Micro finance: Reaching the hard core poor

Mahbubul Islam Khan

Microfinance in its current forms and with all innovations perhaps will not be able to attract a section of the hardcore poor, who lack confidence and skills to take part in economic activities. For example, microfinance does not appear a feasible option for a section of the hardcore poor, which includes beggars and floating population. We need to give them access to resources (e.g. khas land and open water bodies) and provide subsidized skills development and confidence building training first in order to groom them up to participate in microfinance programmes.

The microfinance sector in Bangladesh underwent a phenomenal growth over the past one and a half decades both in terms of outreach and loan portfolio. According to recent statistics from the Credit and Development Forum (CDF), the total number of active members of Microfinance Institutions (MFIs) exceeds 14 million, and taken together, the portfolio outstanding of these MFIs stands at around Tk. 45 billion. A number of factors contributed to this unprecedented growth in poverty-focused group-based microfinance programmes. Important of these are ready availability of the Grameen model and easy replicability of its key features (e.g. formation of small groups, collateral free loans, joint liability for loan repayment and small repayment installments), strong presence of a large number of NGOs that launched and scaled up microfinance programmes, huge demand for microfinance services by the poor and continued support from the government and the development partners. Evidences that microfinance programmes can make a dent on poverty and the potential of attaining financial viability (earning adequate interest income to cover financial and transaction costs of loan funds, if managed properly) also motivated many organizations to embark on and scaling up microfinance programmes.

Despite remarkable successes of the Grameen Bank and many Bangladeshi NGO-MFIs in general, and BRAC, ASA and Proshika in particular, in increasing outreach of microfinance services, there have been growing evidences of under-representation of the hardcore poor in their clientele groups. Also there were reports of considerable leakage of micro-credit to the non-poor with indications that the non-poor were often included at the expense of the hardcore poor.

Reasons for under representation of the hardcore poor

There are three major reasons that can help explain this under-representation of the hardcore poor in microfinance programmes. The first reason operates from the supply side and relates to targeting. In enrolling members, most MFIs put emphasis on whether a potential member falls below a pre-determined poverty line. The question of how far s/he falls below the poverty line receives little attention. The second reason operates from the demand side and is related to programme implementation and design biases. Some of these biases caused a significant portion of the hardcore poor to shy away from the microfinance programmes. The third reason relates to appropriateness of microfinance services as a section of the hardcore poor seemingly finds no relevance of microfinance services in their practical life and therefore, have no desire for joining in microfinance groups.

In an attempt to better understand how the above-mentioned reasons operate, let us first examine who constitute the hardcore poor and how big are they in size.

Targeting the hardcore poor

Although poverty can easily be observed in Bangladesh, which contains plenty of it both in depth and breadth, academic debates on how best to define poverty and categorize poor still continue. In defining the poor, some analysts emphasize on economic variables (e.g. inadequate household income and assets), others on powerlessness and lack of participation. While some argue that poverty is purely relative and blame inequality (which is further growing) as the major underlying cause. There has also been increasing support for the group, which attempts to draw attention on the notion of feminization of poverty putting forward evidences, supporting that the burden of poverty falls disproportionately on women. This group focuses on the socially defined role of women and intra-household power relations between sexes and age groups and how these relations influence family decision-making processes and access to resources and services.

Many Bangladeshi researchers and government agencies use an income measure based on nutritional intake in defining the poor. If a household income is inadequate to provide food for 2,120 k. calories per person per day, then the household members are considered poor. It is widely believed that more than 50 per cent of around 130 million Bangladeshis fall into this group. Many researchers defined this group as absolute poor.

However, not all people falling below the poverty line are equally poor. Therefore, poor could further be sub-grouped depending on the depth of poverty i.e. the distances they fall below the poverty line. More below one falls from the poverty line, poorer s/he is. This led to the use of a second poverty line, which was set at 1805 k. calories. A number of terms are used to name those who fall below the second poverty line including hardcore poor, extreme poor or ultra poor. No matter what we call this group of poor, the striking fact remains that they make up almost a quarter of the entire population of Bangladesh. Another aspect of poverty that is being discussed is its dynamic nature. This refers to the propensity of poor households falling further below and rising above the poverty line.

The incidence of extreme poverty is higher in areas that are backward economically and more vulnerable to natural calamities (e.g. river erosion, floods). Totally landless labourers, women headed households, households with high dependency ratio (relatively large household depending on a single earner), adult members with disability and chronic illness, households living in fully thatched houses, floating population with no place to stay and beggars tend to be the extremely poor. A relatively high incidence of poverty also exists in remote places that are poorly connected to local growth centers (e.g. local bazaar and town centers).

Now how do MFIs operationalize these definitions to distinguish the poor from the non-poor or from the hardcore poor to moderately poor? While enrolling members for microfinance services, for good practical reasons, most MFIs use an index based either on asset (usually land) and or income and/or both. For example, Palli Karma Sahayak Foundation (PKSF), an apex institution that wholesales financial and management services to most of the key players in the microfinance sector requires that the end recipients of loans are to be "landless and assetless" households. PKSF defines as "landless and assetless" those households who own no more than half an acre of farmland or whose monetary value of assets owned do not exceed the price of an acre of land in the local area. In practice, member selection criterion narrows down to land ownership and this criterion is widely used for defining and determining the eligibility for joining a microfinance programme.

Although land ownership criterion, if applied properly, can mostly distinguish between poor and non-poor, this criterion is not sensitive to depth of poverty and thus largely unable to distinguish between extreme poor and not so poor. FMIs, therefore, need to devise targeting strategies and develop tools to distinguish hardcore poor from the moderately poor. Some participatory methods and tools for example, village transect walk, focus group discussions (FGD), wellbeing analysis -- where villagers get an opportunity to categorize themselves in different groups (e.g. very poor, poor, bottom middle, middle, rich and very rich) -- could be effective in targeting the hardcore poor.

Biases in programme implementation and design

Usually, the opening of a new branch of an MFI follows a feasibility exercise, which looks into, among others, the presence of a scheduled bank branch in local area as the MFI needs the services of a bank for cash deposits, withdrawal, and for receiving and transferring funds. Branches of scheduled banks are mostly located in local growth centers that are reasonably connected with paved roads. Therefore, MFI branches also tend to locate in local growth centers and serve those who live in proximity. This introduces a bias against the hardcore poor as the incidence and severity of poverty tends to be lower among the communities living in and around a growth center. Thus remote, relatively inaccessible areas which suffer from high incidence of extreme poverty remain under-served.

Upon selecting a village, potential credit recipients are tentatively identified and encouraged to form their own groups. These groups need recognition from the concerned MFI in order to admit to membership and qualify for loans. At the group formation stage, a tendency to bypass the hardcore poor is observed among the moderately poor. The reason for this is a common perception that extreme poor have higher chances to fail in paying regular loan installments and with a commitment for collective responsibility for loan repayments, inclusion of hardcore poor means inviting trouble in the future. Understandably, many MFIs prefer that the recipients of microfinance services should have permanent addresses. A considerable proportion of the hardcore poor does not own any land (even homestead). They live in temporary settlements built in land owned by others including the government and remain under perceived or real threats of eviction. Such a preference by MFIs restricts participation of the hardcore poor even though they actively participate in economic activities.

Some important features of the mainstream microfinance services are formation of small groups of people who have a common desire to access financial services, collective responsibility for loan repayment, compulsory weekly or biweekly savings and loan repayment installments often starting only one or two week(s) after disbursement of loans. Loans are mostly given for a year to undertake a wide range of activities. For major MFIs, non-farm activities dominate the loan portfolios and petty trading tends to be the single largest activity.

It is now increasingly felt that conventional credit and savings products offered by MFIs are not that attractive to the hardcore poor. This is one of the reasons, why a significant portion of them, shy away from microfinance programmes. For example, rigid loan terms do not appear friendly to them. Loans, which are due, soon one or two week(s) after the disbursements, suit only those who can manage weekly/bi-weekly installment amounts from their normal cash flow as returns from most activities undertaken by loan start much latter. Therefore, they are unlikely to come from hardcore poor households. Extended repayment periods and flexibility in repayments (seasonal or 3-4 repayment installments aligned with the income stream of the investment or of the credit recipient family) are likely to attract more hardcore poor. Hardcore poor also need loans for consumption smoothing, particularly in lean periods. At present, MFIs do not offer consumption loans as such loans are viewed risky. Time is now ripe to test whether there is really a trade off between servicing various financial needs (e.g. investment and consumption loans, flexible savings and insurance) of the hardcore poor and attaining financial sustainability. Such pilots are to test and develop innovative credit products (e.g. consumption loan tied with an investment loan) as well as cost saving institutions (e.g. building capacity of matured groups to handle savings and credit themselves, which will then allow MFIs wholesaling loan funds to groups). In the name of financial sustainability, there is no escape from servicing financial needs of the hardcore poor, given their large size and the fact that microfinance could make a difference between hunger and two-meal a day life with hope and aspirations. With regard to withdrawal of savings, most MFIs allow withdrawal of savings only after full repayment of loan. Open savings and withdrawal facility with opportunity to save any amount and withdraw the balance within a short notice will attract more hardcore poor in microfinance programmes. The hardcore poor do save. Therefore, a portion of them might be interested to save with MFIs only. Currently, a potential borrower can only save with most MFIs.

New and innovative microfinance programmes, which cater to the needs and priorities of the hardcore poor, are expected to attract a large portion of the hardcore poor. These hardcore poor are likely to be able-bodied with a minimum resource base (e.g. homestead) and active participants in income earning activities. However, microfinance in its current forms and with all innovations perhaps will not be able to attract a section of the hardcore poor, who lack confidence and skills to take part in economic activities. For example, microfinance does not appear a feasible option for a section of the hardcore poor, which includes beggars and floating population. We need to give them access to resources (e.g. khas land and open water bodies) and provide subsidized skills development and confidence building training first in order to groom them up to participate in microfinance programmes. Medical treatment facility is needed for chronically ill population in order to bring them back to economically active life. And in order to integrate the disabled persons into the economy, we need innovative comprehensive programmes where microfinance can form a component.

Source: The Daily Star, Dhaka, January 15, 2002