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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