Does Evidence of Success in Poverty Alleviation Divide Us?

There are many different objectives for microfinance.  Let’s acknowledge the dominance of poverty alleviation in the public understanding of microfinance.  The association of the microfinance brand with poverty alleviation is extremely strong in the minds of most donors, lenders and investors.  If microfinance is not explicitly and demonstrably alleviating poverty, isn’t it failing the prevailing public expectation?

I share with most of my peers in microfinance a common commitment to the Smart Campaign, which sets standards for consumer protection in microfinanceACCION’s Center for Financial Inclusion, led by long-time microfinance thought leader, Beth Rhyne, has provided the institutional home and much of the intellectual leadership for the Smart Campaign.  When I was President of Freedom from Hunger, it was one of the handful of founding supporters of the Smart Campaign.  My former colleague, Beth Porter, was there with Beth Rhyne almost from the start, steering the conceptual development and growth of the campaign.

The impetus for setting universal standards for client protection was the Compartamos IPO in Mexico in 2007.  The controversy over the policies and practices of Compartamos that allowed it to do a highly successful IPO sensitized the industry and the press to the possibility of “bad actors” in the industry – primarily consumer-lenders with little, if any, regard for the welfare of their clients.

While I didn’t share this view, some commentators put Compartamos in the “bad actor” category.  One of their main complaints was the very high interest rates charged to poor Mexicans, which generated profits high enough to attract profit-seeking investors (rather than lowering interest rates for the benefit of clients).  This controversy, and the public relations crisis that followed, led to a high-level meeting of industry leaders at the Rockefellers’ Pocantico estate north of New York City in April 2008.  This group decided that the “bad actors” needed to be dissociated from the brand of true microfinance, and from this decision there emerged the Pocantico Declaration.  Its major impact on the industry was launching the Smart Campaign for client protection.

According to the Pocantico participants, true microfinance would have to distinguish itself by setting and adhering to basic operating standards for client protection.  At minimum, the microfinance industry would have to “do no harm.”  Evidence of this would separate the true microfinance practitioners from other actors.

Two years later, in April 2010, Sam Daley-Harris, the legendary co-founder and leader of the Microcredit Summit Campaign, asked Alex Counts, CEO of Grameen Foundation, and me and a few others to join him in a phone call that gave rise to the initiative to create a Seal of Excellence for Poverty Outreach and Transformation in Microfinance.  The concept was to award the equivalent of the Good Housekeeping Seal to microfinance institutions that demonstrate both the will and performance in reaching substantial numbers of the very poor (more or less the same as the chronically hungry) and in making measurable progress in transforming the lives of these very poor clients.  The idea of this Seal of Excellence was to provide guidance on how to reach and transform lives of the very poor by drawing attention to institutions that are doing “excellent” work in this regard.

Those who want to be recognized for their focus on alleviating poverty would have to demonstrate their will and performance in doing so.  Evidence of this would divide the true poverty alleviators from the other microfinance practitioners who have different objectives.

Some of my peers in microfinance object to the Seal of Excellence on the grounds that it would be “divisive” of the industry.  I agree that it would do just that – divide the industry into poverty alleviators and those who are not.  That is the intent, but more important is the intent to provide guidance and standards for those who aspire to be poverty alleviators.  The Seal simply recognizes those who have succeeded in meeting the standards and holds them up as examples for the other aspirants.  The real issue seems to be that the term “excellence” very strongly suggests that poverty alleviators are “excellent” and others are not.  It’s a good point!

Microfinance practitioners (and those who support them) have a variety of social objectives, ranging from financial inclusion (yes, this is a social objective) to poverty alleviation (many would say “reduction” or “elimination,” rather than tepid “alleviation” of the burdens of poverty), to women’s empowerment, to enterprise development, to employment generation for the very poor, and so on.  As often as microfinance practitioners are motivated by a single objective, others have multiple objectives.  In my view, there ought to be a “seal of excellence” for each of these objectives, to provide guidance to those who aspire to each.

If there were only one “seal of excellence” for only this one objective, broadscale collection of evidence of poverty alleviation could be very divisive of the industry.

Does this mean we should not collect evidence of poverty alleviation?  I invite you to comment.  Given the controversial nature of this topic, I feel compelled to point out that I moderate the comments; if yours is on point and respectful, I will upload it as you have written it.

More on this Theme One in the next post (Post 3).

  • Tom Coleman

    Acknowledging that there are a variety of different social goals in microfinance and differing client segments served seems like a good way of describing microfinance with transparency that reflects what has already been evolving for some time in the field.
    Isn’t this better than pretending that all microfinance and all goals in microfinance are the same?
    Why not declare a “Seal of Excellence for Microfinance that Helps to Eradicate Extreme Poverty” for those who ascribe to this social goal as our top priority and acknowledge that others in microfinance may not share this goal or place greater priority on other social goals. This would not preclude other social goals of microfinance having their own seals of excellence for other social purposes.
    Also, might it be more effective to explicitly acknowledge and promote a subset of the microfinance industry which is clearly focused on helping to end extreme poverty and hunger as its number one social goal—however small or large a part of the industry this group is?
    As Paul Collier eloquently stated,
    “A definition of development that encompasses five billion people gives them [development aid agencies and the companies that get the contracts for their projects] license to be everywhere, or more honestly everywhere but the bottom billion.”
    —Paul Collier, “The Bottom Billion”
    It tends to be more profitable or easier to produce program success if one works with people who are healthier, better educated, and less poor.
    Isn’t the same true of microfinance? A definition of microfinance that encompasses 3-4 billion “poor” people who lack good access to financial services gives license to be everywhere, or more honestly everywhere but the bottom billion.
    There are inherent economic incentives against serving the poorest. We can address these, bukt it helps to acknowledge this first.
    It is probably good business to serve fewer or no extremely poor people. This is different than focusing on poverty eradication. Both can be valuable, but serve different purposes.
    Microfinance for the “Global Middle Class” or “mainstream microfinance” may serve a larger client segment, may be more profitable and for some MFIs may not include the extreme poor at all. It may even evolve to be more indistinguishable from commercial banking–with the exception of having some explicit social goals.
    Profit incentives may well drive microfinance to fully serve the “Global Middle Class”. Attention to customer protection and social goals can still be important.
    However it may be valuable to clearly distinguish that part of microfinance and those MFIs that explicitly choose to include the extreme poor, those living under $1.25/day or “Bottom Billion Microfinance”. What does Bottom Billion Microfinance look like?
    • MFIs that do Bottom Billion Microfinance may include 10%, 20%, 60% or more Bottom Billion clients as part of their client mix—not necessarily 100%.
    • Bottom Billion Microfinance may rely on serving some percentage of less poor clients as part of the client mix in order to help maintain profitability or keep serving its most successful clients.
    • Bottom Billion Microfinance may emphasize savings and insurance led approaches or have specialized small credit with extra client support.
    • Bottom Billion Microfinance may work best when it includes or is partnered with other non-financial services-health care, education, etc.
    • Some Bottom Billion Microfinance may be closely allied to TUP programs that are not cost covering or financially sustainable but which graduate lower end Bottom Billion people into greater self-sufficiency and some/many into being MFI clients.
    Maybe it will turn out to be an advantage to distinguish Bottom Billion Microfinance which places a priority on doing the most it can to help eradicate extreme poverty from “mainstream microfinance” which seeks to provide excellent financial services to the evolving “Global Middle Class”. Both are valuable. They can be complementary. They don’t have to do the same things or serve the same client segments.
    Can the microfinance industry make these distinctions without being divisive?
    I say, why not.

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