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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
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Featured Guest | Fazle Hasan Abed
Questions for Fazle Hasan Abed, Founder and Chairperson of BRAC and Advisor to the Year of Microcredit 2005
1. How do programs of IGVGD address the challenges of development unique to Bangladesh? About a third of Bangladesh’s population lives in extreme poverty, spending over 80% of their income on food and yet unable to meet 80% of the minimum calorie requirement. A significant proportion of the extreme poor are chronically so, often inter-generationally. Mainstream development approaches have generally not been able to reach this group of the poor. The extreme poor are caught in a nutrition trap: low levels of food consumption leads to poor health, high morbidity, leading to inability to participate in the labour market, which further decreases the household’s ability to withstand shocks. Such a trap also adversely affects intergenerational outcomes, with children having no schooling or high dropouts, and poor educational outcomes even when they do manage to go to school. Poor nutritional status of the mother often leads to high risks of maternal and infant mortality or the child being born with anemia and very low birth weight. This again leads to poor health status of the children leading to the reproduction of the cycle of extreme poverty. Thus, food assistance is an extremely important entry point to break the nutrition trap that the extreme poor face. However, such assistance, on its own, will not be enough to build sustainable livelihoods for the extreme poor. Indeed, before the IGVGD, a large majority of the extreme poor that received food assistance failed to show any sustainable improvement in their lives after the food assistance was over. This is where the IGVGD approach adds value. It makes use of the window of opportunity provided in the lives of the extreme poor through food assistance to start building the foundations for sustainable livelihood--- through savings, training on building income generation skills, making them aware of their rights, and gradually including them within the fold of microfinance. About 70% of those who enter our microfinance program through the IGVGD route manage to stay on the program beyond three years—this suggests that the approach is working for a large majority of the extreme poor that get food assistance through IGVGD. 2. It is often said that that microfinance institutions should separate business advice (such as training courses) from the provision of actual financial services. How has BRAC structured its safety net programs in a way that effectively responds to some of this criticism? IGVGD is a partnership program between the World Food Program (WFP), the Government of Bangladesh (GoB), and BRAC. The food assistance and training cost is provided by WFP and the GoB. The targeting cost is also incurred by them and is implemented through a partnership between the local government representatives and BRAC. The training is imparted by BRAC using its IGVGD staff who undergo intensive training of trainers course imparted by BRAC’s training division. The microfinance component of IGVGD falls under microfinance management and operated just like our standard microfinance program. The interest rate charged is the same though the starting loan size is lower that our normal microfinance pool, which means that the IGVGD loans, at least in the initial stages are not of a size that can allow us to recover the cost of providing it through interest charged. Thus our microfinance program subsidizes the operating costs of providing microfinance to the IGVGD members. However, as a large majority of the IGVGD members continue to borrow increasing loan size, such subsidies are recouped. 3. To follow up on the previous question, how does the program that is subsidized keep from infecting the pure microfinance products? The subsidy is not on the interest charged on loans to IGVGD members. It takes the form of cross subsidy (because IGVGD starting loans are lower on average) and the subsidy that BRAC receives for imparting training. Thus, there is no possibility of distorting incentives at the client level. 4. The IGVD program experienced a higher dropout rate for borrowers among the very poor than BRAC’s main credit programs. What do you think it tells us about preferences of the very poor? Our research suggests that those who dropout from IGVGD are amongst the poorest. The IGVGD approach is thus not working very well for a section of the extreme poor. These are essentially female headed households having no adult male support, those not even having any homestead land, and those who have a weak and exploitative social support network. For them, we need more long term, comprehensive support covering a wider range of areas. This is the main reason for BRAC’s introduction of a new experimental program for the ultra poor—those whose circumstances are so severe that they cannot benefit from the IGVGD approach. This program is called ‘Challenging the Frontiers of Poverty Reduction: Targeting the Ultra Poor’ (CFPR/TUP). We started this program since January 2001 where the idea is to provide asset grants combined with a comprehensive package of protective and promotional inputs to build the basis of sustainable livelihoods for the extreme poor. Just like IGVGD, here too, the members will have the option of using microfinance services after an 18-month period of intensive support. During the five-year experimental phase of this program, we will be covering 70,000 ultra poor women and their families in some of the poorest regions of the country. 5. One of the goals of the Year of Microcredit is to change the perception of poor people so they are accurately viewed as savers, investors, and good clients that repay their loans on time. How does the IGVGD program contribute to this goal? The IGVGD approach and experiences challenges the microfinance community to be inclusive showing that even the poorest can be served effectively and sustainably. The challenge is not so much to change the perception of the poor people, but for the practitioners and investors who too quickly jump to disassociate themselves from the agenda of addressing extreme poverty. Our experiences make us firmly believe that if we want, we can find innovative ways of including the extreme poor as well within the microfinance agenda. 6. Can the social and economic constraints that keep many “hardcore poor” (particularly in rural areas) from accessing traditional microfinance services be overcome through the safety net linkage programs? Do you think a better path to lift the very poor out of poverty might be savings services combined with Income Generating programs with business training that allows them to “save up” a lump sum with which to launch their business? Safety net linkage programs can be very effective as a strategy to provide microfinance to the extreme poor. However, we need to be more innovative in designing the safety net program, especially in ensuring that it is comprehensive. The linkage also needs to be a flexible option. Subsidies provided during the safety net period will have to be designed so that they do not end up creating dependencies but instead provide incentives for change. We are very much at the beginning of experimenting with such linkages and incentives. Good savings services are crucial for the poor, even the extreme poor. Microfinance institutions all over the world will need to pay more attention to this aspect of their services. However, we also have to understand the context of extreme poverty. The economic base of the extreme poor is so fragile, and uncertain that to expect that they will be able to save up a lump sum to launch businesses is unrealistic. However, this also means that we need to work harder to ensure the right types of products—products that are more responsive to risk and vulnerabilities, be it savings or credit. 7. Should microfinance institutions also consider expanding small and medium enterprise lending to create more employment opportunities for this group? The expansion of support to small and medium enterprises is important in its own right. The employment effects of such enterprises clearly exist. However, I don’t think that the extreme poor will be able to take advantage of such employment expansion without interventions that are more directly targeted towards improving their position. Thus, interventions to support the development of the small and medium enterprises cannot substitute targeted interventions for the extreme poor. Both will be needed but with adequate analysis of how the former will benefit the latter. It is also important to emphasize that financial services though important are by no means the only support that is needed to strengthen the small and medium enterprises sector. The cost of setting up and running businesses is prohibitively high in developing countries, and this burden falls disproportionately on the small entrepreneurs. The whole business environment in developing countries will have to be made more conducive to the survival and growth of small and medium enterprises. 8. As an Advisor to the Year of Microcredit 2005, how do you see the Year moving forward the global agenda of building inclusive financial sectors? The crucial business of providing financial services to poor people remains until now, a poor and distant cousin of the mainstream financial system. Yet, some of the most solid financial institutions are microfinance institutions. Moreover, in many localities, the local branches of microfinance institutions are the only viable and reliable financial service providers. Microfinance can grow faster, be more independent, provide a better range of services and be more effective if it is mainstreamed within the formal financial system. This should be considered as a core task of moving the global agenda of building inclusive financial sectors. 9. As part of the Year’s mission is to educate the general public about microfinance and microcredit, what can you say would be the most urgent message to promote to this audience? The general public will have to be made aware that the business of providing financial services to the poor in a way that is lasting is interaction intensive, and thus relatively costly. Microfinance provides services that address the financial service preferences of the poor, which cannot be served using traditional banking methodology. It deals with small amounts of money involving frequent transactions and uses a methodology that requires investments in social intermediation activities, such as group formation, and a repayment mechanism that is staff time intensive. Reducing the cost of doing the business of microfinance is a constant preoccupation of most microfinance institutions and we all need to work much harder on this. But, the basic structural reality of providing microfinance will need to be better communicated and appreciated by the general public.
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