A Poverty Outreach Index and its Application to Microfinance

This paper aims to develop a scale sensitive poverty outreach index through a modification of the "Foster, Greer, and Thorbecke (1984) poverty measure".

The paper uses the insights that the authors have gained from poverty measure literature and applies them to the empirical measurement of poverty outreach in microfinance organizations (MFOs).

It states that:

• The desirability of any poverty measure is determined by its end use;
• In the case of microfinance, a precise measure of depth of outreach is critical in determining policy;
• When examining the depth of outreach, the existing class of poverty measures has limited value since they do not take institutional scale into account.

The paper aims to answer the questions:

• How do MFOs' depth of outreach compare across regions and by institutional type?
• Can MFOs have a deep outreach without being subsidized?

The paper finds that:

• The application of the poverty outreach index to MFOs reveals a completely different outreach ranking than traditional measures of outreach such as average loan size;
• Banks and credit unions have greater poverty outreach than smaller, subsidized non-governmental organizations (NGOs) that target the poor;
• This casts doubt on the commonly accepted belief that the only way to reach the very poor is through small, subsidized NGOs.

The paper concludes that self-reliant MFOs with scale economies may offer the most promise of reaching the largest number of poor.