Microfinance and Poverty Monique Cohen Microfinance Opportunities November 2002 Thank you to IADB for invitation to participate in this meeting. In my presentation today which will explore the poverty impact of microfinance. I will be drawing on three main bodies of work and one minor one: Three longitudinal undertaken by USAID’s AIMS project in India with SEWA Bank; in Peru with Mibanco and in Zimbabwe with Zambuko trust WDR Infomration gleaned from a wide variety of studies including but no limited to those undertaken by USAID Recent trip to latin America where I had pleasure of meeting with Santa and visiting MFIs in Mexico, Honduras and Peru. I want to begin this discussion of poverty and impact – by being clear what impacts we are concerned with. If we want to talk about poverty we need to begin with the who, who is getting out poverty who are the clients? The I want to review some key findings on impact at the household, enterprise and individual levels. Such results have led to an emerging consensus not only on the impact but on the key issues that affect impact. I want to conclude with a proposal about for improving impact. My hypothesis is that if we deliver more appropriate products and services the industry can have a greater impact.

Poverty Impacts of Microfinance Increases in incomes and investment in assets Reduction of vulnerability: increased ability of the poor to cope with shocks and economic stress events Improved personal financial management For me income growth and reducing vulnerability are the two prongs of poverty reduction. Income growth, largely through putting more household members to work and through enterprise growth are key. As measured changes in household income we look at static indicators of change. By contrast vulnerability defines the dynamics of poverty alleviation. “Life for the poor is one long risk (Card Bank client). Why do I mean? Getting out of poverty for the poor is rarely a straight route out, rather a jaggered route, two steps forward and one back when confronted with a shock. By shocks I mean structural changes, life cycle events, and emergencies. It isn’t just major stress events like school fees or marriages. But the little things. The common place things that significantly affect the forward progress. For most people especially the poor sickness and the loss of a income earner, the two predominant shocks we have identified can significantly affect the fortunes of the poor and the not so poor. Get story from Bolivia. In addition, there are the many shocks that the better off among the working poor might weather that can adversely affect poorer people. Take the example of a hurricane. Monique Cohen Microfinance Opportunities

Impacts at the Level of the Household Investment in physical, financial, human and social assets (build and change the mix of assets); Increases in household income and diversification of income sources; Take advantage of opportunities as they present themselves (from reactive to proactive) Under increases in household incomes – stabilization of basic informal sector income can allow risk taking in by other income earners. Often income growth not from M/E Monique Cohen Microfinance Opportunities

Impacts at the Level of the Enterprise No impact on primary enterprise revenue Positive impact on combined enterprise revenue Small but positive impacts on enterprise employment Limited impact on combined enterprise productive assets Monique Cohen Microfinance Opportunities

Impacts at the Level of the Individual/Client Microfinance empowers women through control of decision making over the assets they manage and through access to knowledge Married women actively make decisions jointly with their spouses and rarely forfeit their contribution to this decision making process Clients are more likely than non-clients to have individual savings accounts Monique Cohen Microfinance Opportunities

Monique Cohen Microfinance Opportunities Emerging Consensus Microfinance is not a magic bullet Microfinance contributes to the process of poverty alleviation (direct and indirect) Reducing vulnerability and risk is an important impact of microfinance. However, microcredit is better for protecting against risk (ex ante) that coping with risk after the shock (ex post) Microenterprise is only one use of microfinance Microfinance is only one of several sources of finance that client juggles Context matters: The economy Length of time client has been in program and the resource endowment of the client Program elements: mission, products and services Context matter: types and magnitudes of impacts vary by country – little real consistency across countries (this is study with same methodology Monique Cohen Microfinance Opportunities

Improving Poverty Impact of Microfinance Improving Poverty Impact of Microfinance? Market-Led Microfinance Not Product-Led microfinance Mention that ODEF as example of MFI that is moving towards market led micorfinance

Responding to Household Life Cycle Financial Needs Household Formation Birth (C,S,I) Death (C, I) Working Capital (C) Productive Assets (C) Investments (S) Asset protection (I) Health (C,S,I) C = Credit S = Savings I = Insurance Old Age (I,S) Education (C,S) Marriage Ceremony (C,S) Monique Cohen Microfinance Opportunities

Market-Led Microfinance Match products to clients’ needs Match repayment amounts and cycles to clients’ needs Match loan size to clients’ needs Match household financial flows and repayment cycles Monique Cohen Microfinance Opportunities