Microfinance and street children

Is microfinance an appropriate tool to address the street children issue?

EXECUTIVE SUMMARY

By Badreddine Serrokh,
Solvay Business School (Free University of Brussels) ***
June 2006

HERE ARE MILLIONS of street children around the
T world, floating and working here and there in the
streets of big metropolitan cities of the “South”.
Witnessing the diversity characterizing such children and
the impossibility to define a “typical” street child, UNICEF
tried to bring some light to the concept and proposed a
binary terminology: the first category, termed “children of
the streets”, live and work on the streets, 24h/24; the
second category, labelled “children on the streets”, spend
most of their daytime there, before returning to their
families at night. However, the concept of street children
is an umbrella term, and operational definitions vary
widely among countries.
Beyond the complexity of finding an appropriate
definition, the last 20 years demonstrated the intricate
and harmful situations such children are facing. Highly
vulnerable to hazardous working conditions,
experiencing loneliness, medical problems, neglect and
abuse, some governments and organisations started in
recent years to put jointly their effort in order to find
effective and sustainable solutions to the issue.
This paper, mainly based on a field research of 45 days
among street children of Bangladesh, is attempted to
enrich the panel of solutions proposed, by focusing on a
new intervention tool which revolutionized the
developing world: microfinance.
Mainly based on the provision of credit and savings
services to low-income people, microfinance is bringing
hope to millions of poor households worldwide, who
perceive access to financial services as an essential
condition for getting away from the cycle of poverty in
which they are trapped by giving them tools to take
their own destiny on hand.
Although considerable attention has been paid to adult
people, little interest has been given to children, and a
high research gap exists. Indeed, it is generally assumed
that, due to their young age, this population segment
does not need financial services; and, even if it might be
the case, providing them those services might create
more harm than good.
Focusing on the particular segment of “street children”,
this paper challenges these assumptions by structuring
an analysis around two central questions:
1. What are the main demand drivers of street
children for financial services?
2. How can we supply them those services in an
effective and sustainable way, in order to
enhance street children’s well-being?
Our paper highlights a first requirement that needs to
be considered before being able to answer those two
central questions: the need to change our common
beliefs about street children and child work. First,
regarding street children, the common view perceives
them as criminals, irresponsible, destitute and without
any capacity, leading therefore to pity. Second, the very
sensitive issue of child work has often been seen as a
dichotomy, where either the child does not work and is
therefore well; either he does work and must be kept
away from any kind of work in order to be well.
However, those two sets of beliefs seem to be too
simplistic regarding the complexity of the issue.

*** Thesis submitted in partial fulfilment for the degree of “Management Engineer”, under the supervision of Dr. Daniel Traça,
titular of the chair of sustainable human development at Solvay Business School, and the support of Pr. Marc Labie, from
Warocqué School of Economics and Business in Mons-Hainaut, and Pr. Christian Platteau, from the Free University of Brussels
and head of Proman Consulting
First, street children are found to hold high moral
principles, to be active policymakers for them, and to
develop high resilience and adaptability due to their
street life experience.
Second, a new movement of development psychologists
emerged the last few years by pointing out the necessity
to change our perception of child work and to avoid
dichotomy. Indeed, those theorists and practitioners
highlight that this perception is mainly based on the
mainstream Western development psychology theories,
where childhood is perceived as a phase which must only
be dedicated to school and play, without any place for
work in their development. Although education and play
are universal important elements for any child in the
world, the emerging theories point out the necessity to
listen to children and to let the ones who wish to work to
do that, except if the job is harmful. Therefore, under this
new “subject-oriented approach”, work has a place in
child development and can have positive effects, such as
increasing his/her sense of responsibility and self-esteem.
This framework, argues, moreover, that children must be
listened, as they know what they want and what they
need.
Building on this new approach, our chapter 2 listens to
79 street children who are part of Padakhep’s
intervention, an innovative microfinance institution in
Bangladesh, in order to assess their needs for financial
services. Relying on powerful participative research tools
(participative rapid appraisals and focus group
discussions), we extract their main demand drivers,
articulated around two products: savings and credit.
In terms of savings, we underscore three pillars of
demand: life-cycle needs (such as supporting their
family or getting education), emergencies needs (such
as coping with the loss of their jobs) and opportunities
needs (such as starting a business)
2
Moreover, street children express how the street life
insecurity is at the root of this demand, being therefore
obliged to use three techniques in order to secure their
money. First, keeping it in short-term devices (i.e.
hiding it in places such as pockets or shoes), but this has
two disadvantages: it is insecure and only useful for
short-term periods. Second, using informal financial
intermediaries, but this has two disadvantages too:
a) The barrier to entry is high, as street children are
negatively perceived in the society and therefore can
generally not be part of such informal savings schemes.
b) The few children who can access it point out the
fear to loose their money, as they do not trust people
who are responsible of these intermediaries.
In terms of credit, three findings emerged. First, some
street children need access to capital in order to start
their own income generating activity, and the profiles
were balanced between the ones who want to start
seasonal businesses, and the others who wish to start a
long-term business activity, as their preference for self-
employment is extremely high. Finally, some street
children point out that they do not need access to
credit, as they just wanted to keep working as
employees.
The street children demand characteristics being
stressed, we leave temporarily Bangladesh and turn, in
our chapter 3, to a supply-side perspective, by
discussing whether and how the microfinance
framework can match effectively and sustainably the
street children demand. After highlighting the main
characteristics of this framework, based on three
principal products (savings, credit and insurance) and
four specific mechanisms (group-lending, dynamic
incentives, frequent repayment schemes and collateral
substitutes), we analyse the scope of this framework
for addressing street children needs.
Taking a first glance at the prevalence of microfinance
for street children, by witnessing how traditional
microfinance framework was argued, since its origin, to
be a process aimed at impacting positively children
through the intermediary of their mothers, we find out
that the two potential providers (i.e. microfinance
institutions and youth serving organisations) are
particularly reluctant to deliver financial services to
street children. However, some few exceptions exist, and
the three most famous in three different continents are
being taken as illustration. This helps us, first, to realize
that such programs emerge from youth serving
organisations who adopt a “subject-oriented” approach
philosophy; second, such supply widens our previous
findings from Bangladesh and teaches us that street
children in other parts of the world need access to
financial services. Lastly, this teaches us how those
programs are far away from providing financial services
alone.
This preliminary review being done, we start our
matching process by defining the two concepts which
will frame our approach evaluation: “effectiveness” and
“sustainability”. Indeed, a high trade-off may exist
between these two requirements, as addressing street
children effectively would mean providing a package of
financial and other services, but doing this increases the
costs and, hence, would hardly be financially sustainable.
Keeping in mind this consideration, we propose a
framework of analysis which contains the notion of
“program sustainability”, defined by two parameters: the
ability of the program to minimize its costs (without
damaging the effectiveness), given a constant amount of
subsidies, and the ability and commitment of the
organisation to keep delivering the appropriate services
in the long-term.
Those elements in mind, we turn to the main question of
our paper: how best to match microfinance with street
children by seeking to reach a good balance between
effectiveness and sustainability? In order to give a
relevant answer, we adopt a progressive process
structured in three phases.
First, we build a minimalist microfinance for street
children framework, incorporating the appropriate
savings and credit products. For savings, we assert
how essential is to deliver reliable, convenient and
flexible savings services. This means essentially to
guarantee the security of the savings places; to deliver
quick and accessible services; to accept voluntary
deposits and withdrawal of any amount; to stimulate
savings deposits by providing non monetary returns
and to accept assets deposits of the children (such as
working materials).
For credit, we propose a product design structured
around three precise characteristics: small loan size,
flexible loan term and low interest rate.
Before discussing the adequate delivery process,
considerable attention must be given to settle clear and
complete eligibility criteria in order to avoid
targeting street children who might not need credit or
not able and committed to make a good use of the loan
amount. The first important step is to target the
adequate street children: those who have the
appropriate age; who have been members since enough
time; who are willing, motivated and able to start a
business activity; and who propose a feasible business
plan. Moreover, those criteria need to include some
collateral substitutes, such as compulsory savings (i.e.
disbursing credit for those who have saved a minimum
amount of money) and guarantors (such as a
shopkeeper or another child)
Those criteria being met, the credit needs to be
delivered by prioritizing three microfinance
mechanisms:
a) Group-lending: disbursing credit to individual street
children under supervision of the group members or
either broadens the notion of traditional group-
lending by providing credit to settle group-enterprise
b) Progressive lending: starting small and then
expanding loan size with the child’s performance
c) Frequent repayment schemes
d) Linking the guardians of street children
3
This minimalist microfinance framework designed, we
turn to the necessity to incorporate supporting
services to it, and to readjust our previous system by
providing street children with four types of
vocational training in two steps:
1. “Production-oriented training” (such as mechanics
or electronics) and/or “Service oriented training”
(such as restaurant servicing techniques);
2. If the child satisfies our previous loan eligibility
criteria, providing:
a) Entrepreneurship training, before launching the
business activity and
b) Management training: during the business activity
in order to support the child in managing his/her
business.
Incorporating those three components help us to reach
our second step and to build a microfinance plus
framework. However, considering the characteristics
of our target population, we incorporate the
operational requirement needed to our framework:
social services (such as psychological counselling or
health interventions). By incorporating this part, we
build a comprehensive microfinance plus
framework which has the particularity to bring
considerable added value to the approach street
children are usually addressed with (i.e. focus only on
social services): by addressing them with microfinance,
street children can be empowered economically, by
providing them tools which will allow them to take
their own destiny on hand: savings services for
helping them accumulate large lump sum of money for
meeting their life-cycle, emergencies and opportunities
needs and, hence, improve their future; and credit
services, along with vocational training, which can be
highly valuable for enhancing the self-esteem and
confidence of the child, for protecting him/her against
hazardous work by, in the same time, increasing
his/her income; and, more importantly, to give a future
perspective for the child who can take a real place in
the society, and avoid being stigmatized.
4 microfinance and all at-risk youth worldwide.
This framework being built, we turn to the most
suitable provision strategy, by pointing out that youth
serving organisations might be the most appropriate
ones, in terms of sustainability, but that large place can
be made for microfinance institutions that can work in
partnerships with youth organisations and hence gain
considerably in terms of prospective clients.
This task being done, we finally come back to
Bangladesh, in order to test the validity of our
comprehensive model, by applying it to Padakhep, an
innovative microfinance institution providing financial
services to street children in Dhaka. By analysing,
through individual-in-depth interviews with street
children, staff discussions and secondary data
collection, the effectiveness and the sustainability of
the program, we highlight how the street children are
actively using the financial services provided to them,
sign of how they value them, but that a non-well
designed microfinance program might create more
harm than good; and the few benefits created might
have a short-term perspective. This helps us valid our
previous model, which argues how important it is to
have a core competence on “youth” before providing
such services, and how crucial is to give particular
attention in settling a clear and well-designed program
before addressing street children.
In such a perspective, microfinance appears to be an
appropriate tool for street children, as long as its
limitation is taken into consideration. Indeed, this
innovative approach, essential for giving a better
future to street children, remains only an intervention
tool. Without precautious prevention, the street
children predicament will never disappear. This calls to
international institutions, governments and donors to
give more and more attention to the issue, by settling
appropriate preventive programs, and supporting
financially organisations starting microfinance
interventions. Finally, beyond the question of street
children, this paper calls for opening the scope of
debate, research and interventions regarding