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FINANCE: Banks Reach Out to Millions on the Margins

Ulysses de la Torre

MIAMI, Nov 25 2005 (IPS) - Expanding the financial services industry to include the poor dominated the agenda at a major meeting of Latin American bankers this week in Miami, Florida.

The annual three-day conference of the Federation of Latin American Banks brought together nearly 2,000 participants representing 600 banks primarily from Latin America, though several representatives from Europe, North America and Asia also attended.

Trade between China and Latin America was a prominent topic on the sidelines, but took a back seat during formal sessions as industry leaders pointed in particular to microfinance and remittances – money sent home by migrant workers overseas – as the two mechanisms which hold the most promise for reducing poverty and bringing more of the region’s poor into the formal financial system.

“It is demonstrated that microcredit constitutes an important engine for development of our economies,” said federation president Juan Antonio Niño during his opening remarks.

Microcredit, the practice of giving small-scale loans of a few hundred dollars or less at a time to entrepreneurs unable to access the formal banking sector, is one element of the growing field of microfinance, which provides a business model that offers savings accounts, insurance and other financial services products to the poor.

Default rates among clients of microfinance services have consistently proven to be equal or better than those found among the general public. The world demand of the microfinance market, currently estimated to be several hundred million potential clients, is approximately 90 percent underserved.

On the final morning of the conference, Niño joined Nancy Barry, president of New York-based Women’s World Banking, a network of 53 microfinance institutions serving 18 million households in developing countries around the world, in signing a declaration on behalf of the federation to include more of the region’s poor into the formal financial system.

Alejandro Picos of Unisys, a technology company specialising in cheque processing for banks, focused on the need for the banking community to pay more attention to the significance of remittances – estimated to be a 55-billion-dollar market in Latin America this year, only 10 percent of which was sent through official banking channels.

The average amount of money sent home by Latin American migrant workers is 300 dollars per transaction. About 16 million Latin Americans are believed to live outside the region.

“We must remember that remittances are only a means to an end,” said Picos. “If remittances to Latin America were to disappear overnight, it would imply a microeconomic shock to the region. The good news is that remittances are going to be with us for a very long time and show a tendency to remain very stable.”

The global remittance market has grown by about 10 percent every year for the past three decades, though growth has been especially rapid in the past few years as multilateral institutions have begun paying more attention to them.

Several studies over the years have shown that families in Latin America who receive money from relatives abroad use it largely for immediate consumption purposes. Until about five years ago, this money was largely ignored by the formal financial sector. “The reason why this money wasn’t counted was because the people who sent it and the people who received it didn’t count,” said Don Terry, manager of the Inter-American Development Bank’s Multilateral Investment Fund.

“Until recently, these flows were in the errors and omissions columns of IMF (International Monetary Fund) tables because they were in the errors and omissions columns of central bank tables. We didn’t count these numbers partly because they were hard to count but also because the people were on the margins,” he said.

“Traditionally, commercial banks aren’t interested in those people and those people aren’t interested in commercial banks in response.”

There were also several calls to balance the expansion of financial services for the poor against the need for proper regulation. Martin Redrado, the governor of the Central Bank of Argentina, said that a partnership between the financial system and migrant-sending workers was needed in light of the tighter restrictions that financial institutions have faced since 2001.

Don Terry referred to this as “the other side” of the financial services business – money laundering and terrorism financing.

“You don’t know these clients yet and regulators understandably are asking you to know your clients when you bring them in,” he told the crowd of bankers, adding that he has found no evidence at the IADB that migrant workers sending a few hundred dollars at a time collectively constitute a money laundering conspiracy.

“If we’re going to bring these resources into the financial system, there has to be a balance. Let’s get the balance right. Keeping these funds outside of the financial system isn’t going to help fight the war on terror or deal with anti-money laundering.”

*Ulysses de la Torre is a journalism fellow at the Autonomous Technological Institute of Mexico in Mexico City.