Graduating the Poorest into Microfinance:

01 February 2006

Microfinance—or formal financial services for the poor—helps people fight poverty on their own terms, in a sustainable way. Poor people use loans, deposits, and other financial services to reduce their vulnerability, seize opportunities, and increase their earnings. Indirectly, microfinance improves schooling, health, and women’s empowerment. In most settings, however, microfinance does not reach the people at the very bottom of the socioeconomic scale—the “poorest.”

Today there is much debate about whether microfinance is for the poorest. Many millions of people living on less than a dollar a day (the very poor) are already being served by microfinance institutions (MFIs). And yet few MFIs reach the “poorest” customers at the bottom of the poverty scale in their own countries. Even in the case of MFIs that focus on reaching very poor clients, there are substantial numbers of people who are too poor to participate. For example, in Bangladesh, where MFIs are strongly focused on serving the very poor, MFI concentration is highest among the second poorest quintile group; it is lowest among the poorest quintile. Microfinance services are not aimed at the poorest communities. Why is this?

One reason extremely poor people may prefer not to borrow is because they think debt is more likely to hurt rather than help them. If a woman has no reliable income source, she may feel that obligating herself to make a regular weekly or monthly payment will make her more vulnerable rather than less. Although her investment of the loan proceeds in a new microbusiness may raise and stabilize her income, this investment is a risky proposition given that a large percentage of microbusiness start ups fail. Realizing this, many extremely poor people decide that their life is already risky enough without taking on debt. Arguably, some of these fears may be more about confidence than reality, but the poor are usually the best judges of their own situation.