This post was originally published on the Center for Financial Inclusion blog.
By Anne Hastings, Executive Director, Microfinance CEO Working Group
At a time when microfinance has fallen out of favor in mainstream development circles and when investors are asking to see metrics showing the impact of their funding, it is especially important to base our discussions of poverty outreach on empirical research. Grameen Foundation and the International Finance Corporation (IFC) recently published a study that does just this. Factors Influencing Poverty Outreach Among Microfinance Institutions in Latin America (also available in Spanish) takes a close look at poverty outreach data from 14 microfinance institutions (MFIs) across six Latin American countries and is the first study of its kind in the region. The information analyzed includes data from Progress out of Poverty Index® (PPI®) surveys and a range of other relevant client profile variables such as socio-demographics and credit disbursement details.
The findings are important. In-depth interviews with the MFIs surfaced an interesting hypothesis that was supported by the data. High levels of competition and over-indebtedness of clients, two interlinked factors, seemed to be driving MFIs to pursue poorer clients. In regions where wealthier clients are already served by commercial banks (e.g., urban areas), MFIs service poorer clients, likely in order to avoid the pitfalls of over-indebtedness and to seek untapped markets. However, the MFIs service relatively wealthier clients in regions that have a higher rate of unbanked (e.g., rural areas). It seems, in others words, that MFIs tend to focus first on whomever is excluded regardless of poverty level, but some will extend their poverty outreach when there is greater penetration among the formerly excluded.
Another interesting suggestion from the data comes from the poverty concentrations of the five MFIs that use specific poverty targets and/or information on community poverty levels, such as poverty maps, to choose which areas to enter. These MFIs are at the top in terms of poverty concentration in their countries and/or met or exceeded the national poverty average*. Because there were so few that included some sort of poverty criteria in their decision structure, and since it is misleading to compare poverty concentrations (based on the national poverty line) across different countries (because of differences in national poverty rates), it’s difficult to generalize this conclusion. Regardless, it seems that industry stakeholders who want to encourage greater access to financial services amongst the poorest should consider requiring use of poverty criteria, and support the use of tools, like the PPI, that help measure and report on client poverty levels. Further analysis is needed as well.
Of course, not all MFIs have an explicit focus on serving the poor. What this report shows is that the lack of an explicit poverty focus does not necessarily mean they won’t be serving the poor, especially in a competitive environment. So, when working with MFIs that simply seek to reach the unbanked, encouraging healthy competition is a strategy that should support greater poverty outreach by some of those operating in the region.
We need more studies like this, which can generate even more insightful analysis based on representative samples and greater consistency in reporting from the MFIs. Networks, donors, and investors that are in a position to support MFIs in poverty measurement and data analytics would serve the industry well by doing so and contributing to the knowledge base of what is working in poverty outreach.
*Poverty concentrations of the MFIs are listed in the table on page 9-10 of the report. Those that use some sort of poverty criteria in choosing areas of operation are MFI A and C in Bolivia, MFI R in Ecuador, MFI B in Peru, and MFI G in Guatemala.