Micro-finance for Rural Poverty Reduction; Are all Poor People Entrepreneurs?

In late 80s and early 90s development economy experienced a major shift from the state-led to market led growth.  Rankin (2001) suggested that market led growth was beyond economic growth as it brought along political freedom and social justice which would directly affect the poor. In accordance with this claim, micro-finance initiatives was introduced predicated on the assumption that the poor should be granted capital to chart their own course out of poverty,  further supporting the neo-liberalism ideology and reinforcing the  concept of participation to boost the bottom-up approach to poverty decrements.

The progressive growth of the micro-finance sector has prompted major promotion by national governments; NGOs and donor alike as an effective tool for rural poverty reduction.  This is an indication of significant economic and social impacts therefore; percussion for poverty abatement for rural areas.

However, while micro-finance initiatives are beneficial to the rural poor, the idea that micro-finance by itself can reduce poverty is oversimplified. Instead of focusing on the credit-lending processes, this post draws on the challenges that poor people face in the process. The question is; can micro-finance aid poverty reduction? Are all poor people aspiring entrepreneurs?  What can be done to aid better result? The aim of this post is to describe and critically evaluate the micro-finance approach to rural poverty reduction. Drawing examples from African and Asian countries, this post presents argument focusing on three dimensions of poverty; empowerment, income creation, and women empowerment.

Micro-finance

Micro-finance refers to an insurance, savings plan, and loan services and other financial products and services targeted at little or no income earners to assist small to medium entrepreneurs. The past three decades, the development community have had a “love affair” with micro-finance  The reason behind this is simply giving mini-loan to poor people to help them sustain a livelihood and overtime get out of poverty. The idea of micro-finance is beckoning to development professionals because it is not charity; give micro-loans to poor people to start and or invest in small enterprise and the poor pays back the loan overtime. The poor are deemed risky and are often marginalized by the formal banking sector.

One of the major challenges with the formal banking sector is that they fail to sufficiently act as a financial channel of transferring resources from savers to investors (Annan, 1998).  Regularly, this is due to a lack of adequate infrastructure and the nature of information imbalance between the bank and borrowers thus commercial banks are circumspect about lending to the poor. This results in the exclusion of a large population, particularly the rural poor.  Furthermore, in developing economies where the above listed challenges are even more astringent, the contest remains formulating strategies and policies that bridges the gap and encourages poor lenders.

Services provided the formal banking sector does not cover the overall population and more often disregards the poor. This is so as a result of constraints such as high interest rates, collateral, income and equity; as such the poor and vulnerable cannot afford such services therefore, restricted from breaking out of poverty through their own participation in the labor market. For example, part of the lending requirement of the conventional banks is that borrowers have a stable source of income where by principal and interest can be paid back.  The rural poor especially the women are mostly affected by this constraint, as a lack of work experience and low literacy rate among women makes it further challenging for them to gain access to formal credit services (Endeley and Thompson, 2005). In rural communities most household incomes are not stable thus making micro-loans necessary to serve the poor. This dynamic of people are deemed “high risk” to commercial banks therefore; banking institutions are more inclined to serving big loans in minimum amounts to reduce administration charges.

It is based on these precepts that one of the earlier embracers of micro-finance as an intervention strategy, Mohammed Yunus, founded the Grameen bank formed the concept of lending to the poor in Bangladesh in the early 1980s as response to the failing development conventional strategies that was largely focused on large-scales intervention and repositioning the economic conditions for growth (Islam, 2006).  The Grameen bank lending methodology is centered on group lending. Its aim was to make financial services accessible to the poor and also exterminate the exploitation of poor lenders by the formal banking sector.  furthermore, you the poor the opportunity to create employment for themselves (Grameen Bank, 2004a).  By so doing, the Grameen bank operated on a lending model solely based on accountability, mutual trust, and participation without requesting collateral. Furthermore, micro-finance services, particularly the micro-credit focus on providing mini loans to the poor and lately have been prompted to be effectuate the challenges and needs of poor households that the government and market fail to address(Swain et al., 2008).

At the first edition of the micro-credit world submit in 1997, raised tremendous expectations about the effective of micro-finance on reducing poverty. The commitments made at the 1997 submit centered on the idea of a poverty free world by 2025 (Islam, 2006).  Consequently, there is bilateral donor partnership through private development or voluntary institutions involved in reaching more dynamics of poor particularly women in the process of lending to the poor (ibid). Regardless the reported impact on poverty, micro-finance also faces a lot of challenges and criticism.  In 2010, the micro-finance sector was faced with negative impression when Professor Mohammed Yunus, the founder of micro-finance was accused of corruption and as a result forced to resign as the head of the Grameen bank in Bangladesh.  Also series of suicide has been reported in Andhra Pradesh India by loan defaulters, raising concerns about the methodologies of the private sector micro-finance lenders (Neha Thirani, 2012).  Following this development, questions such as can micro-finance help the poor escape poverty and who benefits from such ventures; the poor or the lenders has more recently emerged.

Why Empower Women?

According to UNIFEM (2009) women are the most vulnerable to poverty in any given society.  They bare the majority of lowly paid labor and informal sector for both developing and developed economies (Cheston and Kuhn, 2002).  As women represent about half of the world’s population, development process cannot afford to negate women inclusion (Islam, 2006). Thus the issue of gender equality in development is not about political correctness and kindness but rather a necessity (World Bank, 2002).  Furthermore, both the Beijing Platform for Action of 1995(BPFA; women and poverty strategic objectives A.3.) and the World Bank(2002) have emphasized women’s access to finance as a relevant strategy for poverty reduction thus,  prompting donors to channel more financial resources to affect poor and vulnerable women.  As a result, the number of women part-taking in micro-finance programs is high. As at December 2007, it was reported that 3,552 micro-credit organisations with154 million client; 83.4% were women (SOCR, 2009).

In Nigeria, a rural poverty initiative known as the Abuja Enterprise Agency in 2011 set up a women empowerment loan funds called “one village one product initiative” to help create income for poor women in three rural councils in Abuja, Nigeria.  The idea was to identify unique local products rural women could produce by providing finance and facilitating the “product to market” processes.  Shea butter production was selected. A total of 165 women have benefited since project commencement in three communities and 4 cooperatives was formed as a result of this process in Abuja, Nigeria.

The hypothesis behind women empowerment is that women more than men often get marginalized in economic activities. There is also an argument that women have a greater long-term vision and manages scare resources better than men. It is also believed that the trickle-down effect of empowering women reflects on the household well-being i.e. children are able to feed and afford healthcare (Cheston and Kuhn, 2002, Rahman, 1999; Kabeer, 1998; Islam, 2006; Osmani, 2007 and Mayoux, 2002). Cheston and Kuhn (2002), also suggest that women more than men have higher repayment rate; while this could be true it may not necessarily translate to reducing poverty, as these loans are never an addition to an existing family budget.  For example, in Niger Republic and Zimbabwe, evidence shows men abuse such opportunities of these finances by forcing the women to use the loan for the household expenditure (Mayoux, 1999).  As a result, women are left with little or nothing to invest and generate profitable businesses.

Furthermore, the argument for women having higher repayment rates does not indubitably translate to increase income or ability to break out of poverty. Mayoux (2002) suggests that the high repayment rate could attribute to greater indebtedness; as money could be loaned from other sources to avoid loan defaulting, thus targeting women as beneficiaries of micro-finance programs can lead to an intense cycle of indebtedness (Rankin, 2002).

Equating profitability and financial sustainability with poverty reduction can trigger negative implications such as mentioned above.  Consequently, micro-finance projects tend to leave out complimentary services such as entrepreneur skills training and gender awareness (ibid).  Nonetheless, access to micro-finance loan by itself should not be considered the only strategy for poverty reduction but rather as integral parts requiring complimentary services such as financial literacy, book keeping, account management etc.  Focusing on empowering poor women with just access to finance with no complimentary programs would limit impact.

Also another common challenge women face in micro-finance schemes is a lack of support. Even in western countries, women still need investment in their human capital to ensure sustainability in the labor market as all of these elements co-exist in reducing poverty. Still due to global economic fiscal pressure, these supporting components are never priority. This is understandable because it is challenging to invest in long-term human capital in a country where bad roads is threatening human existence. This leaves a lot of these vulnerable women struggling to find their own path in sustaining a business and avoiding defaulting loan repayment.

Micro-finance for Empowerment

There is no single dimension to defining poverty.  It is a composite phenomenon, intricate to grasp or define.  Although poverty is usually measured in monetary premise i.e. the one dollar a day poverty line introduced by the WorldBank in the 1980s (Townsend, 2006), it is the non-monetary components to poverty that reflects the vital elements of social capital development to reducing poverty.  Evaluation of three definitions of poverty by Johnson and Rogaly (1997), Holcombe (1995) and Endeley and Thompson (2005) all laid major emphasis to two common denominator; income and empowerment. There is an assumed linkage between access to credit and empowerment of the poor. According to Rutherford (2000), access to credit is vital to poverty alleviation as it allows the poor the chance to participate in creating income, improve their livelihood standard and eventually breakout of the poverty. For example, in India; the rapidly developing country where the formal sector experiences high consumption rates, income level and living standards of the vulnerable remains extremely low particularly in rural areas. Income earning capacity in India is relatively linked to social and economic status; while the upper and middle class populate the formal sector, the poor and vulnerable dominate the informal employment. Therefore, the poor awaiting job creation by the formal sector breeds a permanently dependency of the poor on the rich for survival for which the poor may never breakout of poverty. Although micro-finance is relatively new experience, most poor beneficiaries have managed to overtime develop an enterprise. Broadly, micro-finance remains the favorable poverty intervention for India’s rural poor.

Micro-finance has the tendency to reduce rural poverty by accelerating employment rate, improving labor productivity and increase wages.  In poorer countries where this intervention programs were implemented, micro-finance successfully opened economic opportunities and improving the socio-economic conditions of the poor people in rural communities.  Countries like, India, Pakistan, Philippine, Uganda and Bangladesh have all recorded successes in the micro-finance poverty intervention scheme.  Furthermore, success of the micro-finance could lead to trickle-down effects such as increase in income rate, control over such income, opportunity to enhance skills, household welfare, access to education and health and participation in communities. However, access to credit alone does not transcribe to empowerment of the poor; as they still require capability to use financial resources to meet the goal –empowerment (Cheston and Kuhn, 2002).

Going forward, if these social and economic opportunities are available in rural areas, it could overtime lead to an appropriate balance between rural and urban areas. Also, it will help to curb the challenges of urban unemployment and underdevelopment caused by high rural-urban migration.

Micro-finance for Income Generation

As stated earlier, the second emphasizes on poverty as noted by Johnson and Rogaly (1997), Holcombe (1995) and Endeley and Thompson (2005) identifies monetary indicators. Furthermore, this directs attention to the relationship between micro-finance programs and income generation capacity. Granting poor people access to credit could mobilize beneficial capacity to alleviate poverty therefore maximizing economic outputs (Cheston and Kuhn, 2002). Additionally, giving the “unproductive poor” opportunities to participate in economic contribution thus enhances their source of livelihood has a positive impact on reducing poverty (Kabeer, 1998).

Underpinning the economic pursuits of the presumed ‘unproductive poor’ sometimes, micro-finance serves as a safety net for people displaced or inadequately accommodated by the formal economy and or as a result of failure of the government to intervene.  Citing example from Nigeria, research has shown that were it not for what some scholars refers to the ‘social cushion’ role of the vibrant micro-enterprise sector, the Nigerian economy would have collapsed in the face of decades of mismanagement, corrupt leadership, massive retrenchments, unemployment and poverty (Ukpong 1996). However, the Nigerian micro-enterprise sector has remained vibrant in spite of the challenge of access to micro-credit   More broadly, following the impacts recorded, the appropriate question regarding micro-finance for poverty reduction should not be whether the poor need access to credit or whether financial assistance would enhance their ability to be productive.  Rather, the argument should be whether the statutory framework guiding micro-finance operations is one that promotes broad-based micro-enterprise credit access, discourages opportunistic lending and also addresses the challenge of access to market.

The challenges facing micro-finance is not restricted to the above mentioned issues as cases in India, Bangladesh (Hunt and Kasynathan, 2001) and Sudan (Mayoux, 1999) suggests that the framework of rural economies and lack of investment opportunities also contribution to the challenges facing micro-finance as a poverty intervention strategy (Rahman, 1999).

The low productivity in rural areas diminishes the level at which rural economies can participates in national and global economies indicating that, access to loans cannot by itself solve the problem (Bernasek, 2003). Furthermore, as a result of the limitations in rural areas economic activities, the small scale enterprise are likely to be seasonal and more volatile, drawing from example of the silk-reeling industry in India. Leach and Sitaram (2002) noted that due to price fluctuation beneficiaries of micro-finance programs especially the women could not become independent.

Poor lenders require financial services and education more than any of group of people however, in most case micro-finance programs tend to focus more on access to loans,  minimizing the role the market places in sustainability of particular types of poor people, what sort of financial education and training best suits their needs. Failure to tackle these issues will result in negative impact for aforementioned empowerment element of poverty reduction as well as income generation for the poor. Globally, it is becoming generally accepted that what reduces poverty in the long-term basis is not access to finance only but providing supportive and financial services for the poor. For example in Nigeria, the Abuja Enterprise Agency (AEA) partnered with HP learning initiative for entrepreneurs and the United Nations Industrial Development Organisation (UNIDO) to provide entrepreneurial skills training for the rural entrepreneurs.  The training program was focused on providing local entrepreneurs with IT based skills to expedite access to modern tools to enable rural business owners’ better plan and manage their business enterprise. A total of 123 rural entrepreneurs have benefited from this initiative.

Conclusion

Micro-finance is a relevant component in the process of reducing rural poverty however; it is not a magical solution as it requires other component.  While there are positive effects of micro-finance on poverty, there are also cases where such projects failed to reach it desired outcome. Furthermore, the goodwill of micro-finance can leave some people poorer as a result of inadequate management, indebtedness and entrepreneurial skills. Furthermore, the fact that poor people have a high consumer rate and relatively low savings tendency; their enterprise fail to generate enough to pay off loans and interest rates.

Notwithstanding, there are evident that micro-finance enhances the livelihood of the rural poor, although this impact is not universal.  Secondly, the highlights of benefiting the poorest of the poor could be largely flawed as not all poor people are entrepreneurs.  In conclusion, it may be more useful for micro-finance initiatives to focus categorically on providing micro-loans to budding entrepreneurs, rather than assume that all poor people are potential entrepreneurs.