Microfinance and street children: is microfinance an appropriate tool to address the street children issue ?

2.2. Effectiveness and sustainability: the trade-off

Our previous section outlined that microfinance is a new way of intervening in the lives of street children and sketched some programs worldwide. This section is aimed at discussing the two important concepts which will follow us in the next pages of our paper, and which must be kept in mind whenever discussing microfinance for street children.

2.2.1. Effectiveness

Any intervention addressing street children need to be effective, i.e. it needs to create a positive impact on them. The three programs highlighted above, although no formal impact assessment has been carried out, underline that such interventions do have positive impacts on street children, as street children are asking for it and such access does enhance the street children self-esteem and helps them to have a better future.

However, two objections may be put forward by MFIs and YSOs who are still reluctant to serve street children.

· Supply-driven demand: Providing financial services to street children may be a pushing factor to the street, because of the supply-driven demand it may generate: the greater is the supply and the greater may be the demand, and the worst may be the street children issue. For example, Lewis (1998)^76(*) does argue that programs for street children often make life on the street more bearable, thereby contributing to an increase rather than a decrease in the number of street children.

· Mitigation of positive impacts: even if some positive impacts may exist for some street children, they can be mitigated by negative ones. For example, street children may use the money provided to them in buying things that increase their vulnerability, such as drugs and alcohol; they may also want to leave completely school, and to start working because of their new profitable working activity.

What could those organisations argue against those objections? Mainly two things:

· Targeting strategy: Kobayashi (2004) points out that some solutions exist in order to mitigate those incentive effects and propose two solutions:

a. Good targeting mechanism, by setting clear criteria in order to have a barrier to entry in the programs;

b. Prevention, by initiating some activities in the local places of children in order to avoid migration.

· Holistic approach: In order to mitigate the negative impacts, the programs outlined before point out the necessity to have a well-designed intervention which adopts a holistic approach, and therefore tackles all the vulnerability parameters of street children.

Assuming that such intervention may be effective by following a holistic approach (this assumption will be discussed in the following section), this second argument leads us to analyse the second important concept, namely the sustainability.

2.2.2. Sustainability

Assuming that microfinance for street children may need a holistic approach leads us to discuss our second core concept: the sustainability.

Indeed, providing additional services such as training and education means designing a «microfinance plus program» ^77(*) and avoiding a minimalist approach centred only on the provision of financial services.

However, as pointed by Nagarajan (2004), a microfinance plus program is generally costly to administer, and may face difficulty in achieving viability without continued subsidies. In other words, this approach can jeopardize the sustainability.

Indeed, financial sustainability requires the organisation to cover all its costs (cost of capital, administrative costs and provisions for loan losses) thanks to the revenues generated by the intervention in order to reach the maximum of poor people thanks to a minimum of resources^78(*).

This means essentially doing two things:

§ Keep operating costs to a minimum

§ Set interest rates on loans in such a way that it covers all these costs

But those two criteria may be hardly reached in case of street children taking into account the necessity to provide a holistic approach. Indeed, keeping operating costs to a minimum would mean providing no additional services that street children may need. Moreover, setting high interest rates would mean targeting the better off street children as well as reducing the total profits of the child.

So here appears a trade-off between effectiveness and sustainability, where on one side we may have an effective but a financially unsustainable project; and on the other side a financially sustainable project, but which is less or not effective.

Taking into account our objective, i.e. to maximise the street children well-being, we would argue that even if the microfinance program for street children is financially unsustainable, it could have sense to launch it if the project is effective. This leads therefore to assume that, most probably, a microfinance intervention for street children will not be financially sustainable and therefore will need to depend on subsidies.

But assuming this should not stop us from thinking about our research topic. Indeed, if the provision of financial services to street children is an effective system of delivering those subsidies, a microfinance program for street children could have all its sense. Moreover, the impossibility (or difficulty) to have a financial sustainable program must not avoid us from thinking about program sustainability, which means finding a way to guarantee a long-term viability of the program, keeping in mind the limited amount of subsidies available. We will therefore view in this paper «program sustainability» in terms of two parameters:

1. Minimization of the intervention costs

2. Ability and commitment of the organisation to keep delivering the adequate services in the

long-term

* ⁷⁶ Quoted in Kobayashi (2004)

* ⁷⁷ The term «microfinance plus» refers to programs which provide financial services along with other services.

* ⁷⁸ As pointed by the CGAP, financial sustainability is not an end in itself, but it is the only way to reach significant scale and impact far beyond what donor agencies can fund. See www.cgap.org/docs/KeyPrincMicrofinance_CG_eng.pdf