Toespraak Koenders bij FMO seminar 'The Future of Development Finance' (Engels)
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financial crisis
Your Royal Highness, Mr Arnold, Arthur, ladies and gentlemen,
There can be few people in this room today who are not curious about the short- and long-term impact of the current international financial crisis on the world wide economy. Fortunately, the crisis has not yet directly hit the financial sector in developing countries. But this could change without warning.
And the crisis could have an indirect effect if Western banks reduce foreign loans and investments in developing countries. In June, the IMF predicted a fall of 15 per cent, but the true figure could well be higher.
Furthermore, because of the indirect effect of the crisis on economic growth in the major world economies, poorer developing countries will also suffer from a decrease in demand for their products. It is very likely that the robust economic growth in developing countries over the past years will diminish over time. This downturn will be more severe the longer the credit crisis in the world continues.
UNGA special event
Whilst the consequence of the financial crisis on developing countries is stil unclear the party in New York is over. Over the last two years total bonuses equalled the entire ODA for Africa. I’ve just come back from New York, where I spoke with world leaders about where we stand on achieving the Millennium Development Goals. The financial heart of the world – New York – isn’t beating quite as strongly as it was, having suffered a number of cardiac arrests.
It was a difficult setting for a conference that required a large ambition level for reaching the MDG’s. The risk of protectionism, lower government outrags and risk avoidance makes the international development diplomacy quite hard. Yesterday I was in Bordeaux on the Dolha conference. I met other development ministers there and we all agreed on this. But it is time!
It is a pity that so many ordinary people are suffering under this crisis, and that the fallout from a crumbling American financial system, founded on turnover-based commissions and bonuses, could not be contained within the banking sector.
As the financial world collapsed around us, it fell to me to address a special event of the UN General Assembly on the importance of a strong financial sector. It seems it’s up to the development minister and the world’s poorest countries to step in and take the risks when the banks throw in the towel!
At the UN General Assembly we began by explaining the basis of a good system: saving. Not because this makes for healthy banks, but because it is the poor who benefit most from setting aside money for unexpected life events. And the most vulnerable will be affected most by the inflationary crisis.
And although we all know that it is not a solution, we do know that truly inclusive financial services can fundamentally transform people’s lives and empower them to become their own economic agents and Africa’s true development champions.
The same goes for insurance products for private individuals in developing countries. There is a great need, among the poor as much as anyone, for reliable health insurance, certainly at a time of rapidly rising food prices. In these times there also should be an insurance to plant next harvest. For example the price of chemical fertiliser will also be higher. Furthermore there is a need for effective old-age pension provision.
If the poor gain access to a wider range of financial services, they can cope better with fluctuations in their personal financial situations.
financial sector policy letter
Because the degree to which low-income countries are interconnected with the global economy is still relatively small, the financial crisis so far seems to be contained to to a larger extent.
Part of the reason, the good news (!), we have not yet seen many acute financial crisis in developing countries lies in better oversight of banks and investments within a financial infrastructure, with credit bureaus and regulations for leasing and collateral. But there are also many countries that are vulnerable.
In fragile states in particular, there is still a lot to do in terms of legislation and regulation. So I see strengthening legislation and regulation in the financial sector as a key objective. We could do it, for example, through
• FIRST, the Financial Sector Reform Initiative that provides for short-term technical assistance for the financial sector in developing countries;
• and CGAP, the Consultative Group to Assist the Poor which helps organisations involved in microfinancing.
And above all we must ensure that supervisory bodies better understand and are better equipped to deal with formal and informal MFIs. Nobel prize winner Muhammad Yunus is among the advocates of this approach.
In my policy letter on the financial sector, which I sent to Parliament last week, I argued for a transparent, robust financial sector – precisely because it provides a basis for poor people and small businesses to participate in their country’s economy. This is not a quick fix.
Effective oversight of banks and international cooperation between central banks to build a clear picture of how our institutions relate to one another are the only effective tools for preventing recurring banking crises.
FMO’s role
In my policy letter I also call on financiers like FMO, that provide additionality, to offer savings and insurance products as well as credit. Microfinancing remains a priority. Private financiers still see it as a safe investment.
Because it is likely from the analysis just given that there is a chance there will be less funding from commercial institutions flowing from rich countries to the poorest group in developing countries, the relative role of donors and development banks – like FMO – in this sector will gradually increase again. The role of additional financiers will become more important. It is precisely at a time like this that they will come into their own as catalysts who can share risks with private financiers.
Development cooperation is keen to play its part in the financial sector, primarily to promote good regulation and supervision.
And secondly to supplement the activities of business and banks in mobilising private finance for developing countries. FMO is our established partner and our first point of contact in this field. So I am very pleased that – under the phantastic and innovative leadership of Mr Arnold – it is prepared to help support financing for small businesses, or ‘meso-financing’. Today I have launched a pilot meso fund for Georgia, Mozambique and Vietnam. It was developed with the partners that drew up the Schokland Agreement on meso-financing. Arthur Arnold also signed on behalf of the FMO, and I am delighted with the constructive and innovative role that his institution has assumed in the interests of making these three pilots a success.
Thirdly, I will focus on innovative financial and risk management instruments aimed specifically at products for the poor and SMEs.
praise for FMO
FMO has of course already played a constructive and innovative role in developing the Currency Exchange Fund.
With this ground-breaking fund, FMO, together with the Dutch government and ten partners, provided a unique solution to the currency mismatch problem by paving the way for international financiers to issue loans to entrepreneurs in the developing world in local currency, thereby offering a buffer against currency risks.
I would like to take this opportunity to again express my pleasure at having been among the signatories of the first close a little over a year ago. And I salute FMO and Mr Arnold for coming up with such an innovative instrument.
Ladies and gentlemen, I think you will agree with me that FMO, originally set up by the Dutch state, has proved itself within the wider world of development banks. It is currently in fine shape, both financially and in terms of what it has to offer. It has become a stable business with substantial assets. This provides a solid and reliable basis from which to invest more in difficult environments.
praise for Arthur Arnold
If risks have to be taken, first-class risk management is essential. This is something that you, Arthur, understood. You have done a tremendous job and you leave behind a superbly well-managed business with a wealth of expertise in the area of low- and middle-income countries.
Under your leadership, FMO has developed into an even more professional organisation, which meets the supervisory requirements of the Dutch central bank. You can look back with justifiable pride at what you have achieved.
In the period in which you stood at the helm, FMO and my ministry established close ties. And we are delighted, for our relationship is consistent with our vision of what our public-private partnership should be. I am confident that we can continue in the same vein with your successor Nanno Kleiterp.
Private sector
You have also driven the debate about the role of the private sector in development cooperation. I don’t need to tell anyone here how important the private sector is to a country’s economic growth. You can’t have growth without the business community: growth is created by the business community! The private capital flows, foreign direct investment and remittances that flow into developing countries are many times larger than the ODA supplied by governments. So they largely determine the scale of a country’s economic growth.
This is one of my key policy positions. Because you can’t have effective poverty reduction without economic growth. Public-private partnerships can be a good way of achieving it, provided they are based on clearly defined conditions and we avoid laying risks and losses at the door of only one party – usually the government. Privatising profit and socialising losses is not the answer. At least that should be concludes these days.
Distribution
Sadly, growth does not automatically benefit the poor. For that reason, I have to rely on my partner, FMO, and the development banks. At its core, FMO is a ‘triple A’ bank whose primary objective is poverty reduction.
It is up to us – me and you, the development banks – to ensure that the poor have the opportunity to get work, and keep working. We can do it by giving them access:
• first, to financial services like microcredit;
• second, to land;
• third, to registered land rights;
• fourth, to Western markets without tariffs;
• and finally, to knowledge, which can foster new methods and products that will ultimately increase agricultural production.
We are forging new alliances based on demand from partner countries. And if the private sector flourishes, the fruits of that growth must be distributed fairly.
That is one of the pillars of our policy: growth and distribution! Everyone, and especially those people at the bottom of the social ladder, must benefit. They must be allowed not only to whet their appetite but also to eat their fill. As development cooperation minister it is my task to make that happen.
2 sectors from the 2012 strategy
Under Arthur Arnold’s inspirational leadership the FMO has built up a wealth of experience over the years. Experience that is hugely valuable to these efforts. The FMO has a strong track record in strengthening the financial and energy sectors, both of which are extremely important. I would only say: keep it up! Development is about learning best practices.
Additionality
I realise – particularly at this moment in time – the importance of investment by development banks in the private sector. They can serve as catalysts in mobilising private capital for developing countries. In these difficult times, it is we who need to be offering additional finance.
I believe it is your challenging task to invest in the most difficult areas with the highest risk – such as fragile states – rather than in the richer developing nations. Stronger countries can be left to work with the commercial banks. What is more, we must support the groups with the greatest potential: women and farmers.
Agriculture
Modern development cooperation wants to achieve the Millennium Development Goals. It wants to enter new markets and find new opportunities for growth within underdeveloped markets. The agricultural sector is one such example. In recent years its potential has been neglected by both donors and local governments.
Everyone feels the impact of rising food and oil prices, but the hardest hit are the poorest countries. So we must increase the amount of food available in developing countries – particularly when prices are high. Together we need to support agricultural businesses and offer them new technologies, research, and access to markets and financial services.
Alongside private partners like Rabobank, my ministry is working to ensure that many thousands of farmers, in countries like Tanzania, Rwanda and Mozambique, are gaining greater access to financial services. My ministry has contributed one million euros to set up a guarantee fund that can provide guarantees worth 20 million euros for export transactions by local cooperatives.
I see opportunities for you here too. FMO is a development bank, which means it is uniquely placed to get involved in this highly relevant niche. There is investment potential here, where development banks can offer services not provided by commercial banks. There are challenges here too, which a development bank can – in fact, must – rise to. Given your position, you owe it to the world! Other development finance institutions have already added the agricultural sector to their portfolios.
Gender
Another area that I would hope and expect FMO and the other development banks to get more involved in is gender. In developing countries, women make up the majority of the labour market. If poor women get the opportunities and resources to enter the job market, this will have a major impact, with an above-average multiplier effect on communities’ and countries’ socioeconomic development.
Because women often suffer inequality when it comes to property and inheritance law, and are not able to easily open a bank account or obtain credit, they can profit more than most from microcredit and lease constructions, which don’t require any collateral. And we must not forget the positive social effect: the improved position of women in these countries.
Results
In the end it is all about results. In the fight against poverty, development banks are indispensable. But due to the scepticism that exists in some quarters about development aid, we need to account more often and more fully for the investments we make and the results we achieve.
FMO is a development finance institution that has pioneered new ways of measuring results. But in these times of intense criticism concerning the impact of development efforts, I would like to have an even clearer picture of how and where development banks in general, and FMO in particular, can make the impact of development cooperation more tangible.
We need not only to give more poor people access to financial services, energy and water, but also, in 2015, to account for how many people we have reached.
Conclusion
This new world cannot succeed without development banks, but you must continue to act like development banks. Keep doing what you do best. Be a development bank. Offer additionality. Don’t become overly cautious. Keep developing new, innovative practices and maintain the courage you have shown under Arthur’s leadership to invest in projects and places where no other bank dares to venture.
My ministry will continue to work closely with FMO. In fact, this weekend the government’s stake in FMO grew with the purchase of shares in Fortis, FMO’s largest shareholder after the government. A good deal all round.
Mr Arnold. Arthur. Perhaps you can offer us a final word of advice? On the eve of your departure, the FMO suddenly has the chance to embrace a whole new area of operations: the United States.
The US offers development banks a great challenge. A wide range of activities with plenty of risk. What do you think?
I wish you all every success and, on behalf of the Dutch government, I thank you deeply again for all your efforts.