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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 16 / September 2005 |
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Voices of Microfinance
Q. While the connection between microfinance and poverty alleviation is considered a given within the microfinance industry, do we really have any hard evidence to prove that microfinance helps achieve the Millennium Development Goals (MDGs)? Editor's Note: Many respondents took this question as an opportunity to not only address the question of evidence, but also the initial premise - that microfinance is relevant to the MDGs. While some felt that microfinance is not given the recognition is deserves by banks and government, and that microfinance has a unique ability to bring about change by "interven[ing] directly at the household level," others were not so sure. One participant called microfinance "a rather blunt tool" for achieving the MDGs, saying that while wealth generation is "the only poverty alleviation tool that really exists", access to markets is more critical than access to finance. Another said that microfinance will only achieve the MDGs if it is linked to the formal financial sector. In the end, most respondents did agree that microfinance contributes to the MDGs, but while they said there is evidence, many did not actually cite any. Some participants named a study or two, but the fact that the majority provided anecdotal evidence, individual success stories, or no evidence at all only serves to reinforce that idea that, no, we can't really put our money where our mouths are. At least not yet. Some contributions echoed this concern, and called for the development of metrics to measure the effect of microfinance on poverty. But perhaps we don't need to prove that there is a connection at all. As one respondent pointed out, microfinance targets a less poor population than the poorest implied by the MDGs - so maybe microfinance shouldn't worry about its contribution to the MDGs at all. Or at least, not so much. *Thank you to all those who contributed their expertise to provide valuable insight into this question. Although my agency has microfinance programs in six countries, we need to be honest and admit that microfinance alone is a rather blunt tool in achieving the MDGs. It only partially relates to MDG 1) "eliminate extreme poverty" and MDG 3) "Gender equality and women's empowerment". Poverty and inequality are complex phenomena, which access to finance will not cure unless microfinance (humbly) finds its proper place within a synergistic web of interventions. In particular, and due to globalisation, access to markets is becoming just as critical (in some regions more critical) than access to finance. Wealth generation (the only poverty alleviation tool that really exists) does not come through access to debt, or financial services alone, but through opportunities to add value and enter markets. The core process is value addition, with financial services remaining the support process. We need to learn more how to strengthen this core process, in order for microfinance to find its role as a strong agent in promoting the MDGs.
Allan Bussard
The connection between microfinance and poverty alleviation is indeed considered straightforward within the microfinance industry. Of the eight Millennium Development Goals, microfinance is mainly assumed to be directly related to goal number one, which aims at eradicating extreme poverty and hunger. Although success stories such as the Grameen Bank in Bangladesh, and the Indonesia's Bank Rakyat have been widely used as evidence of the impact of microfinance on poverty reduction, the link between the two may not be that direct. The current debate is that microfinance benefits the less poor, and that the poorest who are implied in the MDGs rarely benefit from microfinance. Apart from the fact that microfinance programs are only able to reach less than five percent of the world's one billion poor people, there is no guarantee that microfinance is really serving the poorest that are the main focus in the MDGs. For this reason it will be difficult to capture reliable data proving that microfinance helps achieve the Millennium Development Goals.
Franklin Simtowe
The false argument which is often made is if we can only make funds available to poor people (as credit) it will help them get out of poverty. Very often we give examples of successful stories where microfinance has helped a poor family to overcome its poverty but this is by no means hard evidence at all. Availability of funds (credit) is certainly a necessary condition. This does not need any proof because it is the foundation of neoclassical economics: credit is an instrument for investment and growth. Poverty, on the other hand is a different problem which is associated with the redistribution effects, not only of the fruits of growth but also the GDP (flow) and wealth (stock). We know very well that microfinance is a means and not an end in itself (unless we are developing a microfinance project where sustainable operations are the goal). I think microfinance is a necessary input to poverty reduction but by no means sufficient.
Mohammed Hassani
Microfinance is no panacea to poverty if it is conducted in isolation. In such cases, it cannot help achieve the Millennium Development Goals (MDGs). The growth of microfinance institutions (MFIs) will not be significant as long as a coherent policy to link small and medium enterprises (SMEs) and large companies is not in place. Such policies encourage large companies to subcontract SMEs which in turn improve product quality, increase employment opportunities and ultimately reduce poverty. Secondly, if the sources of finance for MFIs are predominantly donor based rather than internally generated funds or commercial sources, it demonstrates that economic players including banks, central banks and government, have not recognised MFIs as important contributors towards meeting the MDGs. If the opposite was the case, government and central banks would ensure that policies which encourage synergies between banks (with their excess liquidity - supply) and MFIs (with excess demand) are put in place. This would lead to significant growth of MFIs' client coverage. I would therefore argue that microfinance will only help to achieve MDGs if it is part of an integrated national plan linking SMEs to large company subcontracts and MFIs to commercial banks' capital and expertise.
Lutombi Kawana
Microfinance will help the world halve poverty by 2015, but it is not the "silver bullet" that will forever eradicate global poverty. Several studies have already shown that this strategy is undeniably making a tangible, positive difference in the lives of millions of the world's poorest people. A 2004 impact assessment by UK-based Institute of Development Studies found that 76 percent of the clients of India-based Share Microfin Limited moved from being non-poor to poor over a four-year period. And, a 1998 World Bank study found that, in Bangladesh, 48 percent of the poorest families with access to microcredit from Grameen Bank rose above the poverty line. However, a universally applied and accepted method for measuring social performance is still needed.
Julie Stahl Peachey
The main objective of microfinance is to improve the quality of life of people with limited access to permanent financing. Nevertheless, any analysis must, from the beginning, take into consideration exactly what it is one desires to measure. If we measure by the number of microenterprises, which over the past 20 years have turned into solid medium-sized companies, then the result is dismal. The highly qualitative level of graduation is very low. However, we can easily see that a considerable proportion of those people who 20 years ago did not enjoy access to a decent level of education or nutrition, thanks in good measure to well employed microcredits, do so today. Microfinance is not a unique means to reduce poverty and improve people's quality of life, but if we think this will be sufficient to achieve the Millennium Goals, we'll be losing the perspective of social and economic changes that governments must make.
Alejandro Soriano
A survey of 510 microfinance clients and 170 control groups conducted in Nepal uncovered that access to microfinancial services was effective to increase income, improve nutrition, provide better food intake, housing, consumption on clothing, health care and access to education for children, lower child mortality, lower birth rate, higher adoption of family planning practices, etc. among clients compared to non-client households. The client use of microcredit is both for production (66%) and consumption (34%) purposes. About 56% clients experienced significant improvement of income upon receiving microfinance services while 36% have no significant improvement and the remaining 10% witnessed worsened cases. The research concluded that the microfinance path towards poverty reduction in Nepal can directly improve access of the poor to finance for productive assets and activities that will enable income growth and welfare improvement through enterprise development, increased ability to address vulnerability and economic empowerment.
Nara Hari Dhakal
Unfortunately, there is no specific Millennium Development Goal (MDG) that deals with microfinance. In fact, given the long-term importance of microfinance for the economic development of the least developed and developing counties, it is difficult to see how the overall goal of poverty eradication can be achieved through the MDGs. To prove that microfinance delivers on the MDGs, a set of microfinance metrics needs to be developed around the eight goals in parallel with the UN progress indicators.
Charles Dowd
In Gambia, the Indigenous Business Advisory Services (IBAS) was established by the government to assist in the development of small scale entrepreneurship in the country. The institution provides soft loans to small-scale entrepreneurs with interest rates below the commercial bank rates. This scheme has been found to be very effective in providing financial assistance to these entrepreneurs and hence increased their productive capacity in terms of managerial and production output. Several of these entrepreneurs were taught basic management, book- keeping concepts and principles and are now practicing these skills in their businesses. This has given further impetus towards expanded private sector activities and entrepreneurial skills development in the country, as many entrepreneurs have now come to terms with the the entity concept as vital for increased productivity and profit for their business. Microfinance is therefore a necessary ingredient for expanded private sector activity and development in the country.
Sako Mboge
Microfinance is well known and accepted around the world as a powerful tool for poverty alleviation. The industry has a lot of evidence to prove that microfinance is helping to achieve the Millennium Development Goals. The microfinance sector is uplifting poor people's economic status and social status as well. The Human Development Index and economic development index could be a key yard stick for measuring evidence. Besides this, we can see and evaluate real development in the rural areas where the microfinance sector is working. There are some challenges facing the industry such as barriers to reaching targeted people. It is uncertain whether the target percentage of the Millennium Development Goals will be achieved or not.
Govinda Bahadur Raut
Microfinance is a practical mechanism that solves the problem of poverty from its roots. How? By dealing directly with the individuals rather than governments as the World Bank and IMF do. The best way to describe microfinance is "One Step at a Time." That is exactly what microfinance is. It deals with the poverty of the individual, which has a positive domino effect on the poverty of others. The Millennium Development Goals, especially the reduction of poverty to half by the year 2015, are being achieved when every single individual gains financial independence through microfinance programs. Amjad Dajani Formal financial institutions are not interested in small loans because they do not bring significant business or are considered too risky. The microfinance sector provides the opportunity to less favoured people to develop small economic activities, to provide income for their families and to have a dream: getting out of poverty. In Colombia, according to optimistic sources, 52% of the population, lives at poverty level. That is, 22 million people. The fact of giving an opportunity to poor people not only helps those particular people, but also generates an important economic movement, helping to increase yearly growth rates. It is because of all of this that we can say that microfinance is an unmatched development alternative for countries and should be supported by all those interested in development. Hernán Londoño Barona Microfinance can achieve its objective of reducing poverty. Clear evidence in Ghana is the provision of funds to fish mongers in the central region. It really enhanced their business. Another example is credit given to gari processing women group in the northern region. It serves as a capital base to expand their business.
Sergio Chacon
Microfinance can provide a valid contribution to the achievement of the Millennium Development Goals and particularly of the first three MDGs: eradicating extreme poverty and hunger, achieving universal primary education and promoting gender equality. Evidence from the field supports this view. Due to its "bottom-up" approach in the promotion of development, microfinance has the ability to intervene directly at the household level, bringing tangible improvements in the conditions of life in rural as well as in urban and suburban areas (i.e., increase in the number of meals per day and in the access to education offering the possibility of paying school fees). Furthermore, the high number of women among the clients of the majority of microfinance programs provides additional evidence of gender equality. Against this background, the main challenge of microfinance remains that of guaranteeing its self-sustainability in the medium-long term.
Francesco Strobbe
Microfinance can indeed help in the attainment of "goal one" of the MDGs. This assessment is based on the empirical observation of the role of microfinance in lifting people out of absolute poverty by the National Poverty Eradication Programme (NAPEP) in Nigeria. In 2004, NAPEP provided non-collateral microcredit to members of 45 co-operative groups in Enugu state. The co-operative societies on-lent the money to at least ten of their members. Thus, given an average family size of 6, the scheme impacted on at least 2,700 family members. Baseline data that captured the level of income, economic and social status was collected for all the participants before the commencement of the programme. The data was re-validated bi-annually and a significant improvement was noticed in all the parameters in 88.87% of the participants.
Hyacienth Ngwu
There is concrete evidence that microfinance helps in achieving the Millennium Development Goals. However, I think it would be fools paradise to believe that microfinance alone will do so. What microfinance can achieve is the reduction or eradication of extreme poverty and hunger. But then, sustainability is an issue of the sincerity of the people in government to address economic conditions that are prevalent in a country. For instance, in places where conditions do not exist to support the growth of small businesses, then, microfinance operations are doomed. Issues of corruption, culture and customs, government policies and defined development routes, mass education, NGOs, international agencies and developed countries collaborations must all be addressed to achieve the MDGs.
Romeo Enueshike Omenogor
The hard evidence that microfinance can help to achieve the Millennium Development Goals (MDGs) can be derived from the definition of the two concepts. The MDGs express key dimensions of human development in a set of numerical time-bound poverty reduction targets. They address income poverty, hunger, disease, lack of education, infrastructure and shelter, gender exclusion and environmental degradation. Microfinance is the provision of financial sectors that serve poor and low-income people to better their lives. Microfinance therefore creates self-employment opportunities and income earning facilities for both poor men and women in full respect of gender equality. Through appropriate credit institutions, poor people can have access to educational programs (asset and environmental management) and send their own children to school. With financial resources, poor peoples can build their future with their own labour in full respect of all Human Rights. In conclusion, addressing income educational poverty through appropriate Microfinance Institutions can help to achieve the MDGs by 2015.
Patrick Ndzana
Medical Relief Alliance gave a US$38 micro-loan to Mrs. Susan Njeri, a Kenyan woman who has been widowed as a result of HIV/AIDS. Susan suffers from paralysis on the right side of her upper body. Despite the difficulty she has had finding employment, this loan allowed her to begin selling maize flower in the marketplace. Having since repaid the loan, she recently experienced an extraordinarily proud moment when she was able to sponsor the local school to purchase chairs for the students. Even after this donation to the community Susan is living off a profit this month of US$63 dollars, which she expects will continue to grow.
Sarah Davie and George Momanyi
Microfinance can help achieve the MDGs if managed properly. For example, Bapak Suharno, an older person living in East Jakarta is a very simple person with a big heart. Although his pension is very small, he and his wife still try to assist poor people, especially the elderly in his neighbourhood. He came to us, to ask for assistance in financing their Home Industry Project, making ginger syrup. We asked him to make a proposal demonstrating how much capital he needs and how he plans to pay it back. In the end we agreed to assist him with Rp. 10,000,000 (US$1,100). That was 18 months ago. Now he is already exporting his product to Malaysia and Saudi Arabia. He is able to provide work to older persons in his neighbourhood (they peel the ginger and receive Rp. 2,500- for each kilo of peeled ginger) and he can feed 100 poor older persons once a day, six times a week.
Eva Sabdono
There is a close relationship between microfinance and poverty alleviation. Microfinance is an effective tool for poverty eradication. The microfinance sector is helping poor people in a variety of ways. Microfinance institutions (MFIs) are lending money at a reasonable interest rate, much less than the moneylenders allow and repayment is also on an installment basis. Now MFIs are also entering into the insurance sector. All these are very good indicators that microfinance is the effective tool for eliminating poverty. Ultimately all this leads to Millennium Development Goals.
P. Narayana Reddy
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