Targeting the Ultra Poor: The BRAC Model
In previous posts I have explained how many business models in low-income markets tend to neglect important segments of the population. For instance, women are important productive economic agents (as consumers and heads of households) who can contribute valuable assets to the commercial efforts in any company. However, very few businesses (with the exception of microfinance) have taken advantage of women’s inherent strengths to secure economic sustainability while generating social profits. Similarly, BoP businesses have yet to figure out ways of profitably supporting early child development.
Another very important neglected segment is the ‘ultra poor’. The ultra poor are the poorest people in low-income markets. These individuals fail to generate enough income to afford even basic foods and often skip meals throughout whole days (Lipton, 1983). Many of the ultra poor households tend to be headed by women who have been widowed or abandoned (Green and Hulme, 2005). These young women often live in the households with their young children who are also malnourished and ultimately join the ranks of the unskilled workforce having no assets or basic education. Additionally, the ultra poor are have very limited social assets. Often, they do not own the land on which they set up their shacks. Instead, they live on the land of their patrons, making their daily lives strongly tied up to structures of patronage and dependency.
This overlapping set of constraints and deprivations make the ultra poor structurally different from other categories of the poor (Appleton, 2001) who are served by businesses in low-income markets. Lower incomes represent only a fraction (albeit a sizeable one) of such constraints because the population living just below the poverty line represents a far more cost-effective investment for the private sector (Lipton and der Gaarg, 1993). For instance, in microfinance, smaller loan sizes translate directly into higher relative costs. Since poorer clients take smaller loans, reaching the very poor is associated with higher average costs per loan which need to be covered with higher interest rates and/or subsidies (Cull, Demirgüç-Kunt and Morduch, 2009). Also, ultra poor individuals are usually not included as members in self-selected microfinance groups. The real problem however is that the ultra poor are poorer than others because of their limited social assets, chronic malnutrition, dependency on patronage structures and vicious intergenerational poverty circle. The complexity of the structure of constraints that create ultra-poverty also requires more coordinated efforts by a diverse group of actors on many different fronts.
So far, the dominant approach to improving the plight of the ultra poor has been through food transfer programs which are often time-bound, and only provide short-term relief. Additionally, there are very few businesses targeting to the ultra-poor.(United Prosperity, a young microfinance recently profiled here, is one of the rare exceptions.) Furthermore, many of the low-income businesses that target the ultra-poor do so out of social concern, rather than because they have a business model specifically targeted at them.
The BRAC graduation model is one of the very few models developed with the specific purpose of moving participants out of food transfer and other safety net programs into income earning activities (or “graduation”) that will allow them to be economically self-sustainable. This model was developed in Bangladesh and is currently being refined with the support of CGAP and the Ford Foundation.
The graduation model is based upon sequenced development services that need to be carefully coordinated. There are three main partners required for this model to work: a financial services provider (often a microfinance organization), a livelihoods promoter (often a non governmental organization) and a health services provider. Other partners, such as an agricultural services provider, are also welcome. The model is usually championed by the financial services provider or the livelihoods promoter.
There are 5 stages in this business model (nicely described in a recent CGAP Brief). The first stage involves the careful selection of the poorest households. Selection criteria include, among other things, no ownership of productive assets and no active male members in the household (for more information on the selection criteria of the BRAC program see Matin, Sulaiman and Rabbani, 2008). In the second stage, selected households start receiving consumption support to stabilize consumption and to provide them some “breathing space”. In the third stage households are encouraged to start saving by opening an individual account in a microfinance organization. Apart from building assets, the purpose of this stage is to stimulate financial discipline on program participants and familiarize them with the microfinance organization.
The most important parts of the program are arguably the fourth and fifth stages. During the fourth stage, participants receive skills training to learn how to manage an asset and run a business. Finally, in the fifth stage participants receive a subsidized asset transfer to help them start an economic activity. To find the correct match between the enterprise and the program participant, these two stages are preceded by a careful analysis of all sustainable livelihoods options available on the basis of existing support services and market infrastructure. BRAC supports a range of enterprises such as high-yielding poultry, livestock, vegetable cultivation and other non-farm businesses. Each has different constraints and characteristics such risk factors, cash flows and required intensity of time, effort and skills (for a summary of the factors affecting enterprise viability see Matin, Sulaiman and Rabbani, 2008). Once the fifth stage is over, program participants are able to apply for credit from the microfinance provider to support their enterprise and ultimately pull themselves above the poverty line.
Pervading these 5 stages, regular monitoring is necessary to coach and support program participants. Skills-training and health support are especially important. Additionally, peer support in group meetings and self-help groups is also very useful to build the confidence of program participants. All in all, the program lasts between 2 and 3 years.
Source: CGAP Brief
Although the economic profitability of this model has not been proven (and it could be a possible weakness of the model) it is expected that the microfinance organization will receive profits in the longer term, as the ultra-poor graduate and become their customers. With regards to the social impact of this business model, the ultra poor have benefited greatly (Rabbani, Prakash and Sulaiman, 2006). Once the program finished, the percentage of households living with less than $1 a day fell from 89% to 69%. Moreover, the percentage of participants who reported going without food for entire days fell from 60% to 15%. Graduated participants also had enjoyed higher access to land, reduced morbidity and reduced vulnerability to chronic illnesses.
The BRAC graduation model could be very useful in areas with extremely high levels of poverty or areas which may have suffered an acute economic crisis, such as in Haiti (about which we have written recently due to its recent crisis). The BRAC graduation model is relatively young (it was first implemented in Bangladesh in 2002) and it will surely be refined in the near future. For instance, since this model requires such well-coordinated efforts from many different stakeholders, hybrid business models could also play an important role in simplifying daily operations. Nonetheless, it is already receiving plenty of attention and in the long term it may offer an interesting extension to BoP models in areas where relief and aid organizations are currently seen as the only way forward. Accordingly, it should come as no surprise that, in addition to the program in Bangladesh, nine other pilot programs (in Ethiopia, Haiti, Honduras, India, Pakistan, Peru and Yemen) are being conducted by CGAP and the Ford Foundation in order to adapt BRAC’s experience to other countries.