From Regulators we ask that they establish an enabling environment with the appropriate regulatory framework where a diverse range of institutions can provide financial products and services and where technological innovations can be fostered. Regulators must keep pace with the innovations in the microfinance industry, looking not only at banks and nonbank financial institutions but also telecommunications and other providers and nonbank retail agents who can extend the reach of financial service providers. Successful regulators have been flexible in their approach, mitigating risks and balancing concerns of safety without limiting access to financial services. An area where this flexibility is important is in the application of international standards on money-laundering and terrorist financing to ensure that country-level regulations do not inadvertently block poor people's access to finance.

For Development Partners, including foundations and CSR departments of financial institutions: The quality of funding for inclusive finance is at least as important as quantity. The shortage of strong institutions and managers should be addressed by investing in building their capacity and all this assistance should be done complementing private sector activities and not competing with them. Development partners are key in helping disseminate best-practices on consumer protection and social performance measurements. Since the recent tightening of the financial markets, funding of microfinance institutions has become more difficult in the capital markets, leading to a return of the development partners as funders and investors.

Finally, our messages to the private sector: you have a very important role to play in expanding access. It is not only about capital, but also about knowledge and practices. When I talk about private sector, I am not only talking about financial institutions, I am also talking about telecommunications, internet providers, cement producers, even healthcare providers and utility companies. In order to reach the last client with the product he or she really needs, you will have to partner with the sector that has the right distribution network or has the product the clients want. Whether its money transfers through mobile phone or partnering with a health services provider to sell health micro-insurance products, you will have to be very innovative in terms of defining your product and finding your partner.

While access to a broad spectrum of financial services can be a good thing, it requires informed consumers who understand the obligations they are taking upon themselves and have the wherewithal to fulfil it. It also depends on fair dealing on the part of the lender, and clear and transparent loan terms. The current global financial crisis owes in part to absence of these factors, and to reckless and aggressive marketing of inappropriate loan products to vulnerable consumers, many of whom did not fully understand what they were getting themselves into. There's an appropriate role for the government in establishing "light touch" market conduct regulation and programs to inform consumers about financial services. And it is the role of the microfinance institutions to have consumer protection and transparency written in the DNA of their organization. I was in Paraguay a couple of weeks ago and somebody from an MFI said something that I will never forget. He said: "It is not about increasing market share and trying to get as many products sold to the customers out there, but it is about giving the product that the consumer needs and that they can afford. Knowing your customer, not on a scoring basis, but really knowing that this client has the capacity to pay back his loan."

Ladies and gentlemen, "Inclusive finance" is so much more than microcredit!! Of all the products encompassed by inclusive finance, there is one that deserves special attention and that is savings. For a variety of reasons, savings has not received the same level of attention or resources as credit, but research shows that it is as equally important -- if not more so. Debt instruments may not be optimum vehicles for the poorest of the poor. Savings, on the other hand, affords a debt-free way to buffer against life's risks, build assets and provide opportunities for the next generation. Despite the important role of savings, only 20% of the world population has a formal savings account. In 2006 the percentage of families using a savings product was 18% in Latin America, 22% in Africa, 37% in Asia and 90% in the OECD countries. In Egypt, 74% of the microentrepreneurs keep their savings at home...loosing its value with inflation and hoping nobody will steal it away.

We have a lot to learn about savings and much data to gather. What we do know at this point is that when people have access to savings they take advantage of it and use it wisely. Just last month, we learned that the number of Kenyans choosing to open bank and savings accounts tripled --- from 3.3 million to 10.1 million - over a one year period, thereby clearly demonstrating that there is a huge need for saving products in Africa.

This demand is not at all surprising since financial services - when available - have a profound and measurable impact on people's lives.

Studies have shown that poor families with access to financial services are more likely to send their children to school, and the children stay in school longer.

In Kenya, farmers who have access to formal savings products are more likely to save after harvest and invest in fertilizer, which in turn increases their crop yields and annual income.

As we focus on the potential impact of savings, we will need to leave behind the myth that poor people cannot save. We know that poor people can and do save, though often not in formal saving accounts. Instead, they put money under their mattress, or are forced into risky, unsecured, illiquid investments such as livestock or building materials, and as a result can see all of their assets - and dreams - wiped out in an instant by an illness, fire, flood or drought. So it is our duty to offer them the opportunity to save safely!

Ladies and gentlemen, on behalf of my fellow Advisors to the UN, I hope this has in some way inspired you to really give some thought to the issue of Financial Inclusion and how you can help enhance it. Just remember that microfinance is back to basics, it is back to the traditional banking activity of intermediary between the saver and the debtor, it is back to a strong relationship between the client and its financial institution and it is back to thorough assessment of how much a client can take as a loan, giving him a chance to improve his life and giving him back his dignity. I thank you all very much for your attention and I wish you wisdom and vision in all your endeavours.

Thank you very much.