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Micro Enterprise Development for Very Poor People Promising Approaches From the Field

Micro Enterprise Development for Very Poor People Promising Approaches From the Field

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Microenterprise Development Services for
Very Poor People:
Promising Approaches from the Field
Microenterprise Development Services for
Very Poor People:
Promising Approaches from the Field

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Published by: Poverty Outreach Working Group (POWG) on Sep 09, 2010
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DRAFT [September 8, 2005]Poverty Outreach Working Group
Microenterprise Development Services forVery Poor People:Promising Approaches from the Field
I
NTRODUCTION
In 2000, the U.S. Congress passed the Microenterprise for Self-Reliance Act,
1
whichmandates that one-half of all U.S. Agency for International Development (USAID)microenterprise funds must benefit very poor people. The legislation defines the “very poor” as people living on less than US$1 a day
2
or those among the bottom 50 percent of  people living below a specific country's poverty line. This paper uses the same definitionof “very poor,” which essentially implies extreme poverty. The law also requires USAIDto develop and certify tools for assessing the poverty level of microenterprise beneficiaries so that the agency can determine whether or not its development partnersare achieving the mandate of assisting the very poor.The U.S. legislation was advanced by pro-poor microfinance advocates who soughttransparency concerning who the microfinance industry is really reaching. Theseadvocates, and certain microfinance practitioners, viewed the legislation as necessary because most microenterprise development (MED) practitioners were not reaching very poor people, despite mission statements and promotional materials that identified these people as their target clients. The reality is that many microfinance organizations haveno idea of who they are reaching. Most microfinance clients today fall in a band aroundthe poverty line; the extreme poor are rarely reached. It it thus crucial that policymakers,donors and development practitioners have reliable information about the poverty levelsof the beneficiaries of development services in order to steer investments and programstoward targeted population segments they want to reach.The current emphasis of the microfinance industry is on scaling up microfinance servicesto reach poor people on a mass scale. Given this background, the U.S. legislation wasdeveloped as a safety measure to keep resources focused on very poor people, a segmentof the population that tends to be left behind in the quest for scale. Mainstreammicrofinance is beginning to be integrated into the formal financial system and the
1
 
Microenterprise for Self-Reliance Act of 2000,
Public Law
number, Cardinal number
Cong.,
cardinalnumber
sess. (
date session began
). The act was amended in 2003 and 2004.TheAmendment to theMicroenterprise for Self Reliance and International Corruption Actin 2003 requires that 50 percent of allUSAID microenterprise resources benefit the very poor. The legislation was further amended in 2004(Microenterprise Results and Accountability Act of 2004
 
).
2
Equal to US$1.08 per day in purchasing power parity (PPP) dollars at 1993 prices.
1
 
corresponding trend towards commercialization and financial sustainablility is drivingmicrofinance operations. As commercial banks downscale to serve large portions of themicrofinance market, the hope is that nongovernmental organizations (NGOs) willcontinue to innovate and create better ways to reach and serve very poor people, who canlater be integrated into mainstream microfinance and the formal financial system.Although many practitioners and implementers opposed the U.S. legislation as restrictiveand costly, it has successfully brought the issue of knowing who your client is, and how best to serve her or him to the forefront of microfinance discussions. Many organizationshave created poverty assessment tools and conducted client analyses over the last twoyears and have come to realize that they are not even close to reaching their intendedclients. The legislation has prompted many practitioners to think beyond povertyassessment and focus on the questions:
Who
is the client?
 How
can we better reach andserve intended clients? If microfinance organizations better understand the needs andwants of their clients (in any income bracket), they will be more successful in designingappropriate products and services and retaining clients.And thus we come to the question: can microfinance reach very poor people? The authorsof this paper believe the answer is yes, but recognize that doing so is not easy. The purpose of this paper is to highlight promising approaches to reaching and serving very poor people with financial and non-financial services. Such programs do not look likethe majority of microfinance programs and are unlikely to achieve operationalsustainability as quickly as mainstream microfinance institutions now achieve it. Nevertheless, there has been great innovation in the developmentment of low-costdelivery mechanisms, products and services appropriate for very poor people. This paper will examine some of the common elements that make such programs successful andrecommend areas for further research.
P
ART
I. B
ACKGROUND
Definition and status of poverty
Traditionally, poverty has been conceptualized in terms of income, with the poor definedas those living below a given income level. Poverty can be also understood as pronounced deprivation in well-being.
3
However, poverty is increasingly recognized as amultidimensional phenomenon that encompasses not simply low income, but also lack of assets, skills, resources, opportunities, services and the power or voice to influencedecisions that affect an individual’s daily life.
4
Poverty also frequently overlaps with andreinforces other types of social exclusion, such as those based on race, gender or ethnicity.
5
This more comprehensive understanding of poverty better captures how the poor themselves define their situation.
6
 
3
World Bank,
World Development Report 2000/2001,
page number?
 
4
World Health Organization (WHO),
 Reaching the Poor,
2004,
page number?
 
5
Ibid.
6
World Bank,
World Development Report 2000/2001
,
page number?
;
 
and WHO,
 Reaching the Poor,
2004,
page number?
 
2
 
The complex and multidimensional nature of poverty makes it a challenge to measure.For the sake of simplicity, an income-based measure of poverty is used most widely, as it permits comparisons between regions and countries. The World Bank, for example,defines extreme poverty as an income of US$1 a day, seen as the minimum amountnecessary for survival. To calculate extreme poverty in an individual country, the dollar-a-day measure is converted to local currency using the purchasing power parity (PPP)exchange rate, based on relative prices of consumption goods in each country. Based onsuch calculations, the World Bank estimated that 1.2 billion people were living inextreme poverty in 2003, roughly 23.3 percent of the population of all low- and middle-income countries.
7
While the definition of very poor people used in this paper is based onincome, the programs explored in the following sections address many aspects of extreme poverty, not income levels alone.
Box 1. Acronyms used in this paper ARCAmerican Refugee CommitteeASABRACCFPR/TUPChallenging the Frontiers of Poverty Reduction/ Targeting theExtreme Poor, a BRAC programCRSCatholic Relief ServicesFFHFreedom From HungeIGVGDIncome Generation for Vulnerable Groups Development, aBRAC programILOInternational Labour OrganizationMEDmicroenterprise developmentMFImicrofinance institution NABARDNational Bank for Agriculture and Rural Development - India’s apex bank for rural development
 NGOnongovernmental organization
PACTPPPpurchasing power paritySEFSmall Enterprise FoundationSHGself-help groupTCPTshomisano Credit Program, and SEF programTUPTrickle Up ProgramUSAIDU.S. Agency for International DevelopmentWHOWorld Health Organization
Role of microfinance in serving very poor people
By providing small loans and savings facilities to people who are excluded fromcommercial financial services, microfinance has become a strategy for reducing poverty.Access to credit and deposit services is a way to provide the poor opportunities to take anactive role in their respective economies through entrepreneurship, building income, bargaining power and social empowerment among poor women and men.
7
World Bank,
Sustainable Development,
2003,
page number?
 
3

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