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Graduating the Poorest into Microfinance: Linking Safety Nets and Financial Services

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This paper considers the questions of whether microfinance reaches the poorest and whether microfinance can be linked to safety net programs. It notes that today there is much debate about whether microfinance is for the poorest. Even in the case of MFIs that focus on reaching very poor clients, there are substantial numbers of people who are too poor to participate. For example, in Bangladesh, where MFIs are strongly focused on serving the very poor, MFI concentration is highest among the second poorest quintile group; it is lowest among the poorest quintile. Microfinance services are not aimed at the poorest communities. The first section considers why this may be so.

Following on from this, the paper states that microfinance is not the only way to help people. It notes that there are other services and institutions, such as “safety net programs,” that are usually better suited to the circumstances and needs of the poorest. One approach to helping the poorest gain access to appropriate financial services may be to start with safety net programs that will eventually help the poorest gain access to financial services.

This Focus Note explores a few cases where the poorest participate in grant-funded safety net programs, where they receive non-financial support, such as employment, food aid, training, etc., as well as support to graduate from their existing levels of poverty to a level where they can make good use of access to appropriate financial services. These examples raise the questions: Can microfinance help the poorest? If so, how? And can people “graduate” from being recipients of grants to becoming full-fledged microfinance clients?

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