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Redefining Microfinance as a Strategy to Achieve the MDGs: International Year of Microcredit Report Advocates Shift from Poverty Alleviation to Wealth Creation

Guest post by: United Nations Capital Development Fund

Article Overview: With microfinance gaining attention for its vital role in eradicating poverty, the International Year of Microcredit recently released a report, "Microfinance and the Millennium Development Goals (MDGs): A Reader's Guide to the Millennium Project and Other UN Documents", to provide further background and support for microfinance initiatives.

Redefining Microfinance as a Strategy to Achieve the MDGs: International Year of Microcredit Report Advocates Shift from Poverty Alleviation to Wealth Creation

By Lauren Kesner, School of International and Public Affairs, Columbia University

With microfinance gaining attention for its vital role in eradicating poverty, the International Year of Microcredit recently released a report, "Microfinance and the Millennium Development Goals (MDGs): A Reader's Guide to the Millennium Project and Other UN Documents", to provide further background and support for microfinance initiatives. The report highlights the critical role access to financial services and microfinance play in the achieving the MDGs and alleviating poverty as expressed in influential reports such as the UN Millennium Project's "Investing in Development" (2005) and its task force reports, "The Commission for Africa Report: Our Common Interest" (2005), the 2004 G8 Declaration on expanding access to Microfinance for Entrepreneurs, and the UN report "Unleashing Entrepreneurship: Making Business Work for the Poor" (2004).

In addition, the paper argues that microfinance will be most effective in contributing to the MDGs when it is treated as finance: the cumulative message is a shift away from seeing development simply as poverty alleviation to understanding development and poverty alleviation as overarching results of wealth creation.

From Poverty Alleviation to Wealth Creation
In much the same way that the Millennium Project's "Investing in Development" redefines the tools for addressing poverty, the International Year of Microcredit's report reconceptualizes the role finance plays in poverty alleviation. Christina Barrineau, Chief Technical Advisor for the International Year of Microcredit 2005 and co-author of the report, suggests that development strategies should be refocused from poverty eradication to wealth creation. She says, "Quality financial services promote long-term self-sufficiency and wealth-creation strategies. Designing these services refocuses our attention on the tools that families need to grow their assets. Wealth creation strategies honor the role that poor and low income people need and want to be play in our collective effort to reduce global poverty". In other words, creating an inclusive financial sector is the first step in long term economic stability.

Microfinance as Asset Management and Growth
Barrineau addresses some of the common misunderstandings of microfinance starting with the definition of microfinance itself. She draws on the basic definition of finance as the science of asset management and creation and suggests that if poor people are to manage and grow their assets, they need the financial services to do so, stating: "Microfinance is only 'micro' because the assets of those living in poverty are micro." Barrineau argues that donors and development specialists must understand that microfinance is not simply a development scheme but rather a serious part of the financial sector of developing economies. And whereas the private sector often considers microfinance a charity, Barrineau argues that it should be considered a real business concern.

The Role of Financial Tools in Development
Barrineau's view is reinforced by the selections from other reports that suggest how and why microfinance and other financial tools should be applied to development. The International Year of Microcredit report draws attention to the importance of sound financial services and a healthy market environment in current development initiatives. The first part of the report highlights examples from "Investing in Development," such as: "A big push of aid-supported investment that puts the country on a path of increased savings and self-propelling growth is far more efficient than low quantities of aid that do not change the fundamental growth potential of the economy."[1]

"Investing in Development" suggests that contrary to popular belief, poor and low-income people are likely to save, if they have the proper financial services. Even in some of the poorest countries, poor and low-income people's savings represent a higher portion of their net assets than those of their counterparts in the upper segments of society. This fact has been long argued by experts in the microfinance industry. In addition to debunking the stereotype that poor people don't save, the report links this important observation to development concerns: "With a low saving rate, the amount of capital per person declines, and this leads to economic decline and even more poverty… The finding that saving rates are low in impoverished countries and rise with per capita income is well established." [2]

The Role Microfinance in Current Development Initiatives
"Microfinance and the Millennium Development Goals (MDGs): A Reader's Guide" pays special attention to linking microfinance to findings from important development reports. Part One opens with a quote from "Investing in Development", "microfinance is one of the practical development strategies and approaches that should be implemented and supported to attain the bold ambition of reducing world poverty by half." The Reader's Guide goes on to illustrate the way inclusive financial sectors help grow domestic deposits and mobilize micro-savings, facilitate national and international remittance flows, and develop local private sectors and investing in innovation, to name a few of the ways financial services help achieve the MDGs.

Microfinance and Achieving the MDGs: Indicators
In addition to being an invaluable guide to the role of finance in today's major poverty alleviation efforts, "Microfinance and the Millennium Development Goals (MDGs): A Reader's Guide" proposes indicators to measure the way access to financial services contributes to achieving the MDGs by the UN's target date of 2015. For goal 1, to eradicate extreme poverty and hunger, the report suggests five indicators including measuring the "percentage of the households of all countries with access to quality financial services (including credit, savings, insurance and transfer and other services)."

For goal 2, universal primary education, the report suggests measuring the "percentage of students able to access appropriate financial services for education needs" and the "percentage of women reporting refusal of credit for education purposes in last year". In total, the report lists 27 indictors for monitoring the MDGs through microfinance.

The links made in the International Year of Microcredit report provide a strong case for the value of microfinance and inclusive financial sectors for achieving the MDGs. The report is essential reading for any serious practitioner of development and for those eager to change the way financial institutions, international agencies and private actors service poor populations throughout the world. Achieving the MDGs is no small feat. It is a challenge that requires the ingenuity of people across sectors and, according to the authors of this report, a rethinking of the role of financial services.

Related Articles
  III. BACKGROUND - Microfinance in Africa
  International Year of Microcredit Advisors Visit Kenya and Uganda: Princess Maxima, Diederik Laman Trip and Marilou van Golstein Brouwers Promote Microfinance on the Continent
  African Countries Focus on Microfinance: Twelve African Nations Engaged in the International Year of Microcredit to Date
  Overview of Microfinance
  Microfinance as Key Poverty Reduction Strategy Paper (PRSP) Component: The Majority of PRSPs Include Access to Financial Services

Article Tags: alleviating poverty, business work, co author, columbia university, critical role, development strategies, g8, international year of microcredit, international year of microcredit 2005, investing in development, kesner, microfinance initiatives, millennium development goals, millennium project, poverty alleviation, poverty eradication, public affairs, self sufficiency, understanding development, wealth creation strategies



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