Where Angels Prey

Where Angels Prey is a novel by Ramesh S Arunachalam. Please refer to www.whereangelsprey.com for more information

Thursday, March 31, 2011

Do We Need a New CGAP - "Consultative Group to Alleviate Poverty"?

Ramesh S Arunachalam
Rural Finance Practitioner

That the delivery of mere financial services (= consumption credit and small production loans) alone is insufficient to reduce or alleviate poverty is perhaps a no brainer, for all honest development practitioners. Despite the lack of serious impact studies, for those, who have worked at the grass-roots and continue to so, it is rather evident that mere access to finance cannot and will not help people out of poverty. Access to finance, is therefore a necessary, but not sufficient condition to poverty alleviation.

While micro-financiers and access to finance advocates can perhaps take comfort in the fact that, while genuine financial services cannot alone make a dent on poverty, there is a caveat in order. They cannot escape the fact that the drive and desire to include low income people with regard to financial services has resulted in the proliferation of financial services focussed on loans and even within loans, primarily consumption lending. The enthusiasm to include low income people has also led to not-so-good practices including multiple lending, top up loans, ghost/benami loans and the like driven by the motivation (some people even call it greed) of some MFIs to generate huge wealth for themselves and their promoters. In fact, one of the major reasons for the on-going Indian micro-finance crisis is the present mindless drive to include people financially, without asking the question (s) of whether the current bouquet of financial services  being offered are appropriate, whether the practices being followed are fair, transparent and ethically sound and whether the other conditions so much necessary for effective use of the financial services exist.

Without question, the onus[i] for this lies on institutions like the CGAP, which lays the claim to being the foremost agency with regard to financially including low income people. A second set of people who are responsible for this are the policy makers (including some Central Banks) who have, encouraged the proliferation of consumption credit and pretended all the time that such loans lift people out of poverty. A third set of stakeholders are the mainstream micro-finance industry practitioners including banks, MFIs[ii] and industry professionals, who have all along, for a large part (there are exceptions no doubt), blown their trumpet (huge and loud) on the fact that micro-finance and financial inclusion can make a serious dent on poverty. And last but not the least, are the hugely enthusiastic donors and international agencies who have played along with everyone, echoing the same old story, again and again...

micro-finance and/or financial inclusion = poverty alleviation

I want to share a recent incident (not to blame anyone and with no Malice what-so-ever), without identifying a large project, for which I led the proposal writing team and unexpectedly (I must be honest), our consortium won the bid. At the inception meeting, in December 2009, even as the micro-finance crisis was quietly simmering in India, I repeatedly made the point that, their (the donor’s) emphasis on enhancing quantity (read large numbers) of financial services through the traditional MFI consumption route is perhaps not appropriate and that the quality of financial services (= wide range of vulnerability reducing financial services including post harvest agriculture and post production financing) and access to other issues like markets and infrastructure will have to go hand in hand. I was really shocked when one of the donor team members dismissed this flatly and said that the delivery of financial services to low income people in India through MFIs is a no brainer and we need no new ideas and we need to push that agenda to scale in the specified underserved areas (This was in January 2010 when the AP crisis was already burgeoning and close to reach flash point over the next few months). I do hope that these people have kept abreast of the recent Indian micro-finance crisis...and understood the real impact of mindless growth of traditional consumption (and/or small production) loans on the low income clients...

For my part, I was disillusioned and I refrained from participating in the same project after the design exercise was - altered significantly and - to be based on whimsical notions and ideas in our various heads, when, in fact, our winning bid had proposed a very comprehensive methodology to understand complex issues related to poverty and inclusive growth in these states. As one of few members of the proposal writing and design team who had worked in every district in the four states where the project was to become operational, I knew for sure that this approach doomed the project for failure. I am now certain that it cannot and will not provide inclusive growth for the thousands, if not millions of low income people, in these states...time will surely prove me right...although, I still wish the project very well and hope my fears are unfounded and wrong…

That said, the larger point that I want to make here is about the role of that donors and various international agencies play and can play in shaping the future of low income people – not to blame any of them but they certainly have to be the watch guards of the poverty alleviation mission and ensure on-course corrections, as and when required. They often get caught in rhetoric and forget grass-roots realities and like hearing what they want to hear. It is about time that they change and encourage honest feedback as well as approaches consistent with peoples’ real aspirations...that alone will ensure real success (of their projects) on the ground...in terms of the fight against poverty…

That said, let us get back to the issue of tackling poverty for which many of us came into the industry...The lessons from the last few decades suggest that access to finance alone cannot have any significant impact on poverty. Poverty alleviation and/or reduction can occur only when peoples’ livelihoods and opportunities (for work, investment etc) are strengthened. And that can occur only when they have access to a broader ecosystem (apart from finance) that provides a range of services that poor people and their enterprises and livelihood systems require – access to information, technology, business development and other skills, markets, product certification and quality assurance, infrastructure and advocacy

And given that CGAP has done a fantastic job of trying to financially include large numbers of poor people, I would very much like them to champion the larger cause of poverty alleviation – They have it in their DNA and in line with their acronym, CGAP must now become The “Consultative Group to Alleviate Poverty” and assume the lead role in fighting and trying to eradicate poverty globally. I am sure they have the wherewithal and resources to do this and let us hope their governing council takes this appeal seriously…

Have Great Day At Work!

[i] My intention is not to blame anyone. I am merely highlighting what has happened and would like to see course corrections
[ii] Only recently in a BBC interview did I hear a couple of practitioners say that the ability of “micro-finance” to alleviate/reduce poverty is hyperbole.


  1. There is only one way to eradicate poverty: economic growth. There is not a single counter-example to this that I am aware of. In the 1950s, the per-capita GDP of South Korea was the same as that of Ghana, and the other indicators (health, mortality) weren't much different. The difference today isn't that South Korea had a lot of poverty reduction programs (I suspect Ghana might win on that front!), but that it focused very seriously on sustainable long-term economic growth.

    The best that anti-poverty programs can do is to help at the margins. Ultimately, bigger forces have to be at play.

  2. Dear Daniel

    I fully agree but anti p0verty programs can help create an enabling ecosystem, more than mere access to credit. The ecosystem needs to created surely and mainstreamed