Microfinance: a weapon of mass empowerment for the unbankable?

Microfinance is benefiting millions of people but is it reaching the very poor? How can microfinance do more to contribute to poverty reduction? Are microfinance organisations (MFOs) able to expand their boundaries and develop innovative services to reach out to more very poor clients? Do donors understand the potential of microfinance to achieve Millenium Development Goals?

A report from the Institute of Development Studies recognises that while microfinance is not a cure-all for poverty, not enough is being done to realise its poverty-reduction potential. Donors are urged to invest in poverty-focused microfinance as a key element in strategies to achieve their Millenium commitments.

Many wrongly assume that the poorest do not benefit from microfinance as they cannot productively use credit. Looking at microcredit through a banking lens, donors promote microfinance for enterprise development – but not as a means for cutting absolute poverty. They feel that because the poor live on the margins of society in remote areas, they are hard to reach. As the poor do not readily come forward to join microfinance programmes, donors judge it too difficult or costly to include them. Thus donors and MFIs often choose to focus on financial performance and do not believe that it is possible to combine this with poverty outreach.

Microfinance myths are dispelled by case studies from Bolivia looking at CRECER (an MFI applying the village bank model to provide finance and education services) and SHARE (an Indian credit provider using the Grameen methodology). Both exclusively target women. Evidence on how they combine financial and social objectives is presented:

• By international standards, 72.5 per cent of SHARE’s and 41 per cent of CRECER’s clients are living in absolute poverty – that is, less than US $1 a day: the great majority in both cases are also below national poverty lines.
• Three-quarters of those who have stayed in the CRECER programme for three years are less poor and a third have actually crossed Bolivia’s poverty line.
• Both MFIs have achieved 100 per cent financial self-sufficiency and are rated investment grade by internationally recognised rating agencies.

However, most MFIs remain biased towards less-poor clients. Conventional design features such as small loan sizes do not necessarily reach out to the poorest. Aid agencies, donors and MFIs wishing to expand their clientele among the poor are advised to develop greater understanding of household cash flows and the mechanisms by which clients repay loans. It is necessary to:

• realise that virtually all people are able to save
• stop linking participation in schemes to having to take out a loan
• abandon the practice of automatically offering progressively higher loans
• encourage flexibility to allow clients to make larger or smaller payments (or no payments) according to the cash flow situation in poor households
• promote more transparent reporting, development of standards and dissemination of good practice guidelines
• use donor funding to give MFIs incentives to include the poor and to develop better indicators and tools for measurement of poverty outreach.

Source(s):
‘Ensuring impact: reaching the poorest while building financially self-sufficient institutions, and showing improvement in the lives of the poorest women and their families’, in ‘Pathways out of poverty: innovations in microfinance for the poorest families’ edited by Sam Daley-Harris, Kumarian Press / Eurospan, by Anton Simanowitz with Alice Walker, November 2002, pp1-73 Full document.

Funded by: Ford Foundation

id21 Research Highlight: 28 August 2003

Further Information:
Anton Simanowitz
Imp-Act
The Institute of Development Studies
University of Sussex
Brighton
East Sussex BN1 9RE
UK

Tel: +44 (0)1273 873733
Fax: +44 (0)1273 621202 or 691647
Contact the contributor: k.knotts@ids.ac.uk

Imp-Act, UK

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'Microcredit: killer weapon in the fight against poverty?'

'New vulnerabilities in South Asia: time for new safety nets?'

'Unveiling the unrecorded: understanding the complex financial lives of India’s poor'

'Credit and control: does microfinance lead to women’s empowerment?'

'Innovations in microfinance: new product development in Bangladesh'

'Blurring the boundaries? Microfinance vs formal banking'