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Sustainable economic development
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Financial services for all
The financial system is the backbone of every economy. Its ability to perform and its stability are key to economic success. And it is often those sectors which are particularly crucial to economic success that lack sufficient access to financial services: agriculture, local government, and small and medium-sized enterprises.
Against the backdrop of the global economic and financial crisis, stabilising financial systems has become an important development goal. Since 2008 the global financial crisis has had a severe effect on the banking sector in many partner countries. Borrowing and capital costs on international financial markets have risen. Foreign capital flows have declined. It has become more difficult to obtain credit – especially for small and medium-sized enterprises.
Financial systems development
Many partner countries of German development cooperation have begun restructuring their financial systems. Germany is supporting these efforts. It overarching objective in this sector is to support each respective partner country, together with other donors, in establishing well-performing and networked financial systems. The aim is to enable these to mobilise local financial resources on the basis of a stable monetary system and to lend investors money across the country.
The German support involves advising partner countries on legislative procedures and funding financial sector reforms. The establishment and strengthening of financial market supervisory authorities and other institutions in the financial system are also promoted. The objective is to improve the range of services provided, as well as to expand the range of demand-based financial products available, such as housing or environmental loans and infrastructure funding.
Other activities Germany is engaged in focus on capital market development, developing rural financial systems, and establishing and promoting specialist institutions.
German development cooperation pursues various approaches to promote financial systems development:
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upgrading of non-governmental organisations into professional micro-finance institutions
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downscaling by commercial banks to establish to establish a business sector for MSME and lower income groups
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establishment of new target-group-oriented financial institutions (greenfielding), and
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linkage banking, i.e. the linking of formal microfinance institutions with informal self-help groups.
From 2003 to 2008 Germany made available every year on average just under 130 million euros in new funding commitments from the federal budget for financial systems development and microfinance. Furthermore the KfW, the world's largest investor in microfinance, is currently making some 1.4 billion euros of its own funds available.
Germany is currently operating in 63 countries (40 of which are partner countries) with 147 projects and programmes. Germany's promotion of microcredits currently reaches around 50 million people. The GIZ and KfW regularly receive top rankings on the Smart Aid for Microfinance Index of the Multidonor Trust Fund CGAP (Consultative Group to Assist the Poor), and are considered leaders in innovative financial systems development.
Microfinancing
Microloans – from as little as 50 US dollars – and other microfinancial services are an important tool for helping poor population groups safeguard their livelihoods and create jobs. Microfinance promotion is therefore an integral element of German development policy and Germany's overall strategy to promote the financial sector. Germany is a leading donor in this sector.
German development cooperation supports the work of microfinance organisations in manifold ways. The BMZ's implementing organisations, such as KfW Entwicklungsbank and DEG (Deutsche Investitions- und Entwicklungsgesellschaft), which specialise in financial cooperation, for example grant loans to provide microfinance organisations with security or take on participating interests.
GIZ (the Deutsche Gesellschaft für Internationale Zusammenarbeit) supports the establishment and expansion of microfinance organisations and advise government agencies on putting in place the legal framework for microfinance transactions.
NGOs, non-profit foundations in the banking sector and banking associations are also involved in this field. They adapt successful financial models to the prevailing conditions in a particular developing country, for instance, and transfer them to the local setting.
Integrating microfinance organisations into the international financial market and supporting their networking is an important area of German development cooperation. Another goal is to make these organisations financially independent and profitable, since only a self-sustaining microfinance organisation will be able to make a sustainable contribution to reducing poverty.
Refinancing problems caused by the financial crisis
The global financial crisis has caused refinancing bottlenecks for many microfinance institutions, as a result of which lending has stagnated. To bridge these liquidity problems, in 2009 the BMZ – through the KfW Entwicklungsbank and together with the International Finance Corporation (IFC) – launched the global Microfinance Enhancement Facility. This facility is making just under 500 million US dollars available to microfinance institutions.
Germany also supports regional funds for microfinance institutions such as the European Fund for South-East Europe (EFSE), and the Regional MSME Investment Fund for Sub-Saharan Africa (REGMIFA), which was launched in December 2009.
To broaden the currency hedging options for companies in developing countries, in late 2008 Germany became involved in the TCX local currency fund. This instrument enables local microfinance institutions and banks, and bi- and multilateral development financiers, to extend loans to companies in developing and emerging countries in local currency. Due to the sharp depreciation in many local currencies this is vitally important for the survival of many businesses, because they generate their income in local currency.
One important focus of cooperation in the context of the global economic and financial crisis is the broadening of access to microinsurance for low-income individuals. In 2008 more than 75 million people received a microloan. Yet the demand is very much higher. More than one billion people are living in poverty. With the aid of microcredits, many of them would be able to improve their lives significantly.
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