Relevance for Development and Poverty Reduction
Better Access to Loans, Saving Opportunities and Insurances
Small-scale loans provide new opportunities. Source: KfW Photo Archive / photothek.net
Functioning financial systems that also include poor people can directly contribute to improving their living conditions. This is because access to credit, savings accounts, payment transactions or insurance also offers poor people the chance to stand up against poverty. The provision of loans and financial services such as savings, insurance and payment transactions are the answers to the very diverse financial needs of poor people. A farmer in a remote area has different priorities than a man with his own business a in a town or the capital. Women have other financial needs than men. But what many poor people have in common is that they lack access to finance altogether, and they share the wish to lead a better, easier and less vulnerable life.
The option of taking money to and from a financial institution helps to meet the daily need for cash, secures savings and allows people to save money for big planned or unplanned expenses in the future (weddings, illnesses, old age, etc.). Insurance against death or crop failure, for example, offers protection to poor people they previously did not experience. Financial institutions helping them to withstand the hardships of life by giving them access to financial services, therefore play a key role in breaking the vicious cycle of poverty. They also promote the individual efforts of the people in developing and transition countries to lead a better life.
Framework for Financial System Development and the MDGs
Every MDG is important, in particular goal number 1, 3, 7 and 8. (Earnings/employment, gender, environment and financial system development)
The development of financial systems that reaches out to poorer groups of the population contributes considerably to promoting more gender equality. The spread of microfinance services enables hundreds of thousands of women to take their lives into their own hands. It makes them more self-assured and enables them to assert themselves in their respective social environment. At the same time, it makes better education for their children affordable, particularly for their daughters (financing school fees, reducing child labour). Women and their families also benefit from improved health education and enjoy greater financial scope to provide for the family in the event of a death or illness. This is one area in which microinsurance, for instance, has a positive impact.
More Money for the Environment
"Green" finance is another field that is relevant from a development perspective. Many countries are experiencing steady growth that goes hand in hand with rising energy consumption. Given the finite nature of traditional energy sources, there is a growing need to safe energy. This can only be achieved through greater energy efficiency, which in turn requires huge investments - a daunting task for public budgets in developing countries. The financial sector therefore has a crucial role to play in financing investments in energy efficiency, promoting renewable energy and developing innovative instruments to mitigate the consequences of climate change.
However, none of these development impacts will occur automatically or immediately. First, the political, macroeconomic, legal and regulatory conditions in the financial sector must be created in order to enable strong growth among financial institutions. Banks can only serve the needs of poor people if they offer an adequate range of products and have a good mix of branch offices and facilities of branchless banking, that works not only in the cities but also in rural areas. Financial institutions have to operate both in a professional and responsible way. They must be able to take loan decisions free from political interference if they are to prosper in the long term. In some countries, however, conditions that hamper sustainable access to finance continue to exist, such as regulations including interest rate caps and the targeted lending.
Last updated: July 2011
