Insight of the Certified Expert in Microfinance Programme of the Frankfurt School: The origins of Financial Inclusion

Anna Letta, Sustainability Operations Officer, LuxFLAG is currently attending the Certificed Expert in Microfinance programme of the Frankfurt School thanks to an InFiNe.lu scholarship. As part of her scholarship, we have asked her to write articles of her experience and insights of the programme. Here is her first article on the International Trends and Best Practice module.

People in developing countries need access to a variety of financial services similar to services offered in rich countries, such as credit, savings, cash transfers and insurance. However, low-income individuals are often excluded from the financial system as their revenues are low, uncertain and come from an informal economy. An alternative solution to traditional finance was initiated with micro-credit and was broadened to microfinance afterwards. Recently, we have seen a shift from microfinance toward inclusive finance.

Microcredit was the first financial product thought for the poor. Microcredit is the provision of small loans to individuals in low-income countries to help them become self-employed or build small local businesses. Micro-loans differ from traditional loans as they are often of a low amount, are not secured by collateral and are short-term.

Microcredit was followed by microfinance which expanded the provision of financial services to the most disadvantaged people beyond microloans to savings, insurance and money transfers. Thus, microfinance answers to a larger number of financial needs for low-income households in urban and rural areas of developing countries. Microfinance is the most efficient when provided to poor people who are economically active, such as independent or informal-economy workers, but do not have sufficient revenues to get access to traditional finance.

Both concepts have been in use for hundreds of years but were conceptualised in more recent times. Informal microcredit has been used for a long time in families and closely-related groups of people living in communities. The birth of microfinance in Europe dates back to the 17^th and 18^th centuries with the emergence in the 1720s of the Irish loan funds or charities that were providing interest-rate-free loans. It was followed by Germany with the establishment of farmer cooperatives and saving banks as part of the credit cooperative movement after the 1850s famines.

The story of “modern” microfinance began in 1983 with Muhammad Yunus, also known as the “banker of the poor” when he established the Grameen Bank in Bangladesh. But modern microfinance was successful after 1976 with the Grameen Banking Approach that spread across developing countries in Latin America later on. In the 1990s microfinance prospered thanks to structural transformations such as the conversion of non-profit Microfinance Financial Institutions (MFI-NGOs) into licensed banks that were allowed to take public deposits and offer the entire range of microfinance services.

Financial inclusion is a more recent concept and is closely linked to microfinance. Financial Inclusion aims at removing barriers that exclude people from participating in the financial sector. In addition to microfinance that supports people in generating income, building assets, smoothing consumption and managing risks, inclusive finance emphasises the importance of financial literacy, consumer protection and the capability of entrepreneurs to build financial resilience.

Nowadays, high-level policymakers and international organisations promote financial inclusion. For instance, the G20 committed to advancing financial inclusion worldwide and reaffirmed its commitment to implement the G20 High-Level Principles for Digital Financial Inclusion[1]. The year 2008 marked the creation of the Alliance for Financial Inclusion[2] (AFI) consisting of central banks and other regulatory institutions from more than 90 developing countries and leading on financial inclusion policy and regulation.

Each year, the European Microfinance Platform publishes a survey[3] to determine five current trends and five future areas of focus for financial inclusion. In 2021, strengthening of client resilience, increase in women’s empowerment and gender equality, expansion of digital innovations (client-side), maintaining or deepening outreach to the very poor and expansion of digital transformation (institutional-side) are the top five current trends.

Financial inclusion is the result of long years of efforts of international organisations to involve low-income individuals of developing countries into the financial system. Complementing microfinance, inclusive finance helps in alleviating poverty and is helped by the development of financial technologies.

(Author: Anna Letta)