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INTRODUCTION
In 2000, the U.S. Congress passed the Microenterprise for Self-Reliance Act,1 which
mandates that one-half of all U.S. Agency for International Development (USAID)
microenterprise funds must benefit very poor people. The legislation defines the “very
poor” as people living on less than US$1 a day2 or those among the bottom 50 percent of
people living below a specific country's poverty line. This paper uses the same definition
of “very poor,” which essentially implies extreme poverty. The law also requires USAID
to develop and certify tools for assessing the poverty level of microenterprise
beneficiaries so that the agency can determine whether or not its development partners
are achieving the mandate of assisting the very poor.
The U.S. legislation was advanced by pro-poor microfinance advocates who sought
transparency concerning who the microfinance industry is really reaching. These
advocates, and certain microfinance practitioners, viewed the legislation as necessary
because most microenterprise development (MED) practitioners were not reaching very
poor people, despite mission statements and promotional materials that identified these
people as their target clients. The reality is that many microfinance organizations have
no idea of who they are reaching. Most microfinance clients today fall in a band around
the poverty line; the extreme poor are rarely reached. It it thus crucial that policymakers,
donors and development practitioners have reliable information about the poverty levels
of the beneficiaries of development services in order to steer investments and programs
toward targeted population segments they want to reach.
1
corresponding trend towards commercialization and financial sustainablility is driving
microfinance operations. As commercial banks downscale to serve large portions of the
microfinance market, the hope is that nongovernmental organizations (NGOs) will
continue to innovate and create better ways to reach and serve very poor people, who can
later be integrated into mainstream microfinance and the formal financial system.
Although many practitioners and implementers opposed the U.S. legislation as restrictive
and costly, it has successfully brought the issue of knowing who your client is, and how
best to serve her or him to the forefront of microfinance discussions. Many organizations
have created poverty assessment tools and conducted client analyses over the last two
years and have come to realize that they are not even close to reaching their intended
clients. The legislation has prompted many practitioners to think beyond poverty
assessment and focus on the questions: Who is the client? How can we better reach and
serve intended clients? If microfinance organizations better understand the needs and
wants of their clients (in any income bracket), they will be more successful in designing
appropriate products and services and retaining clients.
And thus we come to the question: can microfinance reach very poor people? The authors
of this paper believe the answer is yes, but recognize that doing so is not easy. The
purpose of this paper is to highlight promising approaches to reaching and serving very
poor people with financial and non-financial services. Such programs do not look like
the majority of microfinance programs and are unlikely to achieve operational
sustainability as quickly as mainstream microfinance institutions now achieve it.
Nevertheless, there has been great innovation in the developmentment of low-cost
delivery mechanisms, products and services appropriate for very poor people. This paper
will examine some of the common elements that make such programs successful and
recommend areas for further research.
PART I. BACKGROUND
3
World Bank, World Development Report 2000/2001, page number?
4
World Health Organization (WHO), Reaching the Poor, 2004, page number?
5
Ibid.
6
World Bank, World Development Report 2000/2001, page number?; and WHO, Reaching the Poor,
2004, page number?
2
The complex and multidimensional nature of poverty makes it a challenge to measure.
For the sake of simplicity, an income-based measure of poverty is used most widely, as it
permits comparisons between regions and countries. The World Bank, for example,
defines extreme poverty as an income of US$1 a day, seen as the minimum amount
necessary for survival. To calculate extreme poverty in an individual country, the dollar-
a-day measure is converted to local currency using the purchasing power parity (PPP)
exchange rate, based on relative prices of consumption goods in each country. Based on
such calculations, the World Bank estimated that 1.2 billion people were living in
extreme poverty in 2003, roughly 23.3 percent of the population of all low- and middle-
income countries.7 While the definition of very poor people used in this paper is based on
income, the programs explored in the following sections address many aspects of extreme
poverty, not income levels alone.
7
World Bank, Sustainable Development, 2003, page number?
3
Although most MFIs aim to reach poor people, it has become increasingly apparent that
they rarely serve very poor people. Most MFIs reach the “upper poor” in much greater
numbers than the “very poor.”8 The extent to which microfinance programs are able to
reach the poorest of the poor remains an open debate.9 In fact, there is no general
agreement that, in order to have a real impact on poverty, microfinance should expressly
target very poor people.
Both breadth and depth of services are very important for the microfinance industry.
What has become apparent, however, is that very poor people are unlikely to be served
by microfinance programs unless these programs are intentionally designed to reach
them. In order to design products and services for this target market, it is important to
better understand the factors that contribute to the dire conditions of very poor people.
Physical barriers. In many settings, very poor people live in remote rural areas that have
no access to financial services. Reaching very poor people in remote rural areas means
higher transactions costs for MFIs. Such areas are often characterized by poor
infrastructure, relatively low population density, low levels of literacy and relatively
undiversified economies. Many rural economic activities, moreover, have low
profitability and/or are high in risk. Most outlets of microfinance programs in rural areas
also lack trained professionals, who are not properly supervised by head office.
8
Hickson, Reaching Extreme Poverty, 1999, page or chapter number.
9
See, for example, Aguilar, Is Micro-Finance Reaching the Poor?, 1999.
4
save a certain amount before they can access loans, which often excludes the
participation of very poor people.
Self-exclusion. Even when very poor people are not actively excluded by a community,
they often opt out of community-related projects because they are intimidated, believing
that the services offered by such projects is not suited to their needs.10
Sector risk. Very poor people are often dependent on subsistence farming as their main
source of livelihood. Given the high risks of agricultural activities and the unique
requirements of financing such activities (payback of loans, for instance, can only take
place after the production period, which often lasts several months ), MFIs usually shy
away from lending to this sector.
Impact of chronic poverty. Living in absolute poverty for a prolonged time strongly
affects a person’s dignity and hope for the future, as well as his or her ability to take
initiative and overcome stigma. Moreover, poor health (especially chronic diseases such
as malaria and HIV/AIDS) presents a major obstacle for conducting successful
microenterprise activities.
10
SEF Paper LOOK UP
11
Ibid.
12
Hickson, Reaching Extreme Poverty, 1999, page number?
5
Table 1 provides a snapshot of key features of selected microfinance programs that
explicitly target very poor people. It should be emphasized that poverty levels of clients
in programs listed in table 1 are measured and reported by the organizations themselves,
not by means of a universal and reasonably reliable poverty measurement tool (whether
based on income or expenditures), such as that currently being tested by USAID. On the
other hand, several factors (e.g., targeting methodology and the selection of certain
vulnerable groups, such as bonded laborers, dalits and people living with HIV/AIDS)
suggest that most of these initiatives do indeed target very poor people. In the future, it
might be worthwhile to measure the poverty levels of clients served by these programs
and to analyze how effectively and efficiently these programs serve very poor people, if
they actually do. The emphasis of such research should be on identifying the factors that
contribute to program success.
Table 1. Examples of serving very poor people through microenterprise
development programs
6
TUP, Cambodia - Business skill development
Very poor people with Active targeting Individual business seed Learning conversations
W.O.M.E.N. HIV/AIDS based on poverty capital grants - Healthcare services
indicators Savings match - Health and sanitation
awareness
PACT, OXFAM, FFH, - Basic literacy
CARE, CRS, NABARD Poor and very poor Geographic Savings-led MF - Business skill development
Asia and Africa women targeting Savings and lending Self- Learning conversations
help groups - Social Empowerment
Bank/MFI credit to SHGs - Gender sensitization
Types of organizations
The examples of successful downreach highlighted in table 1 include both MFIs that aim
for financial sustainability, as well as multidisciplinary organizations other than MFIs.
The two MFIs featured in this paper, Small Enterprise Foundation (SEF) in South
Africa and spell out (ASA) in India, use a Grameen model to provide loans to solidarity
groups of poor and very poor women. [GAAMAA, if you have data on financial
sustainability for these mfis, please put the information here] In order to more
effectively reach this target group, SEF established a separate program, the Tshomisano
Credit Program (TCP). This program is designed to reach people living in the bottom 30
percent below the national poverty line. Freedom From Hunger (FFH) uses another
group-based lending approach—village banking—which it offers as a new product line to
existing rural banks and credit unions, enabling them to reach poorer clients. What sets
these three cases apart from “mainstream” microfinance providers is that each program
offers non-financial services in addition to its financial products. These additional
services include education, skill training and confidence building.
The remaining case studies relate to organizations and projects that typically share a
broader mission of poverty alleviation and offer services that include microfinance or
microenterprise development among many other activities. Since these organizations use
an integrated approach to poverty alleviation—using microfinance as just one of a
package of services—their activities are less bound by the rigid financial sustainability
criteria that govern most MFIs. Spell out (BRAC), for example, a large, multifaceted
development organization in Bangladesh, operates its broad rural credit program in
addition to two microenterprise programs that specifically target very poor people. Its
Income Generation for Vulnerable Groups Development (IGVGD) program provides
food subsidies and intensive skills training to vulnerable women, as well as a standard
package of microcredit, healthcare and social services. BRAC’s more recent program,
Challenging the Frontiers of Poverty Reduction / Targeting the Extreme Poor
(CFPR/TUP), abandons loans altogether and offers enterprise asset grants instead to the
same target group. Trickle Up Program (TUP), an international development
organization, also assists very poor people with grants, in this case, to start or expand
microenterprise activities. The organization also offers business training, relying on local
partner agencies to provide other development services, such as education, healthcare and
social empowerment.
7
The South Asian Project against Debt Bondage of the International Labour Organization
(ILO) and the American Refugee Committee’s (ARC) programs in West Africa both
target uniquely vulnerable groups: bonded laborers (ILO) and refugees the Mano River
Basin (ARC). These programs also employ a combination of financial and non-financial
services to lift extremely vulnerable people out of poverty through microenterpreneurial
activities. Finally, many organizations worldwide increasingly endorse savings (rather
than credit-led microfinance) and the formation of small community groups to promote
self-managed microfinance services by the poor and very poor, especially in rural areas.
These small savings and lending groups, sometimes known as self-help groups (SHGs),
also serve as an “entry point” for non-financial poverty alleviation programs.
Other initiatives utilize a more meticulous targeting method. SEF, for instance,
introduced a visual poverty indicator test to identify very poor people, after it realized
that its original microcredit program did not effectively include such customers. SEF
went on to create participatory wealth ranking (PWR), a poverty assessment technique
that involves community members in identifying the poorest among them. BRAC went
through a similar evolution. Its IGVGD program first used a rather passive targeting
method, extending services to food-insecure women who were selected by local elected
representatives. Its CFPR/TUP program later used geographic targeting, PWR and
surveys to identify the extreme poor.
13
Hickson, Reaching Extreme Poverty, 1999, page number?Ibid.
8
Products and services
When it comes to providing very poor people with relevant and useful services, designing
the right product is as important as with any other market segment for the microfinance
industry. The case studies show a wide variety of financial services available to very poor
people. In some cases, the same products are offered to poor and very poor clients alike.
In such cases, an active targeting strategy is often necessary, as SEF learned from
experience: only after it began implementing an active targeting method, it managed to
reach the poorest sections of the communities it served. Especially when clients have
multiple options to choose from, the loan size, type of financial service, as well as the
delivery system can all affect to some degree the poverty level of the most likely users.
SafeSave in Bangladesh for instance manages to attract extremely poor households, by
allowing them to deposit very frequently very small and variable sums of cash, which is
very relevant to the needs of this section of the population. 14 PUT IN REFERENCE!
Similarly, mandatory group meetings might be a price that only very poor people might
find worth paying to access savings or lending services. Both SEF and ASA use a
solidarity group lending approach based on the Grameen model. They argue that very
poor people can pay back loans just like the better off middle poor. Instead of modifying
their core microcredit model for the poorest segment of their client population, both
organizations opted for providing very poor people with additional services that are
meant to improve their livelihoods as well as their ability to pay back small loans. In
fact, all initiatives reported in the case studies offer, each in a different degree, a range of
non-financial services, discussed in more detail in a later section.
Other credit approaches build in repayment flexibility for loans extended to very poor
people. Grameen Bank in Bangladesh, for instance, started a zero-interest credit program
with flexible repayment schedule for beggars.15 [PUT IN REFERENCE!] need to add
some additional information, either that these practices actually improve repayment
rates, or that they have helped the program have a positive impact.] Taking into
account the vulnerability and irregular cash flow of people at risk of debt bondage, the
ILO program also advocates a softer repayment culture, including timely repayment
refunds, repayment holidays and tailored repayment schedules.16 [PUT IN
REFERENCE!] [query: and the results are? Better repayment rates? Better
impact?] The savings-led approach, on the other hand, recognizes that savings are often
more important for very poor clients than are loans. Members of savings groups all save
and as their pooled savings grow, individual members can take loans from the group fund
at an interest rate set by group members themselves. Some savings-led models, such as
the NABARD-promoted SHG linkage model in India, for example, facilitate access to
bank loans for strongly performing groups in order to expand the rather limited funds of
such groups.
14
XXX
15
XXX
16
XXX
9
Finally, organizations like ARC and TUP offer program participants seed capital grants,
which, although extended with certain conditions, do not have to be repaid. [query: and
the results are?] After the initial grant, ARC provides qualifying groups access to loans.
TUP does not provide a follow-up stage, but the majority of its local partner agencies
facilitate savings, while some allow successful TUP grantees to “graduate” to a loan
program. In Cambodia, TUP partner agency W.O.M.E.N encourages regular savings
after an initial grant by matching the savings of program participants (households living
with HIV/AIDS) for one year, up to a maximum of US$25.
The majority of the programs examined by this paper cases deliver financial services to
groups rather than individuals. ASA and SEF utilize Grameen Bank–inspired solidarity
groups, while FFH promotes village banking. Self-help groups in Asia and Africa
[queries: any specific program? facilitate savings-led microfinance through member-
owned groups. Finally, ARC in West Africa offers enterprise grants and loans to groups
of varying size, and the ILO project in South Asia delivers a range of financial services to
groups of bonded laborers. TUP, plus the IGVGD and CFPR/TUP programs of BRAC,
are the only exceptions: they opt for direct service delivery to individuals. SafeSave in
Bangladesh also implements its microfinance program (flexible savings and loan
products) to individuals, based on the belief that clients, no matter how poor they are,
usually prefer individual service.17 Individual service delivery may be more appropriate,
moreover, for clients who find it difficult to attend meetings or whose vulnerability
makes them subject to too much stress from group pressure. On the other hand, the
advantages of a group approach include reduced transaction costs, as well as a certain
degree of social pressure that helps manage and allocate funds effectively. The benefits of
group membership—including improved self-confidence and negotiation power—can
also be extremely important for the most vulnerable community members.
More common than BDS is the the provision of a social safety net to very poor people,
such as the food grain subsidies and basic healthcare services offered by BRAC’s
17
Rutherford, Helping Mickles Make Muckles, 2004, page number?
10
IGVGD program. Improved food security is often the most important change in the life
of households that manage to increase their incomes. Very poor people also frequently
suffer from chronic poor health. BRAC, ARC, the ILO bonded labor project, and Trickle
Up partner W.O.M.E.N. all provide healthcare services as an important part of the safety
nets through which they assist the poorest members of a community. In the case of
sickness of a breadwinner, very poor households risk the rapid loss of assets because they
face new expenses and lose part (or all) of their income. Village bank members of
Freedom from Hunger’s Credit with Education program similarly receive not only credit,
but also awareness training and education on nutrition, sanitation and health issues.
Similar health and nutrition education is often delivered via savings groups and self-help
groups, assisted by organizations that promote savings-led microfinance models.
Social safety nets, skill training, healthcare, awareness-raising and empowerment are not
common ingredients in minimalist microfinance, which limits service provision strictly to
credit and other financial products. The more vulnerable and poor the target group,
however, the more such non-financial services seem to take a more prominent place in
what Hickson calls a comprehensive approach to poverty alleviation.18 This approach is
based on the belief that “very poor households are essentially incapable of effectively
managing small businesses and therefore are unable to use financial services without first
participating in awareness and capacity-building programs.”19 However, not all
microfinance initiatives that target the very poor include comprehensive non-financial
services. SafeSave, for example, sticks to financial services only “on the grounds that
even extremely poor clients are able to make good use of properly tailored financial
services without other support, and that provision of non-financial services is costly and
of questionable benefit.”20
The issue of how and by whom to deliver non-financial services is as important as the
nature of these services. To understand the various poverty alleviation approaches that
integrate microfinance into service delivery for the poor, it is important to understand the
institutional framework of each organization that deals directly with very poor people.
SEF, ASA and BRAC, for example, are all locally established institutions with a strong
social mission, broad outreach, solid capacity and good access to donor funding. These
organizations are strongly motivated to assist very poor people with an appropriate
service package and have the capacity to deliver all aspects of an integrated package by
themselves. Freedom from Hunger’s alliance with local financial institutions results in a
different task division. FFH partners (rural banks and credit unions) agree to add a new
financial product (village banking) and adopt FFH’s credit with education approach,
which combines financial with non-financial services. Without a social mission or the
capacity to provide non-financial services, these banks must create and train a new cadre
of field staff and adopt new management systems to effectively do business with very
poor women. In some cases, FFH consultants provide assistance with this.
18
See Hickson, Reaching Extreme Poverty, 1999.
19
Ibid., page number?
20
Ibid., page number?
11
The majority of organizations in the remaining cases studies are relatively small, local
non-governmental agencies that generally use an integrated approach to development in
small-scale projects. Typically, they rely on partnerships with international organizations
or national donors, who only rarely provide them with the support required to provide an
integrated package of financial and social services to their most vulnerable target groups.
TUP, for instance, provides its partner agency W.O.M.E.N. with funds for seed capital
grants, savings matches and overhead, while W.O.M.E.N. relies on another donor to fund
its home healthcare and education programs. Similarly, most savings-promoting agencies
tend to focus primarily on building sustainable savings and loans groups, while counting
on local partner organizations to deliver essential services that very poor people need to
take full advantage of financial programs.
All initiatives examined in the study indicate that very poor people often lack confidence
to engage in microenterprises or to cope with the responsibilities that come with a loan.
Lack of self-confidence is often the reason why very poor people exclude themselves
from microfinance programs in the first place. Even when there is no loan to be repaid,
many poor people, especially women, are often initially afraid of the new responsibilities
and new activities that are expected from them. Participating in group meetings, leaving
one’s house to sell a product, negotiating prices or managing cash flows can be very
intimidating to anyone who has never run a business.
Confidence building and women’s empowerment are therefore high on the agenda of
microfinance projects that have a strong poverty focus. The staff of the TCP program at
SEF, for example, empowers and motivates the poorest community members to join the
project, trains and supports them (many have no business experience) throughout the
business cycle and facilitate group learning rather than “teach.” When FFH and CRS
jointly developed Learning Conversations, they likewise sought to provide groups a
problem-solving process rather than ready-made solutions. Learning Conversations are
simple 30-minute group discussions about a story or activity that resembles real issues
faced by group members. Such conversations enable people to identify issues
themselves, reflect on causes and consequences, consider solutions and commit to action.
The ILO bonded labor prevention projects, as well as other microfinance initiatives with
a strong poverty focus, often educate their clients about human and labor rights. Self-
help group members [query: of any specific case study?] discuss issues of family
planning, women’s rights and domestic violence and often take joint action to improve
their situation. Several organizations offer functional literacy and numeracy classes that
enable women to understand and sign their own savings and loan passbooks. For
example, PACT’s original Women’s Empowerment Program in Nepal (later improved
and replicated in other countries as the WORTH program), concentrates on savings and
literacy as the most important ways to empower women and help them build sustainable,
self-managed savings groups.
Leadership
Involving very poor people in microfinance programs requires visionary leadership and a
commitment of substantial resources. Each of the initiatives featured in this paper
12
resulted from a strong social mission and a willingness on the part of upper management
to innovate. While buy-in from top management is essential, this commitment needs to
be accompanied by an institutional culture dedicated to providing continued microfinance
services to very poor people. In order to reach very poor people and provide them high-
quality financial services in a cost-effective way, an organization needs appropriate
management practices and incentive systems. In addition to monitoring financial
performance, several microfinance organizations with a social mission have begun to
monitor their social performance as well. Social performance management for
microfinance organizations that seek to serve very poor people includes monitoring
poverty outreach, impact and cost-effectiveness.
SEF in South Africa and ASA in India both have management information systems
(MIS) that track financial and social impact, including client poverty, food, housing and
education levels. The information obtained from their monitoring systems is then used,
among other purposes, to make operational adjustments and improve financial products
for very poor people.21 Both ASA and SEF report that at one time, their impact
monitoring systems alerted them to the fact that they were not reaching very poor people
to the extent intended and consequently adjusted their programs.
The programs examined in this paper are testimony to the fact that very poor people can
be reached successfully, if microfinance providers make a deliberate attempt to target
them and offer services that suit their distinctive needs. Most microfinance practitioners
agree that financial services alone are not sufficient—in fact, they are often
counterproductive—to lift very poor people out of poverty. There is less agreement on
what kinds of complementary services should be offered to this target group in
addition to financial services. What can be concluded is that programs generally need
to explicitly target very poor people and provide them a wider range of flexible services
if they are to successfully serve this target market. In order not to lose sight of
sustainability, innovative approaches that lower the cost and mitigate the risk of serving
very poor people are recommended. The following two issues—targeting versus a market
approach and minimalist versus integrated microfinance—should in particular be
explored further.
13
expenditure smoothing, asset protection and risk management. Others are described as
promotional, in that the focus is on income generation, asset building, and creating viable
microenterprises. Very poor people often need to focus on protectional activities before
they can move to promotional activities.
Whether savings or credit services are more effective in serving the financial needs of
very poor people also remains open to discussion. Both savings and credit services can
provide the means for very poor people to access a lump-sum of cash, but do so in
fundamentally different ways. Credit provides the money up front and has the potential to
create a positive income stream, if a borrower knows how to invest the money in an
activity that generates an immediate and regular revenue stream that covers at least the
loan repayments. For this reason, credit is extremely risky for very poor people, who
typically have no income. Savings are much less risky, but such people must save a long
time to build a sufficiently large amount of cash to invest in a microenterprise because
they have little excess cash. Still, many argue that even very poor people can and will
save if they have the opportunity to do so, and that, above all, they need a safe place to
deposit their cash and a flexible savings service.
Instead of resolving whether savings or credit is the most important financial service for
the very poor, they should ideally have access to both. It is therefore not surprising that
microcredit organizations are seeking ways to provide voluntary savings accounts
(instead of the savings required to access a loan) to their borrowers, despite issues of cost
effectiveness and legal restrictions. Self-managed savings groups can increase their
members’ access to credit by linking with banks or organizing themselves into
federations. The long-term sustainability and cost-effectiveness of small savings and
credit groups, as opposed to larger microcredit institutions, will ultimately play a
deciding role in identifying which approach works best in specific circumstances.
Hickson distinguishes between an approach that modifies the client (by preparing her or
him to better utilize financial services through training, education and/or social action)
and a more demand-led approach that modifies the financial services (tailoring them to
client needs).23 To be effective, assistance to very poor people may need to combine both
approaches. The precise role and extent of non-financial services in an integrated
approach remains unclear, however, and depends in large part on the circumstances and
background of the very poor people being targeted. Poor nutrition and ill health clearly
affect the majority of this target group, who, without a minimal social safety net, face
22
CGAP Note 20 XXX
23
Hickson, Reaching Extreme Poverty, 1999, page number?
14
almost insurmountable challenges in taking advantage of financial services or generating
incomes. Even though skills training seems to be offered universally by microfinance
initiatives that target very poor people, the type of training offered varies from
organization to organization, ranging from motivation and confidence building to
entrepreneurial and specialized vocational training. As noted earlier, the Learning
Conversations of FFH and CRS represent an alternative approach, which minimizes
formal training programs and instead promotes group learning and the capacity and
confidence of very poor people to solve their own problems. The issue of training is
further complicated by the fact that impact assessments of training programs are difficult
and rarely done.
In an attempt to solve this problem the microfinance industry was created, however, the
costs to serve the poor didn’t go away. New lending methodologies (group lending)
helped cut costs, yet it would be awhile before even a handful was considered financially
sustainable. In fact, according to Armendariz de Aghion and Morduch, “much of the
microfinance movement continues to take advantage of subsidies”, with only sixty-six of
124 institutions surveyed by the Microbanking Bulletin reporting they were financially
sustainable and just eighteen of forty-nine of microlenders focusing on the “low end”
reporting the same. Armendariz de Aghion and Morduch argue that, in principle, there is
nothing inherently wrong with using subsidies and even go as far as promoting the use of
smart subsidies—“carefully designed interventions that seek to minimize distortions,
mistargeting, and inefficiencies while maximizing social benefits.”25
One form of a smart subsidy is to subsidize those clients, very poor people, who are not
yet ready to borrow from microlenders at “market” interest rates but who, with time, will
be able to benefit from microfinance products that don’t require subsidization. This type
of smart subsidy can be either (1) outright grants, in the form of cash to purchase
business assets (as promoted by Trickle Up and ARC) or productive assets themselves,
such as livestock (as promoted by BRAC’s CFPR/TUP program) or (2) subsidized loans,
where the client pays below market interests rates until it is ready to assume the full costs
of the loan. The use of IDAs, Individual Development Accounts—a common anti-
poverty strategy in the developed world where client savings are matched—is another
24
Prahalad, 2004.
25
Armendariz de Aghion & Morduch, 2005.
15
possible smart subsidy that has great potential to develop and prepare very poor people to
access unsubsidized microfinance services at a later period.
Another way to subsidize the products and services of very poor clients is through the use
of cross-subsidization strategies—using profits from larger loans to offset losses on
smaller loans.26 However, those institutions that attempt to implement this strategy
should only do so if they are profitably serving their larger clients at competitive interest
rates. That is, if they raise interest rates on larger loans to cross-subsidize their smaller
loans they have the potential of losing their top customers from competitors with the lure
of cheaper interest rates. The benefit of this strategy, especially in very competitive
markets, is that the MFI is developing a new potential client base that they can profitably
serve in the future. Nevertheless, MFIs should be careful that their pool of subsidized
very poor clients doesn’t grow too fast because they face the inability to serve them with
the limited subsidies received from larger loans.
Finally, institutions such as ASA, SEF and FFH offer financial services to very poor
people in the form of credit under basically the same terms as for their less poor clientele.
However, they recognize that very poor people are extremely risk adverse, and respond
by providing them with free non-financial services, such as business training and
business development services. This is yet another way to subsidize very poor clients as
they move up the development ladder.
It is important to recognize that serving very poor people can be a costly undertaking;
nevertheless, those programs focused on social transformation should remember that
smart subsidies may be the most effective way to ensure outreach and affordability for
their poorest clients.27 There are appropriate places for subsidies in the microfinance
industry and the use of smart subsidies to serve very poor people might possibly be one
of the most important and appropriate forms.
26
Ibid.
27
Ibid.
16
PART IV. RECOMMENDATIONS FOR THE WAY FORWARD
Focus on Innovation
In order to successfully serve very poor people with unique needs and circumstance MFIs
must be client-driven with a willingness to invest in R & D. However, in general the
microfinance industry, according to Cohen, is the last product-driven industry in the
world.28 There are many reasons this may be the case but one big reason must certainly
stem from the fact that, historically, microfinance products came in one size and shape
and that clients accepted them because there was nothing else. Many MFIs over the years
continued with this “one size fits all” approach because there was no need to do
differently. However, as the industry has become more competitive, especially in more
mature markets such as South East Asia and Central America, MFIs have been forced to
be more innovated and responsive to client needs to stay in business.
This response to competition with innovation and creativity is the same approach that
must be taken when attempting to provide attractive and effective products and services
to very poor people. When it comes to serving very poor clients the “one size” doesn’t fit
anymore. In reality this “one size” doesn’t fit most clients in the market. Only through R
& D and innovation can the microfinance industry effectively serve every market
segment—the extreme poor, the moderate poor, the vulnerable non-poor, the non-poor
and the wealthy.
For an MFI with limited resources and personnel it is very tempting to disregard R & D
and focus solely on performance—the bottom line. However, institutions that don’t
balance growth and profitability with R & D will eventually not be able to perform
successfully because they won’t have the necessary new products and services that will
retain their clientele. Therefore, it is critical that MFIs integrate R & D into their core
business to remain competitive. Furthermore, an MFI that is willing to invest in
developing products and services that specifically meet the needs of very poor people, in
addition to their mainstream clients, may have a competitive advantage over other MFIs
in the end because they will have already developed a clientele base that will grow with
their institution over time.
17
The MED industry is now driven by a strong financial performance culture and expects
high financial performance standards which makes it difficult for NGOs to experiment in
downreach. If groups that are lending to very poor people are held to the same
benchmarks as those working with moderately poor people, they won’t measure up.
In recent years, the social performance movement has been gaining momentum in the
industry partly for this very reason. Organizations should be judged on their performance
both against their financial goals and their social goals.
We could consider redefining financial performance benchmarks for programs that work
with very poor people or we can consider evaluating the performance of an organization
against other organizations that are lending to the same level of clientele.
Reorganizing the financial reporting information would give donors and funders a better
picture of performance within peer categories.
Hickson's statement29 "The survey data highlight the importance poor households place on
flexible financial services. The extent to which poor households seek this flexibility is not
often appreciated by MFIs, or if it is, these demands are usually dismissed as unrealistic
and impractical. This possibly belies a lack of understanding of the dynamics of poverty
and the opportunities that exist for the provision of financial services to the extremely
poor. To date there has been inadequate exploration of 1) financial products and 2)low-
cost service delivery mechanisms that would allow MFIs to include extremely poor
households without compromising their sustainability objectives.”
18
help depositors accumulate funds to meet specific expected needs. Savings
match: similar to contractual savings, but extra incentive and faster
accumulation)
- Safe place to save: lockboxes, etc.
• Innovative lending services
• Targeting geographic outcasts? DRC, Somalia, Southern Sudan, Liberia, etc. – the
places where no one wants to do MED ---- target areas for strategic alliances with
social protection groups…..
30
Price, Reaching the Poor, 2001, page number?
19
o interesting cases from FINCA affiliates in terms of using technology and
improved cost-effectiveness
We have begun to conduct this research with the case studies used in this paper. This has
been a first step. We recommend delving further in to each of these case studies and to
identify others to be representative of all the regions and methodologies.
The POWG is developing a research advisory board for the purposes of this project and
to explore case studies further. See Annex X for more information.
20
Criteria for determining success
in reaching very poor people:
Key elements:
Depth of outreach
Targeting mechanisms Impact of outreach
Methodology Quality of outreach
Financial services - Cost of outreach
Non-financial services
These are, in a sense, the
following questions:
These are, in a sense, the Who? Poverty level at entrance?
following questions: Impact? Poverty level after
How are these organizations some time in program?
or projects fostering success? What services? Non-financial
Models? Leadership, versus financial? Provided by
innovations, impact MFO and strategic partner? If
monitoring, targeting, any? Cost?
information technology?
Quality of services as
perceived by clients (client
satisfaction)?
Focus on research and support for field initiatives to push microfinance farther into the
rural areas, because that is where the very poor often are located (highest proportions in
relation to local population). Even without targeting, mf pushed out to the rural areas
will be more likely to serve poorer people.
The challenge is to offer rural services sustainably, which may be the pre-eminent
advantage of group-based lending; it enables the service provider to extend and sustain
the “supply,” whereas alternative delivery strategies may not. That advantage (if real)
probably comes from the greater efficiency of lending one loan per group to jointly-
liable, self-managing groups. Better controlled research is needed to decide whether
group-based lending is more or less efficient than individual lending, especially for very
poor, women and rural areas (people not able or willing to come to a central point of
service). This seems to me a crucial design issue that needs to be settled by some good
research.
Related to this question is what loan terms and conditions give clients the greatest
opportunity to use their loans in part for agricultural investment. Village bank loans in
rural areas get used for multiple purposes (regardless of stated intentions at loan
disbursement), including for agriculture (crops and/or livestock). And the agricultural
uses of parts of loans reveal a resourcefulness and determination to force loan terms
(designed almost specifically to exclude agagricultural uses) to serve agricultural
purposes. Some carefully controlled research is required to sort out the better
21
combinations of terms and conditions to accommodate rural loan use strategies of the
very poor.
Rather than give up on group-based lending because urban populations with other options
prefer individual lending and rather than give up on group-based lending because it is not
well-designed for rural economies, we might discover that rural lending (to the very poor
who live there) means group lending. I think we have to answer these questions with
some good evidence from the field: does group-based lending allow us to push
microfinance farther out to the more rural areas? If so, why? Can group-based lending
be tweaked to accommodate the realities of rural economies? What are some successful
combinations of loan terms and conditions?
Non-financial services?
Regardless of being rural or urban: do the very poor need non-financial services to lead
better lives? The answer seems obviously “yes”, but the specific questions are: do the
very poor need non-financial services to participate in and benefit from financial
services? More important for sustainability and scale, do the microfinance providers
need to provide or link to non-financial services in order to be sustainable in their
financial services to the poor? The case studies here preliminarily suggest that
microfinance providers are much more likely to be committed to providing non-financial
services if they have evidence that clients are more likely to repay on time and be loyal
customers when they get non-financial as well as financial services. But we don’t have
this evidence about client recruitment costs, retention rates, repayment and arrears in any
controlled comparison of microfinance with vs. without non-financial services. What are
the added benefits of adding non-financial services to mf for both the clients (in their
currency of success) and for the mf providers (in their currency for success). This
requires the “with vs. without” experiment. Dean Karlan of Princeton is currently
working on this topic.
Understanding client behavior –It is important to understand the behavior of very poor
people if MED programs are to help very poor people to move out of poverty? We
would like to investigate what factors influence clients crossing over the poverty line?
22
The reference section needs to include references to the papers that form the basis
for the case studies and that are also referred to in the body of the text.
Make sure to also refer to additional papers within each case
study folder!!!
ADB (Asian Development Bank). 2005. “ADB Activities in Nepal: Reaching the Poor.”
ADB, Manila, Philippines. http: www. adb.org/NRM/reaching_the_poor.asp.
Accessed April 2005.
Aguilar, V.G. 1999. “Is Micro-Finance Reaching the Poor? An Overview of Poverty
Targeting Methods (ADA Dialogue). Appui au Développement (ADA), Luxembourg.
Ani, Carlos. 2002. “Research and Innovation Agenda of the INCOME Project.”
Development Bulletin, no. 57 (February): 81–4.
Ashe, Jeffrey, and Lisa Parrott. 2003. “PACT’s Women’s Empowerment Program: A
Savings and Literacy Led Alternative to Financial Institution Building.” Journal of
Microfinance volume number, series no. (spring):start page–end page.
Churchill, Craig, Madeline Hirschland and Judith Painter. 2003? “New Directions in
Poverty Finance.” Where published? By whom? start page–end page.
(I haven’t read this one, but apparently chapter 3 has some information on poverty-
focused microfinance. Specifically, it talks about institutional culture and human
resource management as two important tools to achieve their social mission)
Grant, William, and Hugh Allen. 2003. “CARE’s Mata Masu Dbara (MMD) Program in
Niger: Successful Financial Intermediation in the Rural Sahel.” Journal of
Microfinance volume no., series no. (season?):start page–end page.
Emrul Hasan, Mohammed. 2003. “Implications of Financial Innovations for the Poorest
of the Poor in the Rural Area: Experience from Northern Bangladesh.” Journal of
Microfinance 5, no. 2 (winter).
23
Emrul Hasan, Mohammed, and Monique Iglebaek. 2004. “Microfinance with Un-reached
People in the Rural Area: Experience and Learning; PLAN, Bangladesh.” Paper
presented at the Asia Pacific Region Microcredit Summit Meeting of Councils,
February 18, 2004, Dhaka, Bangladesh.
Hashemi, S. 2001. “Linking Microfinance and Safety Net Programs to Include the
Poorest. The Hardcore Poor and Why Conventional Microfinance Fails Them.”
CGAP Focus Note, no. 21. Consultative Group to Assist the Poor, Washington, DC.
Also available at http://www.cgap.org [insufficient URL, need full URL of where
article is located].
Hickson, Robert. 1999. “Reaching Extreme Poverty: Financial Services for Very Poor
People.” Office of Development Studies, Bureau for Development Policy, United
Nations Development Programme, New York. [confirm this is a paper and not a
book. Also confirm that it is a DRAFT]
———. Year? “Financial Services for Very Poor People—Thinking Outside the Box.”
Small Enterprise Development 12, no. 2: start page–end page. [please verify that
this is correct]
———. 2003. “Savings Operations for Very Small or Remote Depositors: Some
Strategies.” Institute of Development Studies, University of Sussex, Sussex, United
Kingdom. URL? [editor’s note: believe this was also posted on the Microfinance
Gateway]
Maes, Jan, and Malika Basu. 2005. “Building Economic Self-Reliance: Extreme Poverty
and Sustainable Microenterprise Development; Trickle Up’s Microenterprise Seed
Capital for the Extreme Poor in Rural India.” Unpublished.
Mathie, Alison. 2002. “Including the Excluded: Lessons Learned from the Poverty-
targeting Strategies used by Microfinance Providers.” Development Bulletin, no. 57
(February):17–22.
Matin, Imran. 2003. “Targeted Development Programmes for the Extreme Poor:
Experiences from BRAC Experiments.” BRAC (formerly Bangladesh Rural
Advancement Committee), Dhaka, Bangladesh.
Matin, Imran, David Hulme and Stuart Rutherford. 1999. “Financial Services for the Poor
and Poorest: Deepening Understanding to Improve Provision.” Finance and
Development Research Programme, Working Paper Series Paper, no. 9.
[spell out] IDPM, University of Manchester, United Kingdom.
24
Matin, Imran, and Sarah Walker. 2004. “Exploring Changes in the Lives of the Ultra
Poor: An Exploratory Study on CFPR/TUP Members.” CFPR-TUP Working Paper
Series, no. 4. BRAC Research and Evaluation Division, BRAC, Dhaka?,
Bangladesh.
Moser, Caroline. 1998. “The Asset Vulnerability Framework: Reassessing Urban Poverty
Reduction Strategies.” World Development 26, no. 1 (month? season?): 1–19.
Parker, J. 2001. “Linking Microfinance and Safety Net Programs to Include the Poorest.
Where does Microfinance Fit?” CGAP Focus Note, no. 20. Consultative Group to
Assist the Poor (CGAP), Washington, DC. Also available at www.cgap.org
[insufficient URL: need full URL that locates the article]
Price, P. 2001. “Reaching the Poor.” ADB Review 34, no. 1:start page–end page. ADB,
Manila, Philippines. http://www.adb.org/Documents/Periodicals/ADB
Review/2002/vol34 1/web watch.asp. Accessed when?
Rutherford, S. 2004. Helping Mickles Make Muckles: Designing Suitable Swaps for the
Poor. London, UK: Alternative Finance.
Seibel, H., and S. Khadka. 2002. “SHG Banking: A Financial Technology for Very Poor
Microentrerpreneurs.” Savings and Development XXVI, no. 2:start page–end page.
Simanowitz, Anton. 2001. “Imp-Act Guidelines No. 4.” Imp-Act, City, Country.
http://URL. Accessed when?
———. Year? Microfinance for the Poorest: A Review of Issues and Ideas for
Contribution of Imp-Act. Publisher? Unpublished?
WHO (World Health Organization). 2004. Reaching the Poor: Challenges for TB
Programmes in the Western Pacific Region. Manila, Philippines: WHO.
WHO and World Bank. 2001. Dying for Change: Poor People’s Experience of Health
and Ill-Health. Geneva: WHO.
Wilson, Kim. 2003. “The New Microfinance: An Essay on the Self-Help Movement in
India.” Journal of Microfinance volume no., series no. (spring).
25
World Bank. 2001. World Development Report 2000/2001: Attacking Poverty.
Washington, DC: World Bank.
Wright, Graham A.N., Deborah Kasente, Germina Ssemogerere and Leonard Mutesasira.
1999. “Vulnerability, Risks, Assets And Empowerment—The Impact Of
Microfinance On Poverty Alleviation.” MicroSave Africa, Nairobi, Kenya? http://
http://www.undp.org/sum/MicroSave/ftp_downloads/UWFTstudyFinal.pdf. Accessed
when?
26