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Economic Strengthening for the Very Poor (ES4VP)

Understanding the Very Poor

Very poor households are those that cannot meet their most basic needs. They are vulnerable to shocks and stresses that affect the household’s ability to generate sufficient income to earn a livelihood and achieve a threshold level of nutritional requirements for a healthy life both now and in the future.

Although the very poor are those most in need, they are often, if inadvertently, overlooked by many development interventions. With a few notable exceptions, both microfinance and livelihoods programs typically do not reach the extreme poor. While social protection programs have a better track record of reaching the extreme poor, they often lack clear and sustainable exit strategies.[1]

A research paper entitled Microfinance and Non-Financial Services For Very Poor People: Digging Deeper to Find Keys to Success done by the Poverty OutreachWorking Group discusses the challenges of reaching very poor people with microfinance (and microenterprise development services) including physical and economic barriers, self-selection and self-exclusion, as well as sector risks and the deprivation of extreme poverty itself.

Physical barriers: In many settings, very poor people live in remote rural areas that have no access to financial services. Reaching very poor people in remote, rural areas means higher transactions costs for MFIs. Such areas are often characterized by poor infrastructure, relatively low population density, low levels of literacy and relatively undiversified economies. Many rural economic activities, moreover, have low profitability and are prone to high risk. Even if microfinance programs are present in rural areas, they often suffer from a lack of well-trained professionals and insufficient support by the head office.

Economic barriers: Many microfinance programs use group-lending methodology clients to attend a weekly or monthly meeting to access credit. The cost of transportation to these meetings, together with the opportunity cost of attendance (i.e., lost income due to time away from work) can present a barrier for very poor people to participate in microfinance programs. Alternatively, many individual lending or savings programs require clients to save a certain amount before they can access loans, a practice that often prevents participation by very poor people.

Self-selection: It is well known that solidarity groups in Grameen-style microfinance programs and village banks reject very poor members because they might be unable to repay their loans and would thus jeopardize the creditworthiness of the entire group.

Self-exclusion: Even when very poor people are not actively excluded by a community, they often opt out of community-related projects because they are intimidated, believing that the services offered by such projects is not suited to their needs.

Sector risk: Very poor people are often dependent on subsistence farming as their main source of livelihood. Given the high risks of agricultural activities and the unique requirements of financing such activities (payback of loans, for instance, can only take place after the production period, which often lasts several months ), MFIs usually shy away from lending to this sector.

Impact of chronic poverty: Living in absolute poverty for a prolonged time strongly affects a person’s dignity and hope for the future, as well as his or her ability to take initiative and overcome stigma. Moreover, poor health (especially chronic diseases such as malaria and HIV/AIDS) presents a major obstacle for conducting successful microenterprise activities.