Select Committee on International Development Minutes of Evidence


Examination of Witnesses (Questions 160 - 179)

TUESDAY 28 MARCH 2006

MR JAY NAIDOO AND MR ROBERT ANNIBALE

  Q160  Chairman: I think we saw an example of that in Mozambique when we saw the Banco Oportunidade, which DFID had supported, but I think we would also agree that, whilst it was an interesting prospect and we met some of the customers, it is unproven in terms of what it will actually deliver. It is interesting to hear your comment that you think there is potential.

  Mr Annibale: I think the model of very high repayment norms, of ability to reach scale and to show that the poor are also bankable has been a challenge in the United States, it is still a challenge here, financial exclusion being amongst the highest in Europe in terms of people without a bank account. We are looking at that area too, not just out of curiosity, but what we have found is that you need to engage institutions that know how to reach scale, and not replicate only these larger traditional institutions, but I would look at how do you leverage the existing financial networks. How do you use Post Office banks efficiently? They either can be a failed opportunity or they could be like the Giro system in Europe, which many people still use. It is a matter of how do you leverage some of the banking system that is there today with the infrastructure to reach many, many more people.

  Mr Naidoo: One of the challenges that we face, and I am using the example of South Africa, is that, where the vast majority of people have been excluded from banking services, the disincentive has been high transaction costs and it required policy reform. Part of the transformation of South Africa as it continues into the "future" fold is the agreement around the table of the banking institutions, the Government, the civil society organisations and the trade unions who have negotiated a new policy framework. This requires the banks, the financial sector, to invest in creating a viable and cost-effective banking system where there is a negotiated transaction cost which utilises all the technology and innovation to lower the cost of transactions. It does require government to put into place the appropriate regulatory policy frameworks and that is part of a broader transformation of the financial sector which requires banks to invest into community reinvestment initiatives, to make access housing loans and a range of other services that many people have taken for granted in the South African situation. I think there is an important role that development agencies like DFID can play in the policy process of finding what has worked elsewhere in the world so that we do not reinvent the wheel and in making sure that that information is shared with governments like that of South Africa. There is a role for the private sector in addressing the developing needs of what we call the bottom of the pyramid, the poorest of the poor, and the GAIN model has proved very effectively that we can harness the infrastructure of the private sector. In that instance we are seeing that we are fortifying the vitamins and minerals, basic foods, whether it is soya sauce in China, whether it is wheat flour and maize flour in South Africa, and we have invested approximately $40 million in projects that we give as grants to alliances at the country level, and that has, in a sense, generated investment on the side of the private sector close to $350 million where that cost, to take the cost of fortifying foods, it is 25 US cents a year that could save the life of a young child or a pregnant woman or poorer communities. We have found that we are harnessing the operational capacity, because the private sector produces the food, they distribute the food, and working closely with them to share a development vision brings them into the group of delivering to the poorest of the poor, and I think that is the role that DFID should continue to play in initiatives that promote the role of the private sector in delivering to the poorest of the poor.

  Q161  Chairman: In the answers you have both given, not just because you are here, you really suggest that microfinance is one aspect but the two run together. They are not options.

  Mr Naidoo: Absolutely.

  Q162  Chairman: Within the different options, we have had discussions about the role of the microfinance aspect but remittances in particular. Everybody says the volume of remittances to Africa is possibly greater than the volume of aid. Is there a scope for the banking sector, in partnership with those who are passing remittances, to develop an infrastructure that will actually add value? At the moment, presumably, the remittances are going either in direct cash or in telephone credit, by-passing the banking system altogether in some cases. How do you ensure that they can be used in a way that adds value?

  Mr Annibale: It is an area that we have looked at. The banks have done a pretty poor job of it in the past, whether the United States to Mexico, which represents the largest flows, or to the rest of Latin America, where it is often the largest source of foreign inflows, more than all FDI, all Foreign Direct Investment and donor funds combined. We agree that banks have done a pretty poor job intermediating remittances, but I think we are trying to do something different—. I see this whole issue of remittances, if you want to really transform it, as being much more than one of a transfer. A transfer is easy. We transfer billions of dollars a day out of London at very, very low-cost extremely efficiently for the financial sector alone, for the foreign exchange and investment banking worlds transactions that goes on here. We have all that experience. What has been lacking is to look at the people who remit and their family who receive funds as clients. The remitters have been seen as—primarily transactors: go up, pay the cash—at the green-grocer or whoever you transfer through, this has provided a limited service since the banks did not generally do the transfers—and cash simply goes out and cash is received. When I have remittances sent to me to test it in Mexico and elsewhere, even standing in the queue, people just hand me cash. No-one asks if I have an account or, "Do you want to save anything with us?" They just hand me cash. There is no added value. We have tried something new. I am trying a pilot, from New York to Ecuador, and for Citigroup we are not using Citibank in Quito as our partner, or one of the largest commercial banks, we are using Banco Solidario. Banco Solidario is a microfinance bank with a very strong network linked to the co-operatives, and they really look to give financial services to the beneficiary; and until we look at the people who we give remittances for as clients, as banking clients, and realise we are connecting a family with this transfer, the economy of just two pieces of a family, I think we will continue to see these transactions. We have dropped the price in the US from $40 to $5, but it requires the person to become a client, and that gives them, very often, their first bank account. I think remittances are undervalued in terms of the contribution they make to a country, and the contribution of their people, who work so hard that send them so regularly, get no or little credit by the banking system today, no credit scoring nor any other recognition for the very disciplined and regular transfers that they make. We are looking at how we change our credit scoring to acknowledge remittances.

  Q163  Chairman: You are talking about the donors or the recipients or both?

  Mr Annibale: In both cases, because if you are sitting in Ecuador in a very vulnerable economy and you get a transfer reliably in dollars twice a month, you are appreciated by your family and should be by their local bankers. They should be a pretty appreciated or valued client.

  Mr Naidoo: The challenge that we face is that a lot of development finance institutions lack a personal touch. I can give you a real experience of us at the Development Bank of Southern Africa. We do large projects. We tried microfinance. We did not really succeed at it, and so the issue is what would be the appropriate partner, and I think, as Robert has indicated here, his appropriate partner in Ecuador is not Citigroup, it is someone who has the experience and the personal touch and the relationship with people who require very small amounts of money and where for our big bank the transaction costs are too high. I think that it requires a different paradigm of thinking. One of the things we do when we give these concessional loans is we require the client to justify to us how many people are employed, how many women, how many young people are trained, how many small and medium enterprises, but still these are large amounts of money, and so I think that we should not reinvent the wheel. In South Africa itself we have this informal savings system between people who have no bank account and each one contributed per week to something called the "Stockvels", which is like an informal savings scheme.

  Q164  Chairman: Like a credit union?

  Mr Naidoo: Like a credit union. You have to take what exists and then begin to institutionalise them without raising the costs of transactions, the cost of administration, and that is our big challenge. If one looks at the Grameen Bank, that is part of it. As they grow bigger, the costs of running an institution rise, and we need to refine a mix where we can keep the transaction costs low, we can keep the efficiency there and we can meet the needs of customers.

  Mr Annibale: I would draw the analogy: you are used to probably having your bills paid on-line for free. We do not pay anything for that today. Your bills are paid automatically by direct debit. That is a transfer. That is not much different but it is a domestic transfer. The banking platforms exist today to do high-value at very low cost or even free, and they do it for you because they bought your credit card and your savings account and your mortgage and so they allow you to make these payments for free domestically today. Think a few years ago what that would have cost you to make a domestic transfer. The technology aspect is there in the banking system. It has to look, though, at other people using it, transacting today as clients and provide them with that level of competitive service that we get as consumers.

  Q165  Mr Hunt: I am really interested in what you have to say, but I wonder if you could answer a question about the role of microfinance. I can understand microfinance in the context of someone who is living in poverty in the developing world who wants to start a business of some sort, and I am sure that my colleague, John Bercow, will ask you about property rights in connection with that at some stage this morning, but what about individuals? What about if you are a soldier in the Democratic Republic of the Congo (DRC) who is on a salary of say $10 a month, or you are living in a slum in Kibera in Kenya earning significantly less than one dollar a month. Is there a development benefit? Is it going to help you to break out of extreme poverty to have a bank account even if you cannot read or write, and, if there is a development benefit for you, if it is going to help you to have some kind of a bank account, is there a minimum level? Even if you are reducing your costs to the minimum possible level, so Grameen costs rather than Citibank costs, is there a minimum level of salary below which it simply is not economical, because of the transaction costs, to have a bank account?

  Mr Naidoo: I think there is. The question is: what is the real benefit of someone who is earning $10 to pay 50 cents in transaction costs? There is a certain level. I use the example also of fortification. We can reach in Africa, through the work that we do with large-scale millers, 60% of the population who suffer from micronutrient deficiencies, but the other 40%, which are dependent on smallholdings and villages, we are going to struggle to reach and the costs are going to rise and suddenly from 25 US cents per person we go to double per person to reach them. I do not think that we have found an answer to that; it is just that on the back of microfinance can you grow other economic activity? On the back of microfinance, which enables subsistence farming through the Grameen Bank in Bangladesh, suddenly you bring new applications on that, the Grameen form and other forms of economic activity, which does raise the level of disposable income; but there is a point at which you say, even in places in South Africa, they are indigent people who can never pay for their services, no matter what we say, because they do not have jobs, they do not have incomes and so we have to provide a free basic service in water and electricity. It does reach a point where you say that requires direct government intervention or donor intervention.

  Mr Annibale: I very much agree with Jay. There is a level. We have seen it go very low, though, the level at which you are providing access on a viable basis to places like Bangladesh, Bolivia and elsewhere, and yet there will be communities, just as there are here or in any other country, which will not be reached at the same viable level. You see it with Post Offices in the Outer Hebrides or somewhere. There is a public good about providing a certain level of inclusion into the society, and some of that may need to come from specialised institutions—understanding that post conflict, war or isolated communities or indigent people may not be reached by commercial models, but I think that is a lower number than what we see today that are not getting access.

  Chairman: Presumably if you reach lower than you are reaching now, you create a dynamic within the economy that helps to put more effort into it.

  Q166  John Bercow: Given that there are always several variables in the equation, and specifically, in this context, several factors that are relevant to the generation of private sector development, what, in your judgment, is the relative importance of financial sector development within donors' broader strategy to facilitate favourable investment climates? Very specifically, how much significance do you attach to financial sector development by comparison, for example, with infrastructure development or the wider issue of economic governance?

  Mr Naidoo: In my mind, the situation I know best is South Africa, where the variables are all integrated. You cannot say you have financial sector reform and then we are still in a country that is at civil strife. You have to look at governance issues. The one experience I have found, taking infrastructure as an example, it is not that we have no large-scale infrastructure projects that are really commercial in Africa. There are a range of other issues that surround making those things successful, and part of it is political governance to ensure that the environment is created with stability, part of it is the role of donor aid and how that donor aid is blended into development finance, into national revenues of government, into private sector money in a way that mitigates risk, because all of it is about risk. For me, financial sector reform is one part of a broader set of reforms that have to be in place for there to be sustainable economic development. Therefore, you cannot separate and say: microfinance, of course, it is fundamentally important, especially in places like Africa where agriculture is the mainstay of the majority of people and having access to small amounts of money will enable people to have economic activity, but on its own we cannot solve the problems that face us.

  Mr Annibale: I agree completely with Jay. We have looked at groups like ProMujer in Latin America, a very interesting group that looks at livelihoods and very clearly speaks about livelihoods, because while a key tool for them is microfinance and they have a phenomenal performance level, a repayment norm that we would be envied in this country if any bank had such repayment norm like credit cards or mortgages or anything. Yet they are right that, if they cannot provide basic healthcare programmes, simple access to healthcare to the women who borrow from them, it is going to reflect itself in the financial performance too. Whatever motivates you, you make these choices. If we do not educate people enough, they cannot take advantage of the opportunities; so governance too is, of course, important. When we get to land rights and other issues, as such, if the judicial process does not function, one cannot advance beyond a certain level of financial products for people because we cannot enforce contracts or we are not regulated properly; so I think it is important that we look at the overall context, just as we do domestically when we make choices about supporting careers, education, healthcare and financial sector reform. It is, in many ways, a blend and a choice that policy-makers have to make, more so than we alone can make necessarily from the private sector.

  Q167  John Bercow: I understand, and to some extent can empathise with, your reluctance to put all your eggs in one basket or to plump for one option to the detriment or even perhaps to the exclusion of all others. That said, we on this Committee are charged sometimes in our wide-ranging inquiries, and we have to remind ourselves that we are charged with the very specific task of scrutinising what DFID does, and to do so effectively requires us constantly to ask the question: is it making a difference? That really is the litmus test. Therefore, I wonder if I can come back to a similar theme about prioritisation by putting this to you. DFID currently contributes about £30 million a year directly to microfinance or financial sector development programmes. Does DFID's move to direct budget support, in your view, jeopardise its grass-roots level support to the financial sector, for instance, through smaller microfinance skills?

  Mr Naidoo: Robert?

  Mr Annibale: I can speak on what I know of DFID's work and where I see it has an impact not just on the area of microfinance and its outreach and evolution but also, even more importantly, on how we respond to this issue: because I think no matter how much we talk about £30 million, it is not that much money. In financial services globally, this is not a lot of money, not even in property prices or anything else in London, but it is significant if it is done well, and I think DFID is differentiating itself. I just give it enormous credit. Things like the FinMark Trust. I found that the work that was done with the FinMark Trust, whatever that was, £5 million over a number of years, has influenced the way we look at household finance and household income with a new understanding. It was great. FinMark Trust began with a study in South Africa and they are now working in a number of other countries in the region. Last year we were very active in the area of microcredit—on the Steering Committee of the UN Year of Microcredit, Stan Fischer of Citigroup, who was the Vice Chairman, now he is Governor of the Bank of Israel—worked very much to influence the World Bank and the IMF and encourage DFID to have the FinMark Trust present their work on financial sector household income data collection, about understanding the true dynamics of incomes in a community. We did not know that story well. We did not bank this community. The World Bank, I do not believe, knew it either. I think they were at too high a level in their collection of data. We, in microfinance, do not use much of their data for that reason. It is not translatable to what we have to do to be able to reach more people. The FinMark Trust was a very good example of something that has, I think, had an impact on the multi-laterals and certainly on us in the private sector about going deeper, about the needs of low income people, very specific mechanisms for savings, as you mentioned, analogies to credit unions which are familiar to more of us and help us to realise that this is what many in the informal sector are doing. They are creating savings clubs and credit unions which will help the infrastructure. The governance issue is a very important one and the work that they have done also with CGAP (World Bank).[1] DFID is supportive of CGAP at the World Bank, which has been a leader on issues like governance and the microfinance sector, establishing consumer rights on issues for the very low income and the poor and on standards that need to be addressed by institutions getting donor money. I think also important are the Challenge Funds, which I was familiar with, having some years ago been involved in one of the first programs in East Africa that DFID had launched and that had external people looking at some of the proposals for innovation. Not a lot of money, but I think it engaged multi-laterals and bi-laterals and some of the people like ourselves and the NGOs, the grass-roots people, in a forum in which we do not normally have an opportunity to get together.


  Q168  Chairman: Lastly, if I may, interest rates on the provision of microfinance. In Mozambique recently we learned of some truly excellent work on microfinance and we witnessed some of the individual projects ourselves—very, very small-scale projects. We were I think—and I can probably speak for colleagues—initially rather taken aback by what seemed to be ferociously high interest rates, but the argument was made to us that in fact, where the sums involved are relatively small and where the challenge is to establish a decent business plan and then provide upfront the resources with which it could be kick-started, the interest rate itself was not of such importance. Is that a view you share or is there a problem with rates?

  Mr Naidoo: Let me give you an example. In South Africa we have a serious problem with microfinance institutions that have grown up in an unregulated environment which really are very mercenary, and a lot of people who are workers, domestic workers, in the lower levels of remuneration in terms of the scales, ended up in debt traps until the Government intervened and started to regulate it. Microfinance institutions have to operate in a regulated environment, otherwise the poor get, I think, exploited terribly, as happened in South Africa. I suppose that part of the work, as Robert has said, about building up a policy environment, creating a regulatory environment, creating the case studies which can be proven models is very important work that DFID must continue to do. There is not going to be an organisation of scale in microfinance. I think we have got to operate on the basis that they have to be very entrepreneurial, they have to be very low-cost, they have to give a very personal touch where people can trust their money when investing with someone else. So, yes, I think we should target the grass-root operations, but I absolutely share your point of view in that some of those interest rates are exorbitantly exploitative.

  Mr Annibale: I think the whole issue of notional interest rates is always challenging. First, it has got that headline impact, the fact that they are high by a notional amount, as on credit cards here, for example, consumer finance, when you see people paying 20 something per cent, 40 something per cent a year, which is not uncommon. In India at the moment in many ways there is a problem around this issue in Adhnar Pradesh. There is very much a debate going on around the interest rates of some microfinance institutions. When I compared them, however, with the banking sector's interest rates for consumers, what we would have called those included in the financial sector, people with overdrafts, people with credit cards who are prime clients, they were very similar, and yet our challenge is much lower in terms of delivery costs than in microfinance. I completely agree with Jay, financial services need to be in an appropriately regulated environment. I think people have to feel that institutions are safe, as well, in terms of transparency and certainty if anyone is taking their deposits. What has brought down interest rates in microfinance, as it has elsewhere, has been in markets where there is competition. We have seen it in Bolivia, we see it even in Mexico starting off where notional rates were very high. It is very similar to what our consumer finance company and HSBC's and others are charging working-class, middle-class people, but it still appears notionally high. The real question will be getting that innovation that microfinance has around lending and credit judgment in assessing low-income people and products, with the scale that is more familiar to the commercial banking sector, using platforms that can bring costs down. But, yes, all of us want to see rates coming down. Getting them down by forcing them or capping them is not going to achieve scale. All that happens is that we withdraw as banks from lending and then the black market comes back where people are still paying much, much more.

  Chairman: We have had exactly that debate in the House of Commons on the Consumer Credit Bill.

  Mr Annibale: People will exit that segment and they will have less choice than they do today. The important thing is to give people a choice in finance. There is traditional borrowing, there is the black market or the money lenders, which are the most prevalent, and then there are smaller growing niches like microfinance, and, yes, microfinance is the lowest cost of all those, probably, other than perhaps within a small community, which would be like a credit union approach, but I still think that if an institution takes public money it needs to be very transparent in what it is charging people and where those costs arise . . . yes, especially those institutions that take public money.

  Q169  Ann McKechin: Mr Naidoo, can I ask you one or two specific questions. Your development bank states that it wants to become a Knowledge Bank that goes beyond funding to offer knowledge products and services. I wonder if you could give us some examples of infrastructure investments by the bank that have successfully stimulated markets in southern African countries, particularly in the area of knowledge transfer?

  Mr Naidoo: Yes, the challenge in South Africa is very different to the rest of Africa. We do not really have a challenge of money, it is your capacity to take money and make it into bricks and mortar, and so what we recognised very early on is that we have to extend the envelope in the DBSA[2] to deal with those challenges. Therefore, the concept of a Knowledge Bank, where in a sense we are a provider of concessional money for projects, and so our lending role is very important, but beyond that we have a partnership role to work with governments, work with the private sector, work with ordinary communities around projects that they would see their quality of life improved, and part of it is also a third role to provide technical assistance. We have invested enormously over the last three years, in fact we have invested over £50 million, in actually building capacity of local governments, of private sector, of our clients, in risk management, project management, financial management skills, so that they can build sustainable enterprises, sustainable governments, and that has been, I think, our biggest success. In fact we have taken it one step ahead of that now and we have actually invested in creating a permanent taskforce with that capacity that will help our clients to deliver capital projects. There is a range of different examples where we have done that. In South Africa we work with local governments and, in many cases, where these governments have been in a state of crisis, we intervene and we will send teams out to work with them to straighten out their administration and finances and their information and management systems. In the region we have been taking initiatives to work with governments that are privatising enterprises or enterprises that have gone bankrupt, and we will go in there and work with the client.


  Q170  Ann McKechin: Can you give perhaps one example of such an enterprise?

  Mr Naidoo: Let me give you an example. Mozambique would be an example. Mozal is a big aluminium smelter set up in Mozambique to process aluminium and to export it, so it is a largescale capital project, but what we have done was to provide the end support in terms of infrastructure around that so local communities could have access to clean water, have access to electricity and in a sense create economic activity around that major investment which is primarily driven by the private sector. We would go in, in terms of that project, and say, "Okay, what is it we can do that would support economic activity in the communities that surround such an enterprise?"

  Q171  Ann McKechin: We were in Mozambique as a committee recently and that particular project was discussed quite significantly. However, I think there were a number of concerns (a) about how much actual local employment was created because of the high-skilled nature of the project, and it was difficult to find capacity within Mozambique, and (b) the contribution to the tax-stream of the Mozambique Government was negligible. Given the scale of the project, I am sure local projects in the area to improve roads and water sanitation are very welcome, but they are not equivalent to making a major contribution to the taxable income stream. I am just wondering whether you have learned any lessons from that and whether you would repeat that type of investment in the future?

  Mr Naidoo: The reality is the project was taking place. The terms of that investment were really negotiated by the Government of Mozambique. The choice we face in the Development Bank is: "Can we take that project and create a downstream activity that benefits local communities around it?" Our bank focuses on infrastructure delivery, which is water sanitation, road access, et cetera, and that is a priority, that is the mandate of the plan. That is what we would do in the regular course of our work. It really depends on projects that are brought to us, and our clients usually are either private sector or governments, and we have to work with the client that brings the project to us, and so part of our big challenge as the Development Bank is that we do deal with large scale projects. What we are trying to do now is to work downstream and say: How do we focus? That is why we have created a stand-alone section 21 not-for-profit company called a Development Fund, which is really our grant-making window, where we will work on a much smaller scale with the local communities and help develop those projects, but we are an infrastructure bank at the end of the day, and that is our mandate.

  Q172  Ann McKechin: Do you make any assessment on the effect on the poorest people in the community?

  Mr Naidoo: Yes, we have done impact analysis, cost-benefit analysis post investments.

  Q173  Ann McKechin: Moving on, South Africa's financial sector is obviously the most robust in southern Africa and it has got a very strong regulatory framework. I wonder what lessons you believe to be learned about financial sector development from the case of South Africa. Could it be extended as a model to other southern African countries, or do you think it is in a rather unique position which is difficult to replicate?

  Mr Naidoo: The important lessons one can learn, but I think South Africa, in a sense, is pretty unique in many respects, because we do have a highly developed private sector, the institutional framework of government is very strong, the macro-economic climate is very disciplined and so you can draw lessons. I do not think it is a model you can replicate elsewhere. There are important lessons, and one of them was the recent financial sector reform process which led to a Financial Services Charter which was negotiated. It was negotiated between the stakeholders, between government, society and the financial institutions, which requires certain outcomes in the financial sector review and reform process. Part of it is the access of banking services to the "unbanked", and there are very concrete targets set and investments that have to be made to deliver on those targets, there are requirements around community reinvestment initiatives and the role of government in facilitating those reinvestment initiatives, there are equity transformation targets set for the sector itself. So, yes, I think from South Africa there are important lessons to take, but it is also a pretty unique economy in Africa, so I would doubt that it is a repeatable model in its totality anywhere else in Africa.

  Mr Annibale: I would only draw an analogy to somewhere like Brazil. You find almost no microfinance, for example, in Brazil, it is negligible, although certain NGOs exist and very specific communities have been excluded and still continue to be, but you have a very strong banking system with quite a comprehensive public and private sector banking presence and consumer finance sector, for instance, that is going deeper. It is that sector that needs to be engaged, as Jay said, with the right incentives, I hope, rather than punitive actions if you do want them to go deeper. Brazil is putting in place incentives for microfinance.

  Q174  Ann McKechin: But it is much easier for the private sector to deliver the project?

  Mr Annibale: It can deliver. Private banks are opening branches in all the Post Offices, for example, in Brazil. There is a window in the post office operated by the Bradesco bank. The private and public sector have bank branches that can be leveraged, so the infrastructure is there all over the country. Why do MFIs[3] not use it? You cannot replicate the capital base in a country like South Africa or Brazil, which has a well regulated, capitalised commercial banking sector, with public banks too, but they need to be encouraged to go deeper. That is where the innovation of the microfinance sector may be helpful in a partnership with banks, because they do not have the experience of working with that segment and some of the microfinance groups do.


  Q175  Chairman: Maybe you should have a word with RBS and HBOS about the value of a Post Office network. I have one quick question, Mr Naidoo, on GAIN, which you chair, and then we have some final questions on microfinance as well, and it is supposed to be a partnership to improve nutrition, but ultimately, after pump-priming, to be self-financing. I wonder if you could give us very briefly an indication of how this works and whether or not you have had success in getting projects that deliver the end gain which are self-financing and whether they have passed the initial stage?

  Mr Naidoo: I think that is a very important question because in a sense that is a case model of success. I made a point earlier in that $40 million of contributions have been made so far to 15 projects in 14 countries. They have required in the totality of the implementation of these projects an investment from the private sector over $350 million. If I give you the example of South Africa, we deal with basic foods. The basic food consumed by the poorest of the poor in South Africa, the staple diet, is maize and wheat flour, and we give grants of up to $3 million per country to set up a fortification alliance at a national level that brings together governments and civil society and industry and helps the process of consultation that eventually sees a policy refund component, which is a requirement by government that wheat and maize should be fortified with the products that are specified, with the additives that are specified that are laid down by the World Health Organisation (WHO), and industry feels comfortable because they can absorb that cost in the long-term, because over a year it costs 25 cents per person. So our role has been at advocacy level, at education level, at bringing together the stakeholders to find a common vision and a common strategy, and today in South Africa all maize meal and wheat flour are fortified with minerals and vitamins and a lot of the flour that is produced in South Africa is exported into the region, so it has a multiplying effect. We are having soya sauce in China, we are having fish sauce in Vietnam, and the nice thing about it is that we are mobilising the private sector to make these investments, and our role, like in South Africa, ends. We play a role in establishing the systems to monitor the impact, but it now has a life of its own. It does not require further contributions from our side. We will not make another grant to South Africa. We are now working in about six or seven other African countries with another three or four in the pipeline, and so we will reach those countries where there is a demand and where there is an appetite for people to make an impact, and I think in your whole political representatives here is a low-cost, big impact, it is very good for even the representatives of government to take this initiative forward, and we find that a positive thing. I think what we are looking at is the way in which one can take these projects. It might be very focused and very narrow, but the impact is large and we can deliver. On the back of the success of fortification we are now looking at early feeding schemes, feeding schemes for children post the breast-feeding period where there is a period of intense risk that they face by micronutrient deficiency, so you can start adding things on that build up the health strategy of the particular country. I think that the important thing in this inquiry is not just about the finance level, it is the way in which one can get other people to invest in development outcomes, and the best case that we have to prove today is that the private sector is investing in delivering the benefits of development. It does not require subsidies. That is the whole thing. How do we take the money that DFID has and leverage that money up into a sustainable model to get others to deliver on an economic and commercial basis? I think that has been for me an important element of success in the work that we have done.

  Chairman: I am extremely interested. It sounds as if you have gone a long way in a relatively short time. Can we turn to some questions on microfinance.

  Q176  John Barrett: 2005 was the year of microcredit and there were some notable successes. I can remember clearly an African chicken farmer opening the London Stock Exchange, not something that happens every day. The attempt to raise the issue of microcredit with the general public was one issue but raising awareness in the banking and corporate sector was that a success? Looking back and carrying on, now that 2005 has now passed, has it made a lasting impact and are people prepared to take on the initiatives that were raised last year?

  Mr Annibale: We were one of the large funders of the year of microcredit in the private sector, and actually in aggregate we gave more than the UN did, and the work of the Year had been started, as well, around a programme that we launched in the UK at the beginning of the year, a microfinance club of the UK, at which we had over 200 people. Today each meeting has about 80 to 100 people—and it impresses me that they are attending from across the banks, the law firms too. We host it sometimes in Clifford Chance, sometimes in Citigroup, sometimes in HSBC, so it engaged an issue around a lot of people who do not do microfinance most of the time, and we thought that was key. It is not just preaching to the converted, or within a development circle, an existing audience that had plenty of conferences and events to go to. Getting to a wider sector was a challenge, and making sure that people like myself, who are not in the community department or in the public investor relations department, or whatever, but actually report to CEOs in the business, are involved on this issue was key. We thought the year went very well. It led to a number of events, and we have just had another one in the Netherlands with global banks looking at microfinance and comparing what they did. Princess Maxima, who as an ex-banker in the Netherlands, herself was an important catalyst. I hosted a lunch for her here with bankers to catalyse them. She has seen presidents of the banking associations as she travels around the world, she has visited our branches and sent me emails saying that our credit policies may not being broad enough or inclusive; so I found that the Year actually reached a much larger group and it caused us to work with some of the leaders in the microfinance sector and the multi-laterals in a way we had not before.

  Q177  John Barrett: Obviously, for microfinance to expand and to be a success, collaboration of the banking centres is important, but it is difficult to get the banking sector to be involved with the poorest of the poor in society; so how can that collaboration take place without the mission behind microcredit, microfinance being squashed?

  Mr Annibale: I think an important thing is that we are doing everything with MFIs. From my world it is the strength of our commercial capacity that will bring change. We give $10 million a year to microfinance, we give perhaps $30million to financial sector reform and education, we probably have given maybe $50 million in the financial sector development area in Citigroup philanthropically alone in recent years. It appears as just a drop in the bucket when we have a trillion dollar balance sheet and we have 300,000 people. It is leveraging the business around this issue that is key. In the UK it is for me too a quandary. It has a lot to do with immigrants, it has a lot to do with people who have never banked before, who are excluded, there are those who have fallen out of the system, and we talked about that earlier. Indeed, we have much broader social issues to address, but in fact a lot of people are never let in, who never banked before. I am looking at credit unions in the UK to understand again if they are a mechanism for reaching people? What is the intermediary between us and our capacity as an institution and these communities? That is why everything we do in microfinance I do with a guide. I work with other people, I work in their context, I work with a partnering microfinance institution because I cannot be pretentious that I know the very poor as a client as well. I, the banks, have never banked with them, or we would not have this problem. I feel that there are those who have the trust and the knowledge of this community. We have certain other capabilities to bring. In the UK I am just starting an initiative here and getting some staff to actually look at the issue and understand who is reaching this group, why are they excluded and why is it so hard to open a bank account?

  Q178  John Barrett: Are there specific products that the commercial banks can see make absolute sense, both from a banking perspective and from the poor's perspective? Are there examples which say this has worked?

  Mr Annibale: I think savings have never to be underestimated and neither should the ability to have a simple transaction account to put savings in or to pay bills out of. We used to have that in the pass book accounts at post offices and places for many years. There was a place where the very old saved and the very young had their first account. It did not quite fit into banks' minimum balance products but it, post offices, had such a pervasive presence and banking was made so friendly and accounts easy to open. The first thing most people need is a safe place to save and to begin a history with the financial sector. That became very difficult and many banks, of course, have minimum balances and things Jay alluded to which makes it prohibitive to have a bank account. Try to open one and see how difficult it is. In India we are now involved in a deposit programme with an MFI and our bank. The documentation required dates back to the Indian Banking Act under the British in or something, and requires documents that perhaps 400 million people in India do not have so how can they open an account? To know your client and the requirements of money laundering and all these sensible things, when you have no materiality threshold means some will be excluded. You are simply making the transaction costs of opening an account and the documentation required so prohibitive that ordinary people will not find a low-cost, simple place to put money or have a debit card so that they can then access the whole national network of cash machines. So it is about looking again at things that you put in for sensible purposes that actually further exclude people.

  Q179  Mr Davies: Mr Annibale, I wonder if I could just explore first of all where Citigroup is coming from in all of this. You are the global head of the firm's microfinances and I just want to get a clear picture of what your remit is. Is microfinance regarded in Citigroup as a commercial activity among others, as a profit centre? Is it your job to maximise return on that share of Citigroup's capital which is deployed in microfinance, commensurate with the risk of your activities there? In other words, are you just another profit activity like trade finances or consumer credit or derivatives trading or is that part of the public relations or good citizenship aspects of Citigroup's activities?

  Mr Annibale: That is a very intelligent question. I do not have a peer in the major banks. I have people in community groups, investor relations, public affairs, foundations, or whatever. I do not have somebody else who works for the CEOs. My group's work is not mentioned in the community section of our annual report that came out 2005. It is in the letter at the beginning of the annual report by the CEO as something that was one of his key initiatives. It refers to our building commercially viable and sustainable relationships, beginning with microfinance institutions, microfinance networks and investors. I am remitted with finding ways of growing commercially viable relationships and investing in doing this with scale. We begin with such a low base of knowledge as bankers in this segment but we have a lot of other expertise. How do I develop a large-scale deposit savings programme for microfinance institutions in India which cannot take deposits for their clients and do it for and with them? In Mexico we did the first investment grade bond issue for a microfinance institution, it was three times oversubscribed by institutional investors and it was profitable. We have done insurance which we never did before for this segment. We now insure 12% of our clients in Mexico from this segment. In six months we have gone from zero to insuring 12% of self-employed rural women that are clients of microfinance institutions. That will grow to 40% this year. We have discovered that it is a significant client segment. If we can provide quality and appropriate products to this segment I believe we can scale it and do it at a commercial return which is enviable. Yes, there is definitely a resource investment to be made to do that, but it is coming out of our businesses, it is coming out of the budgets and the product areas of Citigroup; we don't only enable that with the boutique of expertise that we are building in microfinance, but people who do the actual work are from consumer businesses in countries as well as capital markets groups. It has a double bottom line. It is recognised enormously by the shareholders, by the media and by everyone who seem to feel that it is a great initiative to have.


1   Consultative Group to Assist the Poor. Back

2   Development Bank of Southern Africa. Back

3   Micro Finance Institutions. Back


 
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