Microfinance and Poverty Alleviation in the Caribbean

The following paper highlights the main issues that emerged from the results of a recent study into microfinance in the Eastern Caribbean (Lashley & Lord, 2002), of which the primary aim was to make recommendations for the best practice for successful microfinance provision. It appears that despite a number of operational issues that need to be addressed, the first step in realizing a successful microfinance sector in the small states of the eastern Caribbean is to first define what is meant by “success.” In other words, donors, providers, and recipients need to be cognizant and explicit in defining the aims and uses of microfinance. Journal of Microfinance Volume 6 Number 1 84 of institutions such as the Penny Bank in Dominica in the early 1940s, the Grameen Bank did act as somewhat of a catalyst in raising awareness of the concept as a developmental and poverty alleviation tool. This concept of microfinance basically entailed providing very small amounts of capital to allow poor microentrepreneurs to reap the benefits of their labors. Since the early 1970s, microfinance has spread globally in both the developed and developing worlds as a means to both alleviate poverty and develop microenterprises. This provision of finance to those with limited access has been relatively successful, but in some circumstances, microfinance as a tool in the development machine has lost its way. Despite success in certain arenas, there have been several failures, mostly due to a lack of appreciation of context and strategic direction. If “strategic” is defined as planning to achieve a long term aim, the problem with microfinance in the Caribbean is the lack of any single overriding long term aim. MFIs, governments, and donors in the region appear to differ widely in their long-term desires for microfinance. This retards the effectiveness of microfinance; donor funding has been withdrawn at critical times, mostly due to MFIs following different missions that are forced on them by governments, especially in regard to interest rate setting. This trend was especially seen in the island of Dominica, as highlighted in a study by Lashley and Lord (2002), which will be discussed later. In the eastern Caribbean, as demonstrated from previous research on the Caribbean in general (von Stauffenberg, 2000; Wenner & Chalmers, 2001) and case studies of Barbados and Dominica (Lashley & Lord, 2002), many microfinance operators have adopted the attitude that simply providing microfinance services will be a panacea for development ills. The specific contingent circumstances of the target population and society in general are ignored. Jonathan Lashley is a Fellow at the Sir Arthur Lewis Institute of Social and Economic Studies (SALISES) based at the University of the West Indies, Cave Hill Campus, Barbados. Email address: jlashley@uwichill.edu.bb Microfinance and Poverty Alleviat ion Volume 6 Number 1 85 Ignoring Context Recent institutional and client surveys of MFIs in the Caribbean islands of Barbados and Dominica, among others (Lashley & Lord, 2002; von Stauffenberg, 2000), demonstrate that the lack of appreciation of specific contingent circumstances that surround the delivery of microfinance is one of the main hindrances to the success of microfinance in the Caribbean. This lack of appreciation was especially noted in terms of the following factors: • A lack of understanding of the specific nature and characteristics of poverty. In the Caribbean this is especially true where the characteristics of poverty are rural, young, and female. There is a severe lack of targeting these specific areas, as demonstrated in the discussion below. • A high level of government intervention, especially with governments dictating interest rate setting, mostly for political gain. • The poor repayment culture of the population (portfolio at risk, on average, noted at 39% [von Stauffenberg, 2000]), which is believed to stem from political messages that create an “ambivalence about defaulting on governmentbacked loans” (Morduch, 2000 p. 620). • A high level of development of the financial sector, in terms of commercial banks and government fiscal packages, which von Stauffenberg (2000) notes are crowding out the microfinance sector and retarding its development. • A lack of sufficient social capital and interconnectivity of population to facilitate the successful provision of microfinance, especially in relation to a lack of cooperation among businesses themselves and among support organizations in general (Lashley, 2002). Unfortunately the Caribbean has suffered from this lack of context in the appllication of microfinance.This has subsequently led to the exclusion of the poor and the scaling-up of microfinance to reach “bankable” clients, a lack of autonomy (and, therefore, ability of microfinance institutions to target effectively), poor repayment records, the loss of creditworthy clients to the commercial banking sector, and a lack of cooperation among support organizations that should act as part of the social safety net. In addressing these issues, the root of the problem appears to lie at the very basic mission level. Governments, MFIs, and especially donors in the Caribbean appear to lack an explicit mission for microfinance. “Microfinance” is a term that appears to mean lending small amounts of money for enterprise development, with the ultimate aim of achieving a sustainable rise in incomes above the poverty line. However, these stakeholders need to understand what poverty truly means. Poverty is more than just lack of funds; it also relates to vulnerability, defenselessness, and dependency (Bhatt & Tang, 2001). The only way to address these issues is to fully understand the different levels of poverty and the different needs of the various subgroups. While microfinance by itself may address the needs of persons just below the poverty line, those lower down the poverty scale may need microfinance in conjunction with other human resource development measures, skills training, and the like. Stakeholders in the Caribbean are not appreciative of this multidimensional view. There the majority of MFIs are minimalist (providing credit services alone), and this approach is encouraged by donors who are determined that the institutions that they fund achieve sustainability in as short a time period as possible. This view occurs despite the fact that the externality of educational provision requires subsidization for those on the lower end of the poverty scale. Differing Stakeholder Goals Aside from this issue of understanding the characteristics of the various groups within the “poor” category, the microfinance stakeholders need to explicitly define their goals for microfinance. Journal of Microfinance Volume 6 Number 1 86 Microfinance and Poverty Alleviat ion Volume 6 Number 1 Currently, there appears to be three separate, though not distinct, direct goals for microfinance in the Caribbean. First, on the institutional side there is a concerted drive toward self-sufficiency in the medium to short run. It is clear that if this is the main aim, the poor will suffer and, as seen so often in these small states, a scaling-up of services to reach more reliable, “bankable,” clients will result. The second apparent goal for microfinance is microenterprise development. MFIs seek to encourage enterprises to grow, thereby acting as a poverty prevention measure rather than strictly a poverty alleviating measure. It can thus be seen that a primary goal of microenterprise development does not necessarily relate to poverty alleviation. The third apparent goal for microfinance, however, appears to be to alleviate poverty directly. Although directly targeting poverty through microfinance necessarily involves microenterprise development (highlighted above as the second apparent goal of microfinance), efficiency may not be a consideration in awarding finance to alleviate poverty, as it is with the goal of microenterprise development. This is the point where the picture becomes clouded and “success” needs to be defined explicitly by governments, MFIs, and donors. Is the goal of microfinance to create sustainable MFIs, develop the microenterprise sector, or alleviate poverty? If all three, who has which goal? Between the stakeholders in microfinance, goals differ widely and hazardously. The recent study of microfinance in the Caribbean by Lashley and Lord (2002) demonstrates just how detrimental these differing goals can be to both providers and recipients. In the case of a major MFI in the eastern Caribbean, the National Development Foundation of Dominica (NDFD), a substantial amount of donor funding from USAID was lost due to conflicting interests between the NDFD, USAID, and the Government of the Commonwealth of Dominica. The funding from USAID was lost due to default