Can
Microfinance ‘Halve’
Poverty By 2015: A Review
By Sirajul Islam
26 September, 2006
Blitz
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.
The
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