The world is drawing close to the deadline of the Millennium Development Goals   that were set 14 years back. The first and the foremost target was to halve, between 1990 and 2015, the proportion of people living on less than $1.25 a day. In the past 15 years much work has been done to reduce and alleviate poverty. Post 2015, the poverty alleviation discourse will enter the poverty eradication phase. The World Bank President as well as the UN General Secretary have already proposed a way to do so.  

Types of poverty

Poverty is defined in both absolute and relative terms. Absolute poverty is characterised by severe deprivation of basic human needs such as food, water, safe drinking water, shelter, health facilities  among other things. Likewise, the cause of poverty might also be many.  Relative poverty, on the other hand, discusses poverty in relation to the average resources individuals command in a particular society. Relatively poor people have fewer resources than average individuals in society and are barred from leading decent lives. A person considered poor in one country, however, could be considered rich in another in relative terms. And among the many prevailing causes of poverty, the lack of access to finance is one important reason for it.   

Access to finance

Earlier, local elites or feudal lords were the primary source of money to the public. Moneylenders thus exerted control over the lives of the poor by charging high interest rates and determining their access to education and health care. Post 1990, liberal policies adopted by the government led to an increase in development activities, formation of self-help groups and cooperatives, which reduced the role of moneylenders. The formation of various groups for saving and credit, granting seed money as revolving fund for a group certainly helped enhance the poor's access to finance. So due thanks must be given to the donor community, government policies and civil society.  

Micro-finance

Micro-finance institutions (MFIs), in particular, have helped increased lending to the poor.  These insitutions borrow from larger financial institutions at a low rate of interest and lend small amounts to numerous borrowers at higher interest rates. Today, many micro-finance institutions are listed in the Nepal Stock Market (Nepse) and their stock prices are sometimes even higher than some regular financial institutions. Does this mean that poverty is a boon rather than bane for businesses as the poor are a market that have not been tapped? Most micro-finances earmark their objective as poverty alleviation. But on analysing the stock market prices of those institutions, their status look no different than commercial banks. At times, their stock prices are even five times higher than that of development banks.

Going through the records, except for a few, dividend payout of most commercial banks have been insignificant lately. The micro-finances, however, are seen to be handing out more than 15 percent as dividend. Nine micro-finance institutions have announced dividends, which range from 15  to 48 percent. No wonder, the performance of MFIs has surpassed many commercial banks at the Nepse. Among the 30 commercial banks listed at the stock exchange, the share price of 13 banks at present is less that the lowest price of the listed MFIs.

Widening the gap

Nevertheless, the reach of the micro-finance institutions to the poor is unquestionable. But the rate of profitability  of these institutions has also widened the gap between the poor and the affluent. The Indian case is an example where many poor farmers have killed themselves, unable to resist the pressure to repay money borrowed from such micro-finances. The shiny tainted glass houses of the micro-finance institutions in Nepal might have also been made from the land and other assests lost by the poor unable to repay the loan and high rate of interest.  

Therefore, there is a need for a just distribution of economic resources. This could be done by looking at the savings of the poor. One of the measures of poverty is the level of income and consumption. So low levels of poverty implies higher levels of consumption. A greater access to finance can thus lead to an increase in consumption which ultimately helps increase production. This means more jobs and more income for the people. But the employed must be able to save a little from their earnings after consumption. This saving can be invested which will further help others to overcome poverty. When a person borrows from a micro-fiance that charges a double-digit figure as interest, he needs to make a high rate of profit which is not guaranteed. It is therefore very difficult for the poor to repay back the high-interest loans taken from the MFIs. This establishes the need to question the poverty eradication or alleviation objecive of the micro-finance institutions.

Suwal is a portfolio manager at Poverty Alleviation Fund. Views expressed are his own