The structural vulnerability of the poorest microfinance clients

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The structural vulnerability of the poorest microfinance clients a case study of a Bolivian microfinance organization
Schmidt, Hannah Amelia ( author )
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Microfinance has gained huge popularity in the development arena by virtue of its reputation for providing a sustainable means to end poverty through income generation. Its goal has long been to deliver formal financial tools to the most vulnerable populations of the world and help the most extremely poor secure their own exodus from poverty through investment into microenterprises. However, recent research has illustrated that credit and debt can be a heavy burden to bear for the world's most vulnerable, and as such may not be the most effective financial tool to combat poverty. Instead, it has been argued that savings may provide a more effective method of smoothing the uneven income of those who participate in the informal economy. This research program has analyzed data collected from the Bolivian microfinance organization CRECER in order to better understand the vulnerability levels of the participants, and also the role that microfinance structures play in reinforcing this vulnerability. Does participation in microfinance lessen the levels of vulnerability in the lives of the participants? There are clear indications of ongoing vulnerability and poverty, including high incidence of food insecurity that suggests otherwise.
Thesis (M.A.)--University of Colorado Denver. Anthropology
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by Hannah Amelia Schmidt.

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THE STRUCTURAL VULNERABILITY OF THE POOREST MICROFINANCE CLIENTS : A CASE STUDY OF A BOLIVIAN MICROFINANCE ORGANIZATION by HANNAH AMELIA SCHMIDT BA, Metropolitan State College of Denver 2009 A thesis submitted to the Faculty of the Graduate School of the University of Colorado Denver in partial fulfillment of the requirements for the degree of Masters of Arts Anthropology Program 2014


ii This thesis for the Master of Arts degree by Hannah Amelia Schmidt has been approved for the Anthropology Program by John A. Brett, Chair Sharon Devine Tammy Stone May 2 4 th 2014


iii Schmidt, Hannah Amelia ( MA Anthropology) The Structural Vulnerability of the Poorest Microfinance Clients : A Study of a Bolivian Microfinance Organization Thesis directed by Associate Professor John Brett. ABSTRACT Microfinance has gained huge popularity in the development arena by virtue of its reputation for providing a sustainable means to end poverty through income generation Its goal has long been to deliver formal financial tools to the most vuln erable populations of the world and help the most extremely poor secure their own exodus from poverty through investment into microenterprises However, recent research has illustrated that credit and debt can be a heavy burden to bear for the combat poverty. Instead, it has been argued that savings may provide a more effective method of smoothing the uneven income of those who participate in the informal economy. This research program ha s analyzed data collected from the Bolivian microfinance organization CRECER in order to better understand the vulnerability levels of the participants, and also the role that microfinance struc tures play in reinforcing this vulnerability. Does participation in microfinance lessen the levels of vulnerability in the lives of the participants ? There are clear indications of ongoing vulnerability and poverty, including hi gh incidence of food insecurity that suggests otherwise. The form and content of this abstract are approved. I recommend its publication. Approved by John Brett


iv DEDICATION I dedicate this wo rk to my own web of influence: t o my advisor, Dr. John Brett, for the countless hour s I bombarded you with questions in your office and backyard garden thanks for pu lling me out of the rabbit hole s. To my Dad who never tired of re reading my drafts T o Mom and Carol for your never ending support To Ryan, for hot meals and companionship during the long hours of research and writing Thank you.


v TABLE OF CONTENTS CHAPTER I. INTRODUCTION ................................ ................................ ................................ ...................... 1 II. LITERATURE REVIEW ................................ ................................ ................................ ............. 5 III. MET HODS ................................ ................................ ................................ ............................ 55 IV. FINDINGS ................................ ................................ ................................ ............................. 62 V. DISCUSSION ................................ ................................ ................................ ......................... 78 WORKS CITED ................................ ................................ ................................ ................................ 84


vi LIST OF TABLES Table 2.1 2.2 .. 3 . 56 4.1 .................. ... 62 4.2 .72 4.3 77


vii LIST OF FIGURES Figure 2 .1 .. 11 2.2 The Decline of Bolivian Borrower 2.5 Gradual Exclusion of the Poorest Cli 4.2 Categories of Pov 4.3


1 CHAPTER I INTRODUCTION There exist certain structures within society which make specific populations more vulnerable and unable to withstand crisis; ironically, structures within microfinance place the burden of risk on the shoulders of the alr eady vulnerable poor it serves rather th an on the institution itself. Microfinance is structured to prioritize its institutional health and success over that of the microfinance client; repayment of debt is enforced as the highest priority in the financial lives of microfinance participants. The poorest of the poor exi st within a state of vulnerability; their low and uneven incomes create and reinforce vulnerability through a condition of poverty. The cycle of poverty is one of constant gathering of resources and assets in times of plenty to prov ision through times of famine; it is difficult to gain security and stability in a life cycle with such extremes. Methods to break the cycle of poverty have been long debated. The mind set of teaching a man to fish instead of handing him one goes hand in h and with the building development trend to encourage the growth of small business in poor households to financially empower the poor to escape poverty through microenterprise. Can access to credit and loans formal financial tools that the poor often are un able to access be a strong enough catalyst to exit poverty if credit elevates risk through the burden of debt? Although loans can be used to finance a business, poverty is not simply a lack of financial assets but a complex web of influence that dictates a levels way to unforeseen shocks, as well as plan ahead for expected events in the future.


2 Poverty alleviation must emphasize increasing security and comb atting vulnerability; savings prog rams may be more effective to smooth the fluctuations of a very poor et al.. 2009). In this pa per I argue that the structures of microfinance do not alleviate vulnerability levels and are therefore ill suited to improving the security of the most vulnerable poor. Microfinance is a development tool that was created to provide the poorest of the poor with formal financial tools Its original emphasis was on small loans to invest in micro ent erprises that would otherwise be unavailable to them on the basis of their poverty. The primary focus on micro lending and credit is based on the assumption that poverty can be alleviated through access to credit and investment into entrepreneurial capitalist activities. In essence, given access to lump sums of money to invest into a microenterprise, the poor can create their own sustainable means to increase their income and exit poverty. However, loans can have a debt deepening effect that increase s the vulnerability of microfinance participants rather than increasing financial security (Brett 2006:12, Khandker 2000:50). The poorest of the poor in the world utilize a financial strategy of income generating activity that is positively affected by too ls (such as savings) that help to smooth their uneven income, rather than investing in a microenterprise (Allen 2008:52). This research seeks to answer the question: Does participation in microfinance lessen the levels of vulnerability in the lives of the participants? If current microfinance clients remain vulnerable despite participation in the microfinance institutional ( MFI ) program, development tools that emphasize credit


3 do not adequately address the financial needs of the most poor; without a lesseni ng in vulnerability, a sustainable exit from poverty has not been achieved. T o understand the impact of microfinance participation on the clients of a microfinance organiza tion, this research project analyze s vulnerability and the effects of the structure s of microfinance. Analysis focus es on the current levels of vulnerability, as represented in their personal assets, their burden of debt (capacity to repay microcredit loans), their level of poverty (in the arenas of education and finance), and the incidence of food insecurity. The data used to analyze these markers of v ulnerability represent microfinance clients in a Bolivian MFI with varied histories in microfinance participation a wide age range and diverse household sizes and income leve ls. Analysis of the structures of microfinance institutions, the rules of MFI participation, program philosophy and historical context wi thin the economy of Bolivia frame s the understanding of how participation in a microfinance program may cause already v ulnerable participants to become structurally vulnerable. Establishing what it means to be vulnerable, how poverty is understood, and the way these preexisting factors interact with the structures of microfinance all contribute s to answering the research q uestion of whether microfinance part icipation decreases vulnerability for the participants. Microfinance programs across the world offer financial tools for the poor ranging from loans, savings, business classes and basic healthcare programs. For the purp ose of this paper, microcredit refers to the practice of distributing small loans to participants to


4 initiate microenterprises and microfinance refers more broadly to development programs that also may include savings and supplemental classes. Its revolutionary focus on women empowerment, its structure of shared liability in small groups of participants, and other facets of its structure have made it a popular force in the development field. Critique of its impact suggests that while institutional success is widespread, individual level success is not universally shared (Allen 2008, Bateman 2010, Brett 2006). Current emphasis on micro loans distributed to participants to invest in a microenterprise relie s on the assumption that lack of capital is the root of the poverty cycle (Bateman 2010) It has been seen, however, that microenterprise investment may not generate sufficient profit to repay debt and provide for the household financial needs ( Bateman 2 010, Brett 2006, Hulme 2007 ). It is therefore important to ask, do these structures built into microfinance programs make an already vulnerable population more vulnerable? Who is the most vulnerable? Loans have the potential to increase vulnerability of th e poor through debt accumulation; savings may decrease vulnerability by encouraging self made safety nets. Do microcredit loans benefit the participant enough to achieve sustainable security? Analysis to determine the effectiveness of microcredit loans wil l rely on the analysis of vulnerability in current microfinance clients: where there is vulnerability, there is a corresponding lack of personal security yet to be achieved.


5 CHAPTER II LITERATURE REVIEW Structural Vulnerability ity that imposes physical/emotional suffering on specific population groups and individuals in patterned ways, structural vulnerability is a product of two complementary forces: 1) class based economic exploitation and cultural, gender/sexual, and racializ ed discrimination; and 2) processes of symbolic et al. 2011:339). Structural vulnerability, a framework put forth by James Quesada (Quesada et al. 2011 :340), inform s the research and analysis of this project. Microfinance today is overwhelmingly based on the financial systems approach which emphasizes the sustainable existence of the microfinance institution and assumes that poverty alleviation can be accomplished by providing the poor access to capital and c redit (Ledgerwood 1999, Woller et al. 1999, Bateman 2010). However, by virtue of deep poverty and the structural context of poverty, many people are too vulnerable to debt to take advan tage of loan money (Allen 200 8: 53, Bateman 2010:207). Furthermore, microfinance structurally places the burden of risk on the shoulders of the participants and not the institution itself. Microfinance was created in response to the reality that loaning money to vulnerable people witho ut assets is done at a very high risk; if a borrower should default, there are no assets to be seized to recoup the


6 principal balance. Therefore a structure of mutual responsibility amongst participants for loans, short term repayment schedules and high in terest rates to make up for the small principal amount were created to counteract the traditional obstacles to formal financial participation of the very poor (Armendariz de Aghion and Morduch 2005) It is, however, these very structures that place an alre ady vulnerable population into a position of greater financial vulnerability; not only have microcredit participants shouldered a burden of debt which may place their financial lives in jeopardy, but an uncertain profit in a microenterprise may translate t o insufficient alleviation of their vulnerable state of poverty. People, acting as agents within societal structures, may find their options limited or their potential stunted. The source of structural vulnerability can be social hierarchies that dictate perceived self worth, social norms or exclusions (Quesada et al. 2011:340). Structural vulnerability is positionality within a social hierarchy wherein an individual is left in a state of vulnerability as a result of social structures that justify this lac k of power. The externally generated subordinated status becomes internalized and urdieu 1977: 409). Their subordinated status is thereby understood as deserved by themselves and the people around them by continual reinforcement of their position and their perceptions of this position. The agency to exit the state of vulnerability is restricted by an acceptance of their status. Certain structures of mi crofinance could become obstacles restricting upward mobility and success or keeping a particular group of people from meeting their basic needs (see Table 2.2)


7 Table 2.1 Structures of Microfinance Potential Positive Potential Negative Shared Responsibility of Debt Circumvent the need for assets or credit for participation in formal financial tools (Morduch 2005) Social pressure to repay at any cost can force a participant to prioritize repayment over the wellbeing of the household (Brett 2006) Focus on Credit and Loans Access to a large, usable sum can be a platform to begin a microenterprise, paving the way to financial self sustainability (Morduch 2005) A debt burden can be a higher risk than the expected benefit; there is no guarantee that a microenterprise will be successful enough to repay the debt (Allen 2008, Bateman 2010, Brett 2006). Focus on the Most Vulnerable The focus on the poorest, least powerful individuals, usually women, in places within society that are in positions of great est vulnerability by nature of their lack of assets, skills and dependable income (Yunus 1998) The most vulnerable populations are in a position that is least able to benefit from credit. The poorest tend to seek to maximize profit and piece together incom e instead of depending on a single established enterprise (Allen 2008, Collins et al. 2009, Morduch 2005). Payment Schedule: Small Payments Frequently Small, frequent payments are easier for the very poor to make, lessening the burden of repayment (Mordu ch 2005, Yunus 1998) Given an uneven income, a person may have difficulty making payments (Brett 2006). One way to prepare for this decline in income would be to save in advance : savings are inherently valuable even in credit programs. The Result of MFI P articipation Investing in a microenterprise can be a sustainable source of income for a poor family providing a dependable source of income that allows for an exodus from poverty ( Ledgerwood 1999 ). Default on a microfinance loan can leave the participant open to a financial state worse lending group may take valuables to repay the debt, social capital may be dama ged, and assets may be seized Microenterprises are an opportunity for vulnerable people to take a risk through investment. The environment within which these people begin their MFI experience, however, must be understood to have a potential impact on the outcomes of these experiences. There is a stigma to poverty that influences the personal identity of the microfinance program. The parameters of the microfinance organization reinforce positions of power and hierarchy by creating environments where the financial decisions of the poor are decided by the organization itself, and not b y the participant.


8 For ins tance, the assumption that all poor can benefit from microenterprise investment funnels the financial choices of the MFI client into the same financial b ox without much opportunity to deviat e from this predetermined path. Neoliberal understandings of what it takes to be successful in a capitalist economy emphasize the potential of the entrepreneur. Pigeon holing the poor into the informal economy restricts many important opportunities that might be found in a formal job market. Of course, the national econo my and job market influences job opportunities, but designing development tools that lead the poor directly into the informal economy can reinforce a state of vulnerability there is no guarantee of success in a microenterprise The success of small busines s is reliant on successfully identifying a market niche, and creating a sufficient client base to generate profit. Inherent risk may limit the benefit of participation in a program that exists to equip the most vulnerable to achieve security yet places the participants into risky investments. The original intent of microfinance was to address the needs of the most vulnerable populations in the world by providing financial tools that would empower and promote secu rity through income g rowth. There is evidenc e that microfinance is not a panacea for poverty alleviation and does not always succeed in improving net income or access to education and opportunities by those who participate (Brett 2006, irtually all women must borrow money from family members to make payments; they do not make enough from their business enterprises to pa 12). Microfinance loans are often distributed on the condition that the participant utili zes the money exclusively to


9 develop their own business. But, the poor require money for the same broad spectrum as anyone else. In one Bolivian study, it was found that rural households use financial services to meet a variety of household needs, and tha t it was therefore not always directly implemented in business development (Gulli 1998:11). The implications are clear: the poor, like all people, need money to address the costs of their day to day lives. While some want to own a small business and can de velop a profitable business, it is not a universal answer to ending poverty. Programs whose mission is to alleviate poverty must address the many facets of existence that contribute to poverty and recognize that poverty is an economic state of being tied t o many other facets of a lived experience. Of specific interest to this paper is to analyze the roles of structures in the microfinance world that impacts the security/vulnerability levels in the lives of the microfinance clients. Microcredit loans have a repayment schedule based on the concept that for the very poor, frequent and small payments are ideal. However, it has been seen that the profits from business are not always sufficient to even provide for the repayment of the loan, and furthermore do no t have a strong enough positive impact on household income to provide sufficient food for the family (Brett 2006:16). Lack of infrastructure impacts the health and wellbeing of the very poor by exposing them to potentially dangerous human waste. The conte xt within which microfinance was created directly influenced the structural design of microfinance. The very poor pose a high risk to a conventional financial institution: they may have few assets for collateral and little credit history, and


10 generally req uire small loans and make small deposits that pose a similar small profit margin for a bank. Mutual gu arantee within small groups of m icroentrepreneurs is an effective way to circumvent this problem. However, the individuals who participate in microfinance are often highly vulnerable as a result of their position in poverty. If these individuals remain vulnerable despite participation in microfinance, it can be argued that microfinance does not les sen their vulnerability levels. The State of the Microcredit Summit Campaign Report of 2013 highlighted vulnerability and emphasized the need for the microfinance community to improve the products and services needed to address those most vulnerable clients. To illustrate this point, the following graphic was creat ed by the Microcredit Summit to illustrate the many steps along the journey to a successful microenterprise (Figure 2.1).


11 Figure 2.1. Vulnerability. ( ).


12 Defining Vulnerability Vulnerability is the opposite of security; the extent to which people suffer from calamities depends both on how their livelihood is exposed to hazards and the capacity to withstand them (Hesselber g and Yaro 2006:42). Vulnerability can be affected by factors that contribute to the security of a household and can be measured to categorize a summative definition of vulnerability. Vulnerability is dually understood as o recover from shocks (Dutta et al 2011:744). The structural context of vulnerability is made clear by defining what factors of vulnerability exist, and establishing statistical relationships between factors to develop potential causational links In ess ence, where there is a lack of security, there is a corresponding increase in vulnerability. Specifically, ownership of specific assets (such as land or a home), the amount of debt burden, literacy and access to education, financial poverty, food security, participation in the informal job market, and the amount of personal savings are all helpful categories to illustrate vulnerability (Dutta et al 2011:744) For the purpose of this research project, the following questions were utilized to define vulnerab ility in the experiences of the Bolivian microfinance clients of CRECER (Table 2.2 )


13 Table 2.2 Vulnerability D efined by the Literature Contributing Factor Pertinent Questions Literature Cited Assets (or lack thereof) Home Ownership? Land on which the y can grow food? Lack of assets and credit history can preclude participation in the formal financial market (Morduch 2005, Yunus 1998) Debt Burden How much debt does the household have? Are the participants able to repay their loans? The risk of debt can outweigh the benefit, increasing vulnerability (Allen 2008, Bateman 2010, Brett 2006) Educational Poverty Grade level attainment? Literacy? Marketable skills? A history of low educational achievement and literacy can make sustainable career grow th dif ficult for the poor Specific careers are only open to the literate. (Deaton 2006, Elahi 2003) Financial Poverty What is the per person daily income in the household? $1 $2/day Benchmark (Deaton, 2006, Ravallion et al. 2009, Rhyne 2001) Food Insecurity/ Poor Health Do you experience hunger? Do you fear not having enough money to buy food? How frequently? Calorie Based Poverty Lines (Deaton 2006, Collins et al. 2009). Those with the worst health tend to come from the lowest income bracket; most food insecurity is associated with chronic poverty (Barrett 2010, Morduch 2005) Participation in the Informal Job Market The participants of CRECER begin microenterprise s and work in the informal market The incidence of poverty was found to be significantly higher for indigenous people and those in the informal sector. The informal market creates highly variable incomes, leaving households at risk. (Collins et al. 2009, R hyne 2001) Savings (or lack thereof) How much do the participants save? Are savings valued? The poor already do save. Savings can be an effective tool to smooth income and decrease vulnerability. (Allen 2008, Collins et al. 2009, Khandker 2000, Vonderlack et al. 2002) There are many necessary tools if one wishes to succeed in the capitalist economic structure Assets and capital are required for investing in tools or entrepreneurial enterprises. Low debt burden frees up household income to be used for in vestment.


14 labor. Generating sufficient income to provide for the household needs obviously supports security. A healthy body is imperative to success wit hin the capitalist system ; a dequate nutrition impacts ones capacity to succeed Finding and filling an unsaturated Personal savings are a strong financial tool to respond to crisis. Any lack in these areas c an negatively r and ability to react to unforeseen shocks Addressing only one facet of this toolkit for success may not have a strong enough influence to overcome a lack in other areas. Understanding what contributes to and re inforces vulnerability is imperative when creating a program to respond to vulnerability. It is the result of several key components in essence, a lack of what (as previously described) is required to succeed in a capitalist system. Current approaches to development reflect the interconnected nature of factors that create and enforce vulnerability; the alleviation of i t must recognize the web of influence that creates and reinforces its existence (Abraham and Kumar 2008, Calvo and Derkin 2013, Dutta et al 2011) Assets Analysis of assets contributes to an understanding of the portfolios of the poor. Assets have been shown to enable people with varying degrees of vulnerability to help equip themselves to respond from sudden and expected shocks (Rogaly et al 2004:381). Do the participants have access to land to grow food? Is their home rented (a cost to the participant) or owned (a potential investment)? Do the participants have access to running water, electricity and other utilities that contribute to hygiene and health? How


15 many members in the family are able to contribute to the household income and how many are a financial burden? What type of income generating activities do the participants engage in? How do the participants use their loans ? As is discussed later, the financial portfolios of the poor are a patchwork of resources that, when pooled together, create and sustain the individual or family unit. Debt Burden A high debt burden can hinder financial success; in a study conducted by Pressman and Scott, debt poverty was defined as poverty created as a result of consumer debt (Pressman and Scott 2009:423). This is a significant concept that highlights the imp ortance of identifying assets (that provide or contributes a tool for the house hold) as well as debt (which represents something owed, needing to be repaid, or a draw on household income). The risk of debt, repayment regardless of the financial health of one indebted, can outweigh the benefit of accessing a financial tool increasing vulnerab ility (Allen 2008, Bateman 2010, Brett 2006) Educational Achievement A history of low educational achievement and literacy can make sustainable career growth difficult for the poor. Specific careers are only open to the literate. (Deaton 2006, Elahi 200 3). Questions regarding the participation of children in the family microenterprise reveal that children have been pulled out of school to work in the family business ( Maldonado and Gonzales Vega 2008:2246 ); the long term effects of this lack of education could potentially restrict the upward mobility and future


16 opportunities of these children. Education and technical training are necessary to provide more business opportunities if a saturated local market is to be avoided and a profitable arena for busines s is to be supported. Poverty For the purpose of this paper, a distinction between poverty and vulnerability is made: w potential, vulnerability is the effect of poverty (and reflecting this deficiency) which decreases ( Abraham and Kumar 2008:77, Calvo and Dercon 2013: 721 Dutta et al. 2011 ). One may experience financial poverty which in turn, may cause o ne to become financially vulnerable to unforeseen expenses For example, an unexpected medical cost may drive have financial tools to deal with this medical cost where as a financially vulnerable person does not have sufficient financial tools to cope with this cost What causes poverty? The poor are often people from vulnerable groups. Poverty can be understood as a cycle ; there are certain structures in society that a re more likely to increase vulnerability and decrease stability and trap individuals in a state of poverty. The effects of these structures are usually a lack of education, poor health, limited job skills, fluctuating income, little access to critical reso urces, inequity there are a host of factors that can contribute to an individual entering and never exiting poverty. Poverty can essentially be understood as a function of a lack of power (Green


17 2008) at the heart of Society is generally set up as a hierarchy with specific assets (financial tools, education achievement levels, m arketable skills, etc.) that are more valued than others. Individuals who never achieve access to these assets are forever vulnerable to poverty. Defining poverty is a critical component of development programs that aim to meet the needs of the most poor as well as understanding the success of their own efforts; by knowing what it means to be poor, you can also gauge when a person is no longer poor. Poverty lines can be defined financially, such as the one or two dollar per day benchmark (recently updated to $1.25/day), ( Ravallion et al. 2009: 165), or be food driven, such as the calorie based poverty line (Collins 2009:6 Deaton 2006:3 ). Degrees of poverty can be analyzed by looking at head count ratios, making comparisons between median levels of income and the lowest levels of income, or any other arbitrary means to measure inequity (Deaton 2006:9 10). Lack of uniformity in national i nterpretations of poverty levels has made it difficult to apply global programs to combat poverty. Some basic aspects of what it means to be poor have emerged from the global discussion. the basic capabilities that are needed to achieve minimal functioning in the society in which one Poverty is generally understood in terms of the ability to


18 obtain adequate food and other basic necessities; food security, housi ng and health are all determinants of quality of life. This definition has been expanded to recognize that material deprivations may involve more than a lack of private resources they may reflect community level deprivations that an individual lives within Societal structures can therefore be a powerful force in creating and reinforcing poverty. Further expansion of the definition of poverty includes social and physical deprivations that affect an individual. Lack of education, a history of poor diet and/o r health, political and cultural disempowerment and a whole host of other factors can contribute to the cycle of poverty (Murdoch 2005:48). A girl who cannot attend school suffers from another form of poverty educational poverty. A little boy who has no a ccess to clean water and suffers from diarrhea is not able to fully utilize his caloric capital and suffers from health poverty. A lack of access to sufficient resources restricts what opportunities are available to a person. A person does not realize eno ugh financial growth to exit poverty without addressing the other obstacles in his/ her life that held him/her to a life within poverty to begin with. However, lack of money still correlates strongly with all other measures of poverty. For example, those w ith the worst health tend to also come from the bottom of the income distribution (Morduch 2005:27 29). Although poverty is not strictly an economic phenomenon, financial tools that aid in improving the response to these economic restrictions have the pote ntial to impact all other aspects of the poverty cycle by opening up their finances to be used for other areas of self improvement. Despite the many factors that contribute to poverty, focusing on income can be a practical, clear, measurable way to underst and poverty levels. This may at first seem


19 narrow and neglectful, but in reality the financial definition of poverty can be useful for a few important reasons. First, focusing on money is practical and of immediate concern for individuals. Second, low inco mes tend to correlate strongly with other contributing factors of poverty that can be more difficult to measure (Morduch 2005: 29). It has been employment or un taxed an d unregulated jobs), resulting in great fluctuations of income (Collins et al. 2009:35). poverty line, set in the World Development Report 1990: Poverty (Ravall i on et al. 2009:163). Based on the purchasing convert currencies in a way that preserves purchasing power) of the 1990s decade, the original poverty line was set at $1/day. This poverty line reflects the point at which a person can maintain a minimal stand ard of living. This line became the standard to internationally gauge the point at which above an individual can survive and below which an individual is not equipped to provide for their basic needs. Obviously, inflation and economic fluctuations alter th an updated figure was set at $1.25/day in 2009 ( Ravall i on et al. 2009: 165). The data used in this paper was collected prior to the new definition of poverty, and so the original $1/day benchmark is used It is, however, useful to understand that definitions of poverty fluctuate and change as larger economic structures impact individual level incomes. A useable figure of $2/day is thought to represent the line and therefore set s the limiting border for the less poor in this paper. There are obvious restrictions to a use of an absolute poverty line. To think that any person who makes


20 for the sake of th is paper, an absolute line serve s the purpose of defining the individuals who are m ost poor and less poor and therefore serve s to delineate the groups. it is essential to survival. For those liv ing in poverty, money management is an essential piece of responding to fluctuating incomes. For the poor, whether they participate in income generating activities or have a microenterprise, income is not a consistent, dependable flow but rather a tide of ebbs and flows, feast and famine that require saving in times of plenty and pulling on savings during lean times (Collins et al. 2009:30). In one study, the financial lives of poor individuals in both rural and urban areas were analyzed over a to better understand how a household can survive on less than $2/day per person. One important finding was that even the households that survived on less than $1/day per person did not always spend every penny earned; this negates a general misconception t hat a great many poor people live hand to mouth every day to survive. Instead, cycles of saving when they can and borrowing when they need is a common pattern used to manage household income flow (Collins et al. 2009: 3). To accomplish this, a host of finan cial tools are pulled together to work collectively to manage their uneven incomes; these range from stored savings at home or in banks, savings clubs, borrowing from and loaning to friends and f amily, or using moneylenders Surprisingly, negative net wort h was not commonly found in the Portfolios study suggesting this strategy to be overall fairly successful ( Collins et al. 2009: 10). One thing they all have in common is their lack of money and so managing the money they do have is central to


21 survival. Some commonalities did emerge in the analysis co nducted by Daryl Collins and her associates: the financial portfolios of the poor utilize frequent small scale transactions involving both savings and borrowing, often with multiple partners and using multiple fi nancial instruments ( Collins et al. 2009:31). The poor themselves are a diverse group of people with different backgrounds, occupations, ethnicities, cultures, etc. Microfinance clients are not all equally poor: what it means to be poor and financial stat es of being are as varied as their own life histories. Poverty and vulnerability have an obvious relationship: the poorer you are, the greater the potential shock of social and economic stress. Microfinance was created to respond to the needs s most poor people; it is therefore important to consider the different levels of poverty and what those operating at the bottom rung of the financial ladder use to cope with the financial shocks and crises. The most poor may have different strategies for survival than the less poor given their different potential assets and tools to navigate their financial lives. In his 2008 paper, Hugh Allen differentiates between two specific strategies for most poor, with the less poor participating in small to medium established enterprises. Allen defines an IGA as a hodge podge of activities that create income with small investment; in essence, income is not reliant on one establi shed business but rather capitalizes on a diverse range of profitable activities (Allen 208:54). For example, a very poor person w ho utilizes an IGA strategy may do temporary labor in the morning, and in


22 the afternoon sell a seasonal product like grain at a market; this differs from a small enterprise that year round invests in a product and develops a specialized skill to sell. Diversified IGAs seeks to maximize profit and piece together income instead of depending on a single established enterprise. This piece meal financial life has a greater need for income smoothing, to make up the difference in the ebb and flow of their income, rather than growing a business. Conversely, those people who participate in the small to medium enterprise strategy (SMEs) can benefit greatly from access to credit to invest and grow their business. likely it is that s/he will be adversely affected by economic loss. Allen further describes the diffe rences between these two strategies by analyzing what money is used for, when it is needed and what tools will be best used by each strategy. Owners of IGAs tend to maximize withdrawals from their enterprises and minimize the amount of reinvestment just enough to continue operations but not enough to finance growth. Income from IGAs are used to sustain the household on a day to day basis and often have little available after these costs to reinvest into the activity. SMEs minimize the amount of withdrawals from the business and reinvest for growth. Seasonal business owners (IGAs) often are not in a position to make their business full time, and may need access to a lump sum occasionally t o secure their livelihood and make their income more reliable. A person working within an SME strategy may be interested in investing and growing their business by hiring employees, upgrading or buying machines, etc. and can absorb risks in taking on debt to acquire these assets. This strategy requires greater


23 sums of money and needs greater amount of time to get a return on this investment to repay the debt. An IGA owner will be more interested in short term loans and will be more interested in savings to guard against livelihood shocks (Allen 2008:54) An IGA owner is in a greater position of vulnerability and has the greatest need to respond to household cash flow management to regulate income variation; maximizing savings to meet predictabl e and unpredic table expenses may be the best tool for their income fluctuations. Savings will be used for productive investment, managing household cash flow, recovering from unpredictable crises and IGA investment. The less vulnerable poor who participate in the SME st rategy will emphasize enterprise growth and will need large, long term credit and capital for fixed assets, and will need savings more for collateral, enterprise cash flow management and consumption (Allen 2008) An IGA owner then, a person in a position o f greatest vulnerability, will be more inclined to savings based services than an SME owner. Credit is a more useful tool to those with at least some assets (Allen 2008:51). Analysis of the financial portfolios of the poor has illustrated that the very po or diversify their activities to maximize profits and often do not have a steady job or income (Allen 2008:51, Collins et al. 2009, Morduch 2005). The clients of microfinance organizations need more than access to credit; the poor need to have access to sa vings programs in order to prepare for daily expenses and unexpected financial shocks instead of react to the fluctuations in their income, and financial crises that they encounter throughout life.


24 Food Security Food security has been established as havin g an important link to vulnerability (Barrett 2010, Baro and Deubel 2006, Hesselberg and Yaro 2006, World Food Programme 2006) individuals to nutritionally adequate food at all times and p rocured in conformity to human aspirations and dignity (Hesselber g and Yaro 2006: 41). The 1996 World Food all times, have physical, social and economic access to suffi cient, safe and nutritious food that meets their dietary needs and food preferences for an active (Barret 2012: 825). Food security represents an important reflection of the vulnerability s family and self represents an immediate threat to security of life and wellbeing. A high level of food insecurity in the study population therefore represent s a high level of vulnerability. Understanding more strongly the structural causes of this vulner ability is pivotal to improving the health and wellbeing of the very poor. F ood security is an important proxy of vulnerabilit y because it represents a basic hu man need, that when not met has serious implications for the health, wealth and success of a person. It also is a consistent demand on the income of all people, and the daily need to provide oneself sufficient food to survive makes it an important reference point to analyze security, an d thereby, the power of a person to control their own


25 other facet of life and i s also a daily demand that is often at odds with the uneven to day, the daily nutritional needs of a person do not vary. Therefore, if a poor person self reports as being food insecur e, much can be inferred. First, as food is a very pressing and consistent need, that this person has insufficient and/or uneven income flow. Second, that their health may reflect the impacts of inadequate diet. Poor diet reflecting poor purchasing power t o provide a wholesome diet is one facet of a web of poverty that leaves the very poor at a distinct disadvantage to succeed; the structures that reinforce their povert y increases their vulnerabilities towards financial shocks. Food insecurity is a proxy f or understanding structural vulnerability. The poor often spend the majority of their income on food and therefore are strongly impacted by the ebbs and flows of income (Deaton 2006:5). Analysis of the trends of food insecurity, the typical diet of the pa rticipants and also the methods of food preparation will broaden the spectrum of knowledge about the lived experience of poverty for the participants of this study. As a result of its daily demand on household finance, food security strongly represents not only the financial lives, but also the medical wellbeing of the participants. This research project considers questions surrounding food security to further define the vulnerability of the current microfinance clients: How do the poor perceive their own s ecurity? How often do the very poor forgo income run parallel cou rses in the lives of the poor.


26 Food security is commonly conceptualized as resting on three pillars: availabi lity, access and utilization. However, this concept implies that the three equally contribute to food security. In reality, there is a hierarchy with availability necessary but not sufficient to ensure access, which is in turn necessary but not sufficient for effective utilization. s the characteristic of some people not having enough food to eat. It is not the characteristic of there not being enough food to eat (Barrett 2010:825). A person may have food available that the y do not have access to (for example, having their access restricted by not having enough money to purchase the available food source), and some individuals may be poorly equipped to utilize the food source once they have gained access (perhaps they lack p roper tools to prepare the food, etc.). Access is usually associated with concepts of wellbeing: the range of food choices open to the individual given their income for instance. Access emphasizes the obstacles individuals face when responding to shocks su ch as periods of unemployment, price spikes or the loss of assets. Utilization considers what people do with food resources once they have gained access: is the foo d properly prepared in clean conditions to deliver the full nutritional value? Most food i nsecurity is not associated with catastrophes but rather chronic poverty; only 8% of hunger related deaths worldwide in 2004 were caused by emergencies but 92% were associated with chronic or recurring hunger and malnutrition (Barrett 2010: 827). Temporary food aid only goes so far what is most ne cessary is long term mechanisms to help combat the condition of restricted access to nutritional food. In every country rates of child stunting representing chronic under


27 nutrition far exceeds the rates of child was ting indicating short term acute under nutrition (Barrett 2010: 827). Most food insecurity is seasonal and associated with temporary spells of circumstance that increase their vulnerability: unemployment, episodes of poor health, etc. Income and food secur ity go hand in hand. The poorest people in the world spend as much as of their budget on food and the ebbs and flows of income are echoed in the variation in the amount of food available and nutritional deficiencies (Deaton 2006:5). Poverty has historica lly been defined scientifically by calculating the cost of a minimal standard of living, focusing primarily on how much it costs to obtain enough food specifically, in meeting the calorie norm of around 2,000 calories a day (Deaton 2006:4). Unfortunately, this is a very incomplete picture of what makes up poverty or even, what makes up a healthy diet. Not only do some people need more calories than 2,000 (an agricultural laborer may require a great deal more calories than a person with more sedentary work), it also does not call much attention to what makes up those calories. For example: how much of that 2,000 calorie diet is (often expensive) protein? Even when this figure calculates in the cost of a bundle of food that meets basic nutritional needs, the d iet is often monotonous and uninteresting. Although the very poor spend a great deal of their income on food, even the poorest need money to buy non food items illustrates that as people become better off, and even while they are stil l poor, they spend a smaller fraction of their budgets on food, making it problematic to think of poverty entirely in terms of caloric intake (Deaton 2006:5). Hunger is a consistent


28 demand but the ratio of income that is used to meet this need varies ( Coll ins et al. 2009:30 ). they argued that multiple income sources including non farm activities are necessary to reduce food insecurity. Again, when considering ways to decrease food insecuri ty, the issue at hand is truly overall security for the individual. Financial smoothing mechanisms that do not increase vulnerability, but focus instead on increasing the securit y of the individual are ideal. Informal Job Market Participation in the info rmal job market potentially represents an uncertain financial life based on a fluctuating income. The incidence of poverty was found to be significantly higher for indigenous people and those in the informal sector; the informal market creates highly varia ble incomes, leaving households at risk and vulnerable (Collins et al 2009, Rhyne 2001). Those participating in the informal market generally create an income through income generating activities that may include seasonal work, odd jobs, or microenterprise s (Brett 2006:9, Collins et al 2009). Consistent income can improve household security. Savings Formal savings offer many benefits that informal savings mechanisms cannot. Security of savings is one of the main appeals to the poor that drives them to parti cipate in formal savings programs. Formal savings helps prevent money that has been saved from being taken spent prematurely or borrowed (Vonderlack 2002:604). Family


29 members or friends may pressure those who save to loan them money, which may or may not be repaid. This can be especially true within a family hierarchy when a woman is the one who has been saving; husbands may feel ownership over the savings and demand that he have access to the savings (Vonderlack 2002:606). Having a secure, anonymous, and separate location to hold the money helps ensure that the saved money is there when it is actually needed by the saver (particularly when that saver is a woman). Informal savings clubs like RO SCAs or door to door debt depositors do not allow for flexible withdrawals on their savings. Many of these savings clubs do not allow the participant to withdraw their own savings, and have restrictions on which day the withdrawal can be made (Vonderlack 2002:606). These restrictions make informal savings mechanisms less ideal for the participant. The need for formal savings is known in the development world. However, there has not been much research to understand the use of savings over credit for the very poorest of the poor. Often, it is considered an inconsequent ial supplement to a credit program. However, it can be seen that what the most vulnerable and poverty stricken individuals need is a form of income smoothing and self made safety nets rather than debt (Collins et al. 2009:3, Khandker 2000: 53). It is important to therefore conduct research that considers the varying levels of poverty in an effort to illustrate the different financial needs of the different levels of poverty; this will help future designs of financial tools for the poor. Anal yzing the role of savings in the financial lives of the poor will help to illustrate the necessity of providing more than just credit and loans to the poor. Why is it important to provide access to formalized savings? It has been seen that


30 the poor do inde ed already save (Khandker 2009:51) but there are several facets of formalized financial tools that can greatly benefit the poor. Security can be increased by having a safe location away from the home. A formalized savings account allows for the poor to sav e in hard currency instead of material goods which can be lost, stolen, or not easily exchanged into money to respond to crises. A savings account can also allow for confidentiality for family members who may feel familial pressure to loan money to family members. The poor already save, but without access to formalized savings tools, resort to unstable and costly means of informal saving (Khandker 2009, Collins et al. 2009). The very poorest people should benefit from the stability of formal savings tools t o draw on in times of famine, decreasing their vulnerability to financial shocks and stressors. To understand if the very poor have a greater need for these income smoothing mechanisms (through saving) requires a greater understanding of poverty. Who is th e most vulnerable to financial shocks? What mechanisms most effectively help them to navigate the ebb and flow of their financial lives? costs. If, rather than taking out a loan that will cost in interest during repayment, an individual can have savings to draw from when unforeseen costs arise, a person stands to avoid the cost of loans. Savings offer the potential to benefit the saver through interest earned rather than pai d. Truly, saving requires a different mindset than credit. It necessitates that people think and plan ahead, be diligent in developing good savings habits, and manage their money well to allow money to accumulate overtime without being unnecessarily spent Given what we know about the poor, money management is


31 already a pivotal part of their financial lives arguably even more than for those with excess and more financial flexibility. Although some of the poor may want to start and/or grow their own busines However, it can be argued that all of the poor need to manage their money, and savings is a key part of managing their fluctuating incomes. Not only does this call for a greater emphasis on savin gs than credit, it also points out a critical miscalculation of many MFIs that emphasize microenterprises as a method of exodus from poverty. All of the poor need to save, but not all stand to benefit from participation in a microenterprise. In fac t, micro credit can have a debt deepening, rather than alleviating, affect for some MFI participants (Brett 2006:16). Illustrative of this is the incidence of MFI participants that use their MFI loans to pay for personal expenses ( Bateman 2010:204). Exploration of the causes of this bolsters the case that what the very poor need is access to low cost formal tool s to smooth their income, not a burden of debt. So do the poor save? When formal savings accounts are not available, the poor save through informal mechanis ms despite the risks and costs that are associated with these tools. ROSCAs (Rotating Savings and Credit Associations) offer mutual support and some of the same social pressures found in microloan situations. Door to Door Debt depositors are individuals wh o visit participants on a regular basis to collect cash for deposit; this program costs the participating poor. In kind savings involves assets or valuables being stored to be later used or liquidated into cash when needed; this could be anything of value: from cash under the mattress to spare livestock that can be sold. There is a high risk associated with this type of savings: money can be stolen, valuables


32 can be destroyed, or livestock may die. Also, if it is an emergency that is causing the individual to liquidate their valuables, there is a chance that they may not be able to sell their asset for what it i s truly worth (Vonderlack 2002: 602). The fact that the poor continue to save despite these high risks of loss speaks to the level of importance that the poor place on savings. If the poor already save, then what needs to be addressed is how to securely hold the savings to avoid that potential loss. The poor have the same reasons for savings as the non poor. The poor desire to invest for the future. So cial and religious events whose participation is demanded through social pressure can be very costly. The poor recognize that they will eventually need to retire, or that health or disability restrictions may limit their ability to work in the future. Furt hermore, the majority of the poor operate within the informal job market, and as such there is a great deal of fluctuation in income. During times of plenty then, it is important to store any excess for the future times of famine (Ledgerwood 1999: 156). Sa vings can help to improve stability within a fluctuating income. It can be argued that not only do the poor have equal need to save, the fact that so many poor work within this informal economy h ugely increases the necessity for access to a financial tool that helps to regulate and average out the fluctuating income. Recent studies have further supported the importance of savings and the role that savings can play in ensuring personal security. Earlier this year, Jesse Atkinson and his associates published an article involving a savings program in Guatemala. Microfinance clients were divided into an obligatory and voluntary savings track and a


33 group who did not have a savings account. Both categories of savers would receive a reminder to save money at the ti me that they made their loan payments. Voluntary saving resulted in a balance of 2.5X higher than the control and obligatory 5x higher than the control. Their findings suggested that this method of reminding participants to save could help encourage a swit ch from a less debt financed to more savings financed investment. Another study conducted in 2013 by Meera Tiwari analyzed savings led self help groups for vulnerable women in India. These were fashioned after more grass roots savings clubs. It was found t hat women in the most vulnerable category tended to save for specific large purchases not for general security and therefore saw it as a means to finance their own investments. The women also saw it as a direct method of coping with their levels of depriva tion and vulnerability. Savings can be a powerful means to improve financial security. Historical Context : The Bangladeshi Roots of Microcredit The micro credit movement has its roots in Bangladeshi history. Although by no means the only birthplace to microfinance, Muhammad Yunus can be credited with popularizing microcredit the method of distributing micro loans to support the development and growth of microenterprises. It is important to understand the decisions, observations and assumptions that undergirded the initiation of micro credit in order to clarify its current structure. Much of this history is described by Muhammad Yunus in his book Bankers of the Poor: Micro len ding and the Battle Against World Poverty.


34 In 1974, Bangladesh experienced famine. Working as an Economics Department Head at a rural university, Muhammad Yunus noticed nearby fields left unused during the dry season even though wells were dug nearby. He d ecided to investigate the cause in order to see if he could remedy the problem to help address local hunger issues. He found that a lack of capital and cooperation between many people that utilized the wells had prevented irrigation that would provide the water the crops would need during the winter dry season. Yunus responded by creating the Chittagong University Rural Development Project (CURDP) which in turn created the Three Share Farm pilot project. Seeking to solv e lack of capital and cooperation betw een landowners and sharecroppers rampant in the region Yunus had landowners contribute the use of their land during the dry season, the sharecroppers contribute their labor, and he himself provided the capital to pay for the fuel to run the deep tube well ; in exchange for his capital, the landowners and sharecroppers had to give him 1/3 of their crop (a higher yielding Filipino variation of rice suggested by Yunus ) to reimburse him for his capital. In general, it was a success for the participants (althoug h Yunus did not recoup his cost in the first pilot program), but it also bore another fruit from the harvest. The Three Share Farm pilot project highlight ed a sector of labor that was in greater need than the sharecroppers: destitute women. After the rice had been harvested it needed to be separated from the dry straw a very labor intensive, mind numbing task that was offered to the cheapest day laborers of the village. Women often widowed, divorced and abandoned with children to feed, were too poor to be sharecroppers and often became beggars. Standing for up


35 to 10 hours a day, separating the rice with their feet, the women could expect to make 40 cents a day. The women were without assets, landless and with little hope of ever breaking a cycle of poverty. farmer, the more he earned from my Three Share Farm experiment, and the (a poor woman ) poverty, the more I rea lized how important it was to differentiate between the really poor and the marginal farmers (Yunus 1998: 40). Pursuing further research on the plight of the local women, Yunus encountered a woman weaving baskets on her front stoop. She described her relat ionship with a moneylender who provided the capital for her to buy the material to make her goods in the morning so that she could repay the loan in the evening after weaving and selling her goods throughout the day. Her profit from a long day of labor yie lded two cents a day after repaying the moneylender. The Micawber Principle, based on a quote from Charles Dickens, explains poverty in a similar annual expenditure nineteen pounds nineteen and six, result happiness. An nual income (Dickens 1850). The seemingly insignificant amounts of money that create the gap between hunger and plenty are often a very small financial margin in the grand schem e of things. A more complete survey of the area found that the small margin of the entire


36 community combined (when looking at small micro entrepreneurs comparable to these ll these families, all for the lack of twe nty :50). Yunus gave twenty seven dollars to the identified people and then went to a bank to secure more funds and was met with an unmovable structure that would not work with individuals without assets who needed such small amounts it was not cost effective and very ri sky. Furthermore, issues of illiteracy among the needy prevented them from being able to fill out loan applications. Stepping into the middle, Yunus offered himself as a guarantor of the loan on behalf of the many small prospective loan holders. In January of 1977, the Grameen Bank was born. Yunus structured the credit program to collect small sums frequently at first daily payments, but later weekly to respond to the income flow of many in poverty. Next, he structured the credit program to rely on small g roups of five people that If anyone was unable to repay their loan, the entire group became ineligible creating an immensely powerful mechanism of social pressure to repay at any cost to the i ndividual. Each person has to pass a rigorous exam that covered the process of repayment and policies in order to be qualified to take a loan. At the very beginning, Yunus required borrowers to build savings by depositing 5% of each loan into a group fund that can be used by anyone once the entire group approves the withdrawal. All transactions were done publicly at weekly meetings to lessen the potential for corruption. All loans had to be repaid within a year, with repayment starting a week after the loan has been taken out. Interest rates


37 in the pilot phase of microfinance were 20%; Yunus strongly argued that interest rates are not effective motivation for repayment. The general methodology was thus created the next issue was to deliver the tool to those that needed it most the very poorest women of Bangladesh. Yunus faced a great deal of cultural and religious opposition to lending to women and not men. In a society where a woman is not supposed to leave her house alone or speak to a man, it was difficult to convince them to begin the laborious process to secure a loan. Interaction with formal institutions was largely foreign to them. Female employees of the Grameen Bank, although able to establish rapport with borrowers more easily, often faced a great de al of hostility when they traveled through villages alone on a bicycle. This type of behavior is often considered very improper; all women in Bangladesh live within a strict code of conduct that greatly inhibits their ability to succeed as individuals apar t from male family members. This makes them particularly vulnerable if they find themselves without male provisioning. It is critical to understand that the most vulnerable populations in the world are those who are th e victims of structural vulnerability that increase their vulnerability at a disproportionate rate to those of the people around them. The structure of microfinance was originally created to attempt to break the poverty cycle for the most vulnerable by building financial programs that were sen sitive to the needs of this specific demographic. The approach of Muhammad Yunus to alleviating poverty reflects his own economic theory background: he sees poverty as an economic issue that affects a


38 ; therefore any other mani festations of poverty are the Development approaches of the day followed a similar path by emphasizing economic growth of a country to alleviate poverty at the individual lev el. This pro growth strategy proved to be unsuccessful at affecting an exodus from poverty by the most poor because no amount of growth at the national level ensured that wealth made it to the poor. Poverty is not simply a financial state of being and in f act reflects a great host of other influences. But, in order to address poverty, one must consider those foundational causes of poverty, instead of expecting a poor person to defeat poverty if given enough capital. This general assumption can be seen in M alleviation: the problem is a lack of capital, and so having access to usable sums of money can encourage an exodus from the cycle of poverty. There are several valuable aspects of the design of microfinance: the focus on women helps to address social inequality which keeps many women firmly in the grasp of hunger and want. The recognition that poor people need access to the same types of formal financial institutions as the non poor was significant. Weekly repayment help s make the payment less strenuous on the borrower by requiring small sums often. Microfinance succeeded in bringing the poor into the capitalist arena by providing them with access to capital in the hopes of encouraging asset accumulation and poverty reduc tion. But, neglecting to recognize the larger systems that people work within severely limits the capacity of the very poor to succeed ( Bateman 2010 )


39 The Bolivian Financial Systems Approach to Microfinance Bolivia is the poorest country on its continent a s well as having a long history of wide disparities in income, education and political power betwe en its major social groupings (R hyne 2001:4). The elites are Spanish speaking and of European descent, while the poor are disproportionally represented by the mixed or indigenous groups and speak native languages such as Aymara and Quechua. The informal economy predominates the country, with 60 80% of the working age population working within it and 67% living below the national poverty line ; 50% of the population live below the World Bank benchmark of poverty of $2.00/day (Brett 2006:9). The streets of the city teem with vendors of a vast array of goods and services and the informal market easily outnumbers the formal. A 1993 World Bank poverty st udy found 60% of the population of La Paz to live below the poverty line; approximately half of those people had such low consumption that they were considered extremely poor ( R hyne 2001: 18). Extreme poverty means having too little income to purchase a min imum adequate food basket; poverty level allows for purchase of items in addition to a minimum food basket ( R hyne 2001: 18). The incidence of poverty was found to be significantly higher for indigenous people and for those in the informal sector ( R hyne 2001 : 18 ). Microfinance in Bolivia began in La Paz. To understand why microfinance found such a strong foothold here, the economic activity of the area should be examine d. The origins of microfinance in Bolivia followed the economic changes that swept the natio n from 1985 into an era of stable democracy and economic liberalization (R hyne 2001:35 ) An analysis of the presence of microfinance in Bolivia by Pedro Arriola Bonjour helps to


40 frame an understanding of the current microfinance arena within which CRECER o perates. The creation of Bancosol in 1992 is often cited as the beginning of a process of ; this was facilitated by the Su preme Decree No 2400 which regulates the creation and operation of Private Financial Funds (Bonjour 2003:2 3 ). F ormalization allowed for more international investment, encouraging growth of the microfinance presence (Bonjour 2003:4). From 1996 1998, the rapid expansion of microfinance in essence, the rapid growth of microfinance did not encourage the development of standardized protocol nor qualified personnel to evaluate debt capacities of microentrepreneurs. The MFIs also sought to establish the most widespread presence possible to win n ew markets, with less concern of the depth or quality of their programs The result was less effective microfinance programs: much higher levels of overdue loans existed than in other regions of the world (Bonjour 2003:6). A trend among Microentrepreneurs to seek credit in multiple MFIs also created higher levels of indebtedness than could be repaid. The global economic crisis greatly impacted the potential of Bolivian MFIs. A decrease in the level of sales, a devaluation of national currency, restrictions in neighboring countries to import Bolivian goods, eradication of coca plantations, and new customs regulations all limited the capacity of a microenterprise to succeed (Bonjour 200 3:6). Over indebtedness now beca me strongly evident as the potential to pro fit declined, and the need to repay high debt remained constant. Over the period of 1999 2002, the Bolivian financial system lost 221,000 b orrowers ( Figure 2. 2 ) Loan delinquency and profit during this time also reflect economic change (Figure 2 3 and 2.4 )


41 Figure 2.2. The Decline of Bolivian Borrowers (Bonjour 2003). Figure 2.3. L oan Delinquency (Bonjour 2003). Figure 2.4 Profits (Bonjour 2003).


42 Microcredit has grown faster in Bolivia than in any other neighboring countries ( R hyne 2001: 2). Concerned with finding pathways to bring microfinance into the mainstream financial system, MFIs in Bolivia have exemplified the financial systems ap proach This focus on institutional sustainability often leads MFIs to devalue meeting the needs of the poo rest o f the poor by rather placing ultimate importance on the health and existence of the institution itself. I t can be difficult to support social objectives alongside profit as a goal. Despite the dramatic presence of microfinance in Bolivia it is almos t impossible to find a meaningful correlation between the explosion of MFIs in the 1980s and a positive change in the levels of poverty and development (Bateman 2010:118). In fact, the presence of microfinance loans (and an emphasis on very simple informal microenterprises) has created the side effect that the light industry, agricultural production and processing base has been undermined and replaced by a microfinance induce d bazaar economy (Bateman 2010: 119). In short, the strong presence of microfinance financial tools (enjoyed at the cost of high interest rates and short term repayment schedules) downplayed another portion of the Bolivian economy and negatively impacted the development of a sustainable economy in Bolivia. The 2005 election brought about radical change to address these negative impacts of microfinance and a new Bolivian constitution passed in 2009 emphasizes the urgent he promotion of sustainable agricultural activities (Bateman 2010:121).


43 Muhammad Yunus which subordinates sustainability in favor of emphasizing poverty alleviation methods that often need to be subsidized. One impor methods appears in Bolivian microfinance strategies: that of village banking. This concept was developed by John Hatch and the American NGO Finca ( R hyne 2001:8) In essence, money is lent to groups hat in turn lend to their members CRECER, the Bolivian microfinance organization whose participants are being studied in this paper, is a village banking program that is fairly typical of Bolivian MFI s CRECER was founded by Freedom from Hunger, and has adopted the poverty lending approach to microfinance. CRECER provides access to medical care as part of partic ipation in their program. CRECER achieves sustainability by charging interest rates high en ough to cover their overhead costs (Brett 2006:11). In 2012, CRECER had 129,737 active borrowers with an average loan balance of $943.6; their gross loan portfolio was $122.4 million ( ). The majority of the participants in Bolivian and virtually all of the women borrowed from outside sources other than the earning from their microenterprise to repay their loans (Brett 2006:12). Women participating in C RECER programs reportedly valued the savings component of the program (Brett 2006:11). This research program will further analyze the vulnerability levels of the participants in light of their access to microfinance in order to demonstrate the effectiveness o f participation in an MFI.


44 Microfinance Today Microfinance is a method of providing access to formalized financial tools for the poor, usually with an emphasis on credit. Small loans, in the amount of $50 to several hundred dollars are loaned out on a sho rt term basis to low income individuals to use to invest in a small business. These microloans are disbursed to the poor on the assumption that a successful small business will end the cycle of poverty by creating sustainable sources of income for the hous ehold. Microfinance has become a powerful force in the development world. According to the Microfinance Information Exchange survey of 2008, microfinance has reached over 99 million borrowers in 117 countries (Microfin ance Information Exchange 2008) It i s difficult to know the extent of the reach of microfinance. website proudly declares that as of 2014, 175 million clients and 100 million families are currently being reached by microfinance ( Microfinance to it s detriment. Moving away from the welfarist approach current microfinance structure is modeled after the institutionist (sometimes called financial systems) approach. The institutionist approach focuses on creating a self sustaining business model for the MFI itself, and therefore implies a critical swing in focus away from that of the individual avor of focusing on the success of an institution as a whole. This trend reflects the necessity to become sustainable outside of donor support or external financial aid to the MFI. Emphasis lies on breadth of outreach rather than depth of outreach. This fi nancial systems approach to microfinance is tied to a future of large


45 scale, profit seeking financial institutions that provide high quality financial services to a large number of poor clients : p overty is a world wide phenomenon and therefore requires lar ge sc ale response. ( Woller et al. 2007 :3 ). This large scale response is far beyond the donor provisions, and there is no way to depend on the whims of goodwill donation at such a scale. It is this recognition of scarcity that drives the desire to build fi nancially self sufficient MFIs. It is important that MFIs secure their existence; the restructuring of their own policies to do so must not come at the loss of quality and effective financial programs for the poor. If many of the participants of an MFI are not realizing personal financial self sufficiency, then why should the institutions continue to exist? Their very purpose is not being fulfilled. Instead, MFIs must remain responsive and dynamic enough to respond to the realities on the ground to restruct ure their own programs if their clients need different tools to succeed. To not do so is to make of an MFI a bank or money lender like all others already in existence. If t he goal is to reach the very poorest of the poor and empower the most vulnerable pop ulations can this be done with a business model that emphasizes the scale and not the depth of their outreach? Microfinance must refocus on the most needy in the world by analyzing what the most powerless, asset less and vulnerable populations actually nee d to encourage individual level financial security. Many microfinance programs today do not require savings and instead only offer loans. This can usually be attributed to the fact that for an institution to hold funds, they need to act under similar re gulations to a bank. Neglecting to focus on savings removes an emphasis on a self made safety net. Poor people often garner


46 income from the informal market and have a very fluctuating income. If an institution offers loans and expects repayment on a regula r basis, it needs to also stress saving in times of plenty to make up for times of famine to avoid financial crises. Many microfinance programs today offer loans at extremely high interest rates that contrast to the original 20% annual interest rate of Yun is to compensate for the low potential return a small loan represents; overhead costs for a very large loan are about the same as for a very small loan, but a bank does not profit as much from the smaller (Arme ndariz and Morduch 2005) The benefits to microfinance center on access to financial resources that were previously inaccessible to the very poor. The rapid expansion of microfinance organizations across the world make s them ideal connections to the poor for further innovative development projects The format of microfinance programs overcomes several restricting factors that had previously barred the poor from utilizing formal financial tools like banks. Relying on soci al connections in lieu of assets allows even the very poor to participate. Holding frequent community meetings to collect small payments and deposits alleviates the financial stress of traveling to a bank or having to accumulate large lump sums to make lar ge, infrequent payments. Regulated and effective financial tools are a benefit to the poor ( Khandker 2000). A wide range of financial tools are utilized by the poor. Generally, small amounts ncies are addressed


47 further perspective. It shows how households work to meet their needs by patching et al 2009: 67). Some research finds less difference between those participating in MFI organizations and those not participating than would be expected. This can be explained by the existence of many other financial tools utilized by the poor outside of the formal se ctor. Informal lenders, social service organizations, and savings groups like ROSCAs and ASCAs are all financial tools that are used by both participants and non participants of MFIs. Oftentimes, participation in a formalized financial program does not sig nal a discontinued use of these other financial tools (Collins et al. 2009) Formal financial tools should be used to supple ment informal financial tools. Has microfinance met its goals of reaching the poorest of the poor? Unfortunately, it has been seen that there is a gradual exclusion of the poorest of the poor, in favor of addressing the less poor (Gulli 1998:5). In the State of the Microcredit Summit Campaign of 2013, Vulnerability was highlighted. In particular, it was illustrated that in 2011 microf inance providers reached fewer people living on less than $1.25/day than in 2010 ( ).


48 Figure 2.5 The Gradual Ex clusion of the Poorest Clients ( ). Ana lysis by region illustrates that the Latin America and the Caribbean are not heavily represented amongst the poorest microfinance clients ( Figure 2 .6). Figure 2.6. Poorest Clients by Region (( ). The following are explanations for this trend in the Microcredit Summit report The Microcredit Summit identified r apid growth among microfinance institutions


49 leading to over lending, multiple loans to the same borrowers, harsh collection practices and allegations of client suicides leading to state intervention and heavier legislation amongst MFI practices ; this was especially true in the Andhra Pradesh region of India ( ). Market saturation has reached a level in Latin America where the majority of eligible clients have been reached and so MFI growth is slowing. L ess global economic activity impacts local economic activity and microentrepreneurial activity Donor fatigue re presents less support for supplemental programs within microfinance organizations. A lack of centralized information on microfinance activity across the world can create holes in information and understanding of the impact of microfinance as a whole; this inconsistency in understanding can cause oversaturation in some areas, and other areas with not enough services. MFIs tend to operate in other locations where MFIs have already developed because it is easier to invest where other investors have already don e the due diligence; this can result in oversaturation in one region. There are few rewards for the MFIs that reach the poorer and more remote clients; MFIs work within a capitalist system and necessarily trend towards areas with a higher potential for suc cess and sustainability for the institution. There has been an official recognition that measurements in the past focused on the numbers of clients and sustainability of the institutions that reach them; better measurement of poverty must continue to be de veloped to get the most accurate understanding of the impact of microfinance. who have no assets and little power to break the vicious cycle of relying on


50 moneylenders or begging for capital Poverty reduction is no longer the main objective of many microfinance institutions, who instead serve many different market niches (Gulli 1998:5). Microentrepreneurs face a whole host of obstacles in addition to lack of credit in conjunction with their lack of access to credit. Health poverty, educational poverty, a saturated market, and low return on their investment all impact an this shift reflects the acknowledgement that savings services and not just loans can help improve the well being of the poor in general and of women in particular (Vonderlack 2002: 602). Loans are a debt that coupled with h igh interest rates and the stress of repayment is often not an effective tool to reaching financial sustainability; savings, on the other hand, while not carrying the instant gratification of a lump sum loan, carry the potential of making money through int erest gains, and no risk of default. worthy, but all people want savings and are deposit (Schreiner 2001: 639). Expanding to include savings as well as loans in microfinance institutions can be beneficial for b oth the organization and individuals who par ticipate in the programs. Joyita Mukherjee explained some of the main philosophies and understandings Two main phil osophies e xist within the micro savings movement. One philosophy is tied to the compulsory savings structure; this philosophy is based on the assumption that the


51 poor must be taught to save and learn financial discipline. Compulsory savings programs generally exist as a subprogram that is tied to participation in micro lending programs. Generally, this appears as part of a package with compulsory health packages or business training classes. This design argues that without health care, and the other compulsory compo nents, the participants are less likely to build strong businesses and will experience less fruit from their investment. The second philosophy is associated with voluntary savings programs; the assumption here is that the working poor already save, but lac k institutions and services appropriate to their needs (Mukherjee 1997: 2). Voluntary savings programs can be offered exclusively by an MFI, or as a voluntary addition to participation in a micro lending program. The poor often find the compulsory additions (the cost of which is transferred through fees to the participants) as a further stress on their already overextended resources. By making these additional programs optional, you are still providing the poor with access to these resources but not pushing out the poorest of the poor from participating who may not be able to afford the extra associated fees (Mukherjee 1997:4) The incomes of the poor are often highly variable, leaving them more vulnerable to devastating shocks on the household during ti mes of crisis. This high variation in income ties directly into consumption. Microfinance has not been proven to increase consumption on average, but it may offer a means to smooth consumption by smoothing income (Murdoch 1998:6). Upon first inspection, it wou ld seem strange that an individual would choose to participate in a program that doe s not increase their income sufficiently to equally increase their capacity to consume Income variability and


52 the need to smooth their consumption during seasonal work or other ebbs and flows of their financial lives are seen to be a motivating factor to participate in microfinance ( Allen 2008: 52 Collins et al. 2009 :30 ) When comparing the variance of consumption levels of participants of a MFI to someone who does not part icipate in MFI programs, there was found to be an average reduction of consumption variability in a study conducted by Jonathan Murdoch in 1998. Variability in consumption is reduced by income smoothing and not consumption smoothing. Access to MFI programs is associated with substantially lower variation in labor supply and consumption across seasons (Murdoch 1998:28). Including savings programs in MFIs can be beneficial for the organizations themselves. Studies have shown that with every 10% increase in b orrowing by men or women, there is a 6% increase in savings. These savings mobilized by a microcredit program account for 40% of its outstanding loans (Khandker 2000:76). Hence, it is possible that a microfinance institution can rely on its own mobilized s avings. There are legal restrictions that can be a major obstacle for some MFIs to be able to offer savings; these involve new regulations and licensing issues that a MFI has to address to become a deposit taking institution as opposed to a money distribut ion institution. Those that (Ledgerwood 1999: 157). There are reserve requirements that the MFI must conform itself to: these determine the percentage of deposits that a re accepted by the institution that must be held in a safe and liquid form. Basically, when an institution wants to loan out its own money to the community, there is less need for regulation because it is


53 taking on its own risk. Once an organization begins regulations apply to help protect participating individuals. However, if an MFI wants to address the needs of the poorest of the poor, structural changes must be made to provide for programs that include savings. The shi ft from microcredit to microfinance signals the recognition that not only credit is needed to develop sustainable financial stability. Savings is another part of the portfolio that gives the poor the access to a financial tool that is less costly and more beneficial for their own development. The poor save whether or not they have access to formal mechanisms. Informal savings are often high risk and can be lost, stolen, or through social pressures loaned and never repaid. The switch to offering savings acco unts can be beneficial for the MFI by protecting the organization from the costs of defaults and providing a financial resource which can be mobilized and recycled back into its own sustainable development. The process to offering savings involves legal re structuring and conforming to new guidelines, but the hassle of this practice can be worthwhile if it in fact allows for the MFI to become self sustaining. Programs that have offered savings programs have experienced sustainable economic growth at the indi vidual participant level. This switch to individual participant level growth is a huge success when contrasted with the participants who only have access to credit and often experience a credit deepening effect (Brett 2006: 15). Voluntary savings programs are an invaluable tool for MFIs that have the potential to counteract many of the existing obstacles in the microfinance community.


54 Critique of the understanding of poverty called into question the validity of the assumptions of microfinance namely, to wh at extent a microfinance client is truly equipped to succeed in a microenterprise. Within the context of the cycle of poverty, it can be extremely difficult to begin a successful and profitable microenterprise. Given a limited skill set, it is likely that a microfinance participant may be also limited to specific industries which often become saturated in regions with a high microfinance organization presence; the poor have been found to use their microcredit loans for other things than investing in their own business (Brett 2006:14). This tells us that credit and loans for investing in a microenterprise is not always the most pressing need for the poor. Although access to credit can be hugely important for the poor, it should be understood to represent only part of the financial toolkit that the poor (like all other people) require to na vigate their financial lives. Debt represents an uncertain investment in the future that will demand repayment regardless of the success or failure of a microenterprise; savings represent an investment in the future with the potential for earned interest a nd no burden of repayment. Financial tools for the poor must emphasize smoothing their uneven incomes to bolster security ( Collins et al. 2009: 31 )


55 CHAPTER II I METHODS The data this research pro ject used i s secondary de identified data from a survey con ducted in partnership between the Boli vian microfinance organization CRECER University of Colorado Denver, and Freedom from Hunger This evaluation of the program was conducted in 2007 using a survey of ninety q uestions covering the financial portfolios a nd health of the participants of the microfinance program. There were 240 participants in the survey, with ages ranging from 18 to 80 years old. The data is analyzed using SPSS PC and quantitative methods, specifically descriptive statistics that analyze the various facets of vulnerability on individuals that currently participate in a microfinance program. Does participation in microfinance lessen the levels of vulnerability in t he lives of the participants? Spe cifically, this research project i s concerned with the factors that contributed to the vulnerability of the microfinance clients and what role structures in microfinance could play in the exacerbation or alleviation of thei r vulnerability. Defining what factors are known to contribute to vulnerability and what structures in microfinance predispose certain populations to be vulnerable through review of literature is the first step in this analysis. Next, this research program analyze s specific statistical analysis of de identified secondary quantitative data in order to define the vulnerability of this group.


56 To study vulnerability, this research project proceeded through two phases. The first phase provides background and definitions of current understandings of what causes and contributes to poverty and vulnerability; these two concepts are partnered closely together as they both contribute and obvious relationship between poverty and vulnerability: the poorer you are, the more affected you will be by social and economic shocks and stress, and the better off you are Structural vulnerability causes physical and emotional suffering for specific groups in patterned ways as a result of class and race based exploitation and symbolic violence (Quesada et al. 2011:339); analysis of the structures within microfinance that place specific groups at greater risk to remain vulnerable build s on the foundation of what constitutes a vulnerable state. The following contribu ting factors of vulnerability a re examined. Table 3 .1 Contributing Factors of Vulnerability Assets Home owners hip? Vehicle? Land on which they can grow food? Education/Literacy Grade level attainment? Ab ility to read and write? Skills? Food Security Experience hunger? How frequently? Nutritional value of food consumed? Savings How much in savings? Value savings? Formal and informal savings? Repayment of Loans Are the participants able to repay the loans? Is this a hardship? The second ph ase analyze s the vulnerability of the participants of the CRECER program. The survey asks several important question s:


57 1. Demographic Questions: Underst anding of the population is the foundation for all the analysis. Questions used to describe the participants were as follows: What is the average age of the participants? Are they married or single? What is the total househ old income, number of family members and number of family members that generate income ? What the occupation of the participant To begin, it is helpful to understand what makes up an average MFI client ( i.e. the age range, household size, etc. ). Next, questions surrounding income help us to define the extent to which poverty is experienced amongst the CRECER clients. rtant step in the analysis of this research. To begin, analysis of the household income i s analyzed by establishing a monthly average Next, this monthly income i s divided by the total number of people who make up the household, in order to establish a per day income level per person. This i s definition of poverty which divides the most poor from the less poor on the basis of whether they make $1/day or $2/day respectively. 2. What assets do you possess? What types of infrastructure do you have access to? Do you own a home? Do you own a car? Do you own land on which you can plant food? Is there electricity in your home? Running water? Sewage systems?


58 Understanding the types of assets that an individual possesses helps to more fully illustrate the tools s/he has at her /his disposal that may benefit the running of a microenterprise or even impact their personal lives. Furthermore, access to clean water, sewage systems and electric ity hold potential to impact the health and wellbeing of a microfinance participant. This type of information not only helps to clarify the day to day life and home of a participant, but also more fully details the potential restrictions that an individual experiences. 3. What is your level of educational attainment? Can you read and write? What grade level did you complete? Have you ever completed vocational training? Have any children been kept out of school in order to help with the family microenterprise? Literacy is an extremely important skill in the job market. Lacking basic education, many individuals may find their vocational choices restricted; microenterprises reflect the skills that a participant has attained. 4. Have you ever experienced food insecurity? Have you ever gone hungry because of a lack of funds to purchase more food? Have you ever feared that you would go hungry? What is the nutritional value and variation of your diet? Food insecurity is an important representation of vulnerabilit y because it clearly illustrates a person being unable to provide for basic necessities. Understanding not


59 psychological impact of fe aring hunger on a household add s to the unde rstanding of the average microfinance client. 5. What is the state of personal savings? Currently, do you have personal cash savings to use for emergencies or because you are planning an important purchase or investment? How much do you have in savings? In th e last year has your savings (decreased, increased, stayed the same, etc.). Is there an existence of savings outside of the MFI program? Personal savings represent a financial tool which can be used to bolster financial self sufficiency. These quest ions contribute to the understanding of the important differences between the two groups. Without fully understanding the contributions to their state of being, one cannot begin to argue what tools best help them exit this condition. Bivariate analysis utilizin g crosstab statistics in SPSS PC help s to begin this process by pulling out significant relationships between various facets of the financial lives of the very poor and the less poor. Conclusions on the st rengths of the correlation are determined utilizing the statistical analysis (i.e., When savings increase, does poverty decrease? When the number of children increase, does poverty increase?) and crosstabs for descriptive analysis as needed (i.e., what percentage of the very poor own la nd or have assets?) 6. What is your history with microfinance? How many years have you participated in microfinance? What was the amount of your first loan? What was the amount of your most recent loan? How did you invest your loan from


60 CRECER? Did you use y any difficulty repaying your loan? Understanding how long an MFI client has participated in microfinance will help us to understand our results. If microfinance is an effective development tool, i t sho uld be expected that those who have participated the longest in microfinance will show the lowest markers for vulnerability. Understanding the use to which the loan was put is extremely important when gauging the effectiveness of a development program. Dis tribution of micro loans is often contingent on a participant agreeing to use the money exclusively for investing in their micro enterprise. However, ma ny MFI participants have been known to use thei r loans for household expenses. Next, it is important to establish the capacity for which the client is able to repay their debt. Difficulty to repay a loan reflects insufficient return on their investment. The data used in this research program provide a snapshot of the state of clients currently enrolled in a microfinance program. CRECER is situated in a country with a long standing, strong presence of microfinance and is therefore a good candidate for research. The analysis utilize s known precedence in the literature to identify common influences on the vulne rability of the participants, and then explore s the extent to which these clients demonstrate these markers for vulnerability. Participation in microfinance should be expected to increase security, and therefore the continued existence of vulnerable states of being could suggest that microfinance has not accomplished its goal of pulling the most vulnerable populations from the cycle of poverty. Furthermore,


61 analysis of ways that participation in microfinanc e increase vulnerability are established by conside ring how the structure of microfinance places priority on debt repayment rather than security enhancement in the lives of MFI participants.


62 CHAPTER IV FINDINGS Demographic The data was collected from 240 individuals. The mean age of the CRECER microfinance participant is around 40 years old A wide range of ages is represented, however, with participants ranging from 17 to 76 The majority of the participants are married with 78.8% of the participants married 6.7% are divorced, 8.8% are widowe d, and 5.7 % are single. The average household has 5 people with 73% of the households having <2 people generating income This means that in general, the financial needs for the whole household rely on the income provided by only a few members. The majority of the participants are not new to microfinance; 45% of the participants have been participating in microfinance over one year and less than three years, 22.5% have been participating for more than three years. The breakdown on the length of t ime in years that the participants have been members of CRECER was as follows: Table 4.1 Length of Participation in Microfinance Membership in CRECER (Years) % of Participants 1 16.3 2 20.0 3 19.2 4 13.3 5 8.8


63 On average, the individuals in the study had a monthly income of Bs. 2,213.64, which translates to about $276.70 a month (based on the dollar boliviano exchange rates in 2007). The distribution of income across participants was not tightly grouped around t his mean, however, and the very poor and less poor are represented in the data set. Figure 4.1 Average Household Income. To get a better understanding of what that average monthly income really represents, however, there are a few more variables to be co nsidered. First, since most of the participants in the CRECER program are married and part of ahousehold that


64 averages 5 members, it is helpful to clarify income down to the level of per person income. To accomplish this, total household income is divided by the number of people USD. Those that make $1/day per person or less can be classifie those who make over partici pants were classified as making < $1 per person/day and 57.1% made from $1 $2 (the remaining 17.5% reported income over $2 per person/day). Figure 4.2 Categories of Poverty Overwhelmingly, participants of CRECER work within the informal market. Microfinance tools are designed to encourage microenterprise, so it is to be expected


65 that those being studied would participate in their own business It was reported that over the last year, 95.4% of the participants had worked in their own business. Fewer than 5% of the women worked for wages ; 95.8% did not earn a salary in the last year. This same percentage of people during the last year reported w orking in their own business. Given that almost all of the participants reported owning their own business and not earning another supplemental salary, we are more closely able to understand any positive impact the microenterprise had on their vulnerabilit y levels. True, these women are part of a household with variable additional sources of income from other members that can impact their vulnerability, but if the household remains vulnerable despite the participation in microfinance, it can be argued that this participation was not sufficiently strong enough for the exodus of poverty. If the result of investing in a microenterprise is strong enough to increase security, then further analysis of food security, assets ( etc. ) should support this expected outcome. Assets Assets reflect not only potential tools and resources of the participant, but also the buying power of a microfinance client If a participant is currently able (or has in the past been able) to purchase land or a car it tells us something about their financial health. Land their own homes with 62.9% of the participants reporting ownership of their home, 10% rent their home, 7.1% are caretakers of a home, 7.1% share their home with someone, 2.1% report an antichretic relationship with a landowner (that is, a contract wherein the


66 debtor pledges land to a credi tor allowing the use of the property in lieu of interest on a loan) and 10.8% have another arrangement. The homes are modest, and 46.3% reported that their homes had dirt flooring inside and 96.3% had metal roofs ; 65.4% of the participants own land on whi ch they can plant food. Over half of the participants said that they received a benefit from the land, although overall this was reported to be a non financial benefit reaped. Personal belongings supplement the understanding of assets. The majority of the reported using a landline. Gas stoves were overwhelmingly the most common in households (86.7%). Very few households had any heating; 96.3% reported to having no sources of heat in their homes. Almost all homes (96.3%) ha ve electric lighting. Around half of the clients own a bicycle but 89.2% said they were not a member of CRECER when this was acquired. Only 8% of the clients own a car and 97.1% said it was not acquired durin g their participation in CRECER. Everyone owned a mattress or cot but 86.3% said it was acquired when they were not members of CRECER. Infrastructure dictates a great deal of the quality of life for a country. The participants were largely urban with 64.6% of the participants living in an urban area. The poor in rural areas may find that their access to basic utilities are limited by either their existence in that region or their own capacity to access these re sources; the poor in urban areas may be more limited by financial restraints or the part of the city that they inhabit. Access to water is an important part of hygiene and food preparation.


67 Almost 70% of the participants had a faucet inside their home for water and 27.1% of homes had an indoor toilet in their home and another 15% had access to a toilet in the community; thirty nine percent dug a hole or utilized the surrounding countryside. Insufficient plumbing and septic disposal can be a health hazard an d human waste is often a carrier of disease. Cooking is primarily done with the use of gas (86.7% of participants). Overwhelmingly (96%), there is no heat in their homes although the same percentage of people did have electricity for light. Overall, while electricity is present and access to clean water is the general rule, there are still deficiencies in infrastructure that pose a risk to the health and wellbeing of the participants. Education Low levels of education and illiteracy are often found in the life history of a very poor person (Ledgerwood 1999:37). Therefore, if the majority of microfinance clients are likely to have little education in their past, it can be expected that the microenterprises that they design will reflect this aspect of their p ersonal history. This is to say that it is likely that a m icrofinance entrepreneur is restricted to creating an enterprise within the informal economy, with unskilled labor being prevalent. This trend towards selecting within the realm of previous experien ce is demonstrated in the data: 41.3% of participants selected their business because it is in a field that they have previous experience. Education provides for more opportunities and choice in vocation to be available in the future. Although it has been demonstrated that the majority of the poor do not live hand to mouth (Collins 2009 :3 ), income fluctuation can have a


68 decision on schooling depends on current co sts weighed against expected future benefits (Maldonado and Gonzales Vega 2008:2246). Furthermore, the decision is made for each child in the family one child may be enrolled in school if the expected benefits outweigh the current value of them working for the family. Each person must be placed in a role that maximizes the benefit of the entire family. Only 4% of the participants reported that one or more child from the ages of 11 17 had missed school to help with the family business. Of those who made > $2/day, not a single client reported to keeping children out of school to help with the family business. This illustrates any number of things: that education is perceived valuable enough that priority is given to keeping children in school, that the help that children may provide the family does not outweigh the benefit of them receiving education, etc. Without outside data to illustrate the rates that children attend in families who do not participate in microfinance, it is difficult to say any positive i mpact that MFI participatio n has had on these households. A lack of education can restrict the marketable skills avai lable to a poor person and can narrow career options When asked what grade level the participants of the study had achieved, 17.9% had n ot attended school at all, only one had achieved a 76.7% said they could read a newspaper, and 68.8% reported that they could write someone a letter. The restricted tim e spent in school was surely limiting to their skills, however, and although basic literacy was held by of the participants, the lack of completion in primary and secondary schools is significant.


69 Figure 4.3 Educational Attainment It is again helpful to consider what educational levels have been attained within each income group as an indicator of the potential link between the value of education and the potential positive impact on income and earnings. Over 45% of those who make >$ 2/day have achieved the highest educational attainment category, whereas only 18% of the lowest income bracket has achieved a similar feat. The majority of the most poor have only completed from 4 th 6 th grade; almost half have only completed 3 rd grade and below. The less poor do not have a close grouping around any particular educational


70 level achievement. Almost half have completed 3 rd grade or lower as their highest level of education achieved, 19% from 4 6 grade and the remaining 32% achieved 7 th and above. Those that make >$2/day show that about half have achieved some grade level below 6 th grade. Overall, those that make >$2/day do show the strongest presence in those that achieved >7 th grade completion and there is a steady growth in educationa l completion from the lowest income to the highest. informal economy and experiences uneven income that can make paying for school difficult. Microfinance can be utilized as one of many financial tools to smooth out an uneven income and thereby promote the goal of keeping kids in school. Small loans are also a coping mechanism in the face of financial emergencies that help protect the poor from losing all their assets during times of crisis. Education encou rages human capital formation, promotes gender equality and has implications in economic betterment. Education also influences birth rates which tie directly into many health goals of the United Nations. Illustrative of this concept of the poverty cycle, relationship between hunger and learning. Surviving hunger has lasting implications on restrictions of poverty on one s access to food.


71 Food Security addressing hunger. A vicious cycle can be created: hungry children become damaged adults with limited opportunities and capacities, wh o end up having hungry children of their own. But this cycle can also be reversed, with good nutrition and enhanced learning reinforcing each other through generations and leading to long term Where the re is poverty, there is likely food insecurity and the CRECER clients were no exception. Questions collected during this study illustrated that there was emotional stress as well as physical repercussions to their vulnerability as 62.8% of the participants reported anxiety that there would not be e nough money f or food for their family. Around half of the participants reported to not having enough to eat; this was reported to either happen sometimes or rarely 50.4% of the time. In an effort to conserve food resources, 44.4% of the participants reported to having served another was reported to happen either sometimes or rarely 43.2% of the time. This same percentage of participants reported to having eaten less than they should because of a lack of funds to buy food. Microfinance loans are distributed to encourage the exodus from poverty; such high rates of f ood insecurity suggest high rates of vulnerability and a lack of sufficient financial security. Analysis of the association between food insecurity and


72 association suggests that the poorest of the poor are placed in a position of greater vulnerability. Food insecurity fundamentally represents vulnerability in the lives of the participants. Savings Given the question of savings, it was an almost 50/50 split on who vol untarily held personal savings; 56.7% of the participants reported saving. The average amount saved (among those who did save) was Bs. 2,479.11 or $ 309.88, which is about one month of the average income of the participant. About 30% of the participants ha d less than Bs. 500 ($62.50) on savings reserve. When asked if personal savings had changed over the last year, 43.7% reported a positive change to their savings due to profit from business and 26.8% reported insufficient profits from business or that some cost of living (medical, education etc. ) negatively impacted their savings. The remaining individuals who saved reported other reasons why their savings stayed the same or changed little (for example, a change in the exchange rate from Boliviano to dolla r, or that they simply did not add to or remove significant amounts of their savings). In fact, when questioned about their personal savings over the last year, 25.4% reported that their savings mostly stayed the same. Access to savings should be expected to give the poor agency to address vulnerability. Instead of debt which can cripple or hamper financial growth, they will have a resource to complement and strengthen their ability to smooth their incomes. Further research must be conducted to better under stand the patterns of consumption and saving in the very poor in order to understand any


73 differences in the most vulnerable populations versus the less poor which will highlight what tools are the most valuable. To understand the value of savings to the pa rticipants, it is informative to consider a few avenues of exploration beyond the balance in their savings account. To begin, it is helpful to consider if the participants have saved beyond what they are compelled to save as a condition of th eir microfinan ce participation. To understand the value of savings, analysis was conducted to see if the participants reported to having a larger amount of savings than what they were compelled to save; as part of participation in CRECER, participants are required to sa ve an amount equivalent to 10% of the principal of their loan. Over half (56.7%) of the participants reported t o saving outside of their compulsory savings accounts with CRECER. Next, it is important to consider what differences (if any) income level has on saving: do the wealthier clients save more? Across the income scale, the majority of people saved $2 /day income bracket to those below $1/day and those between $1 and $2/day shows a significant difference (F ratio= 2.721, p=0.70) A Post Hoc Test demonstrates individuals who make >$2/day save significantly more than the other groups but there is no difference between the very poor (<$1/day) and less poor (between $1 and $2/day).


74 Use and Repayment of Loan The average first l oan amount was $114.95 (around Bs. 919.58); the average amount for the most recent loan had g rown to an average of $278.12 (Bs. 2225.00). The average loan payment was around $38.75 ( Bs. 310.03 ) about 14% of the average monthly household income. A third of the participants have other loans besides the loans from CRECER. When asked to what purpose the loan money was put, 44.2% of the participants stated that they had used the loan money for commerce/business, 19.2% said it was used for manufacturing, 17.9% said agricultural use, 5.4% said service centered investment and 6. the types of microenterprises that were started with the use of the loan. Those few 6.7% that reported using the loan for other reasons offer particularly interesting insight 91% of those report ing to use the money for other uses than business related purposes instead reported use that was either directly personal or an overlap between business and personal use. In other words, instead of investing the loan directly into a microenterprise, the lo an was instead used for a personal use, or a business use that would also directly benefit the household. What is interesting to note is that there is often a blurry line between the financial records of the microenterprise and the household itself, sugges ting that the family does not ne cessarily differentiate between their own personal income and that of the business profits. This is typical of an IGA which generally utilizes profits directly in the household instead of direct reinvestment into the microen terprise (Allen 2008:54). In fact, 90.8% of the clients did not pay themselves a salary from their business profits, suggesting a lack of defined transmission


75 from business profits to household income. For instance some participants reported using the loa n to buy a car or boat; while their business may involve the use of such a piece of equipment it can readily be seen how the ownership of such a vehicle could be used for personal reasons as well. Another example is the purchase of livestock; while certain livestock provide material benefit for a business, it can also be seen as a direct benefit to a family to own such an asset. This is not to say that it is a negative impact of microfinance that people are using their loans for personal benefit (and not, a s intended, to use solely as an investment into a microenterprise) but rather illustrates a disconnect between the goals of microfinance and the way that this financial tools is used in the daily lives of the MFI client. Clearly, a microenterprise is run a t such a scale that it makes sense why household assets and business assets are not clearly defined as separate entities in a financial portfolio. It has been illustrated that the very poor who practice income generating activities to support the household money and assets are shifted and used where needed to compensate for income fluctuations ( Collins et al. 2009:28 ) What should become a more defined question in the microfinance world is whether a loan is the most appropriate tool for a very poor family. The majority of participants did report to using their loan for commercial purposes but when an enterprise is so intimately associated with the household financial portfolio, can any delineation between the two really exist ? I t has been demonstrated that there can be negative consequence s to those who participate in MFIs and who sometimes find themselves in worse financial positions than before they used their loans; virtually all the women have borrowed from family members to make their loan payments and all


76 but the highest income group (>$2/day) have insufficient savings to compensate for occasional decreases in income that could be used for repayment (Brett 2006:12). Given material and production costs it was seen that nearly none of the CRECER clients m ake enou gh money to make their payments and instead are forced to rely on social capital to borrow from others, eat less food or cheaper types of food (sometimes to the detriment of the nutritional value) or find additional forms of work to complement thei r household income (Brett 2006:15). Given the ways that loans are used, the lack of net income growth and the additional risk that debt places on households, it can be argued that microcredit does not diminish vulnerability it may even add to it In this s tudy, t he majority of participants did not report having had times when ; a round 20% of the participants reported that there have been occasions when they do not have sufficient funds to make their loan payments. Statistical ana lysis found no significant relationship between the income level of the participant and their ability to repay their loan. Repayment is not a complete indicator of the financial security of a participant; it is a reflection of the priority a participant pl aces on repaying their loan. To further support this, it is helpful to understand what those who experience hardship in this area do to fill in the financial gap when they are unable to repay their debt. Most frequently, the participants reported to borrow ing money from a friend or family member to make their payments when they fell behind. Infrequent alternatives offered were borrowing another loan from another bank, leaving the lending group, using money from savings, or taking money from a money lender.


77 Of particular interest is the fact that the capacity to repay their loan is not positively affected by the length of participation in microfinance. The purpose of microfinance participation is to build sustainable wealth and generate income: why are there not fewer participants reporting to not having the money to repay their debt over time ? Why do other indications of vulnerability such as food insecurity remain present at such high rates? rated and consistent relationship between one participated in microfinance. Table 4.3 Length of Microfinance Participation and Loan Repayment Number of Years of Participation in Microfinance % of Clients Reporting Difficulty Repayin g Loan 1 28.2 2 16.7 3 26.1 4 21.9 5 14.3 So, while there is a drop from the first year of participation in microfinance to the fifth year, it is not a consistent decrease and is difficult to directly tie to participation in microfinance. At the least, it seems that there are other influences in the financial lives of the participants that dictate this capacity to effectively shoulder the burden of debt. Overall, the clients did invest their loans into a microenterprise and were dutiful in repaying their loan. that some participants in all income groups have trouble repaying their loans. Income does not dictate repayment frequency.


78 CHAPTER V DISCUSSION Does participation in microfinance lessen the levels of vulnerability in the lives of the participants? The microfinance clients of this research p roject exist within a state of structural vulnerability. Given the historical context within which CRECER was developed, an emphasis on sustainable business practices has led to an embrace of the financial systems approach and a focus on the success of the institution rather than on the impact of the program on the participants. Repayment of loans and thereby the health and wellbeing of the microfinance institution is more highly prioritized than the success and wellbeing of the microfinance participant. A main assumption of microfinance is that all people want to become (or, at the very least can benefit from being) a small business owner: given working capital to start a business, a person can become self sufficient and support themselves and their famil ies. There are a few fundamental problems with this assumption. First, many of those in poverty have limited skills, and have had little education to equip them to eco nomy (Brett 2006, Collins et al. 2009:35). Furthermore, niche markets are easily saturated, and breed high competition that often is not conducive to high profit margins or rapid business growth required to repay a microfinance loan (Brett 2006:14). It ca n be seen that what the poor often require most is a method to smooth their fluctuating


79 income (Collins et al. 2009:25); the informal economy often creates financial feast/famine cycles that can easily have huge negative impacts on an individual or family unit. Finally, providing financial tools without addressing other issues like health or education that are imperative for a person to be a successful business owner is not a holistic development tool to address poverty holistically or effectively for the i ndividual participant. These data do not provide a comparison across time to allow for measured change in their vulnerability levels before and after participating in microfinance. The data do provide a snapshot of the status of current microfinance clien ts, and allows for analysis of the security of individuals currently investing their loan into a microenterprise. This research analyzed how vulnerable the clients are through analysis of their assets, educational attainment, food security, debt burden, sa vings levels and the capacity to repay their loans. These specific aspects have been shown in the literature to influence their capacity to break from the cycle of poverty. The clients demonstrate several key indicators that are associated with vulnerabili ty while they are currently participating in a microfinance program. The background of the client has generally been shown to be that of a low educational achievement level with restricted options for their own business. Very few of the participants had ov er an eighth grade education. Educational attainment is not expected to improve during participation in microfinance, but it is shown to influence career opportunities. Food security is an immediate need and should reflect a change in income as soon as mor e income exists in the household. Chronic malnutrition has the potential to impact the health and physical


80 capacities of the microentrepreneur. Over half of the participants demonstrated food insecurity. There is a very high incidence of anxiety that there will not be enough food for money and half of the participants reported not having enough to eat. Food insecurity represents a pivotal measure of vulnerability because it is directly tied to the health and wealth of the client. Chronic hunger has serious implications on long term health, is a daily need that is easily impacted by income fluctuations and reflects the financial health of the participant by its consistent demand on the household. The capacity to make large purchases, the accumulation of asset s (and thereby, an increase in consumption) could be seen if a net income growth has occurred. Participation in microfinance does not seem to encourage the purchase of new assets. Microfinance clients continue to display indicators for vulnerability despi te their current investments into a microenterprise. Throughout the study and across all income levels and regardless of how frequent a family reported to having to skip meals or go hungry there was one constant. The high rates of repayment existed in almo st all of the microfinance clients. Very few participants reported not having enough money to make their loan payments; this is in stark contrast to the rates of food insecurity. The ability to make their loan payments but inability to buy enough food su ggests a priority is being placed on loan repayment over that of their own wellbeing and health. Vulnerability through food insecurity is not being discouraged through participation in microfinance the structural demands of loan repayment prioritizes funds be used to repay debt in


81 vulnerable groups that have not achieved the basic level security required to buy food. What goal has been achieved if debt repayment is prioritized over household security? Using debt to pay off debt is but another vicious cycle of poverty. Relying on family, friends and money lenders are all existing sources that the poor use outside of the microfinance world ( Collins et al. 2009:3 ) to piece together their financial portfolio. Without data collected before entering into the CRECE R program to compare, it is difficult to argue explicitly that there has been no decrease in the use of these financial sources. However, their continued use does signify that despite the participation of the member of the household in the CRECER program, sufficient financial stability has not yet been achieved to leave all m icroentrepreneurs free from the need to resort to debt collectors or borrowing from other sources to make ends meet. If 20% of t he participants still report resorting to external sources of money to repay their loans, then insufficient microenterprise profit to realize a net income growth has been demonstrated. Self sufficiency is the goal of microfinance, and so further work must be done to close the gap between personal income an d the financial demands that these households encounter. Furthermore, it is important to differentiate between the individual level success of a participant and that of the institution. Often, high repayment rates are given as proof of the success of the institution of microfinance ( Collins et al. 2009:206) Theoretically, i f the clients are repaying their loans, then the program has benefited their household enough that they have the financial capacity to make these payments. However, it has been further d emonstrated that institutional level success does not


82 necessarily represent the success of the microfinance clients (Brett 2006). Qualitative research done with the CRECER organization illustrated the incidence of individuals resorting to eating less food, borrowing from others, or diverting money from other areas in the household towards the payment, rather than using money made from any profit in their microenterprise (Brett 2006: 12,15) Given the high priority repayment is given, it is important to recognize that repayment alone is not an indicator of self sufficiency and security in the financial realm and other markers of vulnerability should complement the data. Debt is a risk; the poor require tools to encourage security and n ot vulnerability. A debt burden can be a higher risk than the expected benefit; there is not guarantee that a microenterprise will be successful enough to be profitable (Allen 2008, Bateman 2010, Brett 2006). These microfinance clients demonstrate several important factors of vulnerability. The most vulnerable populations are in a position that is least able to benefit from credit. The poorest tend to seek to maximize profit and piece together income instead of depending on a single established enterprise ( Allen 2008, Collins et al. 2009, Morduch 2005). Continued indicators of vulnerability and poverty despite microfinance participation illustrate that microenterprise investment may not be a powerful enough force to ensure personal security. CRECER utilizes a village banking system which relies on social pressure to encourage repayment of debt. Mutual responsibility of loans creates a system of both internal and external pressure to repay a microloan (Ledgerwood 1999:72). Personal selection of the members of the group causes clients to select individuals they trust or


83 know well; an internal desire to not let anyone down in a close knit group is a strong internal mechanism to encourage repayment. Fear of damage to social capital or retribution can be a strong external force to emphasize repayment of loans over other financial demands on a household. Social pressure helps ensure repayment of loans at all costs. The cumulative pressure to repay causes participants to prioritize using their money to repay debt. M icrofinance creates and justifies the hierarchy that places the success and wellbeing of an MFI client subordinate to that of the institution. Given the known structures of microfinance that, by virtue of emphasizing the health of the institution over the impact on the financial life of the client, have transferred the risk of participation from the institution to the client, structural vulnerability is reinforced in an already vulnerable population. The potential benefit of debt has not overcome the risk w hen the participants of microfinance remain vulnerable. A sserting that it is the responsibility of an individual to overcome all obstacles that might exist for them to succeed and not acknowledg ing the overwhelming weight that many of these structures plac e on individuals that keep them from doing so is an incomplete picture and a non sustainable approach to development and promotion of security Microfinance has not achieved sufficient effectiveness to encourage an exodus from poverty and vulnerable state s in the participants of CRECER. A restructuring of microfinance should occur to emphasize financial tools and development programs that have been proven in the past to decrease vulnerability more effectively than debt.


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