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Workshop Session: Depth of Outreach: The New U.S. Law Requiring Cost-Effective Measurement Tools

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Workshop Session: Depth of Outreach: The New U.S. Law Requiring Cost-Effective Measurement Tools

Remarks by Chris Dunford

Thank you, Anton. I'll take a different tack at this issue than Joanne and Stacey have taken. Anticipating that the discussion that we have that follows this will get into issues of incentives, the real purpose of having poverty measurement tools is to provide for the microenterprise development industry, by which I'm referring to not only microfinance but also business development services. What would be the incentives that would be provided by poverty measurement tools being used by practitioners on a regular basis? But before we get into a discussion about that I want to look at incentives from a different angle and that is in the absence of poverty measurement. The microenterprise development industry, and I'll just call it MED, remember that it includes microfinance and business development services, the MED industry has three basic goals, outreach to the poor, including the very poor, scale of outreach and sustainability. And to be a bit more specific about that, the idea of sustainability is that MED-support services are run as viable businesses, that they become financially self-sufficient, self-sustaining. The sustainability goal makes it more attractive for service providers to serve primarily the less poor, the better off entrepreneurs because they're generally easier to reach and to work with and when they borrow they usually borrow larger loans. And so from the MED-support service provider's point of view they are more profitable to serve then the poor, especially the poorest of entrepreneurs.

Now when the service sustainability goal is emphasized more then the poverty outreach goal or even the scale of [outreach] goal, there naturally develops a fundamental bias against serving poorer entrepreneurs. In the MED industry since the early 1990's there has been a greater emphasis on sustainability than on poverty outreach and there are good reasons for that, a lot of it addressing issues in the past where there wasn't enough attention to sustainability. But there is now, has been for the past decade or more an emphasis on sustainability, but let's not jump to the conclusion that the donors who drive the MED industry have explicit policies to emphasize sustainability over poverty outreach. I don't think we even have to go there. There's a simpler explanation.

Donors are requiring grantees to report on their sustainability and their scale but in effect donors are not requiring reporting on poverty outreach. The key term is, "in effect." Donors widely accept the definition of financial sustainability that's fairly precise. It's broadly applicable around the world and relatively easy for grantees to measure against, especially given the clear guidance and capacity building support that some donors at least are providing for that purpose. Now in contrast there's much dispute, as Stacey's already referred to, both between and within donor organizations and others, academics, about the definition of poverty. This is a very squishy concept and, and a lot of people mean something quite different then other people when they use the word poverty. And the few widely accepted definitions are based on income and expenditure, which can be measured as Stacey, pointed out only by methods that are beyond the time, expertise, and the money available to most MED service providers.

Now to solve this problem, as Joanne said, loan size has been used as the proxy for poverty status of microfinance. But this loan size proxy can't help us know about the poverty status of people who save or use business development services but don't borrow. Moreover a loan size misleads us about the poverty of a borrower. I want to explain that. Clearly a very poor person is very unlikely to take a one thousand dollar loan. On the other hand even a better off or non-poor person is happy to take a one hundred dollar loan when larger loans are unavailable or come with unacceptable terms and conditions. So what this means is that the range of poverty levels of people borrowing less then three hundred dollars is very likely to cover a broad spectrum of the poor and the non-poor. And therefore average loan size tells us much more about the MFI, the microfinance institution offering the loan then it does about the people taking them. An MFI can appear to be serving the poorer entrepreneurs even when they are not. In effect they are not measuring their poverty outreach and they may even be misreporting.

Now this is not a new problem, it's not confined to the MED industry. We managers tend to manage toward what we measure. This is a corollary of, of the aphorism that Joanne quoted for me before, she said that we tend to measure what we value but the reverse of that is we value what we measure. And as managers we manage toward what we measure. And in the MED industry we tend to manage towards sustainability and scale and the distortion that results is a bias against outreach to the poorer entrepreneurs. We know sustainability when we see it because we've got the training and the tools to see it. When it comes to the true differences in poverty of MED service clients most of us are blind.

Now, a few service providers have used more direct methods then loan size to get a better idea of the poverty profile of their client. They wanted to verify their claim that they are serving the poorer entrepreneurs. And some got a shock from the results and their responses to this shock can reflect the power of good poverty measurement as an incentive to change ways of doing business. Freedom from Hunger found that clients had the same distribution of poverty status as the general population of the communities served. Now clearly anyone in the community could and did join the program regardless of how poor or non-poor they were. There was no bias for or against the poor. This changed the way Freedom from Hunger talked about its poverty outreach and it reinforced the policy to target services to poorer communities. Another example, the Small Enterprise Foundation of South Africa, SEF, found that clients were on average the better off members of the communities being served and so SEF created a new parallel program for the same communities but specially designed to serve only the poorer residents. Third example; some newly transformed commercial MFIs in Bolivia discovered that poorer Bolivians were only a very small percentage of their total clientele. And their response was that they now no longer claim that serving the poorer population is their objective.

Now in all of these cases transparency about the actual poverty outreach provided a powerful incentive to either live up to their stated objectives or to change their objectives to match current reality. And I'll close by saying I think this, this kind of transparency if it were more widespread we would learn a lot more about what it takes to extend poverty outreach and what doesn't [help].

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