Poverty Measurements and Relevance of Micro-credit

Some recent studies on poverty have attempted to put forth terms and classifications of the very poor in a way that will allow the reader to imagine the extreme helplessness, and a state of extreme destitute amongst the people under discussion. The poorest of the poor, as they are more commonly referred to, have also sometimes been called the ‘hardcore poor’ (Hashemi, 1997), the ultra-poor (African Development Bank, 2002) or the ‘chronic poor1 ’. While this paper does not aim to redefine who are the poor, it will use the term ‘poorest of the poor’ to identify the group of people who are economically on the outer edges of survival and managing to continue their existence and live with or below an average $1 per day.

Poverty is commonly defined as ‘the inability to attain a minimal standard of living’ measured in terms of necessary basic needs and services. Furthermore, the concept of a ‘poverty line’ has internationally become accepted as an indicator of poverty which measures the monetary amount needed to purchase a basket of estimated minimum calorie intake and the social services needed to live a healthy life, below this estimated line an individual or household is considered poor (African Development Bank, 2002; Lipton, 1997). Poverty is therefore characterized by the inability of individuals and households to acquire sufficient resources to satisfy their basic needs.

Furthermore, poverty is not static. Research shows that some people may be suffering from poverty from time to time, while others are permanently poor. Therefore, poverty within the present discussion is identified to indicate when the ‘net outcome’ of the process of change experienced by an individual or household is socio-economically negative or unchanged, also sometimes referred to as ‘vulnerability’ status. (UNDP, 2001, Glewwe and Hall 1998; Grooteart and Kanbur 1995).

In view of the recognition that poverty was contextual, that it was not static, and that it was relative, micro-credit was introduced as a mechanism for the poor to pursue poverty reduction activities which were within their means and capacities (von Pischke, 1996). Micro-credit programmes were meant to help the poor generate income and alleviate poverty sustainably (Chao1Beroff, 1999). It became an important development concept since the 1980s, especially after the many publications and reports on the positive experience of the Grameen Bank.

The Grameen Model (Yunus, 1989), which made micro-credit even more popular, specifically for women, and included for the first time a community approach to poverty reduction and challenged serious obstacles to borrowing, such as collateral, male guarantor or co-signer for female clients, and repayment modalities. A further development took place in this model through some experiences in Latin America, such as that of Americans for Community Co-operation in Other Nations (ACCION), which introduced a business approach to micro-credit, through cost-recovery and management as well as individual lending within the group (Berenbach and Guzman, 1999).

Therefore, micro-credit evolved further into a development and poverty reduction mechanism based broadly on the Grameen model and other local experiences. The most commonly found micro-credit delivery channels in the low-income African countries are: profit making micro-finance institutions, credit unions, and village banks (Holt, 1994). However, it is the MFIs that most of the time have a better rural and urban outreach network and more money to inject, due to their access to multiple fund sources. The discussion will attempt to highlight the differential impact on poverty reduction and will give analytical perspective on micro-credit panacea.

ECONOMIC RESEARCH PAPERS NO 74 (January 2003)

Factors Impeding the Poverty Reduction Capacity of Micro-credit: Some Field Observations from Malawi and Ethiopia by Sunita Pitamber To learn more about this author, visit African Development Bank's Website.

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