Microfinance (the provision of credit and financial services to the poorest people) has been one of RESULTS Australia’s advocacy priorities for many years.  The lack of access to financial services adds to the vulnerability of poor people, as they are unable to obtain credit on reasonable terms to start or grow small enterprises, obtain insurance to protect against unexpected costs or loss of income or have a safe place for savings.  Therefore, increasing access to financial services is an important strategy in poverty reduction.

RESULTS Australia has been a strong supporter of the Microcredit Summit Campaign  since its launch in 1997.  The original goal of the Campaign was to reach 100 million of the world’s poorest families – those living on less than $US 1.25 per person per day – with credit and other financial services by 2005.  In 2006, the Campaign took on two new goals for 2015:

  •  Reaching 175 million poorest families with microfinance.
  • Helping 100 million families lift themselves out of extreme poverty.

From 1997 to 2010, the Microcredit Summit Campaign had been able to report phenomenal growth in the number of the poorest people accessing credit and financial services, with the numbers increasing from 8 million people in 1997 to 138 million in 2010.

Resilience: The State of the Microcredit Summit Campaign Report 2014   was launched last month and provides an update on what is happening in client numbers, and also on innovations in microfinance that are better meeting the needs of people who are living in extreme poverty and building the resilience of clients.

In 2010, the strong growth of microfinance came to an abrupt halt, as the State of Andhra Pradesh in India, which had been a hotspot for growth in microfinance, introduced restrictive new regulations on microfinance operations, designed to address the massive over-indebtedness and aggressive collection practices by some institutions caught up in a fever of sustained double-digit growth in client numbers.

In 2011, the Microcredit Summit Campaign reported that, for the first time since 1997, the total number of borrowers, and the number of very poor borrowers, both declined. The latest State of the Campaign Report shows that in 2012 (the latest available information) the total number of clients rebounded to 204 million, while the number of poorest clients continued to fall, from 124 million to 116 million.

The chart below shows the long-term growth and recent interruption of growth in the number of very poor borrowers.

This result seems like bad news, suggesting that microfinance institutions are becoming less focussed on serving the poorest people.  However, Microcredit Summit Campaign Director Larry Reed explains that these results are more encouraging than they seem;

  “We found that most of the decline can be explained by MFIs making increased use in recent years of poverty measurement tools like the Progress out of Poverty Index (PPI) or the Poverty Assessment Tool (PAT) in which they often found that they were overestimating their poverty outreach. In the long run, we believe that increased use of these tools will lead to more people in extreme poverty being reached with products and services that better meet their needs. We’ve already seen this start to happen in the Philippines, where 10 of the largest MFIs began using the PPI at the same time. This led these MFIs to begin looking at what prevented people living in extreme poverty from becoming clients and to developing policies, systems, and services that could include the poorest. As a result, the numbers of poorest clients started going up again in 2012.”

The 2014 State of the Campaign Report highlights some strategies that microfinance institutions and governments can adopt to assist the poorest people move out of poverty:

  • Providing health education, financing, and products through the existing channels for delivering microfinance.
  • Building agricultural value chains that reach small scale producers in rural areas.
  • Using digital cash and banking agents to deliver financial services at much lower costs.
  • Combining conditional cash transfers with ultra-poor graduation programs to provide pathways out of poverty for massive numbers of people.

At around the same time as the release of the 2014 State of the Campaign Report, the Australian Government released its aid policy statement, Australian Aid: promoting prosperity, increasing stability, reducing poverty.   Three of the priorities the Government has set for the aid program are:

  • Promoting private sector development.
  • Building resilience (including disaster risk reduction and social protection).
  • Gender equality and empowering women and girls.

Effective microfinance programs are relevant to all of these objectives.  For example, microfinance institutions can offer insurance and loans to rebuild businesses after a natural disaster (adding to resilience) and the majority of clients of microfinance institutions are women (as they have most difficulty in accessing mainstream financial services and are most likely to use additional income to benefit their families).

Therefore, it is essential for us to continue to call on the Australian Government to incorporate microfinance in its aid to countries in the Asia-pacific region.

by Mark Rice, RESULTS Australia’s Global Health Campaigns Manager