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3.4 Making money work for poverty reduction: Working Out of Poverty
The incomes of working people living in poverty are not only low, but
also volatile. Poor people, aware of the risks of not having sufficient earnings
to meet daily needs, tend to save proportionally more than families with
more secure, higher incomes. However, most banks do not offer savings and
loan facilities to poor people. Many must hide their savings in cash somewhere
and, when they need a loan, resort to the local moneylender for credit
at onerous rates of interest. Microfinance is the provision, on a sustainable
basis, of financial services such as credit, savings, insurance, payments and
guarantees to poor people generally outside the reach of the formal financial
Traditional banks are reluctant to cater to poor people for four main
reasons. First, self-employed people and micro-enterprises rarely have legal
title to assets that banks can use as collateral. Second, banks recover the
costs of researching the business prospects or income security of a client by
charging it to the interest on the loan, but the costs of research for a small
loan are similar to those for larger loans that will yield a much higher return.
Third, small businesses in the informal economy, especially those just starting
up, are rarely able to provide statements of accounts required by banks.
Fourth, taking small deposits from a large number of poor people requires
maintaining an extensive and costly network of branch offices in poor communities.
By comparison, a small number of branches catering to wealthier
clients is a much more attractive business proposition.
Microfinance institutions (MFIs), however, approach the provision of
financial services with a different logic. First, they know that most poor
people are very diligent in meeting repayments because they may have to
borrow again and they want to stay out of the clutches of loan sharks.
Second, small membership-based MFIs have a strong sense of collective selfdiscipline
which rests on kinship and community ties. Third, being much
closer to their clients, MFIs do not need to carry out costly research. Their
experience enables them to take the risk of lending small amounts with little
or no collateral because the risk of default is, on average, acceptably small.
Finally, because they are often run in part by volunteers, the costs of collecting
deposits and managing loans can be kept very low and adapted to the
needs of members.
These powerful advantages have led to a rapid growth in microfinance.
At the end of 2001, 2,186 microfinance institutions reported reaching 55 million
clients, of whom 27 million were among the poorest when they took
their first loan. This is up from the 7.6 million poorest clients identified by
the Microcredit Summit Campaign when it was launched in 1997 with the
goal of reaching 100 million of the world’s poorest families with credit for
self-employment and other business and financial services. The expansion of
microfinance was encouraged by the formation of a 26-member donor network
on microfinance, the Consultative Group to Assist the Poorest
(CGAP), that includes the ILO and the World Bank. The attractiveness of
microfinance to development finance agencies lies in its potential to reduce
poverty without perpetual subsidies by expanding the market for financial services to the poor. Many MFIs started with a public or charitable subsidy,
and some still require outside support to cover their operating costs with
operating revenue. However, MFIs worldwide are moving towards higher
degrees of cost recovery and subsidy independence by refining and constantly
improving tools for monitoring sustainability.
Microfinance makes an important contribution to the ILO’s decent
work approach to poverty reduction in three ways:
● Job creation: Small investments in fixed assets and the provision of
working capital to micro and small enterprises facilitate the creation of
jobs in poor communities.
● Enhanced security: Savings, emergency loans and insurance products
stabilize income levels and reduce the vulnerability of people living
near the subsistence level.
● Empowerment: Group formation and other delivery techniques in
microfinance develop a sense of responsibility, strengthen social capital
and empower the poor, especially women.
The ILO seeks to enhance the capacity of decision makers in government,
workers’ and employers’ organizations and banks and private sector
agents to develop and implement policies that optimize the social benefits of
sustainable microfinance. One of the key issues is the adaptation of banking
regulations to the needs of MFIs. For example, the support programme
for mutual benefit societies and savings and credit cooperatives (PASMEC),
carried out jointly by the ILO and the Central Bank of West African
States (BCEAO), also involves grass-roots initiatives, such as village
banks and women’s savings groups. The aim of the partnership is to advance
microfinance through exchange of information, data collection, training, advisory
services, and the creation of an appropriate, incentive-based regulatory
framework. Microfinance is now a macro business in Benin, Burkina
Faso, Côte d’Ivoire, Mali, Niger, Senegal and Togo, with over 300 MFIs serving
4.2 million members representing one out of five households in the region.
A microfinance database covers all major MFIs in each of the seven
countries, and a “training of trainers” programme, in collaboration with a
Cooperative Training Centre (ISPEC) in Benin, strengthens the capacity of
MFIs to implement their own training programmes.
The success of microfinance lies in the mutually reinforcing effect of
financial resource pooling and social organization. Microfinance institutions
overcome the handicap of individually insignificant transactions and bring
people together in mutual support. As money is involved, there has to be a
measure of trust for such groups to work. The building of trust, or social
capital, is vital to the struggle of the working poor for political rights and representation
and economic opportunities. By bringing years of experience in
building voluntary associations of the cooperative movement, employers’
organizations and trade unions to the microfinance movement, the ILO can
contribute to extending the availability of cheap financial services to the
95 per cent of the working poor who, according to estimates by the Microcredit
Summit Campaign, still do not have access to banking systems.
Related Articles1.19 Building trust: Working Out of Poverty
1.5 Skills development for sustainable livelihoods: Working Out of Poverty
1.9 Building local development through cooperatives: Working Out of Poverty
Recommendations for future research - Factors Impeding the Poverty Reduction Capacity of Micro-credit: Some Field Observations from Malawi and Ethiopia
1.15 Building an employment agenda: Working Out of Poverty
2.9 Conclusions: Working Out of Poverty
Home Business Expert: How To Overcome Poverty Consciousness
Preface: Working Out of Poverty
1.17 Building partnerships: Working Out of Poverty
Abstract - Factors Impeding the Poverty Reduction Capacity of Micro-credit: Some Field Observations from Malawi and Ethiopia
6.3 Come Together: Enterprise solutions to poverty
6.0 Propositions and conclusion: Enterprise solutions to poverty
Poverty Measurements and Relevance of Micro-credit
1.0 Overview: Working Out of Poverty
1.4 Our experience: Working Out of Poverty
Sustained growth with equity is needed to halve poverty in Africa
Wanted: jobs for Africa’s youth - Policy Reforms
IV. Module II: Linking Microfinance to Poverty Eradication
5.1 Is there a poverty reduction crisis? Training outputs and impacts
Wanted: jobs for Africa’s youth - Job Plans
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References: Learning to change: Skills development among the economically vulnerable and socially excluded in developing countries
By International Labour Organization
About the Author: International Labour Organization
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As the world's only tripartite multilateral agency, the ILO is dedicated to bringing decent work and livelihoods, job-related security and better living standards to the people of both poor and rich countries. It helps to attain those goals by promoting rights at work, encouraging opportunities for decent employment, enhancing social protection and strengthening dialogue on work-related issues. The ILO is the international meeting place for the world of work. We are the experts on work and employment and particularly on the critical role that these issues play in bringing about economic development and progress. At the heart of our mission is helping countries build the institutions that are the bulwarks of democracy and to help them become accountable to the people. The ILO formulates international labour standards in the form of Conventions and Recommendations setting minimum standards of basic labour rights: freedom of association, the right to organize, collective bargaining, abolition of forced labour, equality of opportunity and treatment and other standards addressing conditions across the entire spectrum of work-related issues.
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