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Micro-finance can make the poorest poorer, study warns

Micro-finance can make the poorest poorer, study warns
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Micro-finance can make the poorest poorer, study warns1

Finance | Jonathan Last | 19 Sep 2012

The Institute of Education has praised micro-finance as a means of reducing poverty, but warns that caution must be used when lending to the very poorest.  

In a Department for International Development-commissioned report that compiles worldwide data, researchers from the EPPI-Centre at the Institute of Education, University of London have concluded that micro-credit can end up making people poorer as well as better off – and in fact the poorer the borrower is, the more in danger he or she is of suffering in the long term.

Micro-credit – giving minor loans for establishing a small business, such as a market stall – is designed to be a stable way to help people out of poverty.

Poorest are at most risk

But the study, which assessed the 17 most relevant international studies on micro-finance and which was conducted in partnership with the Centre for Anthropological Research at the University of Johannesburg, reports that it is strongly advisable to lend only to those who already have some financial security.

This allows them to make loan repayments even if their businesses do not generate a profit immediately, it said. Since the very poorest cannot do this, they are at risk of getting into debt and further financial hardship.
 
Leader of the study Dr Ruth Stewart said that “considerable care” should be taken when policymakers and creditors are deciding whom to target with micro-credit services, lest they make the poorest even poorer.

Micros saving – safer than credit

The researchers judge that micro-saving, where the individual saves small amounts over a long period of time with organisations' savings services, is the “safer” intervention and that “arguably the poorest of the poor should not be offered micro-credit without careful consideration of the implications for their lives of increased debt”.
 
They say that having bank accounts helps people to increase their assets, and the researchers describe commitment savings accounts – which require clients to agree to save a certain amount until a particular date – as “particularly promising”.

Another conclusion the researchers reached was that those with higher levels of education or training were the most likely to benefit.

Dianne Lowther
Communications Director
VisionFund International
20 Sep 2012

We at VisionFund agree with the principle that caution must be used when lending to the very poorest and it is a precaution we take on a daily basis and encourage others in the microfinance sector to do the same.

A poor community firstly needs to have its basic needs addressed which is why we work alongside World Vision which provides healthcare, clean water and sanitation. Once the basic infrastructure is in place to address the fundamental needs of a community, then the community is ready for economic growth and that is where microfinance can play an important role. Microfinance, combined with other poverty interventions, is a much stronger proposition and one that supports lasting change.

When providing loans to the poor it is vital to have in place a screening process to ascertain an individual’s ability to use the loan constructively and to be able to handle loan repayments. We have also experienced that in many cases it is very helpful for financial training and education to accompany a loan, and this should in our opinion, be part of the service on offer.

The microfinance sector has a duty of care to its clients and takes such issues seriously. This can be demonstrated by the steps taken to introduce self-regulation such as the SMART Campaign which encompasses core Client Protection Principles such as prevention of over-indebtedness, responsible pricing, and fair and respectful treatment of clients. A substantial number of leading organisations in the microfinance sector, including VisionFund, endorse the campaign and its goals.

Many microfinance organisations operate in line with their own mission and observe strict standards. At VisionFund, children are at the heart of our strategy. In line with our Christian values, we have policies on child protection and our MFIs will not grant loans if we find that it will adversely affect a child or the borrower.

Microfinance offers more than loans. It includes a range of financial services such as savings accounts and other suitable products tailored to a community’s needs, for example, insurance to protect against crop damage - services to which communities wouldn’t otherwise have access. Less than 50% of the world’s adult population has access to a formal financial system (World Bank Financial Inclusion Data, 2011) and the majority of these people come from the developing world. At VisionFund, we believe that microfinance, when responsibly delivered, and alongside other poverty intervention mechanisms, can unlock economic opportunities for those who need them most.

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