Fighting poverty with microcredit

fighting poverty with microcredit

Can Microfinance ‘Halve’

Poverty By 2015: A Review

By Sirajul Islam

26 September, 2006

Efforts to extend the provision of financial services to poor and low income people have already helped achieve many objectives of major conferences and summits worldwide as well as the Millennium Development Goals, and Microcredit Summit 2006 goals, in particular the goal of cutting in half the number of people living in extreme poverty by 2015. But there is an enormous unmet demand for micro credit worldwide roughly estimated at 400 to 500 million poor and low-income people, the sector still has a long way to go to fulfil its potential. The encouraging news is that tens of millions of clients are currently being served. However, although the sector has grown and been commercialised significantly over the last thirty years, demand still far exceeds supply and capacity. To guide awareness-building activities prior to the Micro credit Summit 2006, and to ensure that the Summit’s activities go beyond promotion to producing substantive outcomes, a answer to the question is important as to what actions can the global and local community undertake to increase access to financial services to the poor, and thereby ensuring that micro credit and microfinance can effectively contribute to the achievement of the Millennium Development Goals.

Microcredit Summit 2006 provides a unique opportunity for the sector in Bangladesh to discuss some of the issues seldom discussed before. Sirajul Islam working in INAFI Dhaka office, a global network of microfinance practitioners, reviews the issues in a multi-part series in Weekly Blitz. The interpretation presented here, however, is solely of the writer's, and not necessarily the organisation he serves.

T he poor and poverty alleviation has become the object of unparalleled concentration nowadays both at national and international levels (e.g. attaining the Millennium Development Goals of ‘halving poverty’ by 2015, or to fulfil the MDGs by the year 2015 as a mission taken by the much talked about Microcredit Summit 2006 in particular), and both the national and international communities has committed to the targets set by the MDGs which focus on poverty alleviation for those living on less than a dollar a day. Microfinance has proven to be an effective and powerful tool for poverty alleviation. So, the Microcredit Summit 2006 set its attention to achieve the goals set forth in the MDGs by 2015 to reach 125 million poor around the globe by 2015, and alleviate their poverty. But regrettably, like many other development tools, however, microfinance has inadequately made a way into the poorer section of society, as a matter of fact. The poorest of the world consisting the vast greater part of those without entrée to some very basic needs like PHC and basic education. Likewise, they are the mainstream of those without entrée to microfinance as well. While there is no argument that the poorest can benefit from PHC and from basic education, it is not as insightful that they can also benefit from microfinance, or that microfinance is an right tool by which to reach the Millennium Development Goals of 'halving poverty' by 2015, or to say, the Microcredit Summit 2006 goals that copied the MDGs.

Though microfinance born in the early 80s in Bangladesh. it has been at length under assessment by mainly the western experts over the past 10 to 15 years, and the consequential writing is now very large. There are many focused analysis of the text done to weigh up the impact of microfinance on poverty alleviation and the number of thorough studies of client outreach and impact has grown significantly, particularly in the past few years. There has been development of many monitoring tools like USAID’s AIMS Tools, and CGAP’s Poverty Assessment Tool etc. to assess the poverty outreach of microfinance. But what the studies show? The studies show that the tools are relatively low-cost and realistic to use, and they give way valuable data for both programmes and donors. They also show that though the average loan size is an easy indicator to collect but proves to be untrustworthy when measuring depth of outreach, and MFIs show substantial multiplicity in their skill to reach poor populations. But the results also show that outstanding financial performance does not always mean excellence in outreach to poor households, and reaching the poor is not at odds with maintaining excellent financial performance and professional business practices. Many studies show that programmes that make poverty cutback an clear aim and make it a part of their organisational culture are far more useful at reaching poor households than those that value finance above all else, and these lessons indicate to normal evolutions in the microfinance sector. Many MFIs have an inclination to focus foremost on their own financial survival, and have usually been unwilling to spend for the most part in evaluations. At present, the majority of MFIs neither determines the composition of their customers upon intake nor evaluates the success of their programme in terms of poverty alleviation. The development and use of the new tools for market analysis and evaluation suggests that failure to monitor and evaluate can cut costs in the short-run at the expense of achieving long-term social and economic goals.

The review of many studies also indicates to a number of clear-cut wrapping up about the impact of microfinance on poverty alleviation. Data shows the positive impact of microfinance on poverty alleviation as it relates to the first six out of seven Millennium Development Goals. There is also a vast amount of proof authenticating a positive weight on boost in income recorded by various researches and lessening in susceptibility in some studies. Though there are, however, less studies with proof of impact of microfinance on health, nutritional status and primary schooling attendance etc, but the "existing evidence is largely conclusive and positive", told Graham Wright in his book Microfinance Systems: Designing Quality Financial Services for the Poor (The University Press Limited, Dhaka, Bangladesh, 2000).

Although difference on exact definitions of levels of poverty, there is a general agreement amongst the experts that microfinance is not for everybody. Many of them told that entrepreneurial skills and ability are necessary to run a successful micro-enterprise and not all-potential customers are equally able to take on debt. While these points are true across all strata of poverty, it is assumed that they have a greater effect on the very poorest, that is, the sick, mentally ill, destitute etc who form a minority of those living below the poverty line are typically not good people for microfinance. Most researchers agree that this group of people would be better candidates for safety-net programmes or grants recipients (of direct basic assistance). Microfinance is effective for a broad group of clients, including those who are living in the 'bottom half' of those below a country’s poverty line whom we call the 'poorest' or 'hard-core poor' or 'extreme poor' etc. They make up the group that generally interweave the various definitions of extreme poverty: landless-ness, limited access to basic social services, average per capita income of less than $1 a day, and bottom third of a relative poverty ranking. Specifically here, various studies show that there is no evidence of an opposite relationship between a client’s level of poverty and their entrepreneurial ability (Garson), and borrowing patterns and the tendency to save have been found

to be similar across clients at different levels of poverty. But many of the MFIs exclude the extreme poor, and reasons can be easily understood by studying the financial performance of MFIs targeted to the poorest clients to those of MFIs that do not reach the extremely poor clients. There is however little proof found that clients with existing micro-enterprises or employment are the only ones that can benefit from microfinance.

Verified in a number of studies, it has been that the very poor can improve their socioeconomic conditions, researchers have pointed to several common issues that make microfinance work for the very poor. Even a well-designed microfinance programme is unlikely to have a positive impact on the poorest unless it purposely seeks to serve them through appropriate product design and targeting. Experience shows that if not there is a targeting tool, the very poor will either be missed or they will be likely to exclude themselves because they do not see the programmes as being for them, do not have the proper dresses to get out of home, etc. There is also a strong liking of the MFI officials to move to the top of the customers group, and to give little consideration to the needs of the very poor, with the end result that their percentage reduces over time. Only MFIs that design programmes around the needs of the extreme poor are likely to retain them as clients.

In the microfinance sector, there is also a wide-ranging agreement that easing savings is the key, because there is a high demand for it among the poorest and because savings play a role in shielding them against the seasonality of cash flows and fulfilling an insurance like purpose in the microfinance programme. In addition, building up deposits strengthens financial control for clients and can ultimately capitulate guarantee and serve as a source of funding for MFIs. Savings alone, however, have found as only a minor developmental impact because the defence against shock might allow children to stay in school or income-earners to get medical treatment and reduce time away from work, but it is time-consuming to generate any considerable capital in itself unless credit is also available. The review revealed that MFIs that centre on savings more than credit have a tendency to reach a smaller proportion of the very poor, have a lesser and slower impact on poverty alleviation, and are therefore less contributing to reaching the Millennium Development Goals, or the Microcredit Summit 2006 goals by the target dates.

It is clear from the substantiation that there are strong potential synergies between microfinance and the provision of basic social services for microfinance clients. The benefits derived from microfinance, basic education, and primary health care, are interrelated, and programmes have found that the impact of each can increase when they are delivered together. It is also found that the trivial cost of providing education or basic health information can be considerably reduced when the infrastructure for microfinance is already in place, and services provided need to be relevant to the needs of the target group and not just an append that is of poor quality. Very few researches in a straight line evaluate unconventional interventions. Most researchers conclude that it is hard to separate the impact of a specific development tool as each contributes to the others. While the question of which development tool gives the biggest benefit is genuine in principle, in practice it is difficult to compare the benefits achieved by different interventions. With this in mind, it should be noted that microfinance has the possibility to have an instant impact on a wide range of poverty alleviation targets, such as, income, health, nutrition, and education, but the basic health is likely the most crucial intervention, and should be combined with microfinance in order to strengthen the impact on the number1 Millennium Development Goal of reducing those living on less than $1/day. Expanding primary education for children has a wide-ranging impact on the poverty reduction targets (income, health, nutrition, and fertility) but if any paybacks were late, it would lessen its efficacy for accomplishment the targets by 2015.

Microfinance measures up to happily to other interventions particularly with regard to cost effectiveness and prospects for sustainability. An advantage of microfinance is that donor investment is recycled and reused. Direct comparisons done by Shahidur Rahman Khandker in his book Fighting Poverty with Microcredit: Experience in Bangladesh (Oxford University Press, Inc. New York, 1998) show that microfinance can be a more cost-effective developmental tool than alternatives including formal rural financial intermediation, targeted food interventions, and rural infrastructure development projects. Moreover, not like many other interventions, costs for microfinance tend to diminish with the scale of outreach. Regarding the issue of sustainability, it can be said that few, if any, other development tools have the potential to become sustainable as such in the cases of microfinance, where after initial start-up grants, new inputs are not required for every future client. There need not be a trade-off between reaching the hard-core poor and attaining financial sustainability however. Although there are no accurate econometric models to confirm it, there is ample evidence that MFIs targeting the very poor can fare as well financially as those that don’t. There is also plenty of undependable evidence that MFIs (esp. the small microfinancing NGOs) that target poorer clients can achieve largely higher repayment rates than those that target richer clients. It should be noted that laying emphasis on financial sustainability above all else could have the practical effect of excluding the extreme poor because of the prevalent misperception that the poorest are a greater credit risk and the reality that the unit costs of small loans tend to exceed the unit costs of larger loans.

To support the positive impact of microfinance on poverty alleviation there is plentiful of data as it relates to fully six out of seven of the Millennium Development Goals. In particular, there is ample confirmation that substantiating a positive effect on income smoothing and increases to income but there is less evidence to support a positive impact on health, nutritional status and increases to primary schooling attendance. Yet, the evidence that does exist is largely positive. Microfinance is an instrument that, under the right conditions, fits the needs of a broad range of the population, including the very poor, those in the 'bottom half' of people living below the poverty line. While there will be people in this group who will not be suited for microfinance because of physical or mental illness, etc, the keeping out of this small proportion of the population will likely not be a restraining working issue for MFIs.

Indications are that the poorest can benefit from microfinance from both a material well-being and social well-being point of view, and that this can be done without endangering the financial sustainability of the MFIs. While there are many preconceptions presented in the studied texts against extending microfinance to the hard-core poor, there is little experimental evidence to support this position. However, if microfinance is to be used as an achieving tool for ‘halving’ poverty by 2015, specific targeting of the very poor will be necessary. Devoid of this, microfinance institutions are implausible to achieve the MDGs, or the Microcredit Summit 2006 Goals or simply they could not reach 175 million clients by 2015.

Posted on 08 Sep 2006 by Root


Category: Payday loans

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