Poverty Assessment by Microfinance Institutions: A Review of Current Practices
Hatch, J. & Frederick, L.
Publication Date: Aug 1998
Published by: USAID - Microenterprise Best Practices (MBP) Project
Document Type: Paper
Methods used by microfinance institutions to assess the poverty level of potential or new clients
Report based on self-reported information from twelve MFIs, collected and analyzed in 1997 by FINCA International
Identifies 4 major categories of assessment and assesses each of these for:- simplicity
- practicality
- cost
- the ability to discriminate among different levels of poverty
- quality of the data
- reliability of the data
The 4 categories are:
(a) Nonmeasurement techniques include three general categories: (1) use of selection criteria such as geographic area, gender, or participation in other programs; (2) use of loan size as a targeting tool; and (3) peer group self-selection. The first two are based on MFI procedures, while the third incorporates actual clients? decisions in the new client selection process. These methods are extremely low cost and can be implemented as part of the MFI?s regular operational tasks. Unfortunately, however, these methods do not provide information about the poverty level of those who actually enter the program or those who choose not to participate, nor do they provide information for fitting financial services or for subsequent client monitoring
(b)Rapid assessment methods include visual indicators of poverty, such as housing quality, as well as methods in which members of the community identify households by poverty level. In both cases, the methods can be applied to each household within a preselected area but without a household interview. In sum, rapid assessment methods provide a low-cost and relatively effective method of ranking households by poverty level. Visual indicators, which are prone to mistakes, are best combined with follow-up household interviews to verify results if the MFI intends to use the results for targeting purposes. Community wealth rankings can provide high-quality information if implemented by well-trained staff and with internal checks for consistency
(c) Economic variable measures are designed to precisely measure the poverty level of households in terms of income, assets, or net worth. They are the most costly and rigorous of the methods examined in the paper, and involve detailed household interviews with potential clients. Institutions that use such methods to target the poor typically pair the economic variable measure with a visual indicator of poverty, where the economic variable measure confirms or rejects the findings of the rapid appraisal method. Economic variable measures are probably best used by mature or larger programs with sizeable research budgets
(d) Integrative variable measures include a broader range of poverty variables than simply economic variables, while aiming for absolute simplicity and very brief interviews with potential clients. These methods provide a bare minimum approach for small or new programs, and require further testing to determine their accuracy
Overall, the rapid assessment methods and economic variable measures received the highest scores on both ease of use for the MFI and strength of information provided. Integrative variable measures were not far behind, and will score well if examined more carefully for rigor. And nonmeasurement techniques, which perform poorly as stand-alone instruments, can be successfully paired with either rapid assessment or economic variable measures
In conclusion, the poverty assessment field is a work in progress. All the methods surveyed in this study have strengths that are worthy of emulation, and all have weaknesses that could benefit from more active interchange of experience and expertise. It appears that most microfinance institutions do not correlate their local poverty indicators with the national poverty lines of their respective countries, a step that is necessary to confirm the quality of the assessment method. Some MFIs with already established poverty assessment capacity have not yet submitted their existing poverty indicators, measurement criteria, and weighting systems to a rigorous inspection and certification by external professionals. For these reasons, it can be concluded that many poverty-focused MFIs could derive great benefit from technical assistance in the poverty assessment area. Donor agencies could make an important contribution enhancing existing poverty assessment tools by- coordinating the creation of poverty assessment tool kits
- sponsoring the development of checklists and similar instruments to certify the adequacy of MFI poverty assessment capacity
- making available to MFIs, on a cost-share basis, the services of evaluation consultants to upgrade inadequate poverty assessment capacity
- providing grant funding to assist young MFIs in building the capacity to assess and monitor their clientele
[adapted from author]
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