MICROFINANCE MATTERS - Microfinance as Key Poverty Reduction Strategy Paper (PRSP) Component

By Lauren Kesner, School of International and Public Affairs, Columbia University

By the late 1990s, it was clear that something was not working in the field of development. Deteriorating economic growth in Sub-Saharan Africa, the failure of Structural Adjustment Programmes used by the World Bank and International Monetary Fund (IMF) and the question of how to link debt relief to poverty reduction led policy makers to adopt the Poverty Reduction Strategy Paper (PRSP) initiative in September 1999.

The PRSP initiative presented a new conceptual framework, which emphasized poverty alleviation, participation and aid effectiveness. Today, most debt relief programmes and international development agencies link aid to the needs assessment outlined in the country's PRSP.

In addition to being a roadmap for development, PRSPs hold agencies accountable to the goals they set and are useful for comparing poverty alleviation strategies across countries. In such a way, PRSPs are more than just a rearticulation of development strategy: they actually present operational solutions for donor agencies, the World Bank and the IMF.

Microfinance in PRSPs

Microfinance and access to a broad range of financial services are key components in 44 of 56 PRSPs and interim PRSPs reviewed by the IMF.[1] The prevalence of microfinance in PRSPs indicates that the commitment to building inclusive financial sectors is real, and growing. Microfinance is an excellent strategy to meet the PRSPs' goal of achieving broad-based growth and reducing poverty because it is a ground-up model based on building long-term relationships and sustainable business models.

At the inception of the PRSP initiative, microfinance institutions (MFIs) were making their mark by addressing poverty in a way that challenged the modus operendi in many countries. Early experience indicated that microfinance was a powerful tool for achieving economic growth and alleviating poverty, especially among women and rural populations. The most famous example is seen in Bangladesh's Grameen Bank, which has now loaned more than US$4.3 billion to nearly 3.4 million borrowers in Bangladesh - half of whom have crossed over the poverty line.[2] Thus, the PRSP initiative and microfinance both presented fresh responses to the challenge of eradicating poverty.

Country Examples

Many countries, such as Bolivia, Vietnam and Mongolia stress the importance of microfinance in the rural sector. The authors of Mongolia's PRSP suggest that financial services "will reduce risks present in the herder's living."[3] The paper recommends setting up business incubators for microentrepreneurs, using forms of credit collateral and testing small-scale credit insurance systems to mitigate microcredit risks. Mozambique's PRSP (2001) also focused attention on microfinance as a key component for supporting the rural sector. The 2004 update acknowledges the expansion of microcredit programs in the agriculture sector in Mozambique and suggests the continuation of these programs will contribute to the evolution of agricultural production.[4]

Often countries cite the overall economic environment as the principle concern to be addressed. Kenya's PRSP, drafted in January 2005, states that the main objective of financial sector reform is to "enhance the environment for private savings and investment".[5] While Kenya's government is in the process of developing a legal framework to regulate MFIs, the paper identifies the need to develop a national policy on access to financial services and microfinance. The PRSP suggests programmes such as tax incentives for microentrepreneurs and incorporating institutions such as Kenya's Post Office Saving Bank to "expand linkages between the microfinance sector and the banking sector".[6]

Like Kenya, Malawi's PRSP (2002) highlights the need for an enabling, pro-poor environment, conducive to economic growth, credit and microfinance. It cites limited access to affordable credit as one of the most pressing factors facing poor households. The issue of access spans geographical constraints, affordability and availability. In cases where credit is available, "access, particularly, by women, has been hindered by prohibitive collateral requirements, although women have demonstrated high repayment rates."[7]

A comparison of PRSP strategies for building inclusive financial sectors elucidates common problems, creative solutions and future strategies. Identifying the constraints and challenges is an important step for the authors of PRSPs. While economic and political conditions may vary from country to country, creative ideas for expanding financial services to poor people cut across borders. This sort of cross-country and cross-sector dialog is at the core of the PRSP initiative and should serve to strengthen MFIs and emerging financial sectors.

(1) As of February 2005, the IMF's Executive Board had reviewed 44 PRSPs and 14 interim PRSPs. http://www.imf.org/external/np/prsp/prsp.asp#cp

(2) "Microfinance and the Millennium Development Goals: A reader's guide to the Millennium Project Reports and other UN documents," UNCDF and the International Year of Microcredit, p.4.

(3) "Mongolia Poverty Reduction Strategy Paper", September 3, 2003, p.119.

(4) "Mozambique Poverty Reduction Strategy Paper Progress Report (Review of the Economic and Social Plan for 2003)", May 18, 2004, p.6.

(5) Kenya Poverty Reduction Strategy Paper, January 12, 2005, p.37.

(6) Ibid, p.38.

(7) Malawi Poverty Reduction Strategy Paper, April 2002, p.39.