microfinance and poverty reduction: is there a trade-off? a case study from rural bangladesh
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Microfinance and PovertyReduction: Is there a Trade-Off? ACase Study from Rural BangladeshM. Nurul I. Shekh aa Centre for International Development , Oslo UniversityCollegePublished online: 28 Jan 2011.
To cite this article: M. Nurul I. Shekh (2006) Microfinance and Poverty Reduction: Is therea Trade-Off? A Case Study from Rural Bangladesh, Forum for Development Studies, 33:2,367-385, DOI: 10.1080/08039410.2006.9666355
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Forum for Development Studies I No. 2-2006
Microfinance and Poverty Reduction: Is there a ~rade-off?
A Case Study from Rural Bangladesh
Abstract During the last three decades, various changes and innovations have taken place within the microfinance sector. The focus has shifted from borrowers' wellbeing to the financial sustainability of the microfinance institutions (MFIs). By using data from the Associa- tion for Social Advancement (ASA), a minimalist credit organisation, the article argues that MFIs wanting to reach financial sustainability often provide low quality services and exclude the poorest of the poor from the programmes. MFIs that want to reach financial sustainability tend to provide loans to less poor, middle-class people, as they can accumulate large loans that cany a low default risk. The chances of poor people defaulting on loan repayments often increase with large loans, owing to their limited financial skills and knowledge (about loan investment, for example) and limited repay- ment capacity. The article shows that the current practice and lending methodology of ASA is inflexible and unable to meet the diverse needs of borrowers with various economic endowments. The article recommends that MFIs, including ASA, re-design their lending methodology to make it sensitive to households' initial economic condi- tions in order to serve the poorest of the poor and help reduce poverty.
Keywords: microfinance, poverty reduction, savings, microfinance institutions (MFIs), poorest of the poor, financial sustainability, quality of services, Association for Social Advancement (ASA), case study, rural Bangladesh.
1. Introduction M. Nurul I. Shekh The last 30 years have been the most dynamic period in the history
Associate Professor, of the microfinance sector, which has undergone huge changes. Centre for l nternational Microfinance, providing small-scale savings and credit services, has
Development, become one of the most popular interventions for poverty reduction Oslo University College and women's empowerment in recent times. Its potential for poverty
reduction is commonly perceived as a process through which poor households increase their income and expenditure, and thus their wellbeing. Microfinance is often provided to the economically active poor and people of lower-middle income, both male and female, in
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rural and urban areas, by non-governmental organisations (NGOs) and regulated financial institutions. There are various types of mi- crofinance institutions (MFIs) in the world, providing a wide range of financial services to the poor. There is thus no universal pattern for the organisation of microfinance programmes, which varies between MFIs, and between different countries and regions.
During the 1970s and much of the 1980s, the microfinance sector was mainly dominated by the welfare andlor integrated development approach. Since the early 1990s, the sector has been dominated by market-led approaches. This means that MFIs are expected to operate in a competitive environment and charge high enough interest rates to be financially sustainable. The change of focus towards this financial sustainability approach has pushed the MFIs into introducing and adopting strategies that promote rapid programme expansion and increase the ratio of borrowers to staff (Aghion and Morduch, 2005). In addition, emphasis has been placed on separating microfinance from other development services and cutting back non-financial services to a minimum or axing them completely (Shekh, 2006). Consequently, the overall focus has changed fi-om borrowers' wellbeing to the financial sustainability of the MFIs.
The main purpose of this article is to highlight the current debate about the issue of trade-off between achieving financial sustain- ability and reaching the poorest of the poor by the MFIs. The rest of the article is divided into five sections. Section 2 provides a brief overview of microfinance and its potential for poverty reduction. Section 3 draws on the debate about trade-off issues in general, and highlights the reason for the changes of focus. Section 4 consists of a case study of the Association for Social Advancement (ASA). The focus is limited to ASA's group formation policy and lending procedures. Section 5 scrutinises the issue of trade-off based on the data' from ASA, and takes a closer look at the consequences of
1 Data were collected using both qualitative and quantitative research methods over a period of six months in the year 2000. A systematic random sampling technique was used to select the research respondents. A survey with a total of 140 respondents and 46 semi-structured interviews was conducted, in addition to 16 key-person interviews. The interviews were held in private settings without any outsider being present. The design of the research tools took into account the socio-economic and cultural conditions under which data were collected. A pre-test of the data collection tools justified whether or not the tools were appropriate. The fieldwork area was visited prior to the actual col- lection of data to establish a rapport with the respondents. Throughout the fieldwork, observations were made to cross-check the collected data. Focus group discussions were also arranged at the beginning of the fieldwork to ensure a shared understanding
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Microfinance and Poverty Reduction - Is there a Trade-Off? 369
ASA's overemphasis on achieving financial sustainability and the possibility of reaching the poorest. This section also examines the reasons why and how ASA excludes the poorest of the poor from the programme. Finally, Section 6 draws conclusions and presents policy implications.
2. Microfinance and Poverty Reduction: An Overview Financial constraints have always been one of the main impediments for poor people worldwide seeking to increase their productivity and reduce poverty. Various attempts have been made by differ- ent actors to provide financial services to poor and marginalised groups. One such attempt was made by state-owned banks in many developing countries during the 1960s and much of the 1970s. The assumption was that providing subsidised credit to the poor would increase their agricultural production, and thereby their income, and would thus reduce rural poverty. However, research has shown that subsidised formal credit often did not meet expectations, as large and rich farmers were the main beneficiaries of these credit programmes. The reason for this was that before making loans the banks require collateral, which only large and rich farmers could provide (Gonzales-Vega 1984). Thus, a few privileged borrowers increased their income through subsidised formal credit, and the demand for credit by the poor remained unmet.
Besides the requirement of collateral, there are many other reasons why state-owned banks (mainstream financial institu- tions) are unable to serve the needs of the poor. Firstly, banks must process loans at a cost that can be covered by interest charges, and administration of small loans is expensive for banks. Secondly, the banks must have confidence in the borrower's intention and ability to repay when they disburse loans. The practices that most banks use to satisfy themselves about the quality of loans are expensive. They involve credit checks to gain information about the borrower's
of the project and to establish common perceptions on the issue of microfinance, gender and poverty reduction. The Association for Social Advancement (ASA), Birisiri branch, situated in Netrokona, a northern district of Bangladesh, was chosen as the case study organisation for this research. A re-visit was made to the fieldwork area in February 2006 to update and refresh data collected in 2000. In 2006, a total of 12 semi-structured interviews with the borrowers, five semi-structured interviews with ASA officials and eight key person interviews were conducted, in addition to a focus group discussion.
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financial history, and project appraisal to assess the borrower's busi- ness prospects, in addition to formal collateral (Otero and Rhyne, 1994). These factors have contributed to the failure of state-owned banks to provide necessary financial services to the poor.
It is often argued that, as they do not have collateral, the poor worldwide do not have access to sustainable financial services. The constraints of collateral were overcome under microfinance programmes through the introduction of a group-based lending methodology. However, the group lending practices are not univer- sal, and vary between different MFIs/NGOs in various countries. Group sizes can also vary, and can range between three and 25 members. Members of a group are guarantors for each other and, in this way, MFIs can transfer the default risk of a loan to all group members. The joint liability of group pressure, monitoring and auditing are assumed to ensure higher loan repayment rates, and thus enhance financial sustainability for the MFIs (Rahman, 1999; Wright, 2000). Group lending approaches can enable MFIs to reach many people. It is thus beneficial for the MFIs to lend through groups, as this reduces the operational costs per loan (Otero and Rhyne, 1994; Von Pischke, 1996). Under this approach, the MFIs can maximise revenues and minimise risk for the programme by increasing loan interest rates and introducing voluntary savings, shares, and loan insurance (Aghion and Morduch, 2005). However, recent research has shown that the joint liability of group lending is often enforced in the starting phase of an MFI operation, and that the extent of joint liability diminishes as the group matures and members develop individual credit histories with the MFI (Sharif, 1997). Furthermore, group lending and joint liability can also work against the interests of the poorest, as groups become averse to the risk of including people with more difficulties than themselves. In a difficult situation, group members do not want to take on the burdens of others (Shekh, 2003).
The 1980s and 1990s witnessed a growth in the number of MFIs, and of NGOs providing microfinance services, alongside increased interest in this approach on the part of international aid donors. There are several reasons for microfinance being one of the most popular tools for poverty reduction. Microfinance can have the potential to promote investment in assets by providing additional purchasing power, permitting individuals or households to exceed the limitation of their current economic situations (Shekh, 2006). It can facilitate activities for earning and sustaining a livelihood and enables poor households to manage their economic activities more
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Microfinance and Poverty Reduction - Is there a Trade-Off? 371
efficiently. It can also help to protect households against sudden falls in income and increase their crisis-coping capacity (Shekh, 2003). Furthermore, a group lending approach to microfinance can help the poor to build social capital and improve their quality of life as they often participate in solidarity groups (build networks) and establish a credit history and trust (Aghion and Morduch, 2005). In particular, household members - especially women - may experience a rise in self-esteem, dignity and a sense of empowerment through opportu- nities provided by access to financial services (Hashemi, 1997).
It is estimated that by the end of 2005, around 100 million people (clients) were being reached worldwide by various types of MFIs, of whom 84 per cent were women. Nevertheless, there is evidence that although 'credit-only' microfinance programme may reach many poor people, it does not reach the poorest (Hulme and Mos- ley, 1996, 1997; Shekh, 2006). It can, however, be argued that the poorest of the poor, who are not economically active, should not be served by the MFIs, as they can be too risky for MFIs' portfolios, and that other development interventions should be used, instead of microfinance, to serve them (Gulli, 1998).
It is often argued (though many authors differ), that microfi- nance needs to be better integrated with other development andlor non-financial services in order to have a positive impact on poverty reduction. There is also some evidence that MFIs offering 'credit- only' services are not as efficient as institutions that also help bor- rowers to overcome the psychological burden of poverty (Bhatt, 1998). Thus it is argued that microfinance programmes offering 'credit-plus' (or integrated development) services can be highly effective in reaching the poorest, and helping borrowers improve their economic and social wellbeing (Christen et al., 1995; Shekh, 2003). In order to make significant progress in reducing poverty, the poor need a wide range of development services, which most MFIs are currently unable to provide in a cost-efficient manner.
3. The Twin Objectives of Microfinance: Achieving Financial Sustainability and Reaching the Poorest - Reflections on Issues of Trade-off The need for MFIs to be financially sustainable has become a highly contested issue within the international debate on microfinance, especially in relation to the ability of microfinance services to address poverty and women's empowerment (Shekh, 2003). The current financial sustainability approach, according to Ledgerwood
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(1999), is characterised by the following: (a) subsidised credit un- dermines development; (b) poor people can pay interest rates high enough to cover transaction costs; (c) the goal of sustainability (cost recovery and eventually profit) is the key not only to institutional performance in lending, but also to the lending institution's being more focused and efficient; (d) because loan sizes to poor people are small, MFIs must achieve sufficient scale of outreach2 if they are to become sustainable; and (e) measurable enterprise growth, as well as impacts on poverty, cannot be demonstrated easily or accurately: outreach and repayment rates can be proxies for impact.
The advocates of this shift to operational and financial sustain- ability3 argue that financial sustainability is a prerequisite for mak- ing financial services widely available for microenterprises (Rhyne and Otero, 1994). Yet, debate continues on whether it is feasible for most MFIs to achieve the desired level of financial sustainability (Morduch, 2004). This is because of the assumption that financially sustainable programmes are likely to contribute to income expan- sion and poverty reduction (Yaron and Piperk, 1997). Other authors warn that more than 80 per cent of the world's population (a large majority of whom are poor) do not have access to financial services from formal institutions, neither for credit nor savings (Rosenberg, 1994; Christen et al., 1995). Since government sources and donor funds can only meet a tiny fraction of global microfinance demand, financial intermediation by sustainable institutions is the only way that financial services can be supplied to lower-income people worldwide (Robinson, 1998). These arguments are often praised by donors and microfinance advocates of the 'credit-only', minimalist approach of microfinance. This is because the integrated approach to microfinance is not cost-efficient, and often has to depend on donor support.
Achieving both profitability and strong social performance is the ultimate promise of microfinance (Morduch, 2004). Despite
2 Programme outreach is defined as the ability 'to provide large numbers of poor people (including both the very poor and women) access to quality financial services' (Christen et al., 1995: 2). There are five dimensions of outreach, according to Gulli (1998): depth of outreach (how poor clients are), scale of outreach (how many people are reached), breadth of outreach (in which economic sectors they are engaged), geographical outreach (where they live), and quality of outreach (quality of service provided). Operational sustainability means that what the MFI achieved by internally generated income (from interest and fees) is equal to or greater than the expenses of operating the programmes. A financially sustainable credit operation must cover the following through fees and interest charges: operating costs (including loan loss reserves), cost of funds, and iflation. To achieve genuine commercial viability, it must also show a profit (Rhyne and Otero, 1994: 17)
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Microfinance and Poverty Reduction - Is there a Trade-Off? 373
optimism in some quarters, evidence is piling up that combining institutional and social goals is extremely difficult. There is a com- mon assumption that the more MFIs aim to gain profit and financial sustainability, the less will be their effect on poverty reduction (Hulme and Mosley, 1997; Shekh, 2003). This means that there is a trade-ofbetween achievingjinancial sustainability and reaching thepoorest with qualityjinancial services. However, some authors believe that financially sustainable institutions can reach many poor people, and that there is no trade-off between reaching the poor with credit and achieving financial sustainability (Christen et al., 1995). The issue of trade-off, however, is not so clear-cut, as numerous studies suggest contradictory findings. The rest of this article will concentrate on examining the issue of trade-off by using a case study of the ASA in rural Bangladesh.
4. Brief Presentation of Case Study Organisation - ASA and its Microfinance Operation ASAwas established in 1978, and started its development activities to raise the standard of living of poor people in Bangladesh. In its initial phase, it provided a range of services to its members and bor- rowers, such as skills training, awareness raising, savings and credit. In 1991, ASKS leadership decided to focus solely on economic empowerment, and chose microfinance as the core activity of the organisation. Once it started to focus on microfinance (savings and credit) services only, it expanded its programme outreach rapidly all over Bangladesh. By 2005, ASA covered all of the country's 64 districts. The numbers of active members have also increased. In 1992, for example, ASA had 140,000 active members, and by the end of 2005 the number stood at more than five million. As of 2005, ASA had 2,373 branch offices, and a total of 11,307 branch level credit officers (COs). Every ASAbranch office has a disburse- ment target for each fiscal year. The branch level credit officials are responsible for loan disbursement, instalments collection, savings management, and maintaining all other accountancy necessary at branch level.
ASA operates a minimalist or 'credit-only' approach, and does not provide any non-financial services to its borrowers. It has there- by been one of the most cost-effective programmes in Bangladesh. The recovery rate of its loans is more than 99 per cent, the highest among all the MFIs operating the same type of programme in the country. ASA charges an interest rate of 15 per cent flat rate, which
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makes the effective interest rate about 30 per cent for its normal loans. This interest rate is more than four times the interest rate charged by commercial banks in Bangladesh. At the end of 2005, ASA was fully financially sustainable. This is one of the reasons for ASA being able to attract considerable attention from microfinance advocates, practitioners, academics, and donors from all over the world. Currently, ASA has extended its technical cooperation to 14 other countries.
ASA lending: credit distribution procedures ASA is said to practise a group-lending strategy in its credit opera- tion. In reality its practice lies somewhere between group lending and individual lending. Although joint liability is not emphasised among the group members, ASA still distributes credit through groups as this practice helps it to keep operational costs to a mini- mum level, which in turn helps achieve financial sustainability. ASA also lends to better-off (less poor) women and households with a good economic situation, as the fieldwork revealed. When members finish the group formation process and start to obtain loans, then the only function of the group is to be a credit delivery and savings collection unit.
The group has an elected president and a secretary, who in most cases are perceived as more aware, wealthy, educated and power- ful than other members. In theory, participation in weekly group meetings is compulsory, but is not emphasised in practice. During the fieldwork, it was found that very few members were attending these meetings. The group members often sent their weekly savings, loan repayment instalments and passbook4 with other women who were neighbours or members of the same group.
In order to join ASA's microfinance grouplprogramme, the mem- ber has to have less than half an acre of cultivable land. In practice, both landless and asset-less women and men are also in the target group. In theory, the monthly income of the borrower's household should not exceed 2000 taka (1 US$ = 70 taka). Nonetheless, most households targeted by ASA have a higher monthly income. Men and women are not allowed in the same samity (group), and nor are people from the same household. In theory, the groups should
4 All members must have a passbook, provided by ASA. Information about saving, the savings balance, loans, and the loan outstanding balance, together with other loan-related information, is maintained in this passbook.
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Microfinance and Poverty Reduction - Is there a Trade-Off? 375
be homogeneous, consisting of members with similar economic backgrounds from neighbouring households and villages.
The credit distribution procedure of ASA is decentralised at field/branch level, which keeps the cost of operation per loan to the minimum, and is also quite short compared with other MFIs operat- ing in Bangladesh. It takes about three to four weeks to distribute its first loans from the time of group formation. Before members can obtain their first loan, the group members have to meet weekly and deposit savings. The loans are mainly provided for various types of income-generating activities. The first loan is normally 3,000 taka (8,000-1 0,000 taka for a Small Enterprise Development Programme - SEDP), and the upgrading loan amount is normally 1,000-2,000 taka, depending on the borrower's repayment performance and existing economic situation. The loan application process is simple and it takes normally two to three days from the time of the applica- tion to receive the loan. Sometimes the borrowers can also obtain a loan on the day of the application, if the CO has sufficient money to cover the amount required. Often, loans are given in the group centres during or immediately after routine group meetings.
ASA has a standard repayment schedule, meaning that for larger loans there are bigger instalments. Borrowers have to repay the loans in 46 weekly instalments of equal amounts. Loan repayments are tightly monitored by the COs but there is no monitoring and supervision in relation to loan use and investments. Joint liability group/social pressure and tight monitoring are key ASA strategies for keeping up its high repayment performance. ASA also exercises the principle of upgrading loan amounts with every loan cycle, which gives borrowers the hope of continued access to credit. This motivates them to keep up their regular repayments.
Savings mobilisation Soon after the group is formed, group members start to save a specific amount of money (five or 10 taka per week), and attend weekly group meetings. At the time of the fieldwork, the savings scheme operated by ASA required compulsory savings of 10 taka per general member (all women) and 25 taka for SEDP members. Members can save as much as they want on top of the compulsory requirements. They can withdraw their additional savings only three times within a loan cycle, and must maintain a minimum savings balance with ASA, 15 per cent of their outstanding loan amount.
In 1997, in order to increase its capital, ASA attempted to offer
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various flexible savings products to the community, for example an open-access savings account, a contractual savings account, and a term deposit account. Soon after the introduction of flexible savings accounts ASA realised that they were not cost-effective. People who used these accounts deposited and withdrew their money far too often for ASA to build up any real capital which could be mobilised. In addition, the legal framework in Bangladesh does not allow MFIs to mobilise savings from non-members, but they can, however, mobilise savings without any restrictions from members. Consequently, ASA does not provide a wide range of savings services in its current operation.
5. Consequences of ASA's Current Practices of Achieving Financial Sustainability and Reaching the Poorest: Is there a Trade-Off?
Easy access to credit without building capacity: always good for the poor? One of the distinguishing characteristics ofASA is that it normally disburses loans within a short time, with few procedures, after the group is formed. Data from the fieldwork area shows that this was the main reason for borrowers joining the programme (given by 53 per cent of respondents). The need and possibility for loan invest- ment can arise suddenly, and easy access to loans can help the poor to seize the opportunity.
On the other hand, concerns were raised (by 47 per cent of respondents) that the current loan disbursement practice of ASA excludes the poorest of the poor from the programme, and often con- tributes to M h e r impoverishment. Small loans based on borrower savings would have been preferred because of limited capacity to invest the loans. Large loans given to poor borrowers who have neither the knowledge nor the capacity to invest or make use of the loan money for productive purposes could leave them in a worse situation than before. It is important for ASA to get to know its bor- rowers by spending more time during the group formation process if it wants to serve the poorest people. It should also make attempts to stimulate saving capacity before disbursement of large loans. One of the women respondents explains the rationale for this:
I am poor, illiterate, thus have limited capacity to invest my loan money profitably. Through my participation in the samity I do not
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Microfinance and Poverty Reduction - Is there a Trade-Off? 377
learn any new skills, neither does ASAprovide any services that could increase my capacity and self-confidence. Without increased capacity and knowledge, someone might not be able to tackle large amounts of loan. This can be risky and dangerous for a poor household like us (Interview transcript, F-6 1, 16/09/2000).
Providing non-financial services for the rural poor, especially for women in Bangladesh, are as important as providing them with credit and savings services. Non-financial services can intensify the borrowers' investment capacity, which again helps them to max- imise the economic and social benefits of the loans. This process in turn can help the poorest groups to get out of poverty and gain empowerment. One of the key informants commented the following on the importance of non-financial services:
Poor women in Bangladesh face many constraints in their lives in addi- tion to lack offinance. Many microfinance advocates believe that giving women access to credit will include them in economic activities and consequently empower them. In my opinion, if we want to empower women, first we have to eliminate other structural and cultural con- straints that they face in the society. There could also be other factors, for example illiteracy, ignorance and lack of awareness. Poor people's capacity to participate in economic activities to a satisfactory degree cannot be ensured unless there are MFIs andlor other organisations to provide other necessary non-financial services (Interview transcript, K-10, 17/11/2000).
Even though ASA started its activities by targeting the poor and the poorest of the poor, in recent days it has been moving away from providing credit to the poorest and focusing its activities on middle-income and better-off people. The focus on the impact of the services on the lives of the borrowers has declined, as ASA officials do not pay enough attention to the qualitative aspects of change of their borrowers. Furthermore, ASA employs a unified repayment schedule for all its borrowers, regardless of their loan accumula- tion, investment capacity, and the types of activities in which they invest their loans. In Bangladesh the poor often invest their loans in agriculture and related activities, which do not give immediate returns on their investments (Shekh, 2006).
The pressure of regular weekly instalment repayments required by ASA places an additional burden on households lacking regular cash flow. As a result, a notable 63 per cent of respondents in the survey were forced to reduce household food expenditure, which
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resulted in psychological disorders among many family members. This kind of emotional stress is prevalent among the households that did not manage to make a profitable return on their loans (Ahrned et al., 2001), andlor invested loans in an activity that did not provide an immediate return. A significant majority (82 per cent) of the respondents reported that they often do not manage to supply the loan repayment instalments from their loan-invested activities and have to acquire the necessary money from alternative sources. Thus, cash flow problems often lead to extensive informal borrowing (for example, from local moneylenders) to service the regular repayment instalments. Insensitivity to both continuous increase in loan size and insistence on a fixed repayment schedule could put a strain on a poor household's wellbeing (Matin, 1998).
Even though ASA is currently maintaining a very high repay- ment rate for its loans - about 99 per cent - both borrowers and COs maintained that keeping the repayment rates high is becoming a huge challenge. ASA's lending principle is to increase the loan size with every loan cycle, thus making more and more demands on the borrower's household weekly cash income in order to maintain regular instalments. Borrowers increase their loan size in every loan cycle simply because they need extra income and have easy access to a loan. In Rutherford's (2000) terms, these households are 'saving down' as they pay off their loans in weekly instalments. It is possible that many of them have very limited additional capac- ity to 'save up' at the same time, as many of the ASA borrowers reported to have used at least some part of their loans for consump- tion purposes, instead of investing in income-generating activities. Therefore, ASA's current practices can, in some cases, create and maintain poverty for the resource-poor people who have limited loan investment capacity and possibilities.
Savings mobilisation: who benefits? Savings mobilisation is a key feature for the growth and sustainabi- lity of any economy. Savings are as important a service for the poor as credit, and savings are crucial in building sustainable financial institutions (Healey, 1999). Properly devised savings services can encourage a move fiom non-financial savings into financial savings, the advantages of safety and liquidity for the entrepreneurs, and the provision of funds for investment in society. When savings facilities are safe, convenient and ready available, with positive and real returns, this can attract a vast majority of poor people to deposit
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Microfinance and Poverty Reduction - Is there a Trade-off? 379
their savings in MFIs (Robinson, 1998; Rutherford, 2000). MFIs can help stimulate poor people's saving capacity. This procedure could help the poor to build self-esteem and confidence in managing both savings and investments. Savings mobilisation does not only help the poor, but can also help the MFIs to access cheap capital. The focus group respondents from the study area reported the following on the importance of flexible savings schemes:
Our investment capacity in this rural area is limited and is not the same throughout the year. We need a safe, convenient and flexible place to save our money so that we can access it when there is an investment need or other needs arise (Transcript of summarised focus group di- scussion, 26/08/2000).
Even though flexible savings were preferred by the poor, during the fieldwork it was found that ASA does not provide such services to the poor. In 1997 ASA introduced flexible savings services, which offered great advantages and benefits to borrowers (particularly poor women), allowing them to save more whenever they could afford to. However, ASA decided to drop the new accounts in the interest of institutional sustainability, as it is expensive to admi- nistrate small amount of savings (Wright, et al., 2001). Thus, the main reason for not providing flexible savings services to the poor was to keep the operational cost low, and consequently to reach financial sustainability. This was clarified by the Birisiri branch manager. When asked why ASA stopped providing different types of savings services, even when the borrowers appreciated them, the branch manager commented:
We are already overloaded by the pressure of keeping up our high re- payment rates, as the credit market has become competitive. Moreover, introducing and maintaining different savings services would not only be difficult, it would be impossible for us, if we want to maintain the quality of our loan portfolio (Interview transcript, L-3,03/11/2000).
It can easily be argued that a rigid locked-in compulsory savings system can create default traps. This mainly happens in two ways. First, when borrowers have short-term difficulties paying the instal- ments because of illness or other emergencies and cannot withdraw their savings, they usually try to solve the crisis by borrowing from other sources. Such cross-financing can create long-term indebted- ness for the borrowers and eventual default for the MFIs. Second, the locked-in savings system can force borrowers to use more ex-
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pensive ways of paying instalments or responding to emergencies, which in turn can trigger mass default.
We also have to keep in mind that MFIs that use a group-lending approach may face particular challenges in terms of savings mobili- sation from the borrowers, given the social structure of Bangladesh. For example, women in Bangladesh prefer to keep their savings secret from their husband or other family members. They are also afraid that savings with MFIs can reveal their secret cash savings to their husbands or other family members, as there are often several members in a group from the same family unit but who belong to different households. In order to capture women's secret savings it might require no-group settings, given the lack of privacy within the group (Wright et al., 2001).
Disbursement target: who pays? Due to the extensive disbursement pressure of large loans and regular repayments, in order to reach financial sustainability ASA has scaled down its services 'to a minimum and almost stopped serving the poorest of the poor. Fieldwork data from rural Birisiri show a clear trade-off between having a yearly disbursement target and reaching the poorest. Such a target put ASA branch level COs under pressure to disburse the targeted amount in a given period of time. The COs at grassroots level are responsible not only for disbursement of loans but also for collecting the instalments and maintaining high repayment rates. The COs therefore prefer to lend money to better-off borrowers who can accumulate large loans and who also cany less default risk. This process consequently reduces the operational costs per loan. The argument can be explained by the statement provided by one of the COs:
In order to obtain a high repayment rate, we have to keep our focus on whom we are lending to. As the group formation process has become very short, it becomes difficult for us to get the chance to evaluate the borrower's repayment capacity properly. During the group formation period, we instruct the group members not to include people in the group who might have repayment difficulties. Therefore, naturally, we have to lend to the people who are less poor, and who have the ability to repay the loans easily. Moreover, in this way, we can deliver bigger loans to the less poor household without thinking that the loans could be defaulted. If we can see that the woman/household is very poor and there is a chance that the loan can be a default one, we will not disburse the loan to that woman/household (Interview transcript, L-5,20/09/2000).
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Microfinance and Poverty Reduction - Is there a Trade-Off? 1381
Under such priorities, it is natural for the COs to prefer borrowers who have existing income or assets, instead of providinglextending loans to the poorest who only can accumulate smaller loans. The poorest people, especially women, without additional sources of income, are considered a high risk by the COs and thus tend to be denied their loan entitlement (Ebdon, 1995; Rahman, 1999). Furthermore, group members exclude the very poor and vulnerable from the group as the poorest often have difficulty to repay the instal- ments regularly. In addition, the poorest sometimes exclude them- selves willingly, and do not consider themselves creditworthy, lack ability to absorb relatively large loans, and find ASA programmes unsuitable to their households' economic conditions. It is important to keep in mind that if people decide that they are not creditworthy, or that they do not wish to borrow, then the inability to reach them with microfinance should not be seen as institutional failure.
Even though ASA has expanded its microfinance programmes in all districts of the country, it often places its branch offices in relatively well-developed areas of the operating districts, which have better infrastructure. ASA also serves communities that have better access to various income-generating opportunities rather than only one or limited sources of income. It was found to be a com- mon practice of COs to investigate a household's sources of earning and whether it can pay the loan instalments from income sources other than those of the loan investment, before including any new member in the group. Concerns have been raised by integrated or 'credit-plus' advocates that attention should be given to the poorest in the remote areas, and quality financial and non-financial services should be prioritised and provided in order to make a dent in poverty in the rural areas of Bangladesh. One of the key informants from Bangladesh raised the following concern related to the importance of maintaining the quality of the services:
In the drive for reaching financial sustainability, most of the MFIs in Bangladesh are now only preoccupied with the disbursement of large loans and recovering the repayment without evaluating the investment and loan accumulation capacity of the borrowers. We know that there are many rural households who are illiterate and lack the ability to analyse their financial situation properly. So, as a result, they might take large loans without knowing the consequences. Not putting enough attention to the service that the MFIs provide could penalise both the borrowers and the MFIs. The borrowers could end up with huge debts, and the MFIs with a large number of delinquent borrowers, which can
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be a threat to the MFIs' loan portfolio quality and to the entire credit market at large (Interview transcript, IS-10, 17/11/2000).
The current practices of ASA contribute to the inability of COs to evaluate the borrowers' loan accumulation and investment capa- city. It should be borne in mind that both high loan disbursement and overarching emphasis on high repayment rates in reality work against the interests of the poorest in the society. If ASA's goals are to reduce poverty and provide improved financial services for the poor, the COs should pay more attention to the quality of the services they provide and the situation of those they are lending to, than to loan disbursement, repayment rates and the financial sustainability of the organisation.
6. Concluding Remarks and Policy Implications This article has examined the issue of trade-off between the focus on achieving financial sustainability and reachinglserving the poorest of the poor with microfinance. ASA was used as a case study organisation that uses a minimalist approach in order to achieve financial sustainability. The study found that there is in fact a trade-off between achieving financial sustainability and providing financial services to the poorest. The current microfinance operation of ASA can be characterised by the following: high interest rates and service charges to cover costs of delivery; rapid programme growth to benefit from economies of scale; reducing staff and staff costs through a narrow focus on the minimalist approach of micro- finance; neglecting the complementary non-financial services as well as providing high-quality financial services; and using groups to identify eligible borrowers; ensuring repayment; and decreasing costs of service delivery in the disbursement of large loans. All the above have contributed to the failure to reach and serve the poorest of the poor.
Due to the narrow focus on reaching financial sustainability, ASA is not providing the poorest with the necessary, flexible savings services. The priority given to disbursement of large loans and high repayment rates has led to poorer quality services for the borrowers, and has shifted the focus to a different target group. Consequently, this has often led to exclusion of the poorest of the poor from mi- crofinance services. Clearly, there is a trade-off between financial sustainability and depth of outreach, so the ASA focus on sustain- ability can have negative consequences for the poorest people. But
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it is also clear that there is no trade-off between scale of outreach and financial sustainability, since ASA can serve a large number of people. It is important, therefore, to realise that microfinance is not the only solution to poverty reduction, just because it can achieve greater outreach with almost perfect repayment rates. The preferences of the borrowers and the quality of services are also important factors.
It has been evident that if the goal of microfinance is to reduce poverty, then financial sustainability must be seen not as the prime goal in itself, but as one element in sustainable financial services for development. Different groups of poor need access to different types of financial services. Non-financial services can improve borrowers' investment management capacity, which helps them to maximise the economic and social benefits of the loans. This process in turn can help the poorest groups to get out of poverty and become empowered. In the past, non-financial support services in some programmes, including business training and gender awareness, have been expensive, and have had minimal impact. However, this does not mean that non-financial services are not needed or would not make a substantial contribution to all aspects of empowerment (and also to repayment rates) and poverty reduction, if they were better designed.
It is therefore suggested that ASA should attempt to provide diversified financial and some necessary non-financial services in order to meet the various needs of the poor. Special attempts should be made to investigate the reasons for exclusion of the poorest from the programme, and to take corrective measures so that the poor- est of the poor can be included. ASA should redesign its lending methodology to make it sensitive to the household's initial economic conditions. An inflexible methodology is unable to meet the diverse needs of borrowers with various economic endowments. In addition, ASA should assess the needs and economic situations of households before providing large loans. The repayment schedule should also be redesigned and made suitable in relation to the loan-invested activities. This could help borrowers to stop borrowing from other more expensive sources and avoid becoming more impoverished.
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