To be fully effective, microfinance must slot into a broad strategy for cultural, educational and social development
It all began with a simple question. What operational definition can governments or co-operation agencies use for poverty, independently of the sufferings of the needy? In other words, what should anti-poverty programmes try to do and how should their success be measured?
After some hesitation, economists came up with a practical definition that incorporated scales of poverty and measured progress in alleviating it. A person who has a much lower income than that of the rest of the population and who is deprived of any real access to basic services (health, lodging and education) is regarded as living in poverty. In a given population, the poor are those whose incomes are lowest and who therefore consume least. They are those who have the worst quality of life, since they are excluded from the public services which the state provides for its citizens. Poverty alleviation, in this context, means focusing on a precise target - those sections of the population with a much lower income than the rest - via these two parameters. A poverty alleviation programme achieves its goal if it produces a sustainable increase in the income of the poorest segments of the population.
Of course formulating an operational definition does not mean that we have the financial muscle to get rid of poverty. Developing country governments and co-operation agencies do not possess sufficient resources to grant subsidies that would sustainably increase the income of each person defined as poor. Any large-scale increase in the income of needy people must come from elsewhere.
Very early on, some developing countries - mainly in Asia - realized that this "elsewhere" could be the poor themselves, on condition that they were associated with poverty alleviation policies. After all, they reasoned, many needy people have sufficient initiative and energy to devise small projects or activities that, once underway, could increase their income. By providing successive increases in income, such projects could gradually lift these people out of poverty without direct and massive state intervention.
Before this could happen, obstacles to the creation of small projects had to be identified, and the poor who so wished had to be provided with the wherewithal to get round them. One of the chief obstacles was credit, which banks do not usually channel to small-scale projects, especially those undertaken by the poor, who are by definition not very creditworthy. By granting credit selectively to the enterprising poor, governments and co-operation agencies hoped to initiate a sequence of events that would lead to the creation of income-generating economic activities, thereby alleviating poverty. Here was the first link between credit and poverty.
From credit to savings
But generating additional income by granting credit to the working poor only alleviates poverty among a small part of the population. What about the rest, the overwhelming majority? Credit is of no use to this majority, but savings certainly are.
To understand this, it is necessary to analyse what actually happens in the poorest and most isolated parts of developing countries. In these regions all monetary transactions are made in cash. Since there are no banks, people have to keep all their possessions with them. A transaction can only be completed if each party to it has a wad of notes, with the concomitant risk of loss and theft. At best, someone who wants to "invest" his savings can do so by purchasing an animal. In these circumstances it is difficult for the very poor to accumulate sufficient resources to escape from poverty. The absence of institutions that make it possible to transform cash into a deposit and then into savings is a hidden but genuine reason why poverty is so intractable and persistent. …