When Microcredit Isn’t the First Step

June 28, 2010 Posted by Media Exposure

By Sriram Gutta

The microfinance movement has had great success in reaching over 150 million poor and low-income households worldwide. Yet, for nearly 1 billion people living under $1/day, microcredit is not the best first step. This group lives in the deepest and most profound levels of poverty and has little reason to believe that their children’s lives will be any different from theirs. Are these people bankable? If not, can we design interventions to get these people in to the cash economy?

This is the first in a series of articles that I intend to publish on ultra poor populations and some of the organizations that are focusing on this segment. The series will also highlight some of the organizations that I work closely with, who are implementing innovative and market based approaches to target and serve the ultra poor.

“Ultra Poor” (UP) refers to people at the very bottom of the socio-economic ladder – the ‘poorest of the poor’. This segment is seen as high risk and most organizations, given the pressure to scale quickly, cannot afford to serve it. It is tough to uniformly define or classify this population as they look different in different contexts and countries. They could be pavement dwellers in an urban setting, tribal populations in rural locations or even slum dwellers in certain areas. Some organizations define them as populations outside the reach of microfinance, while the others categorize them as people living under $1/day. However, in most cases they have a combination of the below characteristics:

  • Earn less than $1 / day (often less than $0.50 / day), and income very irregular – Income usually derived from manual labor or begging;
  • School-aged children working manual labor jobs instead of attending classes;
  • Severe malnutrition (i.e., access to only one meal per day);
  • High incidence of physical handicap;
  • Own few productive assets;
  • Frequent migration, transient lifestyles in search of work;
  • Landless, or own less than 1 acre of cultivable land (including homestead);
  • Poverty is inter-generational;
  • Highly vulnerable to natural disasters and health catastrophes

For these people, living in destitution and at the very bottom of the economic pyramid, a microcredit loan is not an appropriate first intervention. Their incomes are low and inconsistent and their lives full of risks. The added burden of debt could cripple their confidence and leave them in deeper levels of poverty. The ultra poor need assistance first in stabilizing their life circumstances, meeting their basic health and social needs, and learning the livelihood skills necessary to generate an income. Only once they reach a level of stability (especially in terms of food security and health), can they expect to take on a microloan and use it for productive purposes.

In view of this population’s special needs, there has been a long-standing debate about whether microfinance institutions (MFIs) should serve this segment. Some in India do – good examples are SKS and Bandhan, among others – but do so through non-profit arms.

Both Bandhan and SKS (and many others across the world) are BRAC replicators. BRAC’s Targeting the Ultra-Poor (TUP) Programme (profiledhere and here) has scaled and successfully graduated many of its UP clients to its microfinance program. The social impact of the program is also remarkable. Once the program finished, the percentage of households living with less than $1 a day fell from 89% to 69%. Moreover, the percentage of participants who reported going without food for entire days fell from 60% to 15%. However, the cost per beneficiary in the BRAC TUP is USD 275 (this could vary by geography). Some MFIs / NGOs cannot afford such a heavily subsidized, long-term program. Thus, even though the BRAC model is seemingly successful, we still need alternate models.

The microfinance movement was started on the same ‘high-risk’ premise; it was the discovery of a scalable model that propelled widespread global adoption and took micro-credit to millions.

Now, there is a clear need for the industry to develop creative interventions that cater to the ultra poor segment, inspire rapid uptake and replication by other practitioners, and are scalable and sustainable for the longer term. In subsequent posts, I will talk in-detail about some of unique approaches taken by organizations targeting the ultra poor and their preliminary learnings.

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