The Objectives of Poverty Alleviation and Gender Outreach

A principal feature of the innovative institutions in rural finance is that they deal mainly with low-income clientele. Accordingly, their average loan size is small. In 1995, the initial average loan size of BancoSol in Bolivia, which has a loan portfolio in excess of US$40 million and more than 70000 loans on its books, was about US$108.32 The average outstanding loan sizes in the early 1990s for other well-known rural finance institutions were as follows: Badan Kredit Kecamatan (BKK) in Indonesia, US$26; Bank Rakyat Indonesia's Unit Desa, US$290; Grameen Bank in Bangladesh, US$150.33 In Cambodia, a rela tively new microfinance institution, ACLEDA, which gained formal status of a bank in 2000, had 60000 clients as of the end of 1998 with an average loan balance of $150.34

These and myriad other rural financial institutions are now reaching large numbers of borrowers - many of them women - whose low income levels would have excluded them from access to formal finance two decades ago. However, Dominique van de Walle questioned the effectiveness of targeting the poor in most existing rural finance programs:

Evidence that women and the illiterate feature prominently among participants in African schemes is given as proof that the schemes are pro-poor. The literature examining the many Bangladeshi schemes also takes it on faith that the target groups of women and the functionally landless represent the poor in Bangladesh. . . . But there are reasons to question this assumption. It has been found that what constitutes poverty by cultural or social standards is often far from identical to what constitutes poverty as defined by objective criteria. .. . One study ... in Bangladesh .. . found that perfect targeting to the landless entailed sizable leakage to the nonpoor and imperfect coverage of the poor: some of the poor owned land, while some of the rich (including teachers, doctors, and shopkeepers) did not (Ravaillon and Sen, 1994)35.. . .

Do targeted schemes reach the poor? Design features undoubtedly help promote targeting to the poor. Given loan sizes and the fact that programs such as the Grameen Bank impose

31. Source: conversation with the president of Bancafé, Tegucigalpa, Honduras 1992.

32. Greg Chen, 'The Challenge of Growth for Microfinance Institutions: The BancoSol Experience', Focus, Note No. 6, The Consultative Group to Assist the Poorest (CGAP), Washington, DC, USA, March 1997, p. 4.

33. J. Yaron, 1992, p. 78. More recent estimates show higher average loan balances, for BRI $494, and for BancoSol $530 (Robert Peck Christen, 'Issues in the Regulation and Supervision of Microfinance', in Rachel Rock and Maria Otero (Eds), From Margin to Mainstream: The Regulation and Supervision of Microfinance, Accion International, Somerville, Massachusetts, January 1997, Chapter II, p. 36).

34. Source: conversation with ACLEDA management, Phnom Penh, Cambodia, April 2000.

35. M. Ravallion and B. Sen, 'Impacts of land-based targeting on rural poverty: further results for Bangladesh', World Development, 22(6), 1994, pp. 823-838.

participation costs, the rich will surely have better alternatives. But the poorest of the poor are not being reached extensively by microcredit schemes. .. .36

A more optimistic view of the ability of appropriately designed rural financial institutions to reach the poor is provided by Robert Christen, Elisabeth Rhyne, Robert Vogel and Cressida McKean. They examined 11 microfinance institutions in the developing world and found that the average outstanding loan balances (by institution), which are taken as proxies for the incomes of borrowers, 'cluster in the range of US$200 to US$400 . .. with several well below that level'.37 These authors conclude that:

The study demonstrates that among high-performing programs there is no clear trade-off between reaching the poor and reaching large numbers of people. Several very large programs (BKK, Grameen) have among the smallest loan sizes. Mixed programs, which serve a range of clients, not just those of a given loan size, have successfully reached very poor clients. It is scale, not exclusive focus, that determines whether significant outreach to the poorest will occur.38

In reviewing Kenya's Juhudi Credit Scheme and other experiences with NGO-funded rural credit, Albert Kimanthi Mutua distinguished between a welfare orientation and development aims in targeting credit schemes on the poor:

Welfare-oriented NGOs traditionally have approached development from a very broad perspective. Usually, welfare programs focus on alleviating poverty by providing a number of free or subsidized services. Sustainability-focused programs assume that they are providing a service that poor people want and for which they are willing to pay. When welfare NGOs begin to operate credit programs, their general orientation tends to make them focus on selecting the neediest of clients - the poorest of the poor - rather than on delivering credit efficiently. . ..

Kenyan NGOs are struggling with the question of who the target beneficiaries of NGO credit programs should be: the very poorest of people or poor people who are already entrepreneurs? .. . When welfare criteria are used to select beneficiaries, the credit programs end up with borrowers who are not entrepreneurs. . .. [and they] would most likely divert loan money to serve more urgent needs.

NGOs argue for below-market interest rates because they believe that the poorest people cannot afford higher ones. But studies in Kenya and elsewhere have shown that poor entrepreneurs are more concerned with convenience in borrowing than with the price they pay for these services. The biggest obstacle for NGOs in making the transition to a [sustainable] finance-based system thus appears to be the perceptions of the NGOs rather than reality.39

Detailed statistical evidence on actual targeting by rural finance institutions was provided by David Hulme and Paul Mosley in a study of 13 microfinance institutions in seven

36. Dominique van de Walle, 'Comment on "Rural Finance in Africa: Institutional Developments and Access for the Poor", by Ernest Aryeetey', Annual World Bank Conference on Development Economics 1996, The World Bank, Washington, DC, USA, 1997, p. 183.

37. R. P. Christen, E. Rhyne, R. C. Vogel and C. McKean, 'Maximizing the Outreach of Microenterprise Finance: An Analysis of Successful Microfinance Programs', Evaluation of USAID Program and Operations Assessment Report No. 10 (PN-ABS-519), as cited in Mohini Malhotra, 'Maximizing the Outreach of Microenterprise Finance: The Emerging Lessons of Successful Programs', Focus, Note No. 2, The Consultative Group to Assist the Poorest, Washington, DC, USA, October 1995, p. 2.

39. Albert Kimanthi Mutua, 'The Juhudi Credit Scheme: From a Traditional Integrated Method to a Financial Systems Approach', in M. Otero and E. Rhyne (Eds), 1994, pp. 270-271.

Table 7.1 Benefits for Clients of Selected Microfinance Institutions

Institution

Share of

Average increase in

borrower income as % of

borrowers below

that of the control

group

poverty line (%)

Whole sample

Below poverty line

BancoSol, Bolivia

29

270

101

BRI Unit Desa, Indonesia

7

544

112

BKK, Indonesia

38

216

110

KURK, Indonesia

29

a

a

Grameen Bank, Bangladesh

Vast majority

131

126

BRAC, Bangladesh

Vast majority

143

134

TRDEP, Bangladesh

Vast majority

138

133

PTCCs, Sri Lanka

52

157

123

KREP Juhudi, Kenya

a

133

103

RRBs, India

44

202

133

KIE-ISP, Kenya

0

125

a

Mudzi Fund, Malawi

Vast majority

117

101

SACA, Malawi

7

175

a Not available.

countries.40 They found that for most of the studied institutions a significant share, even 'vast majority', of the borrowers were below the poverty line but that the beneficial effect of the borrowing was proportionately much less for the poorest borrowers than it was for those above the poverty line.

Some of the results of the Hulme-Mosley study are shown in Table 7.1. The control group was carefully defined as persons whose applications for loans at those institutions had been approved but whose loans had not yet been disbursed. This procedure helped reduce potential differences in socioeconomic characteristics between the control group and the sampled group, for each institution's clients. The number of total borrowers varied widely by institution, from 223 in the Mudzi Fund of Malawi to 12000000 in the RRBs of India. However, seven of them had at least 400 000 borrowers and another three had less than that but at least 25000.

Three results that emerge clearly from Table 7.1 are the following:

(a) Most of the institutions were able to reach sizeable numbers of very poor households.

(b) The benefits of access to loans were substantial on average, for the whole sample.

(c) The benefits of access to loans were marginal for the very poor.

The authors point out that some of the very poor even experienced a reduction in incomes as a result of the borrowing, because of increased indebtedness without a corresponding increase in ability to service it. The very poor were very much more likely to borrow for consumption purposes, than those above the poverty line. However:

Despite the overall tendency of better-off clients to enjoy larger income impacts from microcredit, some borrowers below the poverty line achieved substantial increases in income from their loans. Preliminary analysis . . . indicates that these particular poor clients borrowed for relatively low-risk capital investments such as small irrigation, high-yielding

40. David Hulme and Paul Mosley, Finance Against Poverty, Routledge, London, 1996. This study is summarized by Paul Mosley in 'Financial Sustainability, Targeting the Poorest, and Income Impact: Are There Tradeoffs for Microfinance Institutions?', Focus, Note No. 5, The Consultative Group to Assist the Poorest, Washington, DC, USA, December 1996.

seeds in rainfed areas, and new carpet-weaving looms.41

In Bangladesh, many of the poorest of the poor were incorporated sustainably into the microfinance network by first providing them with food aid and training, along with very small amounts of credit. To qualify for this program, known by the initials IGVGD (Income Generation for Vulnerable Groups Development), households had to satisfy the following criteria:

• Be headed by widows or abandoned women

• Own less than half an acre of land

After an 18-month period of food aid was terminated, two-thirds of the participants became regular clients of microfinance institutions. This program was designed and administered by BRAC (the Bangladesh Rural Advancement Committee), an organization that always has emphasized training and other inputs as much as credit for the goal of rural poverty alleviation.42 On the basis of these studies and experiences, it seems clear that microfinance institutions can reach significant numbers of very poor households, but that special care must be taken with this group to ensure that they actually benefit from the borrowed funds. Poverty alleviation can be a feasible objective of rural financial institutions but the challenge is not easy to meet. It is easier to generate benefits for rural households of moderate and moderately low incomes than it is for those below the poverty line. Under the present state of knowledge of approaches to rural finance, poverty alleviation would not necessarily be the main objective of all rural financial intermediaries, but it could be a principal or subsidiary objective of many of them. It is important to bear in mind that in programs oriented toward the poor women tend to form a large share of the borrowers. It also is true that the very poor can benefit indirectly from rural finance programs via the increased employment opportunities that are created as a result.

Nevertheless, in many contexts microfinance cannot be regarded as the only, or even the primary, instrument of poverty alleviation. Poor families may not be able to repay loans, and investments in schools and productive infrastructure may be more effective in raising their standards of living, and to make them eventually eligible for microcredit.

Shahidur Kandker gives the following perspective:

Microcredit programs are not a viable option for many people because such programs require skills, such as accounting ability, that many people in target groups lack. Credit-based interventions are best targeted to those among the poor who can productively use microcredit to become or remain self-employed, while public works programs are best targeted to the ultrapoor who lack the skills to benefit from microcredit.

Microcredit, which finances self-employment activities that are performed at home, is particularly well suited to the needs of rural women, who are restricted by social custom from working outside the home. Many women lack entrepreneurial skills to become self-employed, however. For these women - who cannot participate in microcredit programs because they lack skills and cannot participate in the wage market because of social restrictions - literacy promotion and training are necessary so that they can benefit from microcredit.43

41. Paul Mosley, 'Financial Sustainability: Targeting the Poorest, and Income Impact: Are There Trade-offs for Microfinance Institutions?' Focus, Note No. 5, The Consultative Group to Assist the Poorest, Washington, DC, USA, December 1996, p. 4.

42. This experience is described in Syed Hashemi, with Maya Tudor and Zakir Hossain, 'Linking Microfinance and Safety Net Programs to Include the Poorest: The Case of IGVGD in Bangladesh', Focus, Note No. 21, Consultative Group to Assist the Poorest, Washington, DC, USA, May 2001.

43. Shahidur R. Khandker, Fighting Poverty with Microcredit: Experience in Bangladesh, Oxford University Press, New York, 1998, p. 143.

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