Achieving Sustainable Poverty Reduction

The core mission of the microfinance movement is to contribute to a material decrease in global poverty by providing helpful financial services to the world’s poor currently not served by the mainstream financial sector. That is, see to help the poor become the non-poor. The assumption is that quality microfinance services are enabling the poor to earn their way out of poverty. The outreach results tracked by organizations like Microcredit Summit are very encouraging with an expectation that the cumulative client base of microfinance institutions (MFIs) was around 100 million in 2005. Grameen Foundation USA recently released a comprehensive review of the various impact studies on microfinance which overall indicates positive trends.

I’d like to propose that the goal of poverty reduction is to attain sustainable poverty reduction. I’d like to define sustainable with a high bar – that is, that a non-poor person/family is not easily pressed back into poverty due to a crisis event including death/illness in family, natural disaster, bad weather, economic turbulence, crime, etc. While I view this as a high bar – I think it is an appropriate high bar to strive for. The reality is crises do happen in everyone’s normal life so to have a plan that ignores them is not a plan. If all we’re doing is helping a poor person become temporarily non-poor, then I question whether what we’re achieving is much better than most hand-out aid programs (with the possible exception of being a higher-efficiency approach.)

I’ve noticed that the terms “microfinance” and “microcredit” are often used interchangeably with the latter term more popularly recognized as result of programs like the UN’s 2005 Year of Microcredit. I view microcredit as one of the components of the larger microfinance concept which represents a possibility of a wide range of financial services designed and optimized for the unbanked poor. To date microcredit has been the prevalent microfinancial service offered to the poor and for good reason … there is immediate demand from the poor for loans.

What is needed in order to sustainably lift and keep the poor out of poverty? I believe that that there are three core steps which must be made available in a highly scalable and efficient way:

  1. an opportunity for the poor to generate more income using skills they already have or can easily develop in a self-service manner;
  2. a safety net so that crises do not result in return to poverty
  3. hope that their children will have even better opportunities to participate in the global economic system

The first objective to break the poverty cycle is to enable stabilization by enabling the poor to generate more income. If there isn’t more income, then everything is a crisis and there are few options for the family to begin focusing on longer-term benefits and activities. This is why productive microcredit – loans directed to business activities not consumption activities – are often the most effective jumpstart tool. Once income is starting to increase, there is the need for a safety net to protect the assets of the family. There are many needs here including various insurance and savings products which provide a buffer/cushion from the impact of crises. Finally, an important third step is that the poor (maybe now non-poor) adults have hope for the generational cycles of oppressive poverty to be broken. While many of these formerly poor adults will likely not become wealthy or achieve even middle income, they can start to see the opportunity for their children to climb even further towards a better future in a global economy.

I think the microfinance movement is overwhelmingly focused on the microcredit front (what I call the microcredit ghetto) and needs to start making more investments immediately in safety net microfinance products. See The Microinsurance Centre web site for some good resources. Finally, I think the microfinance movement will need a strategy for connecting their local clients with the global economy. This is going to need some more creative thinking.

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