Integrating Saving into Microenterprise Programs for the Poor: Do Institutions Matter?

Numerous theoretical frameworks have been used to explain factors that influence outcomes of poor families engaged in self-employment. Theories related to human capital, social capital, and financial assets have guided most studies. Using data from fourteen institutions promoting selfemployment among the poor, and drawing on the institutional theory, this study finds that theories related to individual influences do not adequately explain all the phenomenon. Controlling for a wide range of individual characteristics, there is a statistically significant association between institutional influences and participants’ outcomes. Policy makers should consider a range of institutional characteristics when designing policies and programs aimed at promoting self-employment among poor families. Policy makers are exploring and experimenting with new anti-poverty strategies to improve the well-being of the poor. Strategies that combine economic growth with more job opportunities seem to be at the forefront (see United Nations Development Program [UNDP], 1993). Although no single comprehensive strategy has yet emerged, one of the many strategies being explored is the promotion of self-employment for the poor mainly through microenterprise programs (MEPs). MEPs aim at providing micro-loans, business advice, training assistance--and in some cases saving services--to the poor, welfare recipients and the unemployed intending to start and/or grow an existing small family business. Simply stated, MEPs help the poor to afford resources and opportunities--notably, small loans, grants, savings, training and technical assistance--for the start up, maintenance and/or expansion of their own very small enterprises, referred to as microenterprises The theory behind MEPs is simple: if poor people who have a propensity to self-employment could be helped to access affordable small business loans, grants, small business training, saving services and support, they would be able to start, expand and/or strengthen their micro businesses and eventually move out of poverty. For those who are barely above the poverty line, the strategy is seen as something that would reduce their vulnerability to sliding back and forth into and out of poverty. Indeed, to their supporters, promoting microenterprise represents “nothing less than the most promising instrument available for reducing the extent and severity of global poverty” (Snodgrass, 1997, p.1). The strategy of promoting small businesses among the poor began in the developing countries of Africa, Asia and Latin America (see Adams and Von Pischke, 1992; Counts, 1996; Rahman, 1999; Rhyne and Otero, 1994; Schreiner, 1999; Servon, 1999; World Bank, 1975). Microenterprise programs such as the Grameen Bank in Bangladesh, the Self-Employed Women’s Association (SEWA) in India, and ACCION International in Latin America are often cited as the programs that pioneered the experimentation of promoting MEPs as an alternative anti-poverty strategy. Indeed, it is believed that throughout the developing world, MEPs are serving hundreds of thousands of poor families and they (MEPs) constitute one of the fastest growing anti-poverty strategies in these poor developing countries. According to the Microcredit campaign summit of 1996, the strategy could reach 100 million of the World’s poorest families by 2005 (Microcredit Summit, 1996). In the United States, support for promoting MEPs as an anti-poverty initiative has steadily increased among federal, state and private community development organizations and philanthropic foundations. For example, while in 1970 there were only a few dozen MEPs in the United States (Raheim, Alter and Yarbrough, 1996), Dallinger (2001) estimates the number to have reached at least 700 MEPs across the United States. On the political arena, the microenterprise development strategy has been able to sustain its support because each side of the political aisle feels the strategy speaks to its values. For example, the conservatives favor it because they think it speaks to individual self-reliance and hard work, while the liberals praise it for its goal of reaching the poor and the philosophy that anyone is capable of owning a successful business (Bornstein, 1995). Center for Social Development Washington University in St. Louis 1 Generally, the majority of formal MEPs tend to focus either on credit alone, identifying themselves as credit led-programs; or on training alone, identifying themselves as training-led programs. However, having recently realized that neither credit alone nor training alone would be sufficient enough to propel most poor microentrepreneurs out of poverty, a considerable number of MEPs in the United States are moving toward a multidimensional approach integrating saving, training and credit services into one program design— a “one-stop shop”. This approach is not new. According to the World Bank (2001), some programs in the developing countries, notably Bank Rakyat in Indonesia and SafeSave in Bangladesh, already have a saving component in their program designs. However, the majority of the programs in the United States using this multidimensional approach are designing their programs based on Sherraden’s proposal for Individual Development Accounts (IDAs) for microenterprise (Sherraden, 1991). These programs are integrating a savings requirement for their program participants. We are calling these IDAs for microenterprise. These programs are the focus of this study. Unlike credit-led programs and training-led programs, which have received extensive scholarly research (e.g., Adams and Ladman, 1979; Adams and Von Pischke, 1992; Anthony, 1999; Balkin, 1993; Barnes and Keogh, 1999; Clark and Kays, 1999; Dumas, 1999; Edcomb, Klein and Clark; 1996; Raheim, 1996; Schreiner, 1999; Servon, 1999; Sherraden, Sanders and Sherraden, 1998), IDAs for microenterprise are relatively new and have hardly received any attention in scholarly microenterprise research. Yet, given the ongoing proliferation of IDA programs across the United States, there is a need to undertake an empirical study to explore and understand the best practice question, especially in regards to program design. In other words, what is the best way of integrating IDAs and other saving strategies into MEPs that would optimize participants’ outcomes? This study is a first step of understanding how best to integrate IDAs into MEPs. Integrating IDAs into Microenterprise Programs The idea of IDA for microenterprises first appeared in Sherraden (1991), who proposed that individual saving accounts be “open to anyone eighteen years of age and over, with the restriction that the money be used as seed capital to start a business venture” (p.256). In putting this suggestion forward, Sherraden was building on his idea of an asset-based theory of wellbeing, which first appeared under the title “Rethinking social welfare: toward assets” (1988). Within this asset-based theoretical framework, he proposed IDA programs as a strategy aimed at helping poor families build and accumulate assets for socio-economic empowerment and to reach important life goals. Participants in IDA programs receive general financial educational classes on how to save small amounts of money with a formal financial institution, and these small savings are then matched over time to enable a participant invest in homeownership, education or a microenterprise. The accounts are in some ways similar to other defined contribution plans, such as 401(k) retirement plans. Just like 401(k) retirement plans, IDAs offer a monetary incentive for participation. Every dollar saved by an IDA participant—in an IDA account—is matched by funds from a private source (e.g., charitable organizations or foundations) or from a public source. Although programs may vary, participants usually receive general financial education and “goal” specific training. For example, an account holder saving for a micro-business receives general basic Center for Social Development Washington University in St. Louis 2 instruction on financial management and consumption, including balancing a checkbook. In addition he or she receives micro-business specific training such as business-plan writing and marketing. The Corporation for Enterprise Development [CFED] (2002) estimates that by 2002, there were more than 500 IDA programs throughout the United States. The 1996 “welfare reform” law included IDAs as a state option, and a federal IDA demonstration created by the Assets for Independence Act began in 1998. IDAs for microenterprise puts an emphasis on savings by program participants. Indeed it is mandatory for a participant to have a savings account. Otherwise, he or she will not be allowed to participate in the program. There are several probable reasons why some MEPs in the United States have embraced the idea of integrating IDAs and/or savings into their programs. First, introducing poor microentrepreneurs to formal financial institutions is an important step that may allow some of them to establish credit that they may eventually need to support their businesses or to deal with a family financial crisis without disrupting business operation. 4 As the World Bank (2001) observes, MEPs should move towards the direction of incorporating savings into their program designs “so that clients would not have to take out loans to cope with illness or death” (p.157). Moreover, just like any other financial savings, money in the IDA represents a form of self-insurance that can be drawn upon to buffer cash flow shortfalls and/or financial shocks of an IDA participant. Second, money in IDA accounts, whether matched or not, could be used to supplement the ‘very tiny loans’ associated with credit-led MEPs (for a review of the size of the loans disbursed by credit-led MEPs, see Bates and Servon, 1996). It is worth noting that several empirical studies have found a positive association between the amount of starting