When Is Microcredit Not the Answer?

While many poor people can benefit from a microloan, not everyone wants or can use credit. To use credit effectively, clients must be able to generate income at a rate higher than the interest they are paying. Providing credit to those not able to use it productively could push already-vulnerable people into debt. 

So what other services are available beyond credit?
Savings services can benefit most people, if their savings are safe. Secure savings facilities provide a means to reduce vulnerability by allowing households to better manage their risk and cash flow. Savings are an affordable way for poor families to accumulate money that can be used for investment. Often, microfinance institutions may first need to transition to a regulated legal form in order to be allowed to offer deposits to the public.

Other financial services, such as remittances, insurance and pensions, are often sorely needed by poor people. For example, remittances are a significant source of income for many poor people. Enabling cheaper, faster money transfer services would be a great benefit for many poor families who currently spend significant percentages of their earnings to move money. Moreover, many families could utilize insurance products and better pension delivery systems for greater social protection.

Safety-nets are transfer programs targeted to the poor or those vulnerable to poverty and shocks. Some people refer to such programs described as social assistance or social welfare programs. They can provide relief to people hit by crises or who are chronically poor. Displaced persons during or immediately following a conflict or those affected by natural disasters, such as earthquakes, famines and floods, are likely suited for targeted "safety-net" assistance that enables them to meet immediate consumption needs and replace lost assets.

Grants can be used to help people build assets, develop enterprises, and combat chronic poverty. Grants may be suitable for post-crisis situations, as well as for assisting the chronically poor, retrenched workers, and high-risk groups with little work experience.

Conditional cash transfers are a popular way to structure grants. Beneficiaries receive cash or some grant in exchange for important behaviors such as school enrollment/attendance or utilizing health services. Small grants can also work well as first steps to "graduate" the poor from vulnerability to economic self-sufficiency. A successful example is BRAC’s Income Generation for Vulnerable Groups Development program in Bangladesh. This program has graduated more than 660,000 destitute women through free food, training, health care, and savings to mainstream microfinance.

Investments in infrastructure, such as roads, communications, and education, provide a foundation for economic activities. Community-level investments in commercial or productive infrastructure (such as market centers or small-scale irrigation schemes) can facilitate business activity.

Employment programs prepare the poor for employment and can promote income generation. Food-for-work programs and public works projects allow poor people to be functionally employed while contributing to improvement in infrastructure. In many cases, these programs may be out of reach for cash-strapped local governments but within the purview of large donors.

Non-financial services range from literacy classes and community development to market-based business-development services. While non-financial services should usually be provided by separate institutional providers, there are clear, complementary links with the potential impact of microcredit. For example, improved access to market opportunities can lead to more profitable, faster growth enterprises.

Legal and institutional reforms can create incentives for microfinance by improving the operating environment for both microfinance providers and their clients. For example, streamlining microenterprise registration, abolishing caps on interest rates, strengthening customer protection, loosening regulations governing non-mortgage collateral, strengthening the judicial system, and reducing the cost and time of property and asset registration can foster a supportive climate for microfinance.