Full Financial Inclusion in Our Lifetime: Ehrbeck in new video interview

August 19, 2011    

Poor people living in the informal economy face a double injustice, says CGAP CEO Tilman Ehrbeck: “If you are poor you are more vulnerable to begin with, and if you want to use financial services to protect yourself against those vulnerabilities, to improve your income-generating potential by building assets, or to mitigate risks, or to smooth consumption… you pay far more than most people in the rich world would.”

Poor people need and do use many financial tools, Ehrbeck explains in a new video interview, because they lack an economic cushion, and their incomes and outlays are erratic. But with 2.7 billion people lacking access to formal financial services, they mostly resort to using informal means to save and borrow, and manage their household finances. [You can access the video to watch 15 minutes of edited highlights, or read the transcript of the full interview.]

And yet Ehrbeck is optimistic that full financial inclusion will be a reality in most countries within our lifetime.

In a wide-ranging interview that covers the impact of microfinance, regulation of the industry, and the role of public money as more private investment is available, one year after he took on the role of CGAP CEO, Ehrbeck says that what’s needed is an ecosystem of financial service providers. The challenge of providing a microinsurance product is quite different from providing effective savings or credit products, he argues. This implies that providers specializing in different aspects of the delivery chain will be needed to offer the full range of services that meet the needs of the poor.

Too much of a good thing
Asked about the problems of oversupply of credit seen in some local markets, including in India, Bosnia-Herzegovina, and Morocco, Ehrbeck identifies several underlying causes, beginning with a lack of understanding the real demand and market potential. He argues that the industry and individual microfinance institutions did not realize that “the underlying challenge shifted on them from providing access to responsible delivery.” The combination of not understanding fully the demand, fast growth that eroded institutional discipline, and a lack of market infrastructure, led to local market episodes of overlending and multiple borrowing, and overindebtedness.

But Ehrbeck emphasizes that these local cases—of which we’ll likely see more—are still far from the norm. The more common situation in developing countries is still very low penetration, where access to services remains the core challenge: “let’s not kill that budding little thing called microfinance by overlaying too much of a regulatory infrastructure,” he says. Instead we should build the market infrastructure “so that it is in place when the underlying challenge changes from providing access into white space to responsible delivery.”

Profit
Asked whether profit-maximizing institutions are a good thing or a bad thing, Ehrbeck says the notion of commercial versus non-commercial is “a bit of a red herring.” As long as consumers are well treated, and institutions that receive subsidies may need to demonstrate progress against social performance indicators, Ehrbeck argues that for financial services for the poor to be scalable and sustainable “all institutions have to make some type of profit: whether they maximize and dividend out to shareholders, or whether they make profit and reinvest is a secondary issue.”

Reaching those living in extreme poverty
But will this approach neglect the very poor? When it comes to the poorest of the poor, Ehrbeck argues that we have to pursue two paths: one is to start with subsidized programs that provide livelihoods support and other services alongside savings and financial management to help people move out of extreme poverty—the model adopted by the CGAP-Ford Foundation Graduation Program.

At the same time, Ehrbeck argues that some financial services are already reaching such large numbers that they must by definition be reaching the poorest. The example he cites is M-PESA, the Kenyan mobile money service that now reaches 80 percent of the Kenyan population--that means it is also reaches large numbers of the poor, the majority of the Kenyan population, and some of the poorest. M-PESA started as a pure money transfer system, but Ehrbeck points out that poor people use it to store money, and that is beginning to show welfare impacts, largely because it allows users to access to money sent from relatives in urban areas in moments of need.

Impact
On the question of the impact of microfinance, Ehrbeck is quite optimistic. At the household level he says there’s increasing evidence that financial access has a positive impact on households’ welfare by building assets, managing risks, and smoothing consumption. Second, he argues that better financial delivery systems play an important role in improving the efficiency and reducing the costs of other public policy interventions. And at the macroeconomic level he makes the case that deeper financial systems increase growth and reduce inequality. Access to finance, Ehrbeck argues, allows progress for families, for small businesses, and for the economy as a whole.

Full Financial Inclusion—in our lifetime
While he acknowledges that there is still a lot to do, Ehrbeck is nonetheless quite optimistic about the potential for progress toward full financial inclusion. Between a better understanding of what the underlying consumer need is, the opportunities presented by new business models that can reach at far lower costs, and a better understanding of the environment that’s required—the right regulation, the right infrastructure, the right public goods— he argues “there’s a body of knowledge coming together that actually allows us I believe in our lifetime to reach something like full financial inclusion. That’s not what we can say in other fields of development…We can achieve this in our lifetimes. Not in two years, but it also won’t take 20 years.”

Watch the video
Read the transcript of the full interview