Korea Institute of Finance
Seoul, Republic of Korea, April 28, 2010

Thank you for that very thoughtful introduction, and thanks to all of you for taking part in this important conference.

For the World Bank, it’s a great pleasure to be the partner of the Korea Institute of Finance in sponsoring this gathering.

The topic we’ll explore today – trends in “Social and Micro-Finance” – could scarcely be more urgent and more timely.

Urgent – because the challenge that we confront is simply enormous. Around the world, an estimated 2.7 billion working-age adults – almost half the adult population – do not have access to basic financial services through formal institutions.

Timely – because the microfinance sector is now maturing. It’s also rediscovering its identity, after enduring local crises in several countries – including India, Bosnia-Herzegovina, Morocco, Nicaragua and Pakistan.

Simply put: In some regions, the expectations for microfinance had gotten ahead of reality.

Microfinance can indeed be a powerful mechanism for improving the financial lives of the unbanked and the under-served.

Yet we can learn clear lessons from the recent setbacks.

We must now focus on strengthening the foundations of the microfinance sector, so that it can sustain a more stable, more resilient system.

If we come away from today’s conference with a new sense of realism about the system and its foundations, then I think our discussion here will have been a success.

This is the right time for such a conference – and this is certainly the right place.

It was here in Seoul, the site of last November’s G-20 summit, where the priority of broader financial inclusion was elevated higher than ever before on the international economic agenda.

Let’s look at a snapshot of financial inclusion and exclusion around the world – and let’s consider where microfinance can make a difference.

There are now 2.7 billion people unbanked – receiving no services through any formal financial channels. Almost 70 percent of this un-served population segment resides in developing countries.

In Sub-Saharan Africa, in particular, about 80 of the population is unserved by any part of the formal financial sector.

The problem is far-reaching even here in East Asia and the Pacific – even though this region’s financial system expanded rapidly within the past decade.

Only about 42 percent of adults in this region have access to banking services.

An estimated 876 million people in this region are unbanked – more, in absolute numbers, than in any other part of the world.

The problem is less severe in Korea than in most countries, thanks to your nation’s sophisticated economy and well-developed financial system.

Yet, as recently as 2008, about 37 percent of the people in the Republic of Korea were unbanked.

So financial exclusion is an intense and chronic problem.

It will require the ingenuity of all of us – in the public sector and the private sector – to design ways to overcome it.

There are three factors that should be in the forefront of our thinking, as we foresee how microfinance can play a role in easing the dilemma of financial exclusion.

First: Let’s remember that the poor rely on more than just credit, as they pursue their financial lives.

So our concept of microfinance must go further than simply thinking about vehicles for credit.

The poor pursue surprisingly complex financial lives.

Credit is just one aspect of the financial services they need.

They may be unbanked through any formal channel, but, at any point in time, families in poverty tend to be using a wide range of mechanisms offered by the informal sector.

The “Financial Diaries” project gives us a glimpse of how poor households organize their finances – focusing on poor households in South Africa.

It may come as a surprise to us, but a typical poor household in a developing country uses, on average, 17 financial products each year.

Moreover: Not all of those 17 instruments involve credit.

A composite portfolio of a poor household’s financial transactions would contain 11 credit-related products, but also 4 savings and 2 insurance products.

Lacking basic access to formal accounts, the poor reach toward unregulated, ill-organized and often unscrupulous financial services.

The poor go to moneylenders for credit and to pawnbrokers for liquidity. They must rely on “doorstep collectors” to guard their short-term cash – and they must organize village feasts to raise money to buy some form of “mutual insurance.” They often invest in assets like livestock as a vehicle for longer-term savings.

Well-designed microfinance programs, focusing on small but frequent transactions, can make a dramatic difference in their lives.

Let me offer just a couple of examples.

Savings is a factor, according to many researchers, that helps many households manage spikes in cash flow.

A new mobile-savings pilot project in Kenya – called “Easysave” – began last year. It has helped low-income families ease the impact of health-related shocks, increase food expenditure for their families, and increase micro-business investments.

To take another example: Insurance can help poor households mitigate risk and manage shocks.

In Ghana, we find that insured farmers tend to buy more fertilizer, plant more acreage, hire more labor, and enjoy higher yields and income. That, in turn, leads to fewer missed meals and fewer missed school days for their children.

So, that’s my first point. As today’s discussion unfolds, let’s remember that credit is only one part of the array of financial services that are used by the under-served.

That brings me to the second factor that we should keep in mind.

In strengthening the foundation of the microcredit system, we must develop the appropriate financial infrastructure and an effective policy environment.

Financial crises tend to remind us of the fundamental building-blocks of systemic resilience.

The recent global financial crisis showed us that a stronger infrastructure and policy framework are needed to stabilize the upper-income segment of the world’s financial system.

In the same way, the recent localized microcredit crises have shown us that those same factors are essential to making microfinance succeed for those at lower income levels.

We must take a holistic, or comprehensive, approach to creating a more resilient, more inclusive microfinance system.

The right national policies and regulatory environment; more effective consumer protection safeguards; efficient retail payment systems; stronger information-sharing systems like credit bureaus and collateral registries; even data collection and its use, must be addressed.

The recent crises in microfinance have, if anything, made the case even stronger for improving infrastructure and the policy environment.

Providing an enabling environment is critical for strengthening financial inclusion.

To offer an example: Mobile banking has recently been receiving tremendous attention, highlighting the tremendous role that technology has to play in the field.

Its growth is the result of continuous innovation and the entrance of new players who are focused on greater inclusion.

Yet, unless there are investments in financial infrastructure, and unless there is a supportive regulatory regime, mobile banking may be unable to fully develop and deliver on its early promise.

Consider how mobile-phone-based deposit services are transforming financial services for the poor in a handful of pioneering countries, such as Haiti or Kenya. That transformation is dramatically reducing transaction costs.

So, high-frequency, low-denomination savings services – which low-income households need – are becoming economically viable.

So that’s my second point: Stronger infrastructure and a better policy environment would help microfinance develop still further.

The third factor we should remember, amid today’s discussions, is as much a matter of mindset as it is structure or practice.

We must move beyond the recent hype about microfinance, dispelling the myths that have accumulated around it.

Such myths have often led business leaders to forget to assert rigorous business judgment about microfinance.

The microcredit system suffered its recent crises, in large part, because the microcredit idea had become a victim of its own success.

Too many people came to think that it was a “can’t miss” proposition – and, so, speculative excess was the all-too-predictable result.

The rapid growth of competing microfinance institutions – typically focused on credit, and fueled by easy access to debt capital – led to episodes of over-supply and over-indebtedness.

The recent crises were also based on some institutions’ lack of understanding of their customers and their needs.

That factor compounded the effect of the distortion of incentives, the excesses of the funding base, and the unrealistic expectations that had come to surround microfinance.

As a common feature, microfinance institutions that were involved in the recent crises were not allowed to take deposits – or chose not to take them. Arguably, that factor made them less attuned to their clients’ needs – and it made them more dependent on the demands of wholesale capital. That opened the way toward a lack of discipline.

In some cases, this pattern was associated with private capital – but I’m sure the story resonates with those who have studied incentives linked to direct public subsidies, as well.

It is crucial that microfinance institutions again put – at the heart of their business models – the long-term needs of their clients.

As the microfinance sector learns from its past mistakes, it will find that sustainability must be built atop responsibility.

Creating a more responsible environment for microfinance does not merely require government agencies to set consumer protection standards, enforce regulations and align institutional arrangements.

Every part of the system must change its mindset and behavior.

The financial-services industry must assert wise self-regulation, including the adoption of codes of conduct.

Consumers must be more aware of financial risks, and must educate themselves to practice financial self-defense.

Ultimately, the success of the microfinance sector will depend on its leaders’ ability to assert sound financial judgment.

Microfinance is, after all, a branch of finance. It’s not a social welfare program, and it’s not a vehicle for government largesse.

In order to achieve their noble social goals, like promoting social inclusion, leaders of the microcredit sector will have to ensure their viability and sustainability as financial institutions.

As the microcredit sector regroups, after the recent crises, realigning our approach to microcredit – and creating a new, more stable environment that allows for its renewed growth – will require the best thinking of all of us.

We should not imagine that the private sector can solve this problem alone, shunning government input.

And we should not imagine, on the other hand, that the public sector can solve this problem alone, bypassing the private sector.

We need to bring all the major players together, to solve the problems of financial sustainability and financial inclusion.

This means involving the industry, the government, the global development community, knowledge centers and standard-setting bodies, as well as the international policymaking bodies like the G20.

Some have called this “polylateral” development. Call it what you like: Collaboration may be the hard way, but it is the right way to move forward.

Starting with international policymakers, the inclusion agenda today enjoys significant momentum.

The G-20 summit here in Seoul last November was a major milestone. This is a potentially creative moment, as we seek to further expand the circle of opportunity.

It is time for the international community to take the next step, going beyond the G-20’s decisions of last November.

The next stage in driving the financial-inclusion agenda should include target-setting, at the highest level, in order to motivate and measure progress.

Such a framework should apply not only to access to credit, but also to access to a range of financial products and services, including payments, remittances, savings and insurance.

Such a commitment would also add new impetus for action at the country level – where the challenge is even more demanding.

Country by country, the goals of financial inclusion may be the same, but the means of achieving results can vary significantly, depending on the strength of local institutions.

It will require intensive dialogue between governments and the financial industry to calibrate each country’s approach to broadening financial inclusion.

Amid this public-private discussion, research organizations like yours will play a more important role than ever.

By providing the venue for policy discussions – and by keeping both government officials and business leaders focused – you can play an indispensable role in propelling the financial-inclusion agenda.

We all certainly have our work cut out for us.

The task of empowering the excluded – the 2.7 billion working-age adults who now lack access to basic financial products and services – will challenge our ingenuity.

And progress – inevitably occurring only step-by-step – will challenge our patience.

But I believe our task will be made easier, if we keep in mind the three factors that I’ve emphasized to you today:

First, that microfinance requires us to think about the entire range of financial services, not just credit;

Second, that we must develop stronger financial infrastructure and more effective policy frameworks; and

Third, that we must move beyond the recent hyperbole and focus on sustainability.

Korea has led the way in the past, championing the financial inclusion agenda when the G-20 leaders met here in Seoul.

Korea has an opportunity – and, I might even say, an obligation – to follow through, and to make sure that this important concern does not slip from the international agenda.

The World Bank Group will be pleased to be partners in that long-term mission of promoting the financial inclusion agenda – just as it is a pleasure to be your partner here today, in convening this very important conference.

Thank you very much.