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Henri Dommel from France joined the United Nations Capital Development Fund as the Director of the Inclusive Finance Unit in 2007. He is responsible for leading the Unit's strategy in promoting the access to financial services and the development of inclusive financial sectors in Least Developed Countries.
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1. How is microfinance used by the UN in its approach to development? Does it play a significant role in the work of United Nations Capital Development Fund (UNCDF)?
UNCDF has two pillars of activities: one is microfinance and the other is local development. Microfinance plays an important role in our mandate, since we believe that it provides a meaningful contribution to the achievement of the Millennium Development Goals. Studies have shown that providing access to financial services for poor people can have a direct impact in helping them mitigate risks, manage external shocks or take advantage of economic opportunities and develop income-generating activities. In short, access to financial services help improve general living conditions. These services include not only credit but also saving, remittances, micro-insurance etc... At the same time, it is important to recognize that microfinance should not be considered as the panacea for poverty reduction. It will not solve all problems and cannot replace other critical interventions and the provision of essential social et economic services for the poor.
2. Can you tell us about the partnerships that the UNCDF has established and the roles these partners play in your programs?
We work with a number of partners. Our main partners are the microfinance institutions that we finance in the context of our country programs. We select and finance a great variety of institutions and we develop an active technical dialogue with them in order to understand the needs and constraints they face, as well as their potential for growth. We also have a close partnership with governments on policy issues, such as the adoption of conducive regulatory frameworks for the development of the microfinance industry in their countries. On the donor side, we maintain a very close partnership with the UNDP, with whom we have developed joint programs in most of the countries where we work. We are also partnering with other UN agencies, for example we work with the International Labour Organization in the area of micro-insurance, and with the International Fund for Agricultural Development on the topic of remittances.
3. An article in the June 4 Financial Times by Brooke Masters quotes Zack Hocking, head of investments at Co-operative Investments states that “The financial crisis appears to have encouraged investors to think not only about how much money they make, but importantly, how it is made.” What does UNCDF experience show in this respect? Are investors in the microfinance sector more motivated by the guarantee of the returns on their investments or by knowing that their contribution serves sustainable development?
This question reflects the idea of a trade-off that is often brought up in discussions about microfinance: is there a contradiction for investors between seeking financial returns and pursuing development objectives? We believe that these two goals don’t need to be contradictory; helping microfinance institutions to reach return and be profitable is the best way to help them accessing a much wider pool of resources. Many microfinance institutions (MFIs) are now able to borrow from commercial banks or to attract equity investors because they are profitable. At the same time I believe that microfinance is not the right area of investment from which to seek profit maximization. It is normal that a meaningful part of the profits generated by microfinance institutions should be passed on to their clients as better services, provided at lower cost. The ultimate goal of microfinance is to create wide-spread access to appropriate financial services for poor people.
Evidence shows that many investors have combined the objective of ensuring some level of return on their investments with the long term goal of helping MFIs to grow for the benefit of their clientele, helping them re-invest a large part of their profits in increased outreach, better services at more competitive prices. We have also seen is that those investors who have the long-term objective of helping institutions both to become profitable and fulfill their social mission are the ones that have tended to stay - despite the financial crisis.
4. The same article mentions that “there is a huge difference between access to finance and predatory lending.” Because microloans are so different from sub-prime loans “microfinance slowed somewhat” but remained fairly untouched by the crisis. What impact is the current crisis actually having on the microfinance sector? What can UNCDF do to tackle the problems?
We can’t say that microfinance has been untouched by the crisis; it has been affected, but obviously not as much as other parts of the financial sector. A noticeable trend has been diminished lending, especially from some international banks, which has impacted on the ability of many MFIs to continue to growth or maintain their existing level of activity. In addition, we have seen a dramatic drop in the flow of remittances from the North to the South. That has directly impacted the lives of millions of people in developing countries.
MFIs and their clients are also being affected by what is happening in the real economy, in their countries. The markets for local production have contracted, jobs are getting lost, and the price of commodities, especially food, has often risen dramatically. At the same time, it is true that MFIs have tended to be more resilient than many commercial banks, as they took less risk and have traditionally better assessed the repayment capacity of their clients. Those MFIs that mobilized deposits have also tended to fare better, being less exposed to the consequences of diminished cross border lending.
The emerging lessons from the financial crisis have confirmed the validity of UNCDF’s position, which has been to put a strong emphasis on supporting microfinance models and approaches that actively promote saving mobilization. In that respect, UNCDF recently launched a global facility called Micro-Lead, which is helping some of the best microfinance institutions from the South to expand their operations in the least developed countries, with saving-based models.
We are also engaged in an active policy dialogue with the governments in the countries where we work to assess what measures may be best suited to address the impact of the financial crisis. This is especially important as they may face some pressure to roll back on certain reforms and re-introduce practices that may harm access to financial services for the poor, in the long-term.
Another area of growing importance is client protection, which has taken an even more prominent stance in the present context. Most microfinance institutions have traditionally been actively engaged in this area, looking at different ways to protect their clients. However, a new impetus has been given to this agenda through an international campaign centered around theme of client protection in microfinance, led by Accion International. This campaign, centered on some key principles, will develop and promote a number of standards and tools that will help ensure that microfinance institutions have policies and approaches which protect their clients. UNCDF has joined the Steering Committee of this Campaign and will actively promote this agenda throughout its operations.
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