Inhibitors to Success

At its core, microfinance is not terribly different from mainstream consumer finance.

From accessing funding to managing the disbursement and collection of funds, microfinance operates like any consumer finance business. But because microfinance serves a very different client segment – the world’s poor – we cannot ignore the different set of challenges these clients face and the implications these challenges have on the organizations serving them. Unlike customers of mainstream consumer finance, who tend to be middle class and live in relatively stable environments, microfinance customers live under more dire circumstances and contend with a different set of factors, such as poor health, lack of education and access to basic necessities, and unexpected threats such as natural disasters that endanger their everyday lives.

Because these factors are so entrenched in their lives, we cannot ignore their influence on an individual’s economic ability to access, use and repay a microfinance loan.

Clients may be able to gain access to microfinance and may even start a business, but they may be unable to convert this credit into sustainable income. According to one study of three large MFIs in Bangladesh, approximately 5 percent of microfinance program participants lift their families out of poverty each year.8* This finding of impact in particular does bring to our attention that microfinance does not result in overnight success for many clients; with current product offerings and costs, progress for most clients appears steady, but slow. In the current models being used, a certain percentage of clients are never able to generate sufficient profits to completely escape poverty or even to improve their conditions at the margins. An alarmingly high percentage drop out (5-30 percent annually in many cases) and many ultra-poor families never join in the first place (i.e., they self-select out).9 According to some studies, it takes 5 to10

years for a poor client to work her way up above the poverty line, and even longer before she has sufficient productive assets to function independently from the microcredit institution (although continued participation with an MFI is not necessarily an indicator of failure on the part of the client or MFI, and in fact may be correlated with the success of both, in the sense that it may be that many formerly poor clients continue to have robust investment opportunities and the MFI has products that are relevant to those opportunities).

What are the factors that hold back microfinance clients from overcoming poverty more quickly than is currently the case? In other words, why do some people move out of poverty and others fail to do so or make progress slowly – even though both participate in a microfinance program? In assessing the research and speaking with numerous practitioners, we identified three elements that diminish microfinance participants’ chances for being successful in a program:

poor health, natural disasters, and lack of education. Because the poor live in a state where even the smallest misfortunes threaten their survival, these three elements are critical factors in determining the performance of their loans, their progress out of poverty or lack thereof, and ultimately the long-term sustainability and profitability of the MFI.

Microfinance: A Platform for Social Change by Marge Magner March 2007 Grameen Foundation To learn more about this author, visit Grameen Foundation's Website.

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