What We Believe: Delivering Financial Services – “Microfinance” – to the Poor
More than one-third of the world’s population – 2.5 billion people – do not have access to a bank account or other formal financial services that would help provide them with a cushion against risk, to safely and efficiently manage daily cash flows, or to fully take advantage of income-generating opportunities. The vast majority of those households are poor. Yet because of their irregular incomes and precarious economic position, poor households need access to appropriate, affordable financial services even more than the non-poor.
A seminal book based on deep field research, Portfolios of the Poor, captures the role of financial tools in helping poor households manage and rise above poverty. The authors write, “We came to see that money management is, for the poor, a fundamental and well-understood part of everyday life. It is a key factor in determining the level of success that poor households enjoy in improving their own lives. Managing money well is not necessarily more important that being healthy or well-educated or wealthy, but it is often fundamental to achieving those broader aims. Second, we saw that at almost every turn, poor households are frustrated by the poor quality – above all, the low reliability – of the instruments they use to manage their meager incomes.”  Professor Muhammad Yunus, founder of Grameen Bank, recognized these financial needs early on, and pioneered ways in which a range of financial services – credit, savings, insurance – could be provided to poor households in Bangladesh.
For decades, microfinance institutions (MFIs) were the only entities striving to meet the financial needs of poor households in an effective, broad-reaching and sustainable way. The successful expansion of MFIs’ easily replicable approach has been cause for celebration and praise. MFIs figured out how to cost effectively reach hundreds of millions of poor households, how to build trusted person-to-person relationships with clients and how to mobilize large amounts of capital to disburse in micro-loans. And yet, once the original models were established and proven, relatively little innovation took place. The primary focus was on credit, rather than the full range of financial services we know that clients need (loans, savings, payments and insurance). Instead, undifferentiated products were provided to vastly different clients the world over, while large amounts of mostly foreign capital began flowing into microfinance, creating pressure to disburse loans and leading in some cases to clients taking on more in loans than they could reasonably pay.
Here is what we know from our experience in helping to deliver microfinance through locally-managed and incorporated partners for 15 years, through achievements and crises, and through a variety of actors ranging from microfinance institutions to commercial banks to telecommunications companies (which have become active providers of financial services in some emerging markets). These beliefs have shaped how Grameen Foundation approaches its work, designs interventions and engages with the broader community working to expand access to financial services for the poor.
Microfinance works. Financial services – payments, savings, loans and insurance – are critical components in the toolbox of the poor as they manage their cash flows and, thus, their lives. We have never believed that access to financial services is a panacea for addressing global poverty; rather, we believe that it provides essential tools for poor households to improve their lives. Through evaluation instruments, such as randomized control trials, researchers have also shown that access to microloans can help microenterprises increase their income, and that access to savings accounts has a positive impact on household economic well-being.
As outlined in Measuring the Impact of Microfinance, written by Professor Kathleen Odell, “there is evidence from a number of studies suggesting that microfinance is good for microbusinesses. Various studies showed increases in business ownership, investment and profits ... Microsavings in particular appears to be a promising financial instrument whose potential is only beginning to be discovered.” Though Odell notes that these same studies have shown a less-clear connection between microfinance and overall poverty reduction or improvements in measures of social well-being, such as education or health, Chris Dunford, in The Evidence Project, does find evidence that the poor “use microfinance to reduce their vulnerability to ... consumption interruptions and financial shocks for their households.” There is also evidence that greater access to bank accounts in a society is correlated with greater economic growth and lower income inequality.
Though we believe that access to financial services provides a net benefit to the poor, there is still much to be learned about which aspects of these services most benefit poor households and how to deliver them in a way that not only meets the needs of the poor, but improves their lives. Therefore, we continue to support a robust research agenda as an important way to help identify which microfinance practices are most effective from a poverty-reduction perspective, and which are not effective.
One size does NOT fit all. What does this mean in practice? It means no more “autopilot” or “monoproduct” approaches. It means that the sector should revamp its products so that it offers a broader array that meet poor households’ financial needs. It means offering financial service providers the tools they need to design, launch and scale new products. It means a deep focus on savings, where there is massive unmet demand.
We must ensure that financial products are customized, creating different suites of products based on individual market segments, and we should continually tinker with products to ensure that they create more value for clients. Product design starts with deeply understanding client financial needs and designing products that not only meet those needs, but reinforce clients’ ability to understand and utilize the products for maximum impact.
For these efforts to be successful, the sector will need to proactively engage regulators, to ensure a conducive regulatory environment and proper controls.
Delivering financial services to the poor can be costly, but innovation can drive those costs down. The cost of delivering financial services in tiny increments to remote or difficult-to-reach areas is often high, and of course institutions must be able to cover their costs to be sustainable.
Nevertheless, we must constantly strive to bring down costs and, thus, interest rates. Through a combination of innovation, technology solutions, innovations in delivery channels and economies of scale, we have seen large financial service providers bring down costs significantly. When these costs savings are passed on to clients in the form of lower interest rates for loans, higher interest rates for savings or the ability to offer new services, clients benefit.
Interest rates must also be transparent. Grameen Foundation, through its initial backing of Microfinance Transparency, has been a strong proponent of transparency when it comes to lending rates for the poor, and will continue to be.
Organizations should focus explicitly (but not necessarily exclusively) on reaching the poor and tracking outcomes. Why does this matter? Put simply, if we want to have an impact on poverty, we need to reach the poor directly, including the poorest. Seven years ago, we launched the Progress out of Poverty Index® (PPI®), a simple, accurate tool that measures poverty levels of groups and individuals. Today, the PPI is the industry standard for poverty measurement, with 185 organizations using it globally. Cross-referenced with other data, PPI data can tell us which client segments are benefitting from a product, and which are not. It can tell us which clients segments are most quickly moving out of poverty, and which client segments are falling behind. It can tell us about product uptake and usage at different poverty levels.
We’ve also learned that the poor are not a monolithic group – we need to understand how to segment the market of 3 billion people living on less than $2.50 per day, and design products and services that meet each segment’s specific needs. A commitment to using the PPI and other research tools can help us do that.
There are many viable routes for delivering financial services to the poor. Today, there are a number of effective ways to deliver a range of financial services to poor households; a decade ago, MFIs were often the only entities doing so sustainably. There are almost 5 billion mobile phones in the developing world, and many mobile network operators are not only allowing payments (which can be critical in times of crisis for a poor household) but are also enabling the poor to use their phone to save in a number of ways. Commercial banks are thinking far more creatively these days and, in some markets, may provide the quickest route to scaling financial services for the poor. Some microfinance institutions are reinventing their business model to serve as banking correspondents, leveraging their strong field-based networks. Village savings-and-loan groups, in which the poor form organizations that allow for saving and lending, have taken root in parts of Africa and Asia. Agricultural cooperatives are professionalizing their operations and passing more capital to their members, who often are far beyond the reach of formal banks.
In other words, there are sometimes many ways to solve the same problem, based on what works best locally. What is right for one region may be wrong for another region. Approaches to providing financial services to the poor should be adapted to local market conditions and the needs of local populations.
Sustainability is a means to the end, not the end itself. In the kind of poverty-focused microfinance that Grameen Foundation advocates and promotes, earning profit should not be the end goal; rather, it is a tactic to sustainably deliver quality financial services to a growing number of poor households and thereby reduce poverty. When institutions focus solely on profits, rather than on the well-being of their customers, they have the potential to have a negative impact on their clients’ lives and negatively affect the public image of microfinance.
Financial services are necessary for all of us, but can be risky; whenever money is involved, there is upside as well as downside. When working with the world’s poorest and most vulnerable people, it is essential to ensure that their interests, safety and protection come first. For the poor to have long-term access to financial services, providers must be sustainable but they also must ensure their clients’ well-being. If clients thrive, the institution will thrive. Industry efforts, such as the SMART Campaign, the Seal of Excellence for Poverty Outreach and Transformation, and the Universal Standards for Social Performance Management (developed by the Social Performance Task Force) are leading the way to ensure that those providing financial services to the poor do so in a way that makes client well-being central to success.
1. Portfolios of the Poor: How the World's Poor Live on $2 a Day, Princeton University Press, 2009. Page 3.