Thank you very much, Mr. Chairman.
I thank you for this opportunity to speak to all of you. I understand that many of you had a late night last night and I thank you for your attention today.
This is an important matter to discuss, I think, this area of how government funding can be used to leverage private funding so that the overall impact is much greater than either the private sector or the government could do on their own. I think the field of microfinance provides an interesting example of where that has happened and also provides examples both of the success that can happen and of the dangers of public-private partnerships. I'll go into that in just a little while.
First let me explain the Microcredit Summit Campaign. The campaign started in 1996 with a goal of seeing 100 million of the poorest people in the world reached by microfinance.
At that time, when we did the numbers, there were six million people being reached by microfinance. Our goal was to see 100 million reached in 10 years. We met that goal. We met it a year late, but we did meet it.
We had a big celebration here in Canada around that goal. We had our global summit in Halifax. At that summit in 2006, we reviewed our goals and set two new goals.
The first goal was to see 175 million of the world's poorest families reached with microfinancial services. The second goal was to see 100 million of those families actually move out of poverty. As a guidepost, we're using the extreme poverty line of $1.25 per day. We want to see 100 million families move from below $1.25 per day to far above that line. As you can imagine, this is actually the much more challenging goal that we face right now.
I will talk more about how we're going into that, but let me step back to this issue of public-private partnerships and what microfinance can teach us about these sorts of partnerships in regard to how they go right and how they sometimes go wrong.
When I started working in this area in the microfinance community, I actually got my start with Opportunity International, so it's good to be back with my friends here. That was 28 years ago. At that time, the only funding going into microfinance came from governments and from private donations.
About a decade ago, all the governments of the world combined were putting about $400 million a year into microfinance. Now, I should mention here that Canada has been one of the leaders and one of the key innovators that has made all of this happen. Early on, CIDA supported the Grameen Bank and BRAC, in Bangladesh. They then were small start-up organizations and now are two of the world's largest microfinance organizations. Canada has played a lead role in this from the very start, and it's a role of leadership that I think Canada can continue to play.
I've talked about how this started with just government investments, with $400 million in government funding a decade ago going into microfinance, plus more private donations. Today there are over 100 microfinance investment funds in the world, with a combined asset base of over $8 billion. That investment by governments has helped to build microfinance organizations to a scale such that private money has now entered in. Private money sees that there are both social and financial returns to be made in this area, and they've built this large base of funding to fund the continued growth of microfinance.
Let me pause here and talk about the key role that government played. My research tells me that the historical example of a microfinance organization that goes the farthest back is the Buddhist temple loan system of 400 A.D. in China. We've had microfinance systems around for that long, for over 1,500 years.
It didn't grow to any sort of scale until the 1980s, when governments got behind this effort and helped build this concept to a scale that the private sector then could come behind and continue to support. Government played a leading role.
Lately, though, microfinance has shown that there are times when the public-private partnership doesn't work as well as it should. We've seen examples in several countries recently, such as Morocco, Bosnia, and Pakistan, and then more recently in the state of Andhra Pradesh in India, where the finance has led to a funding bubble. There has been overindebtedness happening among clients, and sometimes that has led to overly harsh collection practices, with the net result of working with very poor people who are trying to improve their lives being that they instead have become overindebted and worse off as a result of an intervention that was supposed to make their lives better.
That's a challenge we need to look at now, and look at honestly. What did we do wrong? How did our good intentions lead to this negative impact, in some countries, on the clients we were seeking to serve?
I think government and the private sector working together can make a market. They can create a market where none existed before, or where none existed at a scale the private sector could involve itself in. The partnership can also break a market, if it's not done right.
The challenge, I think—especially from the government side, when it is investing—is to shape the market such that the incentives and the rules of the game are set up so that the public good for which the government was investing continues to happen, even as private sector players come in and begin to become the dominant funders in the market.
I want to provide a few lessons from my experience in microfinance. What could we have done differently and how could we have shaped this market better, with cooperation between civil society, government, and the private sector, to avoid some of the difficulties we've had?
The first lesson, I would say, is to make sure early on that you establish the rules for standards of behaviour. Because of these problems in the microfinance community, we've established a basic ethical code that all microfinance providers should follow. It's called the client protection principles. It's promoted by a group called the Smart Campaign, and it has been adopted widely in the community.
In my opinion, we should have done this two decades ago. It makes sense. We more or less assumed everyone's good intentions back then and didn't do the work to make sure that this code was put in place and that everybody was trained in it from the very beginning, when they started working. We're having to go back and do that work now. Establishing a code of behaviour is very important.
Second, and this is an area where government funding can be very important, is to establish metrics for the social side of the investment. Is the social good the government is investing for actually being accomplished? In our work, poverty alleviation is one of the main targets, but until recently the microfinance community hasn't had in a way of measuring whether that is being accomplished. We could tell stories about individuals who have moved out of poverty, but it has been difficult to say whether our client base overall has moved out of poverty. Because there was no social measure, financing decisions were made around financial performance measurements: who had the lowest arrears rate? Who had the highest growth rates? Who was generating the highest levels of profit?
All the money started to flow to the same small number of institutions. We have that $8 billion in investment. We also have international financial institutions making investments in microfinance organizations, and we have governments making direct investments. They're all flowing to the same institutions. In fact, 50% of the investments from the international financial institutions go to the same top 10 institutions in the field.
There should be a metric that those institutions with a social purpose can use to measure who's doing the best at accomplishing the social purpose, and the money should flow there. The purely private money can flow to the areas that have the best financial performance. Without the metric, all the money stacks up in the same places, and funding for innovation, funding for people doing the most difficult part of the work, is not available.
What we're doing in the Microcredit Summit Campaign is establishing a seal of excellence for poverty outreach and transformation. What the seal will do is recognize those institutions that, working with the very poor, can show that over time their clients are moving out of poverty. By awarding the seal, we hope to direct more funding in this direction and learn from the best practices of these institutions.
Again, I think government support in developing these indicators, in developing the metrics used, can help direct private and social capital in a way that creates the greatest good for the people you're trying to serve.
I appreciate this chance to talk with you. I encourage this group to continue looking at these public-private partnerships and the potential for them, but also, as you look at them, to look at ways in which the government can establish the rules of the game, can establish incentives and metrics that help that money flow in the direction of creating the public good that you are investing for.
Thank you very much.