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2001/12 Microcredit (MPs)
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LASER
SPEAKING POINTS – December 2001
MICROFINANCE – A REQUEST FOR LEADERSHIP
Many very poor people have the skills and willingness needed to run a business – they just need finance and support.
Microfinance programmes reaching the very poor include SHARE India and BRAC’s Credit Programme, which are operationally self-sufficient.
BRAC also runs an effective micro-grant programme targeting destitute Bangladeshi women, as a first step into microcredit.
In 10 years nearly 1 million women have moved out of absolute poverty.
DFID’s main task is to eliminate world poverty.
To do this it must support poverty targeted programmes.
We request that DFID relaxes its stance on sustainability and makes poverty targeting its main priority in funding microfinance programmes.
BACKGROUND
SUPPORT SHEET – December 2001
On this sheet you will see the information given in recent letters signed by Clare Short, responding to RESULTS partners’ letters to their MPs. The DFID response is shown marked "[D]". Underneath, marked "[R]", there is a suggested answer to each point. You may find these useful when speaking and writing to your MP about microfinance.
[D] DFID recognises the great importance of microfinance services, which allow very
poor families to take advantage of opportunities to increase income and
build more secure livelihoods. We currently have multi-year investments
totalling some £100 million strengthening microfinance (credit and savings)
institutions throughout Africa, Asia, Eastern Europe and the Caribbean.
[R] It’s great that DFID recognises the importance of microfinance services and funds MFIs so generously. We request that at least half of this funding goes directly to MFIs that target very poor people.
[D]..……. suggests that we direct an increasing proportion of our microfinance support to those institutions targeting 'the poorest'. We strongly support this concept, but experience shows that it is not easy to deliver credit services to the poorest.
[R] We’re glad that DFID supports the concept of poverty targeted microfinance. We agree that it is not necessarily easy, however the fact that it’s not easy doesn’t mean we shouldn’t do it. DFID’S remit is the reduction of poverty so we suggest it should focus on poverty targeted microfinance. MFIs such as SHARE India, the Small Enterprise Foundation (SEF), and BRAC have all shown that it is possible.
[D] First, credit alone is not always the most appropriate support mechanism for the most disadvantaged groups.
[R] We are not advocating for credit alone.
[D] For example, the elderly, the sick, of HIV/AIDS orphans may have very limited capacity for self-employment and few income-earning opportunities.
[R] Yes, we largely agree with this. We are not advocating for microfinance programmes targeting the sick and HIV/AIDS orphans. Many microfinance programmes, SEF is one example, do have groups of elderly borrowers, who are quite successful. However, there are many very poor people who do not come into any of these groups and for whom microfinance services will be appropriate.
[D] Typically, they require many different public and private services beyond microcredit. However, certain financial services are particularly relevant to those at great risk - such as simple and accessible savings opportunities, or micro-insurance. We encourage integration of such services into microfinance programmes.
[R] Yes, we agree, experience has shown that integration of savings opportunities into microcredit programmes is valuable and many poverty targeted programmes require their borrowers to save. However there is no evidence that savings and micro-insurance alone provide a viable route out of poverty for very poor people. Using credit to develop a microenterprise does provide a viable route out of poverty, and there is evidence of this.
BRAC’s IGVGD programme is an example of an effective and innovative microfinance programme where credit is not the principal component (though it is an essential component - see action sheet). We encourage DFID to promote more innovative microfinance programmes that meet the needs of very poor people.
[D] Secondly, our experience is that microcredit is most effective when directed mainly at the ‘productive poor'.
[R] Firstly, there is no conclusive evidence that very poor people lack the skills and willingness needed to run a business.
Secondly, people can only become productive if they have the necessary resources. Individuals’ poverty levels fluctuate over time, and people may lose resources or assets through circumstances beyond their control. That does not mean that they should not have access to a means of replacing them and moving out of poverty.
BRAC’s IGVGD programme is an example of effective microfinance reaching destitute women. It requires a large initial financial input. However we suggest that if DFID is to be successful in contributing to poverty reduction, it must not neglect extremely poor people, and therefore must support programmes such as this more widely.
[D] Lending to a large number of viable micro-enterprises enables small banks to grow into sustainable, independent institutions. It is necessary to create viable ways of working in order to set aside resources to seek to reach out to the poorest.
[R] Reaching out to the poorest is viable – SHARE India reported 105% operational self-sufficiency in August 2001 and BRAC’s Credit Programme reported 108% operational self-sufficiency in December 1999 (the latest figure available). Poverty targeting and sustainability are compatible. We request that DFID simply extends the time limit within which it requires MFIs to become sustainable.
In addition, the SEF has found that repayment rates in its poverty targeted programme are better than those in its non-targeted programme. With institutional discipline and borrower support very poor people are a good investment risk.
[D] DFID's collaboration internationally with institutional partners such as the CGAP, a coalition of donors and microfinance practitioners, has also helped develop a range of tools to ensure that the poorest receive quality microfinance services.
[R] We’re pleased that DFID is working proactively with CGAP and funding research posts there.
[D] The Small Enterprise Foundation (SEF) in South Africa, the microfinance institution
mentioned in your constituent's letter, has become increasingly concerned
about the adverse impact of HIV/AIDS on the poverty of its rural clients,
and on its lending operations. DFID has therefore recently agreed to provide
funding for a collaborative project between SEF and the London School of
Hygiene and Tropical Medicine to develop an operational model for
integrating HIV/AIDS prevention into SEF's microfinance activities. This
model will also be of value to other microfinance institutions struggling
with the problem of HIV/AIDS, a disease which particularly afflicts the
poor.
[R] We’d like to acknowledge DFID for funding this important work.
(At the same time we note that no money is going directly to fund SEF’s work).
RESULTS has used information from John de Wit, Anton Simanowitz, Barbara Haley, Syed Hashemi and CGAP to prepare these action materials.
ACTION SHEET
TAKE ACTION – December 2001
MICROFINANCE – A REQUEST FOR LEADERSHIP
“I want us to be remembered … as the generation which – in the face of deprivation and despair – finally freed the world from want”. Gordon Brown, Chancellor of the Exchequer, 16 November, 2001
The goal of the Microcredit Summit – to ensure that 100 million of the world’s poorest families, especially the women of those families, receive small loans for self-employment and other business and financial services by 2005 – is quite attainable. A huge factor determining the ease of its success is the activities of major donors, such as the Department for International Development (DFID). Donors, by determining the criteria on which funding applications are assessed, determine the nature, size and thrust of microfinance institutions (MFIs).
The Secretary of State for International Development, Clare Short, recently replied to letters from RESULTS partners who had requested that DFID give 50% of its microfinance budget directly to programmes targeting very poor people. This month we will challenge some of the assertions made in those replies. We will request that Clare Short and DFID reconsider their stance in the light of recent commitments made by Gordon Brown to the reduction of poverty and Clare Short’s own leadership in focusing the work of her Department on poverty reduction.
ACTION
Speak or write to your MP.
If you wrote to your MP about microfinance in July and received Clare Short’s reply then:
1. thank your MP for forwarding your letter to Clare Short and for sending you her reply;
2. acknowledge the leadership shown by Clare Short and Gordon Brown in calling for governments to give greater priority to global poverty reduction and ask that DFID also show leadership in changing its funding priorities;
3. use the information in these action materials to (politely) challenge some of the assertions in Clare Short’s response, in particular request that DFID relaxes its focus on MFI sustainability and promotes poverty targeting as a first requirement. You could point out that the two are not incompatible, as shown, for example, by SHARE India;
4. repeat your request that DFID allocates at least 50% of its microfinance budget directly to poverty targeted microfinance programmes;
5. ask your MP to forward your letter to Clare Short.
If you do not have a response from Clare Short then:
1. acknowledge the leadership shown by Clare Short and Gordon Brown in calling for governments to give greater priority to global poverty reduction and ask that DFID also show leadership in changing its microfinance funding priorities;
2. request that DFID relaxes its focus on MFI sustainability and promotes poverty targeting as a first requirement. You could point out that the two are not incompatible, as shown, for example, by SHARE India;
3. request that DFID allocates at least 50% of its microfinance budget directly to poverty targeted microfinance programmes;
4. ask your MP to forward your letter to Clare Short.
IN ADDITION - If you have not already done so, please ask your MP if s/he would like to join, or help to set up, an All Party Parliamentary Group on Microfinance.
FUNDING DETERMINES ACTIVITY
Inevitably institutions, including MFIs, will be influenced by the criteria imposed by the donor institutions from which they get their funding. Most international donors, including DFID, have been keen to see MFIs reach financial sustainability as quickly as possible. Programmes such as SHARE India (see November 2001 action sheet), and BRAC’s Credit Programme in Bangladesh, show that poverty targeted programmes can be sustainable. SHARE India declared 105% operational self-sufficiency in August 2001 and BRAC’s Credit Programme declared 108% operational self-sufficiency in December 1999. However, because of the smaller returns on lower loan sizes given to very poor people and the more concentrated support that is needed for loan repayment, it takes longer for a poverty targeted programme to reach sustainability. We request that donors such as DFID relax their focus on early attainment of sustainability, and make poverty targeting a first requirement instead.
FINANCE FOR DESTITUTE WOMEN
As DFID says, credit may not be suitable as a first choice for extremely poor people. However, effective broader microfinance programmes exist. BRAC’s Income Generation for Vulnerable Groups Development (IGVGD) programme uses initial micro-grants as a first step to reducing vulnerability, and allowing extremely poor people to spend time and resources learning skills and building up an asset base. IGVGD targets destitute rural women; over 10 years nearly a million women have moved form absolute poverty to economic independence.
However, grants can create dependence, and need to be carefully managed to ensure that they do not adversely affect borrower or institutional discipline when run alongside credit programmes. Micro-grants must:
- * be very carefully targeted;
- * be one-off and include a ‘graduation’ process to mechanisms such as microcredit;
- * be carefully structured and monitored to ensure that they are spent as intended;
- * be accompanied by training or mentoring;
- * require a cash contribution of at least 5-10% of the grant value from the recipient.
IGVGD begins with an 18-month commitment of free food to people at greatest immediate risk. The programme trains participants in income-generating skills such as poultry rearing and silk production. During this period, BRAC helps participants learn to save, building up a “nest egg” for future investment and protection. Most participants then progress to individual income-earning activities. Within 2 years, roughly 80% have made the transition – with their small income-earning activities and accumulated savings – into BRAC’s mainstream microfinance programme as borrowers. This progression of support services – from grants to training to savings to self-employment – appears to be sufficient to break down the barriers of extreme poverty, social isolation, lack of productive skills, and poor self-confidence that previously kept these women from self-employment.
DFID MUST LEAD DONORS
There is increasing agreement in the microfinance world that, for poverty targeted microfinance to work most effectively, practitioners must make sure they meet poor peoples’ needs exactly. DFID can play a role in making this happen by directing its funding to innovative microfinance programmes, as well as those demonstrating best practice in poverty targeting. We request that DFID leads donors in meeting the needs of very poor people and allocates at least 50% of its microfinance budget directly to poverty targeted microfinance programmes.
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RESULTS Education, 13 Dormer Place, Leamington Spa, CV32 5AA
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