Amid concerns that the G20 is becoming a talk-fest where poverty reduction is just another topic of discussion, the G20 must now ensure it actively supports this new focus.
The G20 is not a humanitarian organisation, but supporting poverty reduction strategies is in its best interest: assisting developing states to diversify their economies and bolster their sustainability is the first step toward weaning them off foreign aid. And microfinance is a key tool in this transition from dependency to sustainability.
Microfinance programs provide small-scale financial services to those excluded from engaging with commercial banks. Many in developing countries require greater access to financial services to establish businesses, secure stable income and initiate savings schemes. This, in turn, can secure better access to health and education services, which are key to breaking self-perpetuating poverty cycles.
The main premise of microfinance is that opportunity is the only thing limiting the economic and social prosperity of individuals. Microfinance provides individuals with knowledge of business and a stream of income previously unavailable — it simulates the characteristics of a developed economy. In order to escape poverty, individuals and communities must first become independent from charity, and microfinance is an efficient mechanism to do so. So microfinance is not only a mechanism to escape poverty but provides understanding of how a self-sustaining economy functions.
The Grameen Bank in Bangladesh is an example of the success of microfinance programs. With over 8.3 million members, the Grameen Bank has more members than the National Australia Bank, the 17th largest bank in the world. The Grameen Bank offers financial services such as group-based credit and deposits as well as several development-orientated businesses, with over 96 per cent of their members being female. The success of the bank can be attributed to the synergy of the types of product and the area which employed. It is clear, through the Grameen Bank’s scale and product specificity, that microfinance programs present an attractive way of promoting social inclusion and economic equity in developing states.
Given the calibre of talent and power of economic influence that is centred around the G20, the organisation is uniquely positioned to help microfinance gain scale and efficiency. The G20 can add value to — and further develop — existing microfinance programs by providing the framework, funding and consultation necessary for governments of developing states to implement such programs.
During the 2010 Toronto and 2010 Seoul G20 Summits, the organisation agreed to make social inclusion a permanent item on the agenda. In 2010 the organisation adopted the nine Principles of Innovative Financial Inclusion, which highlights the ways in which the G20 can cooperate with the governments of developing states to empower and protect individuals and communities by bringing leadership and framework to their domestic economies.
One of the five key goals for the recent summit in Los Cabos was to strengthen the financial system and foster financial inclusion to promote economic growth. In his closing remarks, President Calderón announced the Global Alliance for Financial Inclusion, which aims to extend financial services such as microfinance to the population with the least amount of resources. The G20 must ensure that this commitment to microfinance is reaffirmed by action.
The G20’s support is crucial to develop the global microfinance movement because the members of the group contribute the largest absolute amount of foreign aid. And they can use their public power to exert significant political pressure on leaders of developing states to implement microfinance programs.
Although both the US and Australia have recently announced cuts in their 2012/13 foreign aid budgets, both nations supported the commitments President Calderón announced in his conclusion.
The G20 must have the concrete motivation and methodology to ensure continual support for the conclusion in Los Cabos. The G20’s public power demonstrates that the reduction of global poverty is correlated to the momentum the G20 provides for the microfinance movement. This well-positioned organisation must be able to fulfil their proposals and maintain their credibility and relevance.
Scott French is a member of the Global Voices G20 Australian Youth Delegation and a student at Macquarie University’s Global Leadership Program.
Microfinance has not proven to be the silver bullet that many had hoped. Statements like, “Better microfinance mechanisms will contribute to the reduction of global poverty and assist developing nations in sustaining their economies without foreign aid”, do not add any value to the discourse – you haven’t presented any meaningful analysis to suggest this could be the case.
What about the current criticism of microfinance? e.g. its failure to alleviate poverty, high indebtedness of borrowers, high interest rates, coercive loan-collection tactics, lack of transparency in public fund management etc… doesn’t this need to be considered if you’re calling for the G20 to put pressure on low-income country governments to implement programs?…
“The G20’s support is crucial to develop the global microfinance movement because the members of the group contribute the largest absolute amount of foreign aid. And they can use their public power to exert significant political pressure on leaders of developing states to implement microfinance programs.” … are you saying the G20 should put pressure on all low-income governments without considering the fit of microfinance to their development agenda – while microfinance has been an excellent tool in Bangladesh it has proven to be far less effective in other places such as India? Your argument is similar to the attitude which directed many failed ‘one size fits all’ approaches to development thinking from previous decades.
The clincher for me was, “The G20’s public power demonstrates that the reduction of global poverty is correlated to the momentum the G20 provides for the microfinance movement.” This is a huge statement without any supporting evidence (and barely makes sense as a sentence). Where is the careful analysis the EAF is known for!?
My apologies for the critical nature of this comment but this article provides no new thinking or deep analysis on the issues currently facing microfinance, nor any meaningful analysis of how the G20 can be used to increase the effect use of microfinance for poverty reduction.