Working Paper 199 - Microcredit for the Development of the Bottom of the Pyramid Segment: Impact of Access to Financial Services on Microcredit Clients, Institutions and Urban Sustainability
Description Today, although mainstream debates on sustainability especially in urban areas are full of literature on the importance of creating sustainable cities through the involvement of different stakeholders in urban development, there is little practical orientation in the academic literature for the growing gap between the rich and poor. In addition, the current literature is enormously concerned with resource use and environmental pressures and very little is mentioned on the nexus between urban sustainability and the empowerment of the urban poor. This research attempts to remove the myths and to open debates on the segment of urban population often referred to as “the bottom of the pyramid (BOP)” regarding how they are faring in the unfolding urban phenomenon. This is done through an analysis of the microfinance innovation following an evaluation of the impacts of access to microfinance and the implications to urban sustainability. The purpose of this research is to demonstrate the role played by microfinance in urban BOP development through, 1) identifying gaps and complementing the weak existing urbanization and microfinance literature, 2) analyzing and evaluating the impacts of access of microfinance, and 3) measuring the implications of access to microfinance on urban sustainability. The research methodology uses both quantitative and qualitative methods. It employs empirical and iterative approaches based on sustainability measurements and microfinance indicators. For analysis, a new set of data derived from questionnaires successfully administered to 1006 respondents in two villages in the Kibera slum in Nairobi is used. The sample population is grouped into participants (treatment group) and non-participants (control group) who were followed for 18 months to track the impact of participation in microfinance. To measure the impacts of microfinance services on urban BOP development, this research uses non-randomized controlled trials - a combination of double difference and propensity score matching approaches. The results are used to gauge the impacts of access to microfinance and financial training services to households, businesses, microcredit institutions and to analyze subsequent impacts on urban sustainability in Kenya. The findings indicate a significant increase in per capita income of the urban slum population studied. In addition, the results show significant improvement in business skills. For microfinance institutional development, the results indicate a no impact on loan repayment and client retention rate. However, there is little or no evidence on the spillover effects of access to microfinance services on the equally important urban dwellers’ concerns such as water and sanitation, solid waste management and access to alternative energy. The main conclusion reached is that microfinance has an instrumental role to play in promoting sustainable urban development as it supports social welfare improvement and increases the livelihood of participants, business development and urban sustainability to a certain extent, thereby empowering the urban poor in contributing to poverty alleviation. The message to be derived is that there is a need to make the urban BOP segment take a more active role in development through collaboration with the government and other stakeholders. This research delivers implications for business and policy pertaining to sustainable urban development with a focus on stakeholders’ participation to improve lives in slums. The future of slum upgrading and eventual urban sustainability will depend on political willingness to ensure that the poor are empowered so as to actively participate in the process of development. For implications for business, the urban BOP segment provides business opportunities to both individuals and institutions. Microfinance businesses should be supported and operated formally to support national development through the payment of taxes. This is because current microfinance businesses within the urban BOP settings are operated informally. Also, business investment in slums should not only focus on micro-small businesses but also small and medium-sized enterprises to support industrialization. As for the implications for policy, the development of the urban BOP segment should be hinged on slum upgrading as opposed to resettlement and eviction. As a tool for urban poverty alleviation, easy access to microfinance should be promoted in order to support BOP entrepreneurship. Moreover, stakeholder participation in urban development should be promoted to improve service delivery in slums. As for policy implications, therefore, this research proposes that top-down approaches to urban development should be complemented by bottom-up approaches that involve all stakeholders in slum development to ensure that the poor are empowered to actively participate in the process of development.