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CHAPTER 1
Introduction: integrating vulnerable people into financial and market systems
Linda Jones
Abstract
This introductory chapter starts by examining how we define poverty and destitution, including the Human Development Index and the Multidimensional Poverty Index. It considers which groups of people are most likely to be poor and vulnerable; they are often smallholder farmers, women, young people, people with disability, excluded minorities and the entrenched poor. It goes on to outline the chapters, debates and programmatic approaches that follow, including the use of smart subsidy, cash transfers, savings groups and the push-pull approach.
Keywords: financial inclusion; value chains; Human Development Index; Multidimensional Poverty Index; destitution; poverty
Introduction
This book presents experiences from development programmes on the integration of vulnerable people into financial and market systems (including value chains) through development programming.
Smallholder farmers, women earners, young job-seekers, people with disability and the entrenched poor often struggle to sustain themselves or contribute to the wellbeing of their households. Despite our knowledge of this situation, and our collective desire to remedy it, microfinance and enterprise development programmes have repeatedly been unable to reach the most vulnerable for a variety of reasons discussed throughout this volume. At the same time, some programmes and approaches are making advances, and the writings included here provide conceptual and practical insights into how we can contribute more to the wellbeing of those most in need. First, however, we turn to an examination of who the most vulnerable are and where they can be found (MEDA, 2014).
How do we define poverty?
In order to know who is vulnerable, it is helpful to understand poverty in general – how do we define poverty, where are the poor clustered, and how can we characterize the lives of the most vulnerable? The commonly used UNDP Human Development Index (HDI) ranks countries across dimensions: health, education, and income. However, HDI is a 'summary measure of average achievement across measures' and 'does not reflect on inequalities, poverty, human security, empowerment, etc.' (UNDP, 2014a). The World Bank's US$1.25 (PPP) per capita per day measure of absolute poverty is also widely used (including in the HDI) and is helpful for understanding which households are the poorest in terms of income. But both the HDI and $1.25 PPP are lacking when we consider the multi-dimensional characteristics of individual household poverty. For example, although Ethiopia and Uzbekistan both reported about 50 per cent of the population living under $1.25 per day in 2010 'by multidimensional measures that capture living standards, almost 90 per cent of Ethiopians live in poverty, while only a small percentage of Uzbekistanis do' (Morrell, 2011).
Therefore, in order to reflect the reality of people's lives and to determine which households are poor, Oxford University and UNDP introduced the Multidimensional Poverty Index (MPI) in 2010 that assesses non-income factors across three key areas of deprivation applied at the individual level: health, education and living standards (OPHI, 2014a). Although not all countries report on the necessary metrics, about half of the countries covered (91 of 187) in the 2014 UNDP Human Development Report are assessed according to the MPI (OPHI, 2014b).
Consolidated findings in 2014 (OPHI, 2014a) reveal that 1.6 billion people are considered to be 'MPI-poor', with 85 per cent living in rural areas (Alkire et al., 2014a). Of the world's poorest countries, the bottom 10 on both the MPI and HDI are in sub-Saharan Africa (UNDP, 2014b). In fact, out of a total of 30 countries with over half of their population MPI-poor (in those countries for whom data are available), only 6 are outside sub-Saharan Africa: Pakistan, India, Lao PDR, Philippines, Timor-Leste and Yemen. According to HDI, four of the six – India, Lao, Timor-Leste, Philippines – are rated at a middle level of human development, revealing significant disparities in the vulnerabilities of people within these countries.
The existence of widespread destitution – even among middle-income countries – is supported by the MPI which describes a standard of living for the destitute that is shockingly low and includes half of the MPI poor. As of the writing of this introduction, MPI reports found that over 638 million people are destitute across only 49 countries analysed thus far with India accounting for about half of the destitute (28.5 per cent of the Indian population). The following are selected statistics on the world's destitute households (Alkire et al. 2014b):
• 46% of the destitute do not have anyone in their home with more than one year of schooling;
• 36% of the destitute have a primary-aged school child out of school;
• 41% of the destitute live in a household in which at least one woman/ man has lost two or more children;
• 67% of the destitute have someone at home with severe malnutrition;
• 71% of the destitute don't have electricity to turn on their lights;
• 90% of the destitute practise open defecation to relieve themselves;
• 40% of the destitute don't have clean water, or must walk 45 minutes to get it;
• All of the destitute are deprived in at least one-third of the weighted indicators.
Deep and widespread poverty also exists in urban centres. When we raise the poverty bar to $2 PPP per day or even $10 per day and consider the cost of living in a city, then a very different poverty picture emerges. For example, the ADB reports that in Asia about one third of city dwellers live in slums or substandard housing and urban environments are often congested, unhealthy and lacking in social supports (ADB, 2013).
Who are the poor and vulnerable?
Within the poorest segments of society, smallholder farmers, women, youth, people with disability, discriminated ethnicities and other excluded groups are over-represented.
• The MPI reports that the majority of the rural poor earn their living from agriculture, which is supported by the 2013 World Bank study on poverty: 'not surprisingly, a large share of the poor (63 per cent) are working in agriculture – mostly smallholder farming (Olinto et al., 2013).'
• Women's poverty is often related to access: the FAO reports that women carry out almost half of agricultural work but have greatly reduced access to inputs, services, markets, and finance (FAO, 2014), resulting in significant lost income for their households (whether joint or female headed).
• Ethnic groups may be excluded from economic benefit: OPHI has found through its MPI index that even among the poor whose lot has been improving, certain ethnicities – such as the Peuhl in Benin and the Guan in Ghana – may be left out as poverty is reduced (Alkire and Vaz, 2014).
• People with disabilities often face external barriers to participation: the ILO promotes economic inclusion of people with disabilities demonstrating that when social and physical barriers are addressed, people with disabilities contribute to society as a whole (ILO, 2014).
• Youth are massively unemployed and underemployed. In 2013, the ILO reported on a generation of youth at risk due to high youth populations and extreme unemployment with up to two-thirds of youth underutilized in some economies (ILO, 2013).
Moreover, the most vulnerable people often bear the brunt of advancement – unfortunately not usually their own development – eking out a livelihood in a degraded environment and most affected by climate change. Further, they are frequently found in countries that are beset by corruption, conflict, natural disasters and other disabling phenomena.
The world's vulnerable people are therefore a vast segment of society, concentrated in sub-Saharan Africa, and South and South-east Asia (but not only in these regions). They live in both middle- and low-income countries; most are rural, but urban poverty is also severe; they are smallholder farmers, women, youth, people with disability, excluded minorities and the entrenched poor; and half of the poor are destitute suffering extreme deprivation – with few skills, virtually no assets, low education and very little to enable them to become participants in the mainstream economy.
This book reports on the experience of microfinance and enterprise development programmes in integrating vulnerable populations into mainstream economies, and for the most part illustrates that a 'leg-up' of some kind is normally required. That is, with too few resources and assets of any kind, meagre market information and knowledge, limited access to opportunities, frequently high transaction costs due to weak infrastructure and long distances, and no clear path for engaging with markets, vulnerable people require supports that go beyond the typical microfinance and enterprise development initiatives. This viewpoint is not new, but there is significant growing awareness, programming and formalization of methodologies that offer additional supports to enable more vulnerable people engage in financial and market systems.
The chapters
The chapters collected here explore many of the vulnerabilities described above, cut across Africa, Asia and Latin America, and cover topics as diverse as: non-financial support for very poor would-be microfinance clients, credit barriers for people living with disabilities, capacity building and localized support for women microentrepreneurs, development of pro-poor value chains for smallholder farmers and self-determination of indigenous peoples in terms of economic resources. We now turn to a brief discussion of each chapter and its relevance to the inclusion of vulnerable populations in financial and market systems.
The first two chapters offer an examination of different types of graduation models for the financial inclusion of the poorest. Zimmerman and Holmes (2015), positing cash transfers as the first step to financial inclusion, turn the whole notion of the bad subsidy on its head. Subsidies had been considered poor practice in market systems programmes in the early 2000s, followed by a loosening of practitioner opinion that led to 'smart' subsidies being acceptable if they were time-bound, non-distortionary and transparent (see for example: Jeans, Fowler and Osorio, 2011). During the same time, microfinance institutions had become increasingly risk averse, focusing on operational sustainability and lending mainly to those hovering around the poverty line rather than below it (Hashemi and Montesquiou, 2011).
Zimmerman and Holmes discuss the value of cash transfers in poverty reduction for the very poor – typically provided by national governments when tied to savings and delivered by efficient electronic payments. Although not usually linked to financial services, Zimmerman and Holmes explain the benefits for recipients when the cash transfers are linked to savings: improved management of assets, consumption smoothing and increased resiliency to shocks. They review savings-linked social protection models and suggest that this approach has the power to 'provide an even more effective and efficient means of protecting and empowering the most vulnerable populations (Ibid, p.13).' The chapter provides strong statistical evidence for the efficacy of cash transfer when linked with savings, and with the use of new technologies. Zimmerman and others have also worked on the electronic delivery aspects of cash transfers, and while benefits are clear, there are challenges that impede successful outcomes. For example, Zimmerman et al. (2014) found that in Brazil, Mexico, Colombia and South Africa that country readiness and the technical capacity to shift to electronic payments may not be up to the required level; design and security issues remain a concern; and recipients may need further support and trust building to benefit from electronic payments (Zimmerman, 2014).
Taking a different tack, Grameen (Druschel et al., 2015) proposes a graduation model for the poorest that combines financial product development, livelihoods support and value chain approaches. In this model, transfer of assets or cash may not be necessary, the emphasis being upon sequencing of capacity development – e.g. confidence and entrepreneurship – alongside linkages to economic opportunities. Grameen draws key conclusions from research with RUMA in Indonesia, Fonkoze in Haiti, BASIX and Unitus in India, and M-Pesa in Kenya among others. These lessons illustrate that there is a business case for working with the very poor, that the poorest households require more hands-on support, that market-systems approaches must be rigorous in their inclusion of the poor at different steps in the value chain, and that savings combined with the use of technology are critical for the very poor.
Although only touched on in these two chapters, savings groups – in particular, village savings and loan associations (VSLAs) promoted by CARE and Oxfam among others – have received widespread attention as an impactful avenue for financial inclusion of the poorest. Jeffrey Ashe, a pioneer in the savings movement, reports that ten million people in the world now have access to savings, and that this revolutionizes not only financial inclusion but development of the poorest – smoothing consumption, investing in other livelihood activities, empowering women, and more (Ashe and Neilan, 2014; Jones, 2015). Similar lessons are reported in various articles from Enterprise Development and Microfinance journal including (Hendricks and Chidiac, 2011; Proano et al., 2011, Ledgerwood and Wilson, 2013).
The next two chapters offer insights into the challenges for financial inclusion of a highly vulnerable target group – people with disabilities. Often stigmatized, isolated, without needed supports, and viewed as non-contributors, people with disabilities are rarely included in economic development programmes. In order to promote access to financial services for people with disabilities, Leymat (2015) examines the process for designing and delivering the most appropriate products. The author concludes that complementary partnership development between microfinance actors and organizations serving people with disabilities is the best alternative for project success. The chapter also stresses that people with disabilities want a fair shot at access to financial services – that handouts are not a permanent answer and that they are ready to take on this challenge. The Beisland and Mersland chapter (2015) supports Leymat's findings, providing an in-depth example from Uganda which asserts that the greatest obstacle in accessing finance for people with disabilities is product design. Although not the only barrier, if products were more 'disability friendly', there would be greater uptake by people with disabilities. Like Leymat's, this chapter also underlines the value of working with organizations for people with disabilities.
In the following set of three chapters, we look at the case of the rural poor, especially smallholder farmers – their vulnerabilities, risks and opportunities. In the first of this group, Stoian et al. (2015) questions the growing trend for value chain development projects, cautioning that such initiatives are commonly based on the assumptions that poor households have sufficient resources to participate effectively in value chain development, do not face substantial trade-offs when using up resources for value chain activities, and are able to assume higher risks when reinvesting capital and labour. In reality, they remind us, many poor households reduce risk by pursuing diversified livelihood strategies that combine subsistence and market-oriented agriculture with off-farm labour and other non-agricultural income-generating activities. Therefore, the authors suggest that selecting a single value chain for investment of money and time may not produce the desired poverty alleviation goals, and that programmes should adopt an asset-based approach to understand households and to build capacities for value chain integration as appropriate.
Proponents of the value chain approach were aware of the challenges of working with the very poor, and programmes were designed to experiment with new models to gainfully include poorer farmers into market systems. MEDA had conducted a programme in Zambia that supported smallholders in the acquisition of productive technologies, that recognized the risks faced by these farmers (Snelgrove and Manje, 2015). The chapter reports that poor farmers are disinclined to purchase new technologies, while manufacturers, wholesalers and retailers are unwilling to invest in inventory to sell to such farmers. To remedy this situation, MEDA went against best practice at the time and introduced subsidies (in the form of discount vouchers) to accelerate demand and supply for critical production technologies. The thesis of the initiative was that properly administered incentives would attract commercial suppliers to actively address the needs of rural, underserved smallholder farmers. To further reduce risk for farmers and bolster demand, the programme offered training sessions on the use of new technologies (in this case micro-irrigation), did not limit the use of the incentive to a single specific product, and enabled farmers to make informed decisions about the use of subsidies and the purchase of farming equipment.
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