Ask Obama

The global financial crisis of the past two years again had its epicentre on Wall Street. Once more, the reputation of bankers has suffered massively – and not only in the United States. German banks too are guilty of misguided speculation. Financial corporations hid risks in ever more complex products, promised ever higher returns on investment and allowed ever more dangerous bubbles to build up. Cheap central bank money and weak regulation kept the party going. In the end, governments had to spend trillions of dollars and euros worth of taxpayers’ money to prevent a second Great Depression.

Humankind would probably have fared better had the financial sector stuck to its core task of lending money to clients, thus allowing them to invest in the real economy. That is what microfinance institutions (MFIs) are doing. Ensuring that small-scale and even micro entrepreneurs are able to start and expand businesses is perhaps what matters most in the fight against poverty.

For far too long, formal-sector banks in many developing countries shied from serving anybody but the wealthy elites. In the past two decades, MFIs have become better and better at filling that gap.

The world of microfinance is hugely diverse, ranging from small grassroot-­level self-help initiatives to big organisations with more than 1000 staff. As MFIs grow and as their clients become better-off, MFIs have to meet increasingly diverse demands and mobilise more money. Once they start to deposit savings of clients to refinance credits they give entrepreneurs, they become growth engines for the places and communities they serve.

Over time, another category of financial service will become relevant: insurance. All people who have escaped the worst depths of poverty can afford small premium payments to protect their families from the dramatic financial consequences of illnesses and death. Experts reckon that there are three billion people who would need insurance but do not have access yet.

Insurance, however, is quite unlike banking. The mathematics is much more complex, spreading individual risks over large numbers of people. MFIs are normally not in a position to run insurance schemes of their own. If, for instance, they want to cover more than only their clients’ most basic health risks, they will need a well-established insurance company as their partner.

Governments have a role to play. They must pass laws to ensure
– that small-scale savings-and-loan services are accessible to the bulk of their nation’s people whilst shielding them from the effects of high-risk speculation, and
– that affordable insurance-schemes for the vast majority become feasible and reliable.
Both issues matter. Just ask Barack Obama. He’s struggling with them. In the EU, meanwhile, the European Parliament has reconsidered the issue of exclusion from financial services. Reaching out to mariginalised people, it has earmarked funds for new microcredit schemes.