Arun Kashyap, private sector development advisor at the United Nations Development Program (UNDP), talks about how microfinance can help cut global poverty in half over the next ten years and open big, new markets for the finance and insurance sectors.
 | "Suppose that by 2015 around 1.5 billion people are able to get more cash flow," says Arun Kashyap of the UNDP. "Imagine the market that has been created for any banking or financial institution." |
One of the Millennium Development Goals is to halve worldwide poverty by the year 2015. How can microfinance products, such as insurance and loans, help achieve this goal?
If all of us agree to try to cut poverty by 50 percent by 2015, one of the major resources for that is access to finance. That means access to finance at the level of industry and business, but also at the level of poor people who do not usually have access to financing.
 | MGD Picture Gallery (click on the image to start)The UN Millennium Development Goals at a glance (Photo: reuters) |
The Millennium Development Goals include gender equity, improving the quality of life of children, environmental protection, addressing HIV/AIDS and other health concerns. In all these cases, a key is providing more access to the goods and services for the people who need them. That means creating livelihoods and cash flow at that level, as well as things like access to water sanitation, energy, health services and even some kind of insurance or safety-net mechanism. To do all of that, you need an inclusive financial system.
What kind of microfinance products might be the most-effective ones to reduce worldwide poverty?
I think starting by giving people a place where they can save. Then providing credit. Beyond giving families 100-dollar loans, microfinance institutions should look into possibilities for taking it to scale. So far, they have not been doing that very well.
It is important to spread the idea that by saving 100 dollars today, within 40 years, you could upgrade your house or water system. Microfinance and renewable energy systems have not worked together enough. There is a big market for that.
Or, look at the basic sources of livelihood, whether it is agro-processing industries, fisheries, opening small shops or maintaining existing services. Microfinance needs to start linking those things at the community level.
Then is the community the ideal level at which micro-financers should operate?
We can look at it at three levels. One level is that of the household: what a household needs and how we can provide those goods and services. The second level is creating a general infrastructure that provides general services for households, and that could be things like agro-processing industries - some of which create demand for energy, demand for water.
The third level is the community level; enabling the creation of things like schools and health clinics. You want to set up some kind of community-based systems that run as a sustainable businesses and create livelihoods. As a rule, microfinance in the broadest sense can be very useful at all of these levels.
Adding yet another level to our discussion - the national level - can micro-insurance stimulate long-term economic growth for developing countries?
Yes, but I believe that to fulfill the Millennium Development Goals at the national level, you have to start at the local level. We have been talking about trickle-down economic growth. Well, it rarely trickles down. You need to have centers of entrepreneurship at the local level.
How would that work? How does that help pull an entire country out of poverty?
Part of the reason that people do not have access to banking at the local level because transaction costs for banks and insurance companies at the local level are very high. So, we reduce those transaction costs by making business at those levels profitable. That means building partnerships with local, trusted, non-profit organizations.
Once business at that level is profitable, local initiatives expand and link up to banks in the wider community (at the state, provincial, and national levels). So, in other words, a microfinance institution becomes a microcosm where this seeding takes place and goes all the way upward.
Of course, its not only a one-way flow from down to up. From top to bottom you also have to provide policies, support, incentives, removal of barriers, and make sure that people have the capacity, skills, and training to do it.
Allianz is currently working with UNDP and other international organizations to explore micro-insurance opportunities in places like India, Laos and Indonesia. Is this model - public-private partnerships - the one that is going to work best?
I think so. Governments alone have not succeeded in building up infrastructure for people who need it. The next model is getting the public and private sector to work together. The fact that UNDP and Allianz are working together to remove barriers that encourage corporations to get involved in business activities at that level.
And why would they get involved at that level?
Today nearly three billion people live on less than two dollars a day. Suppose that by 2015 around 1.5 billion people are able to get more cash flow. Imagine the market that has been created for any banking or financial institution.
For the private sector to come in, they need initial assistance with capacity and policy advice, for example, which is what UNDP can provide. Once we do that, then business can come in. It is a new model of finance where the public and private sector work together to create more goods and services for the people, but in a manner where it also becomes lucrative for the private sector.
How is Allianz's approach to microfinance different from others?
Allianz was able to recognize an opportunity early on. They were willing to step out and use their resources, and say, "okay, let's at least explore the possibilities." That is a very forward-thinking approach.
First, they did their research about the needs in the market. Once they found out about the possibilities, they were willing to take the next steps, such as introducing life insurance in India, and see what happened out in the field. Some other companies leaped right in with products without first doing the research, and they failed.
What are some of the lessons that the private-public partnerships have learned from their experiences so far in South Asia?
First, there has to be commitment and support from each of the institutions - the corporations, NGOs, or governments - that are working together, because it is a time-consuming process. You have to be able to see the long-term benefits.
The second thing is that partnerships must represent the strengths of institutions. Cooperation between organizations like UNDP and Allianz will not happen unless there is some convergence of interests. What is it that UNDP can bring to the table? What is it that Allianz can bring to the table? Furthermore, there has to be trust and good communication.
We must have very clear indicators of success and failures. You must have very clear benchmarks against which you measure where you are going with the project. Finally, we should share the lessons of our experience, so that we build upon our strengths, and do not repeat the mistakes.
editor: Valdis Wish
publishing date: July 27, 2006
