A woman in Tanzania with micro loan visits the bank.
Photo: Anders Gunnartz
Developing new financial services for poor people, especially women, is a way to avoid expensive and uncertain options for saving or sending money. In this way, the poor are also included in the formal economy, can more easily manage economic crises and eventually build their prosperity.
Financial system is a broad term that encompasses everything from functioning stock markets to new financial services ("inclusive finance") for the poor. In many countries, cash has been the only means of payment for large groups of the society, which includes both the high costs and risky management. Few have been able to save and send money safely, and financial institutions have traditionally not considered poor people as a potential or a profitable customer base.
Lack of credits is traditionally considered to be the most limiting factor for small businesses, which are generally regarded as poor countries' engine for growth and primary source for new jobs.
The fact that even poor people have different economic relationships and utilise a variety of channels already today suggests that these services should be formalised, and therewith also cheaper and safer.
The steadily increasing use of mobile phones and other new technologies has made a big difference for small business owners and individuals. Today, many are able to make financial transactions using a mobile phone. Sida has supported a part of that development, as well as other successful solutions such as smart cards.
One such example is the Financial Sector Deepening (FSD) Programme in Kenya, where Sida’s support helped more low-income people have access to various financial services such as money transfers to home countries (remittances), savings, insurances and loans.
Different types of financial institutions, offering entrepreneurs a variety of usually small scale financial services, has made it easier for many small business owners to, for example, get access to capital in order to start or grow a business, and therewith also create jobs. Sida was early involved this process. Today, many of the market actors, including commercial banks, have become aware of this potential and have embarked on entering new markets. Sida's support thus becomes more focused on removing obstacles to this development and tries to make sure that the markets become inclusive by e.g. tailoring products they offer to customers' actual needs. This has not always been the case, which may partly explain the crises that occurred in different places. One of the challenges is to ensure that regulation and monitoring are at such a level that good enough control can be established without strangling the market forces.
Other examples of efforts that Sida funds are CGAP – a knowledge generating think tank within "Inclusive Finance", and Women's World Banking. Through their network of various financial institutions around the world, they focus precisely on women's access to these services.
Financial stability – a prerequisite for lasting poverty alleviation
Research shows that many people are at risk of falling below the poverty line in the event of a financial crisis and it is the poor who have been the most vulnerable for not being able to protect themselves. It takes a long time to recover from such shocks, although it is in fact many more individuals that are affected and fall below the borderline than what is usually reported. There is thus a strong incentive to try and counteract financial crises, and Sida supports, among others, the Toronto Centre (www.torontocentre.org) - a training centre for central banks and our Swedish Riksbank. Their staff is available in a number of partner countries to assist with their own experiences in order to ensure financial stability.