Financial Services

 They may take their tea with milk and pronounce "tomato" wrong, but here's something on which we can agree with our friends across the pond.

Yesterday, the UK's International Development Secretary Douglas Alexander announced DFID's ₤1.4 million, three-year project: Facilitating Access to Financial Services through Technology (FAST).  Working with CGAP and GTZ, FAST's aim is to "lay the foundations for financial services to be made available through new and emerging technology across Africa and Asia."

As it stands now, 2 billion people in the developing world lack access to financial services, because of distance or affordability constraints.  With that in mind, FAST aims to explore the possibilities and extend the reach of "branchless banking" using new technologies and innovative methods.

Its three-pronged strategy is to:

Social policies around the world are shifting to account-based systems. Governments and corporations are using accounts to deliver a wider array of benefits. Between 1980 and 2004, the presence of defined contribution plans with public support increased from 10 to over 50 countries. But account strategies are also growing for the purposes of education, home ownership, health, and benefits directed at children.

Many of these account-based systems, however, are provided by employers and/or assume that persons have relationships with financial institutions, leaving out millions of low- and no-income people. This pattern is repeated in nearly every country. 

Take, for example, the obviously frustrated account of Cape Town, South Africa resident who is desperately seeking to do right by her injured employee by helping him receive his unemployment benefits payments (from today's Cape Times, via Charles Klingman's awesome "unbanked listserv"):

On the horizon of this year's Clinton Global Initiative, I saw the next frontier for pioneers of the global asset-building field.  At past CGIs, microfinance (and microcredit in particular) has been centrally celebrated and largely heralded as a panacea to global poverty.  However, this year, there seemed to be an undercurrent of recognition the microfinance field, in its current construction, simply can't do it all.  More specifically, there are two very important poor populations that microfinance simply doesn't reach - those in extreme poverty whose needs are too small for average microloans, and those who own small and medium-sized businesses too large for the average microloan but too small to access finance from formal banks.  A big players are lining up to fill the void.

The Clinton Global Initiative is coming to a close and as I sit here listening to Gordon Brown talk about the importance of the global economy and the gap between the rich and poor, I find myself also thinking about the images of Drew Barrymore, Matt Damon, Muhammad Yunus, Bono, Bill Gates, Wylclef Jean and Bill Clinton on my camera, and last nights performances of James Taylor and Yousoo Ndour's.  Waking up from my day dream, I realize that this conference could have easily succumbed to three days of a star-studded, papparazzi-riddled social affair.  And perhaps in some ways it is.  

But as I go through the notes I've taken over the last three days, I am quite pleasantly surprised by the amount of substance and the breadth of issues and innovations covered over the last three days. Indeed, I'm so impressed that I find myself at the end of this conference in 30 minutes unwilling to end my blogging on its sessions and commitments.  Over the next week, I plan to continue providing commentary on CGI sessions, issue areas and commitments. Here is a sampling of topics I plan to cover:

• Asset Building Beyond Microfinance? The Forgotten Bottom and the Missing Middle
• Rural Finance: a New Frontier for Global Asset Building?
• Technology, Information and the New Age of Access
• Energy, Climate Change and Sustainable Development: An Opportunity for Microfinance?
• Food Prices Shifting Microfinance Focus?
• CGI Commitments:  My Top 10 List

All day yesterday, I capitalized on the opportunity to unabashedly promote the asset building framework by putting a spotlight on its prominence in poverty alleviation discussions and commitments here at CGI.  And I actually barely skimmed the surface of some of the specific asset-focused activities coming out of these sessions (Habitat, others).  As much as I relished it, I also want to acknowledge that asset building and financial services for the poor are one piece of poverty alleviation in a complex global environment.  The specific commitments are great, but what about the larger perspective?

Yesterday's afternoon CGI held a plenary on profits, jobs and equitable growth.  The stifling of poverty alleviation around the world is not simply due to lack of access to effective financial services, but also to lack of access to property, to opportunity, to education and to healthcare.  Exclusion from any combination of these often results market inefficiencies, slack productivity, an inability for an individual to live to their full human potential.  Hernando de Soto called for property rights and legal empowerment of the poor to give them the tools they need to achieve their version of the American Dream. 

There is still much to learn about the financial tools needed to help the world's poor mitigate risks and build assets in order to build an economic base and contribute to long-term economic development. This session primarily focused on "building assets in the developing world."

Sylvia Matthews , director of Global Development at the Bill and Melinda Gates Foundation opened the second working group session stating that 2.3 billion with no access to financial services for the poor, even though evidence suggests they would make perfect customers. She asked her panelists: "What do people need, what works, what are some solutions and how do we reach scale?" Again, asset building and asset protection products reigned supreme:

Bob Rubin, the first Director of National Economic Council, then Secretary of the Treasury, and now a Director at Citigroup, Inc remarked on the health of the financial system and impact on financial services for the poor. "We need to stem the crisis of confidence in the US now, but we also need to put into place effective responses to longer-term problems the country faces, like healthcare, education and economic opportunities for the poor."

When I walked around yesterday's CGI exchange, getting a convention-style glimpse into the organizations and corporations making commitments to poverty alleviation this year, I was particularly excited to see not only institutions focused on financial services for the poor, but particular, savings and asset-building. Yes, the actual word - asset-building - at the CGI. Considered by some as an inaccessible term to describe wealth creation opportunities for the poor, I am thrilled to see it permeate the global microfinance field (as I assumed it would). Oweesta, the CDFI running IDA and other asset intervention work in native American communities in the USA, seems the only organization focused on empowerment of native communities, and if carrying the AB message in all of their materials. And Oxfam, who have been running a Gates-funded Savings for Change program (informal rotating savings groups mobilizing deposits for those still completely untouched by formal microfinance) for a few years around the world, have added the term asset building to the September version of the program's one pager.

In the United States and many developed nations, banks offering savings to children as a means of social and economic inclusion and empowerment may seem tired tradition of the thrift era that has long passed.  Gone are the days of widespread school banking programs once so common in the US. And in the very few developed nations where efforts to provide children social and/or economic opportunity through financial inclusion exist, they typically come in the form of social policy (UK's Child Trust Fund, Singapore's Baby Bonus, USA's ASPIRE Act).  In developing nations, however, we're witnessing a wholly different phenomenon: financial institutions are, out of their own volition and with no push from the government, choosing to target the child market segment.   

Last month, I argued that USAID inaptly named a three-day virtual conference on savings as "The Forgotten Half of Microfinance." Instead, I posited:

"As someone working on asset building and financial inclusion for the poor (and/or their cross-fertilization in the development field), I would contend that the hosts got it wrong when chose the title for this event. Indeed, "savings" is not "forgotten" at all. Though perhaps traditionally underemphasized, I would argue that, on the contrary, savings is the in fact the "next big thing" in financial interventions."

Looks like I got this one right.

In Monday's New York Times, Paul Krugman raises the question whether the United States has gone overboard in promoting home ownership. Krugman points out not only that the bursting of the subprime bubble has also burst the homeownership bubble, but also that homeownership brings risks of excessive leverage (if prices go down some, an equity stake can be totally lost); "stickiness" (making it hard to move when jobs dry up); and the high expense of commuting (when families chase low house prices well beyond where the jobs are).

Krugman got much right, but before we throw homeownership overboard, it's worth pausing a minute to consider both the benefits of homeownership done right and what we need to do to make rental housing a reasonable alternative, both as shelter and as a way to build assets.