Second European Research Conference on Microfinance

Second European Research Conference on Microfinance

16-18 June 2011

Groningen, Netherlands

The Impact of Microfinance Programs

on Household Poverty Reduction:

The Case of Algeria

Presented by:

Ahmed Smahi Abderrezak Benhabib

University of Tlemcen, Algeria

The Impact of Microfinance Programs

on Household Poverty Reduction:

The Case of Algeria

Ahmed Smahi[1], Abderrezak Benhabib[2]

University of Tlemcen, Laboratory MECAS, Algeria

BP 226, 13000, Tlemcen, Algeria

Tel & Fax +213 (0) 43 21 21 66

Abstract

Currently, there is much controversy about poverty reduction, especially in developing countries (DCs), as well as about the ways to implement the Millennium Development Goals (MDGs) which remain key challenges to enhance individual welfare.

Actually, economists and policy makers have attempted to examine both theoretically and practically the impact of microfinance on socio-economic policies of developing countries including mainly poverty alleviation policies through several studies conducted across Asia, Latin America and Africa such as (Hulme and Mosley(1996), Wright (2000), Morduch and Haley (2002), Khandker (2003),Guérin and Doliguez (2006),Duflos and al (2009).

The issue at hand presented here is central to the debate on the contribution of microfinance tools and their usefulness in the development process of DCs particularly their poverty alleviatingpolicies. Thus, the range of public programs to fight poverty implemented inAlgeria in a context of economic integration has been initiated as a tool to promote income generating activities.

The main objective of this research is toquantify the relationship between poverty and microfinance and implicitly microcredit through a survey involving a sample of 429 of microcredit Beneficiaries in the wilaya of Tlemcen (Smahi, 2010).

The results of the field study for recipients of the ANGEM (National MicrocreditManagement Agency), allow us to clarify the country’s microcredit policy and check out whether there is an effectiveimpact on subjective poverty levels, as well as on the improvement of the households’ living conditions. Then, using a Two-Stage Least-Squares Regression Method2SLS(Pitt and Khandker 1998), we found that theamount of microcredit is less significant in the first model: povertyas dependent variable does not seem to depend on microcredit for the Algerian case, but it exhibits much significance when considering microcredit as a dependent variable.

Key Words: poverty - microfinance- microcredit – beneficiaries- impact assessment-quantification- ANGEM- Tlemcen- Algeria

Introduction

The first of the Millennium Development Goals[3] set by the United Nations in september 2000 and to halve the population living in extreme poverty by 2015.

Thus, the need to raise urgently the challenge of improving the welfare of the poorest inhabitants of the planet has been and remains the major concern of international bodies including the World Bank, which has profoundly shaped research on poverty issues- poverty is gradually conceptualized as a multidimensional phenomenon- to the extent as to guide poverty alleviating policiesand judge their effectiveness.Thus, a movement composed of diverse actors (NGOs, donors ...) saw another alternative to classical tools by considering microcredit and microfinance as an effective way to eradicate poverty, arguing the benefits of a bottom-up approach that focus on the individual's potential can constitute a basis for social capital enhancing.

The advent of microfinance as a practice of financial intermediation has been largely extended as a result of the failure of the banking sector in the financing process of the poor (Coquart, 2002; Hugon, 1996; Morduch, 2002). Initiatives to extent access to credit began in the 1960s, than accelerated since 1989, when the World bank started to devote special attention to it through the publication of annual report (World Bank 1989). In 1997 the World Summit on Microcreditconsidered microfinance as a functional approach to financingdevelopmentincluding poverty reduction; this was followed in 2004 by the Tenth FrancophoneSummit in Ouagadougouwith acommitment of heads of states of somesouthern countries to support microfinance institutions (MFIs) and to facilitatetheirinvolvement in the conventionalfinancialchannels.

The idea that microfinance helps poor people build businesses, increase their income and leave poverty has turned into the birth of a global movement called “microfinance revolution” (Imai et al, 2010).

The year 2005 was declared as International Year of Microcredit by the United Nations (UN) and the targets set in Halifax in 2006, namely the credit granting to 175 million poorest families in the world and the justification that these families do not exceed $ 1 per day per person in adjusted PPP[4], come to reinforce credit granting facilities to the poor.

Currently, it is recognized that the microfinance sector, apart from the benefits of its proximity and its decentralization, is a considerable potential in the financial development

The question, however, is whether microfinance really could significantly reduce world-wide poverty?. Our research question of this thematic study tackles the effectiveness of the Algerian microcredit state programstowards alleviating poverty.

1. Some Literature Review on Poverty and Microfinance

Actually, the micro-credit remains a purely institutional account managed by public bodies and funded by public banks[5]. Review of literature on the impact of microcredit is virtually absent in Algeria from practitioners and theorists perspective.

In recent public debates microfinance[6] has been mentioned as an important instrument for poverty alleviation in developing countries.Many authors argue that microcredit can help reduce poverty substantially (Littlefield,Morduch and Hashemi, 2003; Dunford, 2006).The micro-credit movement has, in many ways,revolutionized the banking system of many countries, such as Bangladesh, by helping alarge segment of the rural population move from the informal to the formal capital marketthrough access to institutional credit.Pitt and Khandker (1998) measured the impact of group-based lending programs in Bangladesh, using a quasi-experiment for 1991-1992 and found that the programs had positive and statistically significant effect on household consumption. This finding was confirmed by Khandker (1998) that "the most important impact of microcredit is its impact on consumer spending for the household”. Khandker (2003) found that microfinance provides benefits for the poor, and resulted in a significant reductionof poverty in Bangladesh. Zaman (2001) noted the positive impact of microcredit provided by the Bangladesh[7] Rural Advancement Committee (BRAC) on poverty and vulnerability reduction in Bangladesh.

The issue of proximity and network bankers has been addressed by Burgess and Pande (2002), who studied the expansion of bank branches and its impact on the welfare of households and showed that this growth reduces poverty and inequality.Significant impacts of credit on the increasepending of farmers in Pakistan are also present in the work of Khandker andFaruqee (2003).

Furthermore, increasing income and consumption are not the only metric of judgement of microcredit impact. (Orso, 2011).So,the poor tend to use credit and savings not onlyto smooth consumption, but also to cope with emergencies like health problems and pay for expensive services such aseducation, weddings, or funerals.

However, there are several studies that find no significant impact of microcredit to improve well-being and poverty reduction.Coleman (1999) found no significant impact of microcredit on improving household wealth.In addition, Diagne and Zeller (2001) find no statistically significant impact of microcredit on the income of rural households in Malawi.

According to Hulme (1999), research studies on the impact of microcredit on the improvement of living conditions of the poor are always partial and contested.In this context,Duflos et al (2009) estimates of the real impactof microfinance on the lives of customers are still relatively difficult and unclear, since all studies have revealed three conceptual issues:
• The fungibility of credit refers to the difficulty that arises when one wants to calculate the rate of return on investments made by microentrepreneurs..
• The determination of the impact linked to the question: to whatextent an improvement in the situation of a client is really attributable to credit granted by MFIs.
• The selection bias refers to the fact that the implementation of microfinance programs is never done at random.

In addition, many contemporary authors in microfinance in southern countries are questioning whether microfinance can really assistthevery poor? (Labie, 1999)[8].

Moreover, while some authors and practitioners argue in effect that we should provide microfinance services under market conditions, other point out that this could be a deviation from the initial mission of IMFs that consists in the provision of better financial services to the poor. In this latter case, we shall be presenting the Algerian experience.

2. Poverty and microcredit in Algeria: The ANGEM device

Following the national conference on poverty alleviation and exclusion, organized in Algiers in october 2000, a new governmentinterest emerged first, in the process of understanding, beyond the monetary data, all aspects of non-material dimensions such as social disadvantage, education, health, water, and second, by considering people at the center of concern for MDGs.

Obviously,awareness about the scale and severity of poverty has so far no given tangible results. Part of this is attributed to the fact that poverty has become a complex and multidimensional phenomenon; the other stems from the methodology used in the way that most of the studies have focused and still focus so far on the consequences of poverty such as malnutrition, unemployment and exclusion but do not give too much attention to the causes of poverty.
Moreover, poverty data are not clear: some are presented in decline (Ministry of Labour and National Solidarity, 2006)with an attenuation of the phenomenon to the order of 3% over 2000; on the other hand, others report on the basis of UNDP Data that the number of poor exceeds 10 million, a figure that contrasts with the723020 poor people identified by the Department of the Ministry of employment and Solidarity.
Moreover, along along with the ministry figures, the latest CNES (2007) shows that the proportion of the population living below the nutritional poverty threshold has moved from 3.6% in 1988 to 1.6% in 2004, representing 518000 individuals[9].

In fact, solidarity actions undertaken by national government in Algeria and the range of development state programs including support of the Algerian populations in infrastructure and basic social services marked a new era in human development.

Government measures to support new projects through ANSEJ (The National Agency for Youth Employment), ANGEM (The National Microfinance Management Agency), and CNAC (The National Unemployment Benefit Fund), need also to be improved and coordinated (CGAP, 2006). They appear as important tools for promoting entrepreneurship and opening the way for microfinance in Algeria[10].

Description of ANGEMdevice

The National Microcredit Management Agency (ANGEM) was created by Executive Decree No. 04-14 of January 22, 2004 and began operations in October 2004, but for the case of the Wilaya Tlemcen, ANGEM has started its operations only from the year 2006 onwards.

Micro-credit is a soft loan, guaranteed by the State with a rebate of 12 to 60 months and an interest rate varying between of 1% and 2 % depending on the characteristics of the beneficiary.

The Agency setup is spead over 48 Coordinations network, each representing one department in Algeria.Credits are split into two kinds depending on the cost of project. When the cost is less then 30.000 DA, beneficiaries must justify only 10 % of it as a personnal contribution. Moreover, when the project cost varies between 100.000 and 400.000 DA, 70 %of it is covered by an encouraging credit bank.

COST OF PROJECT

Cost of 30.000 DA

TRIANGULAR FUNDING

• Cost of project 100001 to 400000DA

ANGEM is an agency that depends on government supervision and whose main tasks are:
- To manage the microcredit device by supporting, advising and assisting the beneficiaries in the implementation of their activities.
- To notify those whose projects are eligiblefor the device.
- To monitor beneficiaries activities and ensure that beneficiaries comply with credit terms.
- To assist beneficiaries through other institutions.

Drawing on Lelart (2006) definition, it is "often asked to develop an income generating activity, whether an old one that you would like to expand or a new one that you would create, "the ANGEM device expanded it scope to reach both existing and new activities. We shall test whether this credit device has given positive result in the region of Tlemcen.

3. Descriptive analysisand definition of variables

To assess the impact of microcredit on poverty, a survey was conducted among a sample representativeof the total 2459 beneficiaries of the National Agency for Microcredit Management (ended March 31, 2009).The sampling process went through a first step using the quota method for the twenty Daira (subregion)that compose the wilaya of Tlemcen (region), then a second step with the implementation of the simple random sampling for each daira.

The breakdown by gender is shown in the table1, following the basic sample of 429 beneficiaries for both types of microcredit. This database comprises 237 men representing 55.2%, and 192 women covering 44.8% of the sample (table1). It is clear that the women participation it as important as men’s with a difference ofalmost(11%). Another criterion that needs to be valuated concerns age requirement that is not required for microcredit eligibility since age of recipients varies between 20 and 70 years with an average age of 32.

Insert table 1

The main question addressed is to describe empirically the link that exists between accessto financial services namely microcredit in a narrow sense as well as microfinance in a broader sense and level of poverty, especially in terms of impact. The table 2 describes the 9 variables used in the two regression equations.

Insert table 2

Table 3 shows that living standard of 288 beneficiaries (67.1%)is at intermediate level while for 111at poverty level(25.9%),23 at extreme poverty level (5.4%); however 6 beneficiaries are wealthy (1.4%), and finally 01 is very rich (0.2%). Households responses on their level of poverty have been made on a scale ranging from very poor to very rich. This scale was followed by another monetary scale where each beneficiary indicates the total household income, which theoretically should correspond to its poverty level. We can say that the coverage in terms of microcredit ANGEM, primarily concerned medium beneficiaries and secondly the poor classes. So a receipt record for microloans applicants is done without preconditions relative to social situation of beneficiaries.

Insert table 3

Table4 allows us to note that the participation of poor and very poor decreases graduallyas the level of education increases (60% to 10, 90%). The participation of beneficiaries in medium situation increasesgradually as the level of educationincreases (40% to 85, 45%). Thus, participation of the richisnever constant from one level to another.

We conclude that the PNR[11] of 30,000 DA (Algerian Dinar) is more adaptable to illiterate and primary education level groups since this type microcredit is made without recourse to the bank and avoids the administrative procedures.

Insert table 4

Our analysis is based on the subjective assessment of household living conditions which is a subjective perception of well-being (Subjective Well-Being, SWB).
Results in table 5show that 31% of the beneficiaries or 133, admit that the microcredit has no impact on improving their living conditionsincluding very poor 6.76%, 23.30% living in poverty, 69.17 % mediumand 0.75% rich

In the same way, 69% of beneficiariesor 296 admit that microcredit has had a positive impact on their lives,including 4.72% are very poor, 27. 02% poor, 66.21% medium 2 % rich.

Insert table5

Table 6 shows that 13.3 % of beneficiaries lives in precarious habitat, 21.4% in rental housing, 5.6% in dwellings has common part, however 23.3% in dwellings of the heirs, and finally 34.7% in well appointed homes. For poor people and very poor, they represent
(19.40%) among those with a fragile habitat, (30.59%) among those living in rented accommodation, those living in homes was up only common part (4.47%), beneficiaries living in homes are well-appointed (16.41%), and (29.10%) are those living in houses belonging to heirs.

Insert table 6

The results shows also in our sample that the personal contribution represents 50.6%. For the second half of the respondents, (34.5%) have resorted to parents, (figure1), 11.2% have resorted to friends. We may note also that family solidarity explains the sources of personal contributions to enable beneficiaries to apply for microcredit. Admittedly, the situation is different for the two types of microcredit. For the PNR of 30,000 DA, personal contribution is very small and represents only 3000 DA, but it is strain for an unemployed. For the PNR of 400,000 DA, the contribution varies depending on project cost, and there may also be a financial strain for the unemployed.

Our study note that 30.76%beneficiaries reported that the personal contribution is very high. This may explain the form of solidarity have always existed in our society and thus should be considered as a key factor in Microcredit policy enhancement.

Insert figure 1

4. Analysis Method
To analyze the relationship of poverty with microcredit, we based on the model of Pitt and Khandker (1998) who consider that the credit will depend on some characteristics of households (individuals)[12].
We begin our empirical work (on the basis of our investigation that affected 429 people[13] in receipt of a Microcredit) by applying a causal model based on simultaneous equations.

The sampling is based on a random selection by chance through the listing of all files of beneficiaries of ANGEM located at each Daira.

Moser & Kalton (1993) explain that causality exists if it will satisfy the following three conditions:
1. An association must exist between the variables contributing.
2. The cause must appear before the effect.
3. The connection between the variables should not disappear when we take into account the influence of other variables.
Two simultaneous equations will be applied to find the impact of the level of poverty on Microcredit (through the Credit) and the impact of microcredit on poverty levels as shown in Figure 2.

Insert Figure 2

4.1.Data and estimation models
The estimated parameter of both models is based on causal reciprocity between the level of poverty and the amount of credit. The application of the method of OLS gives biased estimates of the coefficients (the endogenous explanatory variables are correlated with the error term, a violation of the assumption of OLS).
The solution is to use 2SLS(Two Stage Least Squares) adopted in the model suggested by Pitt and Khandker (1998). Thus, to estimate the coefficients of both equations of the model, we use the SPSS (ver.12.0).
The first level (First Stage) is represented by equation 1, where the dependent variable is the level of poverty and the log of the amount of credit is an endogenous variable. The independent variables of the model are the kind of profit, educational level, type of housing, and the log of personal contribution.
The second level (Second Stage) is represented by Equation 2, where the dependent variable is the log of loan amount and this time the level of poverty is endogenous. The independent variables of the model are the log age of the beneficiary, the overall impact of the credit, log of total expenditure, and the log of personal contribution.