Examination of Witnesses (Questions 180
- 195)
TUESDAY 28 MARCH 2006
MR JAY
NAIDOO AND
MR ROBERT
ANNIBALE
Q180 Mr Davies: It sounds to me that
your answer to my question is really it is a bit of both. It is
image building and government relations and so forth and assisting
in the achievement of your other objectives, but also if you can
build genuinely profitable businesses out of this or gain some
customer relationships that you otherwise would not be able to
achieve, then that is it as well.
Mr Annibale: We start with a ladder.
I believe we can reach very large numbers of people in a viable
programme. Twenty five per cent of people in Poland, an EU country,
do not have a bank account. That is a significant number of potential
people to reach.
Q181 Mr Davies: I think we have got
the flavour of it. That is very helpful indeed. You said earlier
on that you thought the commercial banking system had not been
good at handling remittances. That is possibly the understatement
of the morning. This Committee has had quite a lot of evidence
of appallingly inefficient handling of remittances. Of course
these people are some of the most deserving people in the human
race because, by definition, they are poor, they are hard-working
and they are rather generous because they are supporting families
in other countries and so forth and often work far from their
homes and then paying regularly over 20% of their hard earned
remittances into the banking system, so that is obviously very
bad. Taking account of the progress that Citigroup has made, what
would be the all-in typical transactional cost of remittances
of, say, $50 to $200 from London to Bangladesh or New York to
Ecuador which are some of the countries which you mentioned, including
the cost of the foreign exchange transaction, including the transfer,
the all-in remittance cost?
Mr Annibale: For the banks it
was not viewed as a stand-alone product. If it was, one of them
would probably have bought Western Union in the past or other
banks would have done the same thing. It was not in a developed
segment nor was it seen as a key product to deliver to the majority
of this client group. I believe the banks never invested in it
enough to bring the costs down to make it attractive. When I looked
at New York to Ecuador, where I am piloting now, we went from
$40 a transfer to $5. That $5 is capped, if I remember, to $3,000
or $4,000.
Q182 Mr Davies: $40 irrespective
of amount?
Mr Annibale: Irrespective, it
is a $5—
Q183 Mr Davies: For $100 you paid
the $40 charge?
Mr Annibale: It was a $40 charge,
it was a flat fee. It is the same you would pay if you were to
transfer from London to New York.
Q184 Mr Davies: And the cost of foreign
exchange would be on top of that?
Mr Annibale: In that case it is
dollar to dollar but it would be 1 or 2%, like credit cards or
other transfers that we make. If you take dollars out of your
account, you would use your credit card in New York and you are
debited and you are charged an exchange rate to convert sterling
into dollars, and that is usually 1 to 2%. The difference was
that the whole fees structure was based around it being a low
volume of business for the banks. It was a one-off. We were not
banking the communities that were remitting very heavily. What
we do with the Indian community here in the non-resident Indian
programme is that we do not charge anything for remitting to India.
Q185 Mr Davies: I can go to your
office in London—
Mr Annibale: —As a non-resident
Indian.
Q186 Mr Davies: —tomorrow and
I can send $100 to India and you will not charge me for that?
Mr Annibale: If you are a client
of ours and you are sending it to your account or any family account
in India. That was the idea of integrating banking to remittances,
because if you want to bring the costs down, the transfer alone
for us in the banks on the whole—with the money laundering
regulations and people just walking in with cash to send it somewhere—made
it unattractive as a stand-alone product, but creating it so that
it is part of a product for your clients means that you can push
the costs much lower. We are currently piloting one now—and
we will announce it in the UK—with the Kenyan community.
Q187 Mr Davies: But both parties,
the sender and the recipient, would have to have an account with
Citigroup?
Mr Annibale: To be free under
the NRI programme, yes. From the US to Mexico would be $8 if one
of you was a client of Citigroup. We are working on the basis
that you are a client to remit and that is partly for the "know
your client" and the money laundering requirements.
Q188 Mr Davies: Okay and what would
be the charge if the recipient does not have a bank account, possibly
for the bureaucratic reasons that you have already described this
morning? For someone who needs to pick up that money in cash from
your branch in India, what would be the transaction cost?
Mr Annibale: I am not sure. I
do not remember the transaction cost. In most countries we do
not do transfers for people who are not a client, who just walk
in with cash. That is why until we began to bank people that remit
and see the numbers of people doing remittances that costs did
not decline significantly.
Q189 Mr Davies: I understand. You
might transfer the money to somebody. The sender might be somebody
with an account, working in the West and would therefore have
the money and a regular job and so forth, enabling him or her
to set up an account. The recipient might be somebody incredibly
poor in a village in Bihar or Bangladesh who might not have an
account. Hence my question. There is no money laundering problem
if the recipient does not have an account. Would you allow the
sender to transfer the money in such a way that the recipient
can pick it up in cash? That was my question.
Mr Annibale: In Mexico it would
be $8 for the person to receive it.
Q190 Mr Davies: We are all familiar
with the De Soto hypothesis that says basically that there is
not really a shortage of capital even in the poor countries, rather
that all the capital is tied up and frozen in real estate without
proper property titles and therefore cannot be transferred and
the capital is therefore immobile and cannot be mobilised. As
a result of your experience in this area, to what extent do you
think that this really is a major problem of the importance that
De Soto implies and to what extent do you think this is not such
a major obstacle to potential growth from developing countries?
Mr Annibale: I should declare
that I sit on the board of advisers for the UN Commission for
the Legal Empowerment of the Poor, which is chaired by Madeleine
Albright and Hernando De Soto, which was kicked off by the UN
a few months ago. I think land rights is a key issue, not only
land title. De Soto was an advanced thinker in its work on the
path where we were talking about the segment and then more recently
about the importance of land title as evidence of wealth. I think
along with the importance of giving people specific, individual
titles—again the governance issue comes up, the land registry,
the enforceability of the title. The question really also is we
are most concerned that land not be taken by speculators and by
others who can take your land if, inappropriately, you just give
titles to people. Today what we mostly look at in the best of
microfinancing is security of land tenure.
Q191 Mr Davies: So it is the tradable
rights in the form of a lease or a tradable tenancy, for example,
is what you are saying, as opposed to title in respect of freehold
title?
Mr Annibale: I am not sure that
today in the legal environment in Peru where they have given many
titles that you have actually seen many people get mortgages who
have those titles.
Q192 Mr Davies: You are distinguishing
between tradability and security?
Mr Annibale: Yes I am. I am saying
one of the important things is the security of land rights and
tenure because that is an important part of our lending. We know
people are not going to move their home in most cases unless they
are evicted in the countries in which we operate. That is the
net savings of the family in a home and they will repay as best
they can to secure that. Whether that is best secured by a transferable
title against a mortgage is questionable. There are many jurisdictions
where we have those and it is good order to have them. It may
make sense for other reasons to have that legal claim of enforceability
and the ability, or even a need, to enforce it, and the implications
of that may be very much less of a factor than the psychological
sense for both the person who lives there and for ourselves to
know that that person has the right to stay where they are, and
that their investment there and their income is more secure because
they have a right to a home and permanency; and they are not going
to be thrown out and therefore disrupt the whole cash flow of
that family. If we look at the cash flow of people in that situation
we need to know the variables. There are so many variables of
risk and removal, replacement and eviction is a key one. The title
itself is indisputably the right direction, yes—
Q193 Mr Davies: The lender has to
have a mortgage on a tradable asset. It does not necessarily have
to be a freehold, it could be a lease, but it needs to be tradable
so if the lender forecloses the lender can realise the value;
is that right?
Mr Annibale: As you develop mortgages
and you develop a legal framework that supports that, and a judicial
process that operates correctly on that basis, you are absolutely
right. Directionally it is the route that we would like to see
it go.
Q194 Mr Davies: But it is very important
that on the record we are quite clear about the advice you are
giving us this morning. Are you saying that title is not really
relevant and what is important is to have some sort of right?
Are you saying that that right must be tradable or are you saying
that even a right to remain somewhere, a right of permanent residence
itself is valuable as a basis for making a loan, even if the right
is not tradable?
Mr Annibale: I am saying that
as part of the progression towards a tradable title, I believe
that the first thing to ensure is that people have a right to
remain where they are. To get that directionally moving towards
their having a title, which again allows them more options with
their assets and their home, is the direction we should go. I
think De Soto's outlook is to go in that direction and it is ours
too, but I believe we have a need to begin and also to look at
the very many ranges historically. We have co-operatives that
have titles. Most of us live in freehold or leasehold premises
in London. Many of those legal structures need to be considered
along the way to getting tradable titles, but I think it is important
to have the rights of people where they are today and then to
incorporate that because it is a complicated and costly process
giving titles and remunerating those whose land they happen to
sit on today.
Q195 Mr Hunt: Mr Naidoo, you have
been on both sides of the table. You have been a trade unionist,
a campaigner, a part of a government which has got an explicit
agenda to help the poorest, but also president of a large bank.
I am trying to understand whether microfinance or microcredit
is a good thing for consumers in poor countries. I think we would
all accept that it is a very important thing for people who want
to start businesses. In Brazil, which Bob mentioned, you have
the largest electronics chain having very innovative ways to enable
very poor people to buy fridges and white goods and things like
that, but in this country, to take the poorest people in this
country, there is a big problem of consumer debt. You find that
people who buy a sofa that would cost you or me £500, for
some of the very poorest people it ends up costing them £2,000
because they have to pay it back over a long period of instalments.
So is microfinance and microcredit a good thing for consumers?
In other words, enabling them access to credit which may help
them get out of poverty could also increase their debts, or are
there risks in that?
Mr Naidoo: I think the most important
issue for consumers, whether they want to buy things or whether
they want to start an economic activity is access to credit. I
believe that it is a prerequisite for development. So access to
credit is very important. The issue of what is the regulatory
framework to prevent what you are saying could possibly happen
(and has happened) is very important, and that is a requirement
of what is the regulatory policy environment, what is the education
that goes along with access to credit, what is the role of the
private sector who is offering that, whether the private sector
is a money lender off the street or whether the private sector
is a bank. That is why for me it is fundamentally important that
we go in partnership around extending the right to credit. That
is so important. If you look at the role that Citigroup has had,
I think it is very important. What we are doing is getting large
institutions to see that there is a body of citizens who are quite
substantial in any country that have a right of access to credit,
but you have got to do it in a sustainable way so that you weed
out the bad apples. Doing it in the way and playing the role through
DFID or through the role of you as a Committee in getting large
institutions in the financial services area to have a responsible
way of how they want to extend credit to the poor is a very important
process, I believe, and that can only come about as a result of
smart partnership. The issue really for me is how does one harness
the infrastructure that exists in these developing institutions
in a way that makes them share the development goals that all
of us believe are important. We want the private sector to succeed.
I would certainly want to see the private sector succeed in fortifying
as much food as possible as laid down by the standards that the
WHO have. I would love the idea that the Citigroup gets every
other bank to extend credit because one of the big challenges
in Africa in entrepreneurial development is access to credit.
I have started a business. I am in the private sector and I run
an investment company. When I went into the bank, irrespective
of what I had done in government and before, the first question
I was asked is "What is your credit history?" I have
handled a transaction in telecoms worth over $1 billion, I have
helped build a trade union movement, I was a minister in government,
but they wanted to know "What is your collateral?" It
is access to capital to help grow business and we were saddled
with the interest rate charges. I think that access to credit,
whether for consumer activity or for entrepreneurial activity,
is very important and getting the cost of money down is an important
goal. If we can harness the resources of the private sector to
get into the areas of development all well and good, but it has
to be alongside other things like education so we avoid the debt
trap that many people have got themselves into.
Mr Annibale: I think the other
reality is that where you get institutions—RBS, Citigroup,
whoever—involved, we would be a catalyst to what should
be the largest players, the domestic banks in these countries.
Domestic institutions really are the largest providers most often
of banking services. We know that we play a certain role as a
catalyst. We are also very accountable. At the end of the day
if you do not like how the banks trade or act you have the Financial
Services Authority (FSA) and you can call us in; and you do. There
are other bodies like the Fed in Washington et cetera.
We are totally accountable as the media holds us to a level of
accountability which is not the case with money lenders or some
of the smaller institutions that may fall under the radar. That
is probably one of the important roles of public policy, that
you do have a framework that sets the boundaries for banks and
others providing finance, especially for credit, as you said,
such as is there being appropriate transparency in the kind of
rates they charge. There is also the role for financial education
which is a big programme receiving funding from ourselves too.
Did the client know what they were really paying? Do they understand
it? Because we will be held accountable for that in the end both
financially and publicly if we do it badly.
Mr Naidoo: There is just one final
point I would like to add to that, which is that today people
take credit. From my experience as a trade unionist, I have seen
people who stand outside the gates on payday and zap the salary
off the worker. So you cannot stop people taking credit. I think
it is very important to institutionalise this and create a code
of behaviour that requires responsible banking and extension of
credit because it will happen. It has happened for thousands of
years. You are never going to stop it. The important thing is
to get a code of behaviour and conduct in the area of extension
of credit that can be monitored.
Chairman: Can I thank both of you very
much for the fullness of your answers, your enthusiasm and that
fact that you have shared some successes. I think the thing we
are concerned about is the amounts are small against the problem,
so clearly a lot more success and a lot wider spread of these
kinds of activities will be needed if we are really going to see
an improvement. Thank you both very much indeed for the exchanges
and for taking the time and trouble to be here.
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