Bhutan

Stakeholder Meeting and Annual BDFCL Conference

Deputy Governor, Royal Monetary Authority
Managing Director, Bhutan Development Finance Corporation Limited
Representatives from international agencies
Other distinguished guest,
Ladies and Gentlemen

It gives me great pleasure to address this important gathering of the Microfinance stakeholders of Bhutan Development Finance Corporation Limited (BDFCL), coinciding with the BDFCL Annual Conference.

It is a fairly normal practice in occasions such as these to start with highlighting how many people live in poverty to provide a sense of the magnitude of the challenge facing governments and their development partners.  Let me approach this differently - not from the perspective of a planner but from the perspective of a person living in poverty. 

If you are poor, your income is small - in many countries less than a dollar or two a day.  But of course we know that this is an average and some days you earn more and some days you earn less or nothing at all.  So your income is probably irregular.  Yet regardless of your income, your spending needs are regular and fairly predictable.  You need to make sure that the basic needs for food, water, energy and paying bills are met every day and not just when income is earned.  You need to find cash fairly quickly to overcome set backs such as an illness in the family.  You need to find enough money at one time to deal with big expenses on births, marriages, death and religious occasions.  And you may need to find cash to invest in a small business or income earning activity.  At such times when you desperately need cash and cannot find any, you tend to either go without, or you sell hard-to-replace assets at knocked down prices making you worse off in the process.  Or you draw on past income (saving) or future income (borrowing) through savings or loans. 

That's what financial services are for, and arguably the very poor need financial services more intensely than the non-poor because their money management pressures on a daily basis are more intense.  Therefore providing access to financial services is a major policy goal for the achievement of the MDGs and for social protection. 

The question is how.  Contrary to popular view, financial services are available to most poor people.  Where poor people want to draw on future income (i.e. borrow), they will often go to the informal money lender or a relative or a friend.  When they want to draw on past income (i.e. savings), they may go to informal groups organized to help people save.  By and large though, most of these services are very expensive (e.g. the informal money lender) or unreliable (e.g. friends and relatives) or risky (e.g. informal savings groups). 

The long-term prize for Bhutan therefore is financial inclusion:

-       universal access to financial services

-       at a reasonable cost,

-       with a wide range of financial services for everyone needing them

-       provided by a diversity of sound and sustainable institutions operating in a competitive market environment. 

While Bhutan is far from this ideal scenario, this nonetheless provides the key elements of a vision towards which we can all aspire and that can shape policy to respond to financial services needs in Bhutan.

The UN in Bhutan contributes to the goal of financial inclusion, primarily through the cooperation of the UN Capital Development Fund (UNCDF) with BDFCL.  UNCDF is the UN's capital investment agency for the world's 48 least developed countries. It creates new opportunities for poor people and their communities by increasing access to microfinance and investment capital. UNCDF programmes help to empower women, and are designed to help access larger capital flows from the private sector, national governments and development partners, for maximum impact toward the Millennium Development Goals. (UNCDF works in close partnership with UNDP).

In 2010, UNCDF signed an agreement with BDFCL to provide support through its Global MicroLead Programme.  The programme with technical assistance through BASIX, a livelihood and microfinance institution based in India, expects to achieve the following:

• Increase access to savings, credit and other services in rural areas by enabling BDFCL to provide these services directly;
• Encourage linkages between financial and non-financial services;
• Promote strategic partnership among BDFCL and NGOs to promote community based organizations and facilitate access to financial and non-financial services by rural households; and
• Facilitate multi-stakeholder consultations in Bhutan, so as to develop a strategy and action plan on microfinance that could be adopted by BDFCL as well as other policy makers in Bhutan.

The overall strategy is to support BDFCL to strengthen its systems and procedures in microfinance and help to increase outreach in 50 months to around 57,820 credit customers (from 24,519 at the end of last year) and 58,554 deposit customers (from 24,830 at end 2010) .  11% of credit customers will be in the form of groups.

The progress in the project is good and we congratulate BDFCL in reaching all the key performance targets of 2010, with an almost doubling of the number of depositors between December 2009 and December 2010 and the growth of deposits volumes by more than 5 times; and a significant growth in the number of active borrowers 36% of the active borrowers are women.

In a recent mission to Bhutan, our advisor on Inclusive Finance from Bangkok noted a number of key issues, which we hope to address in the coming months with BDFCL and with the RMA as the apex regulatory and supervisory institution. These issues are as follows:  outreach sustainability and demand

• Challenge of reaching people in remote areas:  While BDFCL has an extensive branch network in rural areas and is expending it, it is clear that the costs involved in delivering services will prohibit reaching some poor clients especially given the ceiling on pricing loan products in Bhutan.  Low-cost alternative delivery systems will have to be found to ensure the potential for financial inclusion.  In this regard, UNCDF has made a commitment in principle to BDFCL and RMA to help explore the potential for mobile banking in Bhutan;

• Offering financial services on a sustainable basis: the RMA has been a supportive institution to the development of the microfinance sector in Bhutan and is in the process of developing a policy for the sector.   It has also been thoughtful in adapting international best practices to the specific Bhutan context.  We look forward to participating in the development of the microfinance policy.  In this process, we would like to look at the potential for opening up the discussion on interest rates.  Currently, interest rate ceilings may have the effect of prohibiting the supply of financial services as the cost of operations is much higher to reach rural areas.  While this is a politically sensitive issue, we will be looking for advice from the RMA on how best to start a discussion on this topic, particularly if there is a desire for full financial access in the country. This is a subject that is of relevance to the support of IFIs as well as the UN agencies, funds and programmes and a coordinated approach to our collective support is important.  Thus we look forward also to an opportunity to discuss the policy with all concerned development partners under RMA's leadership

• Addressing the demand side of the equation: there is an increasing global realization that strengthening the supply of financial services needs to be balanced with strengthening the financial capability of poor clients.  As I mentioned in my introduction, one key problem in poor people's lives is how they are able to manage their limited daily income.  Access to finance provides one of the solutions.  The other is how poor people better manage their finances.  In other words, how they do their financial planning, how they manage their income and expenses, how they judge investment opportunities and so on.  Supply can only do so much and ultimately financial success for people will depend less on what financial institutions do and more on what poor people do themselves.  Therefore our role needs to be also to help poor people become active players rather than passive recipients.

In closing, on behalf of the UN family in Bhutan, I would like to reiterate our continued support and collaboration with the Royal Government of Bhutan, particularly in the area of Inclusive Finance.  Going forward microfinance services will be an important intervention to reduce poverty and to achieve the MDGs.  Empowering the poor and disadvantaged, particularly women, is at the heart of microfinance interventions and the goal is to ensure that these services are sustainable and accessible to all.

I would like to convey my best wishes to all the participants for fruitful deliberations and a successful outcome of the meeting.

Tashi Delek.