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Promoting Inclusive Markets and Financial Systems

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From Microfinance to Inclusive Market Development

by on Oct 23, 2012  |  posted in Microfinance  |  0 Comments

Over the past thirty years, with the support of donors, NGOs, civil society and the private sector, the microfinance field has attained considerable achievements:

  • More than 150 million individuals today, who previously had remained outside the financial markets, have gained access to financial services (Roodman, 2011).
  • Hundreds of micro lenders (NGOs, commercial banks, others non-bank financial intermediaries) are thriving, profitable institutions, creating a sustainable and reliable source of financial services useful for coping with poverty (Rosenberg, 2010).
  • Over $70 billion has been invested to capitalize these financial services, a significant portion sourced from commercial investors (CGAP, 2012).
Microenterprise development has been a significant program area for USAID over three decades. Microenterprise funds directed to financial services and business development have helped to ensure that the poor are part of economic growth strategies and have benefited millions. While these achievements are laudable, some studies have shown that even when loans are used to stimulate business start-ups they have limited impacts on reducing poverty, at least in the short to medium term. The implications of these findings are that cash-strapped entrepreneurs may need more than finance to improve the productivity of their enterprises, capture more value added and increase profits.  They also may need a more conducive enabling environment, access to reliable markets, and cooperative relationships with other economic actors to mitigate risks and facilitate market access. On the strength of these observations, in the early 2000s, USAID began implementing a broader ‘value chain’ approach focused on upgrading industries that engage large numbers of the poor as entrepreneurs, smallholders, subcontractors, and laborers. Market-based approaches, by themselves, may have limitations in lifting the most vulnerable households from poverty. People facing extreme poverty may need to stabilizeconsumption, acquire basic skills, and build up savings to prepare for and reduce the risks associated with market participation. With this in mind, USAID and others have adopted specific programs targeted to the very poor, including the Graduation Model that help create sustainable pathways out of extreme poverty through a series of sequenced strategies.  These include careful targeting, consumption support, asset transfers, savings, and intensive training and case management. By combining social protection, livelihoods, and finance, the Graduation Model can provide lower risk entry points into markets. Recognizing diverse groups and needs among the poor, USAID’s Microenterprise and Private Enterprise Promotion Office (USAID/MPEP) seeks to promote growth that both engages and benefits the poor by considering the market system in its totality through an ‘inclusive markets’ approach. This approachtakes account of households and enterprises within value chains, from input suppliers to end market buyers.  It also considers the supporting markets that provide technical, business, information, and financial services and the enabling environment, including laws and regulations, infrastructure, and socio-cultural norms, in which the value chain operates. In addition, the more we learn about the financial needs and behaviors of rural households, the more apparent are the benefits of accounting for the inter-relationship among agricultural value chains, non-farm enterprises, and rural households in our support of agricultural and rural finance. USAID/MPEP’s vision of inclusive market development aims to improve incomes and wellbeing for three categories of clients and seeks impacts at three levels:

Clients

 

Levels of impact

The very poor—in need of assistance to become “market ready”   Households—meeting consumption requirements, building assets, and managing risk
The moderate poor—economically active and need to upgrade to improve the benefits from market participation   Microenterprises—where income and employment are generated and productivity gains realized
The better-off—possess resources to invest in smaller enterprises and to catalyze change in market systems   Markets—where competitiveness matters most, supplies are secured, products or services are bought and sold
  The ‘inclusive markets’ approach supports the participation of poor and very poor households in value chains, first, by identifying context specific constraints to market participation, and second, by buying down the risks of entering markets where appropriate. A combination of ‘push’ strategies that prepare the very poor to take on the risks of market participation and ‘pull’ strategies that create lower risk opportunities are required. Ultimately what we care about is promoting inclusive markets, markets that extend choices and opportunities to the poor. To learn more about the MPEP Office’s work in this area, please stay tuned to Microlinks and join us as we continue to explore the questions outlined here.    

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