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Financial services

Small servings save development

by Peter Hauff

In brief

Credit disbursement to women in Vietnam

Credit disbursement to women in Vietnam

Microcredit has lost its image as a miracle cure for poverty. Nonethe­less, the Sparkassenstiftung, a foundation run by Germany’s municipal savings banks, points out that ­microfinance does help to reduce ­poverty. Its experts stress the importance of refinancing by ­savers and prudent regulation.

The Sparkassenstiftung has been supporting local projects in develop­ing countries and emerging markets for nearly 20 years. In 2010, its advisers were active in 25 countries. The 130 staff are not supposed to achieve fast growth; nor do they make many headlines.

They were surprised, however, when the tone of microfinance coverage in the media suddenly changed last year. Microcredit, which had previously been hailed as something like panacea for poverty, was suddenly portrayed as the cause of spread­ing distress. The reason was the micro­finance crisis in the Indian state of Andhra Pradesh, where too much money was channelled into the sector. Eager to grow, commercially run microfinance institutions (MFIs) had used funds they raised on financial markets to lend to customers who could not service their debts.

The Sparkassenstiftung pursues a different strategy. “The best help is to help people create lasting institutions,” says Niclaus Bergmann, the managing director. And the best way to create lasting institutions at local level, he adds, is to collect savings there.

Germany’s municipal savings banks have a long history as local, publicly owned institutions that provide banking services to the people. They use savers’ money for ­loans to local businesses. Such financial services, of course, must not put savings at risk. “If a microfinance institution is persistently in the red, it has to close down,” Bergmann says. If an MFI focuses exclusively on profit, he adds, it loses its justification.

In many countries, savings accounts are regulated by stringent laws. Where rules are too tight, however, they prevent the devel­opment of a sound, self-reliant, locally-based microfinance sector, the Sparkassenstiftung argues. Bergmann says: “Many governments fail to understand that saving and borrowing are two sides of the same coin.” According to the Sparkassenstiftung, four conditions need to be met to permit sustainable microfinance growth:
– Microcredit needs to be flanked by financial services such as savings books, insurance and transfer services.
– Laws and regulative authorities must protect debtors from exploitation, but allow MFIs to operate profitably at the same time.
– Children should be taught financial matters as early as possible.
– MFI managers and staff need a profession­al knowledge of the financial industry.

The Sparkassenstiftung argues that laws and governments in many developing countries are preventing local MFIs to operate independently, and that authorities should trust MFIs, self-help groups and credit bureaus, which rate client’s ability to service loans, to network in sensible ways. Sparkassenstiftung’s advisers try to per­suade authorities that, at some point, trusting is better than trying to control.

Peter Hauff