Minister of International Development and Human Rights Hilde F. Johnson

Microfinance in Norwegian development cooperation

Oslo October 20, 1998

Dear friends,

It is a great pleasure for me to welcome you all to this conference, where the focus will be on microfinance as a one of the most powerful tools we have for combating poverty. I would particularly like to welcome those of you who have travelled the farthest - Marguerite Berger from the Inter American Development Bank, Rashid Salimi from PRIDE Tanzania, Nancy Berry from Women's World Banking in New York, Richard Rosenberg from the CGAP secretariat in Washington and Luke Jongah from Norwegian Peoples' Aid in Zimbabwe.

Microfinance, with its clear grassroots orientation, is a very promising way of doing something concrete about poverty. It has proven to be an effective means of assisting poor people in developing countries, and has demonstrated how the very poor - the majority of them women - can repay their loans at an impressive rate. It has shown how the benefits of such loans can translate into improved living conditions for the entire household, especially for the children. Approximately 70 per cent of the world’s poor are women. This is referred to as the “feminization” of poverty. Poverty-oriented assistance is therefore women-oriented assistance, as the saying goes that “educating a man means educating one person, whereas educating a woman means educating a whole family”. Such synergy effects are of great value in development work, including microeconomics.

For many, microfinance is synonymous with Grameen Bank in Bangladesh, which may be regarded as the “mother” of microfinance. However, it is by no means the only institution of its kind active in this field now. I personally had the pleasure of visiting PRIDE Tanzania, not long ago. I was encouraged to see how poor people can benefit from financial services and how such services can change their lives.

Microfinance in Norwegian development policy

Poverty reduction has always been at the core of Norwegian development policy. However, under the present government poverty eradication has been given new emphasis. It is the ultimate objective for everything we do. It guides our choice of regional focus for support and our development strategies. It guides our choice of countries, partners, projects and programmes. Combating poverty is also a fundamental human rights issue.

Based on the principle of help for self-help and empowerment of the poor, Norway has supported microfinance activities for a number of years. We have been one of the main contributors to Grameen Bank, and our accumulated contribution now amounts to approximately 400 million Norwegian kroner. This is by far our largest contribution to any individual microfinance institution.

We are, however, involved in a number of other activities in this field. We contribute to programmes financed by the Inter American Development Bank, the Asian Development Bank, the World Bank, the ILO and the FAO.

We are also involved in a number of bilateral projects, which include contributing to the financing of PRIDE Tanzania, Khula Enterprise Financing in South Africa, Agrani Bank in Bangladesh and CDRO in Guatemala; a programme directly targeting the Mayas, a group that previously had little or no access to financial services. In Sri Lanka microfinance has long been a component of a NORAD-funded rural development programme. A significant share of Norwegian support to microfinance is channelled through Norwegian NGOs - most of which I believe are represented at this meeting.

It is difficult to estimate the total value of the Norwegian microfinance portfolio, due to the fact that microfinance can be a component of a larger development programme, as is the case in Sri Lanka. Nevertheless, NORAD has currently committed approximately 250 million Norwegian kroner for microfinance institutions in Africa, Asia and Latin America this year.

Our commitment to microfinance

Our commitment to microfinance efforts is strong and it is a part of the focus on poverty reduction and private sector in our development policy. As set out in the proposed national budget for 1999, the Government is committed to assigning high priority to private sector development in our partner countries.

We are preparing a new strategy for private sector development in developing countries. The focus is on how we can contribute to the development of the private sector and to viable enterprises in developing countries. There will be less emphasis on Norwegian business interests. The purpose of the strategy is to maximize the effects of Norwegian contributions to private sector development in poor developing countries. The measures proposed range from support for integration into the global economy and contributions to improved macroeconomic and legal conditions, to incentive schemes at the micro level.

This new strategy is closely linked to the Government’s strong focus on health and education in our development policy. Without a dynamic private sector to generate income and jobs, support to the social sector will not be sustainable, and may rapidly lead to increased dependence on development assistance or increased loans. The strategy for private sector development will be based on an analysis of the challenges and opportunities that exist for each individual country. Microfinance can make a significant contribution to private sector development. However, it must be part of broader, coherent efforts.

For small-scale producers, who constitute the backbone of many developing countries’ economies, the lack of access to advisory services and capital represents a significant bottleneck. Small-scale business is heavily dependent on a favourable environment, or at least one that is not obstructive. The threshold for entry into the market is simply too high for many. Creating a more conducive environment, through improving the macroeconomic framework, institution building and otherwise, is therefore among the areas that will receive more attention through the new strategy for private sector development.

The strategy will lead to appropriate support schemes that form an integral part of Norwegian development cooperation with individual recipient countries. This means that private sector development, including small business and microfinance issues, will be integrated in the policy dialogue with our partner countries in the South, making it an integral part of the country strategies. This means that we have to strengthen the expertise of our administration at home and at field level in planning and implementing microfinance programmes. The workshop during the next two days for more than 30 microfinance practitioners from Norwegian NGOs and staff from NORAD is one step in this direction - to build our own expertise.

Although microfinance is not a new phenomenon in Norwegian development policy, it has certainly been given increased attention during the last few years. The establishment of the Consultative Group to Assist the Poorest (CGAP), the Microcredit Summit and other international initiatives promoting microfinance have contributed to this.

The CGAP, which was formed on the initiative of the World Bank, is a donor group concerned with making more efficient use of resources for microfinance. The objective of the CGAP is basically to make us all better at what we are doing in the field of microfinance. This can be done, for instance, through dissemination of best practices and by creating synergies between the work carried out by the respective members.

Norway joined CGAP in late 1995, and during the three years of its existence it has proven to be a very useful platform for the international donor community. It provides a forum for discussing and agreeing on measures to improve microfinance programmes. The fact that the World Bank holds the chairmanship and hosts the secretariat gives CGAP a leverage that would have been unlikely without the Bank's involvement. I am pleased, however, to note that CGAP is truly a multidonor forum, as demonstrated by the governing structure that has now been established for its second phase..

Norway decided this spring to become part of CGAP II and made a contribution of 15 million Norwegian kroner - or USD 2 millions - to the work programme, which was drawn up on the basis of extensive consultations with the members.

For Norway, our membership of CGAP is part of our overall efforts towards poverty alleviation. Our work in the group is part of a policy dialogue with the World Bank and the regional development banks on strategies for poverty reduction, gender in development, private sector development and beneficiary participation.

Consultations with NGOs have been an important aspect of Norway's membership of CGAP. A group of NGOs that are particularly active in the field has regularly been consulted on CGAP matters. They have had a say in determining Norwegian CGAP policies. To my mind this is important, since our input to CGAP should be founded on experience from the field level.

Furthermore, if the CGAP is to make a difference, it is crucial that the outputs of the group are disseminated to the relevant actors in each member country. This definitely includes NGOs.

Issues in microfinance

Let me now touch briefly on some of the issues I believe are central in the ongoing debate on microfinance.

Given the success stories we have already witnessed, it is tempting to see microfinance as the tool for reducing poverty. The nature of microfinance is not, however, so simple and straightforward. There are a number of issues that remain controversial and difficult.

One of the controversial issues related to microfinance concerns the target group. How poor are the people we can actually reach with microfinance? At what point would other means of intervention be more appropriate to address the needs of the poorest? And is there a potential trade-off between targeting the poor and reaching financial sustainability?

There are examples of microfinance institutions that have reached poor people and at the same time been financially sustainable. My impression, however, is that no final consensus has yet been reached as to whether this is generally possible or if it requires particularly favourable conditions in each case.

Another question concerns institutional constraints on the recipient side. It is important that we make sure that there is a sufficient motivation and capacity in our partner institutions at field level. One of the dangers of the current enthusiasm for microfinance is that less serious players enter the microfinance scene with the wrong objectives.

This is particularly important in the light of the warnings now being expressed by experts in the field of microfinance. Without dismissing the importance of microfinance, some question whether the microfinance “bubble” is about to burst, and expect a large share of today's microfinance institutions to be out of business within the next few years. Not because of a lack of potential clients, but because they were not properly equipped to run microfinance programmes.

We must be realistic. Here I would like to quote from a paper by researchers John Grierson and Donald C. Mead, Supporting small and medium enterprise in developing countries: “[Micro] Credit is a means to an end, never an end in itself. Credit facilitates the application of some other capacity - in general the ability to make or market something, a product or a service. But credit cannot substitute for productive skills or a saleable product. A person cannot go into the market with empty hands or devoid of ideas, even if she or he has money in their purse or pockets” .

With this in mind, I would like to join those who caution again a hasty proliferation of microfinance programmes that might end up doing more harm than good. Quality must be put before quantity.

As donors, I am afraid we sometimes tend to jump on the latest bandwagon and throw our money after whatever is in fashion at the moment. For some time now this seems to have been the case with microfinance.

When embracing microfinance, we must also take care not to fall into the old trap of paternalistic attitudes towards the poor. We should be careful about proclaiming that we have found the solution to the poverty problem and imposing this on our partners in the South.

As I said at the beginning of my speech, microfinance is one of the most powerful tools for reducing poverty - and this is true. But as with all other areas of development, success is much more likely when the programmes are designed to respond to the needs and plans of the recipient country and to the local groups. We must keep reminding ourselves that processes of social mobilization involving elements of credit at the local level existed long before the arrival of donor funded programmes. It is important that we build on what already exists and learn from indigenous methodologies.

Though it can make a significant contribution, microfinance alone is obviously not the ultimate solution either to poverty or to economic development. We need a broader approach to development.

The effects of microfinance programmes are linked to the overall macroeconomic framework, the legal system and the state of the financial sector in any given country. Support for microfinance should not be at the expense of other important means of intervention to reach the poor - such as support to health services and support through education building. It is important to be aware that even if microfinance can facilitate the distribution of capital to the poorer segments of the population, there are groups of people who will never be able to benefit from lending, and for whom social security is necessary.

Conclusion

Having touched on these rather difficult issues and raised some critical questions, I would like to stress that I sincerely believe that microfinance can - and will - help the poor. I believe that microfinance differs from other efforts to reduce poverty. The experience of microfinance so far represents something new in development policies.

The traditional view of the poor as passive recipients of charity has been challenged by the poor themselves. They have demonstrated their role as economic agents ready to pay for services tailored to their needs. Microfinance can initiate important processes that are necessary for the social and economic development of a country - processes that are initiated at the lowest level of society.

Microfinance can meet the needs of the poor. At the same time it has the potential to attract new actors to the development scene, actors traditionally not concerned with poverty or social development, such as commercial banks and private investors. There is evidence, particularly from Latin America that banking with poor people can be profitable and is commercially viable.

These issues must be considered in future discussions concerning microfinance in Norwegian development policy.

Norway has been involved in microfinance activities for quite some time, but we know that we still have a lot to learn. We are prepared to make a serious effort to see to it that we make optimal use of our own resources. Through our participation in CGAP, and through events like this meeting, we can learn from others' experience. We can benefit from their successes and failures. Formulating strategies to ensure the best use of resources and possibilities will be the joint responsibility of the governments and the NGOs together. I believe that the review of the Norwegian microfinance portfolio, which will be carried out jointly by the CGAP secretariat, NORAD and Norwegian consultants, will start a process through which we will become more aware of what we can - and what we cannot - achieve with microfinance.

Ten years ago, I spent a year in a village in Tanzania - not far from my birthplace - doing field work for my thesis in social anthropology. I lived and worked among village farmers and ”measured” at close range how international prices, debt, government subsidies (or the lack of them) and access to financial services and capital affected these women and their families. A development assistance programme is almost meaningless unless it takes these conditions fully into account. Microfinance as a means is therefore inadequate unless it relates to this "social and international order", to borrow concepts from Article 28 of the Universal Declaration of Human Rights.

In Tanzania I have seen small and great successes and also failures of what we refer to as development. Some were the responsibility of the Tanzanians themselves, others definitely that of external actors like ourselves. Most were the fruits of some kind of collaboration. The failures have made me approach the challenge of development with considerable humility. The successes - of which microcredits is one - are what gives me hope and conviction that the job can be done better and better. This is my job. And it is yours.

Thank you.