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If Microfinancing Creates a Cycle of Debt, is Handing Out Cash a Better Option?

Svetha Janumpalli was disillusioned. Fresh out of college, she traveled to India on assignment for Microfinance Focus Magazine to interview...

Svetha Janumpalli was disillusioned. Fresh out of college, she traveled to India on assignment for Microfinance Focus Magazine to interview hundreds of borrowers. “I could not believe the horrifying stories that I heard,” Janumpalli remembers, “of women being threatened to pay back their loans, taking out ten loans at a time just to pay back one with another.” In households desperate to cover health costs, gain access to a clean toilet or send their kids to school, the specter of debt—however well-intentioned—was pressing in. “It was just a disaster,” says Janumpalli. “I feel like what we do in the United States, we’re applying to the world. We’re basically giving the poor credit cards and incentivizing them to get into debt.”


Microfinance, a system of services including small loans, is premised on the idea that charity merely perpetuates the cycle of poverty, creating an ethos of dependency. Opportunities like microloans, alternatively, are meant to provide capital for entrepreneurial ventures, giving the poor a chance to work their way toward self-sufficiency. But Janumpalli saw borrowers doing what many of us do when we’re cash-strapped—racking up debt to survive today, forgetting about tomorrow. Even Muhammad Yunus, who won the Nobel Prize for his microcredit work with Grameen Bank, has resoundingly criticized for-profit micro-lenders throughout South Asia for abusing the model.

After herself working in the field for Grameen Bank in Bangladesh, Janumpalli came back to the US hoping to find an alternative. She learned about Conditional Cash Transfers (CCT), a process through which individuals are given small, but regular and predictable cash sums for fulfilling agreed-upon conditions that contribute to their long-term odds of escaping poverty—say, $7 per month for giving up child labor and attending school.

For all the attention given to microfinance, in the past 15 years, governments in developing countries have led a quiet revolution by investing in increasingly large scale cash-transfer programs that are now estimated to reach between 750 million and 1 billion people. Mexico’s Oportunidades, one of the oldest CCT programs and most rigorously evaluated, has been associated with a 30 percent reduction in the poverty gap and, according to the Chronic Poverty Research Centre, raised the height-for-age of beneficiary children by 1 cm.

Janumpalli searched for an online way to fund CCTs, a cash-transfer equivalent of the online lending platform Kiva. Finding none, she spent two years building her own. The resulting New Incentives allows users to donate small amounts, like $9 for twelve-year-old Jogeshwari to attend school in exchange for her cash transfer, a sum that compensates for the salary she would otherwise earn working.

In February, as a member of the Clinton Global Initiative, New Incentives will launch an ambitious plan, “Healthy Moms, Healthy Babies” to provide CCTs to 1,000 Nigerian women, who currently live on less than 30 cents per day, in exchange for the women performing healthy prenatal and delivery behaviors. The women will be connected with existing infrastructure and services to receive their health care—with serious long-term consequence: Nigeria accounts for 30 percent of the world’s mother-to-child transmission of HIV. Gaining access to an inexpensive drug cocktail, trained delivery team, and foregoing breastfeeding can reduce HIV transmission by 98 percent. The simple reliability of their cash transfers provides other benefits. “With regular, predictable sums of money, families can invest more in food, health and the education of their children,” Vishnu Sridharan, who has written extensively on CCT programs with the New America Foundation, explains.

For donors, it’s rather painless to pony up the Starbucks generation’s equivalent of what you’d spend on a couple of cups of coffee. Recipients, in New Incentives’ model, meet in community focus groups where beneficiaries outline the conditions they could reasonably fulfill—and how they’d like to spend the cash. Says Janumpalli, “you get to choose how you’re going to use this money—and earn it.” On-the-ground partners track data on each recipient and cash distribution, with New Incentives also checking with randomized samples of recipients to make sure they have received the money. Some spend it on milk, others, slippers or shoes. Some make household improvements, others pay for vitamins or vaccinations. Still others save it. The beauty is in having the autonomy to make those choices.

Yet for some, CCT smacks of paternalism. There’s a standard question to be raised “Who are we to tell poor people how to live their lives?” (This assumes the poor don’t access health care, education or adequate nutrition because they prefer not to, not that they merely have a legion of other factors preventing them from doing so.) Others suggest bootstrapping, not cash in hand, is what lifts people out of poverty. “If we believe that it’s someone’s own fault that she is poor, then it will seem natural to ask her to ‘work her way’ out,” Sridharan explains. Yet, says Sridharan, if you consider poverty to be a reflection of “a world in which where someone is born and who someone’s parents are has an egregiously large effect on whether or not one she has a basic level of subsistence—then maybe we will be more inclined to give her money without strings attached.”

Skeptics raise a final objection against CCTs—recipients can spend that money on anything. Are you alleviating poverty, even if you get a child laborer to school, if his parents just blow the money on tobacco or alcohol? Janumpalli acknowledges that this is bound to happen at some point but “we feel like giving them that decision-making power to control the money is worth it, and we think that most families will spend it on improving their lives.”

The thing is, with CCT, most people do make the right choices. More children attend school. Debt levels drop. A study of a Nicaraguan program showed parents not only invest a larger portion of their incomes in their children’s health and nutrition, but also read more to their kids. Even in the worst-case scenario, if mom or dad spend the cash on tobacco, at least a child who otherwise wouldn’t, gets to go to school, eats nutritious food, has a higher likelihood of being born without HIV infection. In the long fight against poverty, that might be the biggest marker of true change.

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