Financial systems development
Microfinance – a contribution to reducing poverty
The cooperation countries of German development cooperation are demonstrating a growing interest in the provision of needs-driven financial services for individuals, households and businesses. Microfinance services including insurance, savings accounts and payment transactions are seen today as a key instrument in giving poor sections of the population greater economic and social leeway.
Sustainable microfinance builds on independent microfinance institutions. Only a microfinance organisation that is financially self-sustaining can play an effective part in reducing poverty.
The chance to save money can give poor people an opportunity to build reserves and thus underpin their survival. A bank account into which small sums are paid can tide them over crises or allow them to invest.
Microloans help individuals to invest in seed or working capital, allow them to finance education or housing, and can improve the health care available to family members. A study published by the non-governmental organisation Microfinance Information Exchange (MIX) comes to the conclusion that some 100 million people in 117 countries have been granted a loan by one of more than 10,000 microfinance institutes (as at December 2008). The demand, however, far outstrips these figures: 2.7 billion people still have no access to formal financial services.
Low-income households are disproportionately vulnerable to the risks that come with everyday life – ill health, accidents or extreme weather events hit them particularly hard, and can cost entire families their livelihood, forcing them into poverty. Health insurance, life insurance and agricultural insurance are efficient ways of covering the risks faced by individuals. The huge demand in developing countries is still largely unmet – only three per cent of the population in the world’s 100 poorest countries has insurance cover of this sort.
Large sections of the population in developing countries still have no access to microfinance services. Mobile-phone-based services offer an opportunity to step up access in a cost-efficient and effective manner. About 2.7 billion people have no bank account, but almost one billion of them have a mobile phone.
Mobile-phone-based financial services make customers independent of bank branches. This opens up entirely new opportunities in rural areas in particular, where there often is no commercial bank.
The promotion of sustainable access to needs-driven, transparent financial services is incorporated in the overall German strategy for financial systems promotion. The Federal Republic of Germany is one of the leading donor countries in the field of microfinance. At international level, Germany is an active member of the G20's Global Partnership for Financial Inclusion. Flagship projects of German development cooperation include the Access to Insurance Initiative, a German-initiated multi-donor platform that aims to improve access to microinsurance schemes, and the European Fund for Southeast Europe, which is one of the largest financing funds for small and medium-sized businesses in Southeast Europe and the Eastern European Neighbourhood Region.
The Federal Ministry for Economic Cooperation and Development (BMZ) supports the work of microfinance organisations, insurance bodies, banks and political actors in a wide variety of ways. Implementing organisations of the Ministry, including KfW Entwicklungsbank and the Deutsche Investitions- und Entwicklungsgesellschaft (DEG), which specialise in offering Financial Cooperation services, extend loans to secure microfinance organisations or take out a stake in these institutions.
On behalf of the BMZ, the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) supports moves to establish stable financial systems. The governments of cooperation countries are advised on how to improve the legal framework and banking supervision. With a view to strengthening the financial infrastructure, credit information offices and microfinance associations are being established and consolidated with German assistance. These bodies help microfinance institutions to expand their product portfolio and develop needs-driven financial services.
Involving private investors in microfinance institutions and microinsurance funds offers a huge potential. In future, the BMZ would like to encourage private-sector involvement to a greater extent, and thus facilitate responsible and sustainable investment in the financial sector in developing countries. This will also spawn numerous opportunities on which other sound development projects can build.
- Microinsurance as a social protection instrument new window, PDF 456 KB, accessible 05/2011 | pdf | 456 KB | 16 P. | accessible
Security at little cost: Microinsurance in Financial Systems Development
BMZ Position Paper
Strategies 179 new window, PDF 288 KB, accessible 05/2009 | pdf | 288 KB | 23 P. | accessible
Developing markets, creating wealth, reducing poverty, taking responsibility – The private sector as a partner of development policy
BMZ Strategy Paper new window, PDF 265 KB, accessible 04/2011 | pdf | 265 KB | 15 P. | accessible
- Fighting Poverty More Effectively – Worldwide | Cross-Sectoral Strategy on Poverty Reduction new window, PDF 1.7 MB, accessible 11/2012 | pdf | 1.7 MB | 16 P. | accessible