t: 020 7219 8155 e: fieldm@parliament.uk

Microfinance

January 26, 2010

Microfinance

Mr. Mark Field (Cities of London and Westminster) (Con): I am glad to be able to introduce this important debate, because in the face of difficult economic times, a hitherto united front in favour of the Government’s international development programmes is perhaps beginning to crack-not, I hasten to add, in Parliament, but among the public at large. As all politicians look towards cutting the vast budget deficit that we have run up in the past couple of years, some of our constituents-I suspect that this applies as much to Harrow, West as it does to the Cities of London and Westminster-are beginning to ask why we are reducing significantly assistance to British citizens when we continue to channel taxpayers’ money into international development.

I have received several letters from constituents asking why this country continues to provide aid to countries such as South Africa-£78.5 million last year-to India, which received more than £400 million last year and to China, which received £118 million, particularly when the latter two nations are running huge budget surpluses. This is an apposite time to have the debate, because it is appropriate in these times that British taxpayers demand full value from our international development budget.

Mr. Lindsay Hoyle (Chorley) (Lab): This is a very important debate. Like the hon. Gentleman’s constituents, my constituents question why we give aid to India when it is buying up British companies such as Jaguar and British Steel or Corus. Does he now suggest that the policy should be that we withdraw from giving aid to India?

Mr. Field: On the contrary. I hope that my speech will make this clear. I think that it is all the more important that the case for international development and, more specifically, for microfinance is strongly made, in the light of what I suspect is becoming a more conventional view among many of our constituents across the country. People are entitled to question whether Britain should continue to have the same duties to the developing world now that our own economy is under pressure, and whether, in a new global landscape, developing nations’ regional partners should perhaps bear slightly more of the brunt. Politicians from these shores should not shy away from that emerging debate.

For that reason, I am particularly delighted that my hon. Friend the Member for Sutton Coldfield (Mr. Mitchell), who has spoken so effectively for my party in the shadow Cabinet on these issues during the past four years, is here personally to reply to this debate. That is the clearest possible indication of the Conservatives’ commitment in this area. If we are to make the case that international development remains vital to our national interests, we need to show that Department for International Development money is being channelled to effective projects and that our people overseas work vigorously to reduce the flaws in existing programmes, rather than hiding behind a shield of good will that has until now shamed people into not asking tough questions.

Aside from that, the Department might also consider the expertise that it could bring to poverty reduction in this country, where people living in poor communities might benefit from some of the techniques used to help those in the developing world. A good place to start much of that debate is in the field of microfinance. Despite the debilitating effects of the financial crisis on the developed world, I believe that broadly, the growth of financial institutions has done more than anything to spread wealth across the globe. The most pronounced poverty continues to be in the communities that are most excluded-indeed, excluded entirely-from the financial system.

Microfinance can help poor people to protect themselves from risk, to escape debt and to live sustainably by creating small enterprises. It is not and cannot be a cure-all. It has not even proved sustainable or effective in all the communities in which it has been used. However, as a development technique that encourages responsibility and independence, microfinance is a form of assistance that is more likely to garner the support of the British taxpayer, especially, as I said, if it is put to work in some of the UK’s own poorest communities.

Many commercial activities in the developing world are not monetised, with trade conducted through means of exchange such as livestock. Banks are rarely tempted to change that. There is always a break-even point in providing loans or deposits, below which banks will lose money on every transaction. With poor people depositing or borrowing only small amounts, banking operations in such areas can quickly become commercially unviable. The poorest people also tend to have the fewest assets that can be secured by a bank as collateral in the event of default. That can leave the poorest ill prepared for life’s day-to-day risks. Paying for education, weddings, childbirth, health care and the impact of natural disasters-as we have seen particularly in the past two or three weeks with the terrible events in Haiti-can be an unbearable struggle, particularly in countries where there is no established welfare system. When forced to borrow, the poorest are often left to rely on family members or local moneylenders with extortionate interest rates. In those circumstances, microfinance can play a crucial role in preventing the development of a downward spiral.

Although the idea of small-scale credit as a means of poverty alleviation is a relatively old concept, it was properly developed by a Bangladeshi economist, Muhammad Yunus, in the 1970s after he discovered that very small loans to poor women in the village of Jobra could make a disproportionate difference to their lives. Yunus found that, given the chance, the poor tended to repay borrowed money, often by establishing micro-enterprises. By 1983, a pilot for a fully fledged microcredit bank was established and, in October 2007, the Grameen bank could claim to have distributed $6.5 billion in loans, boasting a loan recovery rate of 98 per cent.

The microcredit movement has tended to loan mainly to women, who are thought to be more likely to use the money to benefit their families. Since the concept’s expansion in Bangladesh, microfinance has been used as a tool to reduce poverty in developing countries worldwide, often to great effect.

Let us go to another continent. After years of struggling to support seven children by working as a seamstress, Jennifer from Uganda took out a small loan in 1997 to buy her own sewing machine. That enabled her to expand her sewing business, which in turn led her to diversify into other areas-first, opening a motorcycle taxi business and later purchasing land to build rental properties. Today, she employs 57 people and has taken on the care of five AIDS orphans. Meanwhile, her natural leadership skills led to her election to the town council.

I first became interested in the idea of microfinance-as is often the way for Members of Parliament-when a constituent approached me about the concept as long ago as 2003, spurring me to write a paper on free trade and aid that made the case for distinguishing free trade from fair trade. I wrote at the time: “The way forward should be the way of free and fair trade where the word ‘free’ (or perhaps I should say ‘open’) is as important as ‘fair’. There is a strong ethical case for supporting trade in preference to aid in promoting development in poorer countries because it makes each nation sustainable. However, I believe that where aid is the right solution, we should support direct, locally distributed aid, such as micro-finance, that preserves incentives for the citizens of those countries to achieve self-sufficiency.”

More than six years later, microfinance has returned to my consciousness by virtue particularly of the efforts of two constituents involved in the field: Louise Holly, who works for RESULTS UK, and Rev. George Bush of St. Mary-le-Bow in the City of London. RESULTS was started more than 25 years ago in the United States to empower and encourage ordinary citizens to create the political will for change in international development. Today, there are RESULTS organisations in seven countries, with the UK branch co-ordinating groups across the country from a little national office just off Regent street in my constituency.

Rev. George Bush, whose politics, I should add, are about as far removed as possible from those of his slightly more famous namesake, is involved in the establishment of a microfinance fund in the City called Arcubus. The fund aims to raise £1 million by issuing a five-year social investment bond with a zero interest coupon that will return donors’ money while channelling the interest from the collective pot into four microfinance non-governmental organisations. They will consider providing formal banking services and micro-loans to those unable to access mainstream bank loans; expand and enhance existing microfinance operations by improving efficiency and sustainability; and arrange short-term placements for City professionals at microfinance institutions in Africa.

At his ministry at St. Mary-le-Bow on Cheapside, Reverend Bush is putting in place a phenomenally important way to help people who might not otherwise understand the connections between microfinance and finance in the City of London, and the initiative provides a tremendous opportunity to open the eyes of opinion formers. Ideally, projects under the Arcubus initiative will eventually create a mixed portfolio of complementary microfinance initiatives that British individuals, companies and Churches can support.

Only three weeks ago, I returned to the home of modern microfinance, Bangladesh, to lead a delegation in my role as the vice-chairman of the all-party group on Bangladesh. We visited Dhaka, the capital, and Sylhet, from which many Bangladeshi Britons hail. One of our stops was the national football academy, which is sponsored by Canary Wharf and none other than the Grameen bank-a mark, again, of the expansion of Muhammad Yunus’s vision. I also met our high commissioner in his residency.

Having spoken to him, I am concerned that we are trying, perhaps perversely, to do too much with the £150 million annual development budget that DFID spends in Bangladesh, and if the Minister will hear me out, I will try to explain what I mean. We currently invest in 40 different schemes in Bangladesh, but given the obvious constraints on manpower in DFID’s organisation there, it is difficult to see how we can properly supervise all those schemes. We should perhaps look to spend our DFID money in a slightly more concentrated, accountable way on fewer, higher-profile projects. I accept that political issues, and particularly regional issues, in Bangladesh perhaps make it easy for us to spread ourselves a little too thinly, but if we are to get as much of a bang for our buck as we can and derive a benefit from the taxpayers’ money that we spend, we must try to do a little less through smaller and, in some cases, longer-term schemes that we can see through to the end-currently, schemes tend to last for about three years. Despite the guarantee of a large pot of £150 million a year, there is a worry that we are not making as much of our money as we should be, and I hope the Minister will consider that.

As a way of maintaining public support for the Government’s microfinance initiatives abroad, we could adhere to the adage that charity begins at home and show that tools such as microfinance can help British people who are unbanked.

Annette Brooke (Mid-Dorset and North Poole) (LD): Is the hon. Gentleman aware of organisations such as Street Cred, which works with the Bangladeshi population in the east end?

Mr. Field: It is very rare for me, as a Conservative MP, to be accused of anything to do with street cred, but the organisation that the hon. Lady mentions has just recently come on to my horizon. Obviously, I know of the tremendous amount of work that the hon. Lady does on this issue, and I hope she will understand when I say that we need to link microfinance to what we do in this country so that it is regarded as being not only of relevance overseas, but of great relevance-particularly, but not exclusively-in inner-city communities in this country.

Thanks in part to our welfare system, very few people, in truth, live in absolute poverty in this country. When it comes to accessing finance, however, the problem is different. It is estimated that almost 8 million people are unable to access mainstream credit and often find themselves turning to informal moneylenders, who can frequently charge exorbitant rates of interest. Three million people do not have a bank account. Our average household debt, excluding mortgage payments, stands at £9,500, and Citizens Advice has been dealing with 7,200 new debt problems every working day. Although we have more material wealth than ever before, poverty has become more concentrated and inequality has become more marked, with some communities heavily dependent on charitable giving and public money, whether in the form of welfare benefits or grants.

People in such communities are also more likely to be preyed on by doorstep lenders owing to financial illiteracy, poor credit ratings, a sense of exclusion from mainstream financial lending, past family experience and confusion over the financial products available. I do not want to sound hysterical, but a headline that appeared only yesterday-it was quite shocking for me as a London MP-said that 19 per cent. of London’s children are being brought up in severe poverty, which is a great worry. We see that poverty even in my constituency, cheek by jowl with a lot of wealth. As I say, it is wrong to be hysterical, but we need to recognise that there are quite significant problems in this country, which are partly down to the fact that too many people are unable to access more mainstream finance.

Introducing microfinance initiatives into such communities will help to challenge the perception of risk that attaches to the poor’s ability to repay loans, and it will help to support entrepreneurs who are considered unbankable. Community development finance institutions are a fast-growing sector and provide finance and support to new and growing businesses in disadvantaged communities, which in turn creates jobs and services where they are most needed. I was contacted only last week by a constituent, Richard Matthews, who is looking to establish a credit union in the Covent Garden and Leicester Square districts of my constituency, something that is proving particularly popular with the Chinese community there.

CDFIs, which combine elements of the private and charitable sectors, promote a culture of self-help and combat poverty and social exclusion from the bottom up. Although they are not conventional sources of finance, they provide finance to viable enterprises and seek financial and social returns on their investments. In 2007-08, the last year for which we have reliable figures, CDFI lending totalled £76 million, levering £35 million of additional finance into unserved markets such as black and minority ethnic businesses, women’s businesses and small start-up businesses.

In London, a new drive to assist people through microfinance projects is being spurred by Fair Finance, an organisation that offers loans and advice to those who have been excluded from accessing mainstream services. Launched in 2005, Fair Finance has grown incredibly rapidly, expanding from its original base on a council estate in Stepney, just four miles east of here, to cover half of London. It has helped hundreds of excluded women to create businesses and it has saved many hundreds more from eviction. Its managing director, Faisel Rahman, has a background in international development and experience at Grameen bank and the World Bank, where he focused on the development of microfinance.

A client who borrows from Fair Finance tends to save £20 to £100 per month in reduced interest payments alone, compared with what they would pay to doorstep lenders, who have been known to charge interest rates of up to 4,000 per cent. annual percentage rate. By opening bank accounts and establishing credit histories for its clients, Fair Finance helps them to access cheaper products and services, helping them, for example, to pay utility bills by direct debit and to obtain longer-term contracts for mobile phones. Importantly, it also advises clients on managing their finances, which will, one hopes, introduce the habit of saving.

Unfortunately, Mr. Rahman believes that the biggest barrier to micro-entrepreneurs who take Fair Finance loans is the structure of the benefits system, which makes it unlikely that someone starting a business will be able to make enough money to cover council tax, rent and living costs, and there is obviously an issue with housing benefit, which is a particular problem in the capital. Micro-entrepreneurs also have to fill out a self-certification form every time their income changes, potentially leading to a damaging reassessment of their benefits. Such difficult short-term prospects may have an impact on whether they wish to remain part of the initiative.

Obviously, there are other pitfalls in the application of microfinance here and abroad. Unfortunately, we have to accept that microfinance is not a panacea. As with all other development interventions, it is important that we constantly ask questions about its effectiveness. Access to financial services has undoubtedly permanently improved the lot of some poor people, but is it unclear whether microfinance reduces poverty on average. There are few studies of its effectiveness, and it has been difficult to use a correlation to prove a causation. For instance, if affluence and microcredit go hand in hand, does that mean that the better-off borrow more or that borrowing makes people better off? That is a potentially circular argument.

Microfinance does not work as well in every country and it has great difficulties in large parts of Africa, for instance, where a lack of basic resources, a dearth of customers and difficulties with health make it particularly hard to be entrepreneurial. A disparate population can also make microfinance unsustainable owing to high operational costs, and loan books concentrated in a specific geographical area can be vulnerable to natural disasters or downturns in the local economy. Some women have also reported that their money has been stolen by their husbands or others, or that it has been lost to the demands of corrupt officials or village elders.

For many, microfinance alone cannot be an alternative to direct aid, and I am not suggesting for one minute that it should be. Critics of microfinance also point to high interest rates charged by lenders, but equally, interest rate caps can harm the poor, as they prevent institutions from covering their costs, often choking off supply. Furthermore, few institutions are held accountable for their performance, which leads to significant inefficiencies and market distortions. At worst, borrowers have on occasion effectively become wage labourers for a local microfinance bank. In places where microfinance is in operation, traditional moneylenders are often found to flourish too. Such lenders offer quick loan disbursement, confidentiality and flexibility. By contrast, the poor do not always find the lower rates of interest from microfinance institutions to be an adequate compensation for the time it takes to attend meetings and training courses, and the financial cost of monthly contributions.

Such criticisms tend to be valid, in my view, only when microfinance is considered in isolation. Its proponents have never claimed that it is a cure-all, and it should be kept in mind that microcredit and training are designed to offer a hand up rather than a long-term handout. It is also about more than just loans. The most successful microfinance institutions are increasingly providing access to other financial tools such as savings, insurance, training and financial education, as an economy becomes more sophisticated.

As I have said, I would continue to promote free trade as the best tool to alleviate poverty, but in its absence microfinance can play an integral role in a comprehensive economic development process by generating local economic activity and stimulating demand for goods and services. Microfinance has dispelled the notion that those on the lowest rungs of the income ladder are worthy only of aid, not the assistance of financial services. It has also helped to shoot down the idea that the poor are not able to follow basic rules of commerce. In much of Asia and Africa, the rural poor have proved that they can be entrepreneurial, and can launch a business and earn money. Even if the loans fail, the amounts of money involved are so small that that form of support for poverty alleviation may still be more effective than traditional aid.

Donors should now focus on capacity building, particularly when it comes to obtaining strong managers to run microfinance institutions. We should also cast aside prejudice about traditional moneylenders, although we should not of course support lenders who charge extortionate rates. The poor have diverse needs and therefore need a range of lenders that can operate in any market: traditional banks, microfinance institutions, credit unions and even some doorstep lenders.

At a time when Government budgets are under strict scrutiny as never before, it will become even more important for each Department to articulate the benefits of its work. That is one reason why I wanted today’s debate. If global development budgets are to be ring-fenced, the Department for International Development must prepare to explain its work in terms that demonstrate value to the taxpayer and tangible results for the poor communities being served. In microfinance, DFID has a form of aid that has more chance than most of becoming self-sustaining and long lasting, and which will echo the themes of responsibility and independence that will become ever more important as our own nation negotiates the tough times ahead.

Microfinance is insufficient alone to eradicate poverty and is second best to free trade, but if it is implemented alongside complementary policies, there is every opportunity for it to promote long-term growth in the poor communities that it serves. That applies equally to the slums of Nairobi, to rural Sylhet in Bangladesh, or to a council estate in Stepney.