Economics of Microfinance

							                         UNIVERSITY OF CAPE COAST
                         DEPARTMENT OF ECONOMICS


               MICROFINANCE CONFERENCE, JANUARY 2007.


            LINKING MICROFINANCE, POVERTY AND HIV/AIDS:
                THEORETICAL AND EMPIRICAL REVIEW.

                      PRESENTED B JAMES ATTA PEPRAH
                            JAMES ATTA PEPRAH

                                      &
                            SAMUEL KOBINA ANNIM
                          DEPARTMENT OF ECONMICS
                          UNIVERSITY OF CAPE COAST.

ABSTRACT

Proponents of microfinance often state that its primary purpose is to provide investment
capital for micro enterprises development so that clients can grow their income and
assets. A complementary microfinance strategy is to assist clients to protect their income
and assets from impact of crises events such as HIV/AIDS and its related diseases such
as syphilis and gonorrhoea.

Africa, Asia and the World at large face a serious HIV/ AIDS epidemic and the people
most at risk are the poor in general and women in particular. This group of people is also
the target for microfinance initiative. This paper reviews some theoretical and empirical
literature about poverty, HIV/AIDS and microfinance. A link is established between
microfinance, poverty and HIV/AIDS. The paper establishes the fact that if microfinance
can reduce poverty then it could also be used as a powerful tool for preventing
HIV/AIDS. The justification is the fact that as a result of high level of poverty, the
vulnerable in society mostly women seek alternative means of livelihood as a result of
which they fall victim to the dreadful disease.

The paper finally enunciates policy recommendations to help microfinance institutions
embrace the reality of HIV/AIDS in meaningful and effective ways, support the
prevention of HIV/AIDS, and mitigate the economic impact of HIV/AIDS on affected
households.

Confidence in the reliability of the theoretical and empirical review opens many avenues
for further research that could exploit micro and macro dimensions of this issue




                                            1
INTORDUCTION

About half of the world’s population live on less than two dollars a day. Some 125
million children are not in school and more than 500 million women are illiterate. About
1.5 billion people do not have access to safe water within some of the communities in the
Sub-Saharan Africa and Asia, one child in five will not live to see his or her fifth birthday
(Chen and Ravallion, 2004), the case of infant mortality. In addition to this the
HIV/AIDS syndrome is also claiming lives of the poor adults living behind orphan
children. About 33 million people are infected with HIV/AIDS the world over. Out of
this figure, 25 million live in sub-Saharan Africa. Every year about 2.5 million people get
infected with the virus. For example according to ILO Report one out of five women in
Zambia is infected with the virus and there about 200,000 orphans as a result of
HIV/AIDS. In Brazil it is estimated that about 220,000 women living with the HIV virus.
UNAIDS estimated that between 210,000 and 560,000 adults and children in Ghana were
living with HIV/AIDS at the end of 2003 (UNAIDS, 2004). According to estimates from
the HSS, the national prevalence rate for HIV has increased from 2.4 percent in 1994 to
3.6 percent in 2003 (GHS, 2003).
        These conditions have worsened the poverty situation the world over. Many
intervention have been put in place to combat the issue notably among them is the
Millennium Development Goals, a millennium project, with eight major goals to be
achieved by 2015. The first of such goals is to: ―eradicate extreme poverty and huger‖
which incorporates microfinance intervention; and the sixth is to: ―combat HIV/AIDS,
malaria and other diseases by 2015‖.
        In the early seventies experimental progammes extended tiny loans to groups of
poor women to invest in micro-businesses, and that gave birth to microcredit. Some
pioneers include the Grameen Bank in Bangladesh; ACCION International in Latin
America and the Self Employed Women’s Association Bank in India. The Grameen Bank
concept proved successful by alleviating many women out of poverty through the
powerful initiative of Pof. Muhammed Yunus. During all this while, HIV/AIDS was not
considered in the intervention framework.



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          Microfinance has proved to be a tool for deepening the financial sector growth,
which in turn leads to poverty alleviation although there is some disagreement about
whether and under what circumstances this occurs. The microfinance policy of Tanzania
for example has the objective of providing savings and credit facilities to alleviate
poverty (Tanzania Ministry of Finance, 2000). It is on record that microfinance has three
big promises according to Norwood (2005), they are:
           To reduce poverty
           To empower women and
           To enhance family planning knowledge.
Norwood does not give us the environment within which microfinance could achieve the
above three objectives. It is important however that we give credit to Norwood for
including family planning issues but to a large extent this can be achieved with the
assistance of the government.
          MicroSave argues that microfinance is widely seen as improving livelihoods,
reducing vulnerability, and fostering social as well as economic empowerment. The
implication is that microfinance is an attractive tool to help the poor.
Bloom et. al. (2001) also establishes the fact that poverty has a direct link with
HIV/AIDS. A survey of 15,557 adult women was conducted and interesting results were
found. According to them the poorest young women are likely to have engaged in earlier
sex than their rich counterparts, an important risk factor. In addition, the wealthiest
women are as twice as likely to practice safe sex as the poorest women. It can be inferred
from Bloom’s findings that the poor are at higher risk than the rich. Should they be
engaged in an income generating activity, they will be occupied and there is the
possibility of reducing the risk.
      Nattrass (2004) uses the term ―Sexual economy‖ to describe sexual activities
that men and young women engage, in exchange for money. The participation in
the sexual economic activities, as a result of poverty, places young women, in
particular, at higher risk of HIV transmission and infection. Nattrass quotes
Akeroyed (1997) who asserts that sexual culture places women in a vulnerable
situation regarding HIV infection, and poverty exacerbates it by encouraging women
to engage in sex as an economic strategy for survival. The forward and backward

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linkage between poverty and HIV/AIDS cannot be underestimated. As poverty can cause
one to contract the disease, the person becomes poorer at the post infection period. It
means that HIV/AIDS can also worsen the poverty situation of the individual
       The Canadian Aids Society confirms that ―Living in poverty is a determinant of
health that increases vulnerability to HIV‖ (CAS, 2004). Poverty pushes the vulnerable in
the society to engage in indiscriminate sex with the view to earning a living as well as
catering for their children. Single parents (mostly women) find it difficult to cater for
their children and may therefore resort to any loose means of livelihood including
indiscriminate sexual behaviour. Poverty may also lead to homosexuality where the host
partner aims at making money to survive.
       The issue is if microfinance is a powerful tool of alleviating poverty, then
microfinance could also be a powerful tool to reduce the risk of acquiring HIV/ AIDS
and its related diseases. How can the millennium development goal one be linked to the
millennium development goal six? Does this mean that there is a linkage between
microfinance and HIV/AIDS and its related diseases? Are practitioners, programme
planners and donors aware of this linkage? What kind of support services should be
provided by microfinance institutions in order to address the issue of HIV/AIDS? This
paper seeks to establish a linkage between microfinance and HIV/AIDS.
            .
MICROFINANCE-POVERTY-HIV/AIDS: A CONCEPTUAL FRAMEWORK
       Conceptually microfinance is defined as programmes that extend small loans to
very poor people for self employment projects that generate income, allowing them to
care for themselves and their families (Microcredit Summit Campaign Report, 2002).
        Theory has it that the underlying causes of many diseases worldwide are poverty.
A poor person cannot have access to health care services; a poor person is likely to be
used as a tool by others for their own selfish interests. The family is burdened by working
to survive the patient. Labour productivity is reduced thus affecting GDP. Consumption
decisions are affected. In some countries educational standards have fallen because
teachers are being infected with the virus.
       The other causes of HIV/AIDS such as indiscriminate sex, blood transfusion, use
of shared tools (blades, shaving equipment, etc) are secondary factors that they emanate

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from poverty. It is therefore not true from economic perspective that the major cause of
HIV/AIDS is indiscriminate sex as put forward by Weinreich and Benn (2004) and
World Council of Churches. HIV/ AIDS is not only public health issue but also economic
issue because of the underlying factor which is poverty.
        Within this framework, poverty plays an intermediary role and at the same time
serves as a pull factor. As a pull factor if poverty is reduced, it will serve as a preventive
measure but not as a curative one. This is because even though HIV/AIDS has no cure it
is preventable. It is expected that the combination of financial and non-financial services
will reduce the poverty level of the individual. This has trickle-down effect on the family
as well as the society at large.
        The theoretical framework below suggests that microfinance provides two main
services namely financial and non-financial. The right wing shows financial services that
microfinance provides such as credit, savings, leasing, insurance and money transfer
(micro money transfer) to the poor. The result of these services is positive because they
contribute to poverty reduction. They also at the same time contribute to the prevention
rate of HIV/AIDS. The diagram shows that financial services result into high income
levels of individuals, increase self dependency, increase the level of investment of
individuals, make individuals’ income less volatile, empower women, provides higher
consumption levels, reduce household vulnerability to risks or shocks, gives greater
security, enables household to acquire wealth, provides access to basic needs, reduces
migration because beneficiaries are occupied with some income generating activities.
        The left wing of the diagram also shows that microfinance provides non-financial
services in the form of education, counseling services, business advisory services,
monitoring of business activities, training skills etc. The result of these services may
empower the poor, make them self reliant, have self confidence, be well informed and
take them out of poverty. There is likely to be a reduction in social exclusion and sexual
exploitation that are risk factors of HIV/AIDS. As poverty level is reduced all things
being equal, the probability of acquiring the disease will also reduce. Since poverty
delays access to health care and inhibits treatment adherence (Bates et.al, 2004), common
preventable and curable diseases like malaria and tuberculosis and sexually transmitted



                                              5
diseases that serve as entry points and co-factor of HIV (Stillwaggon, 2001) can be
treated earlier.
Figure 1: Theoretical Framework (Microfinance-Poverty-HIV/AIDS Linkage)




   Non-financial                        MICROFINANCE                Financial Services
   services



     Education, Counselling                                   CREDIT, SAVINGS,
     services, Business                                       LEASING, HOUSING
     Advisory services,                                       MONEY TRANSFER
     Monitoring of business                                   INSURANCE
     activities, Training skills,
     Money management
     skills
                                                          High income levels, self
                                                          dependency, Increase
                                                          investment, Less volatility
     Self confidence, Self                                in income, Empowerment,
     Reliance, Reduce                                     Higher consumption levels,
     social exclusion,                                    Reduce household
     Empowerment,                                         vulnerability to risks/shocks,
     reduction in sexual                                  Greater security, Acquisition
     exploitation,                                        of wealth (wealth creation),
                                                          Access to basic needs,
                                                          reduces migration



                                          POVERTY
                                         REDUCTION
                                           (MDG 1)




                                    COMBAT HIV/AIDS,
                                    MALARIA AND ITS RELATED
                                    DISEASES   (MDG 6)



                                            6
Source: Authors
POVERTY-HIV/AIDS RELATIONSHIP

Wealthier individuals do better than poorer ones on most measures of health status
including malnutrition, morbidity, mortality, and health care utilization (Kuate-Defo
1997; Adler and Newman 2002; Fotso and Kuate-Defo 2005). It is reasonable to expect
that poverty increases individual vulnerability to HIV/AIDS in the same manner. Gender
inequities are important for HIV transmission because many women in sub-Saharan
Africa face heavy economic, legal, cultural, and social disadvantages. Women’s
economic dependency on their male partners and lack of power in the relationship make
it difficult for them to negotiate safe sex, and may force them into transactional sex (Kim
and Watts 2005). At the same time, individuals with little or no education tend to have
poor access to safe sex information and are less likely to use condoms (Lagarde et al.
2001). Mobility significantly increases HIV-related risk because men and women with no
jobs are more likely to migrate from the rural areas to the urban centres in search of jobs
and thus have more opportunities for casual sexual contacts.
       Indeed, early HIV studies from sub-Saharan Africa showed a significant
relationship between risk of HIV infection and a history of travel (Van de Perre et al.
1987; Barongo et al. 1992). In Ghana, in the 1980s, the nation witnessed massive
migration of women to neighbouring Cote d’Ivoire and Nigeria. Majority of these women
returned with unidentified diseases suspected to be HIV/AIDS. Mobility significantly
increases HIV-related risk because men and women with more education and higher
incomes are more likely to travel and thus have higher rate of being contaminated or
being infected.
       Moreover, for some poorer women, the sexual exploitation or compulsion to
engage in risky behaviour due to economic needs may both increase their risk of infection
and lead to their economic advancement. It may be hypothesized that the epidemic starts
out among the wealthier people and certain higher-risk groups through their higher-risk
behaviours and then as wealthier become aware of transmission risks and start taking
precautions (reduce partners and start using condom, especially with higher-risk
partners), the prevalence may start to decline among the wealthier, eventually shifting the
distribution of the epidemic toward the poorer. If the infection rates decline first among

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the wealthier, as one would expect, it is possible that the direction of the correlation
between wealth and HIV prevalence could eventually change even if the infection rates
among the poor remain unchanged.
       Women’s economic dependency on their male partners and lack of power in the
relationship make it difficult for them to negotiate safe sex, and may force them into
transactional sex (Kim and Watts 2005). At the same time, individuals with little or no
education tend to have poor access to safe sex information and are less likely to use
condoms (Lagarde et al. 2001).
       Data from eight national Demographic and Health Surveys (DHS) in sub-Saharan
Africa— Kenya, Ghana, Burkina Faso, Cameroon, Tanzania, Lesotho, Malawi, and
Uganda— was conducted during 2003-2005. The association between household wealth
and HIV serostatus was examined using both descriptive and multivariate statistical
methods. Wealth was measured by an index based on household ownership of durable
assets and other amenities. It was observed that in sub-Saharan Africa poverty is the
underlying factor of HIV/AIDS.
       On the contrary, there is evidence of an inverse relationship between
socioeconomic status and risk of sexually transmitted infections, such as herpes,
Chlamydia, gonorrhoea, syphilis, and bacterial vaginosis (Ellen et al. 1995; Fleming et al.
1997; Lacey et al. 1997; Holtgrave and Crosby 2003; Kyriakis et al. 2003; Miller et al.
2003; Wald 2004; Chawla et al. 2004; Uuskula et al. 2004; Bukusi et al. 2006). Although
much of this evidence is from western countries, it is reasonable to expect that poverty
increases individual vulnerability to HIV/AIDS in the same manner. It is indeed often
argued that poverty is the root cause of the spread of the HIV/AIDS pandemic (Fitzgerald
et al. 2000). A recent article in the Lancet argued that ―since poverty plays a role in
creating an environment in which individuals are particularly susceptible and vulnerable
to HIV/AIDS, poverty reduction will undoubtedly be at the core of a sustainable solution
to HIV/AIDS‖ (Fenton 2004). At the global level, there is evidence of a positive
correlation between countries’ HIV prevalence and poverty, as measured by per capita
income, income inequality, or absolute poverty (Bloom et al. 2001). However, the
HIV/AIDS epidemic in sub-Saharan Africa represents a notable exception to this general
pattern. On the one hand, at the macro level African nations with high HIV prevalence,

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such as South Africa and Botswana, tend to be the wealthier countries in the region
(Whiteside 2002; UNAIDS 2006). On the other hand, at the individual level wealth has
been found to be positively associated with HIV serostatus (Menon et al. 1998; Kirunga
and Ntozi 1997; Shelton et al. 2005).6Several hypotheses have been put forward to
account for this apparently anomalous finding. It has been argued that greater prevalence
of risky sexual behaviours among the wealthier may increase their vulnerability to HIV
infection, while better nutritional status, greater access to health care, and greater use of
antiretroviral drugs (ARVs) may improve their survival with HIV infection (Shelton et al.
2005). Reviews of the existing literature about the association between socioeconomic
status and HIV infection indicate that only few studies have found a negative association,
whereas most have found a positive association (e.g., Ainsworth et al. 1998; Wojcicki
2005). Using data from eight recent population-based, nationally-representative surveys
with HIV testing in sub-Saharan Africa, an in-depth analysis of the association between
wealth status and HIV prevalence in the region was conducted. We are made to accept
that conceptually and theoretically the underlying cause of HIV/AIDS is poverty.


DOES MICROFINANCE HAVE IMPACT ON HIV/AIDS? : EMPIRICAL
REVIEW
        We review some studies to provide answers to the above. Costigan et. al. (2002)
and (Odek et. al 2002), report that in Kenya, the STD/AIDS Control your project
University of Nairobi and Improve Your Business undertook a project to help 209
commercial sex workers. They report that there is notable reduction in sexual risk
behaviour among borrowers of the scheme. 20% of the women left sex work completely
and those who remained in the industry reduced their average number of clients. What
might have caused this? We argue that irrespective of the transmission mechanism,
microfinance is able to prevent HIV/AIDS infection.
       Carolyn Barnes et. al (2003) undertook a study in Zimbabwe on Zambuko Trust
the largest microfinance institution in the country. Their findings were fantastic however
the study was mainly on women which seem a little bias. Their result suggests that
affected client households had more sources of income than the affected non-
microfinance clients, indicating that these clients had pursued an income smoothing

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strategy.   Also, the affected client households, compared to the affected non-client
households, had a higher proportion of the household’s boys ages 6 to 16 enrolled in
school, indicating investment in the human resources of its members. In addition,
Zambuko’s program appears to have had an impact on the way affected clients managed
their finances. In 1999, 13 percent more of the affected clients than the affected non-
clients insisted on a deposit when they extended credit to their matched enterprise
customers. Also, 16 percent more affected clients than affected non-clients had an
individual savings account with a 22 formal institution. This is the indication that if a
microfinance client is successful he or she can move away from non-formal banking to
formal banking (a form of vertical graduation). In addition, the average number of ways
the respondent saved was higher for the affected clients than affected non-clients. These
differences imply that Zambuko’s business management training has a positive impact on
the way affected clients manage their money. Carolyn Barnes and her friends are
criticised on the grounds that microfinance should be seen as a preventive tool but
management one. It is important for practitioners to be proactive instead of dealing with
affected households. This notwithstanding, we cannot despise the findings because they
serve as evidence of positive impact of microfinance on HIV/AIDS.
       A very important issue that has not been stressed by researchers in this area is that
they have not been able to determine in quantitative terms what percentage reduction in
poverty will cause a certain percentage decrease in HIV/AIDS prevention. In this paper
we attempt to fill that gap. We try to establish a relationship between HIV prevalence rate
and people living below the poverty line (absolute poverty) using the purchasing power
parity (PPP) theory. We estimate a linear equation to determine this relationship. Data on
21 African countries including Ghana were collected from the World Bank Development
Report, 2006 and World Council of Churches publication on HIV/AIDS. The result of
our estimation is as follows:
                                     PR = 5.7 + 0.12 POVL
Where PR= prevalence rate and POVL = people living below the poverty line. Our result
suggests that there is positive relationship between poverty level and prevalence rate. As
the number of people living below the poverty line increases the prevalence rate
increases. The implication is that if microfinance is a tool of creating wealth and reducing

                                            10
poverty then it is expected that it should be able to reduce the number of people living
below the poverty line. Mathematically a reduction in the number of people living below
the poverty line will lead to a reduction in the prevalence rate of HIV/AIDS. This will
ensure a direct positive linkage between millennium development goal one and six which
to us are the core issues affecting development.


CONCLUSIONS AND POLICY IMPLICATIONS
   Microfinance has earned well-deserved optimism as a development tool and for that
reason it should be approached with critical eye regarding what can be accomplished and
who will be served. In this direction and for this purpose, for microfinance programme
practitioners, donors and planners should aim at HIV/AIDS prevention. This does not
mean that MFIs should directly fight HIV/AIDS but rather address the poverty issue to
the extent that it will be effective in preventing HIV/AIDS. It has also been observed that
governments have not made the necessary provisions conducive for the operation of
microfinance institutions key among which are infrastructure, regulations and others.
These have contributed to the inability of MFIs to tackle poverty issues as well as
HIV/AIDS and malaria.
   What policy implications are there for donors, practitioners and programme
developers and providers of microfinance services?
      Donors need to be aware of the risky environment within which microfinance
       institutions operate. However risky the environment is, it must accepted that
       clients are valuable in good health and ill health and for that reason investment
       must be made in them. Donor support to MFIs will always be relied upon. Policy
       should be directed towards pulling more donors to finance MFIs in countries with
       high HIV prevalence rate.
      Programme planners of various microfinance institutions should put in place
       proper methodologies (modus operandi) that will enhance poverty reduction and
       thus reduce HIV/AIDS. It must be understood that microfinance is not an end in
       itself but rather a means to an end.
      If microfinance is powerful tool for poverty alleviation and thus can reduce the
       prevention rate of HIV/AIDS, then government support and regulation cannot be

                                              11
    relegated to the background. In some sub-Saharan African countries like Senegal,
    Kenya, Botswana, and Tanzania regulation has already started. It is about time
    other countries joined the train. In this paper we strongly advocate for holistic
    regulation of all MFIs as a matter of concern and urgency (transformation of
    MFIs). Governments should not necessarily take active participation microfinance
    but rather create conducive environment for MFIs to operate. Government should
    provide infrastructure for instance. We advocate that there should be
    MICROFINANCE LAW as it is being operationalised in Ethiopia and Tanzania
    and other African countries (Amha, 2003). Prudential financial regulations
    according to Chaves and Gonzalez-Vega (1994) will contribute to stable and
    efficient performance of MFIs especially in the case of saving mobilizing MFIs.
    Regulation will also protect the interest of donor agencies. In places where
    government takes direct participation in microfinance, disbursement of credit
    becomes very political.
   The implication for practitioners about whether microfinance should be directed
    towards social change or financial sustainability is not a matter of concern. What
    matters for policy implementation is how microfinance can reduce poverty and
    this can be done by a combination of the two approaches. Despite the fact that
    HIV/AIDS pose a threat to the financial sustainability of MFIs, if the non-
    financial services are well packaged, there will be social change which will in turn
    sustain most MFIs.
   Even though we have shown that microfinance impacts positively on HIV/AIDS
    prevention, in the opposite direction the epidemic can seriously affect the
    activities of MFIs. It is also true that HIV/AIDS can affect the portfolio of MFIs
    (Amha, 2002). Mathison (2001) argues that it is practically not sound for MFIs
    that are financial intermediaries to be directly engaged in public health
    intervention. The implication is that microfinance institutions should not directly
    get themselves involved in HIV/AIDS programmes. They are to collaborate with
    HIV/AIDS Support Organisations to respond to the epidemic by building on their
    respective institutional and technical strengths. Policy should be directed towards
    not only credit and savings but also preventive services to complement the

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       financial services. These services should be designed in collaboration with
       HIV/AIDS Support Organisations.


AREAS OF FURTHER INVESTIGATION
       Further study could be made into the form and the kind of regulations that
microfinance activities should take. We believe that is important that regulation should be
tailored to suit the financial legislation that exists in countries. Another are of research is
product development that will that will be suitable to meet the desired outcome. What
kind of microfinance product will be suitable for HIV victims? It is important as a way
forward to explore the various ways that MFIs could partner with HIV Support
Organisations to intensify the intervention process.




REFERENCES
Amha, W.(2003) Microfinance in Ethiopia: Performance, Challenges and Role in Poverty
       Reduction, AEMFI, Occasional Paper No. 7
Bates, I., C. Fenton, J. Gruber, D. Lalloo, A. M. Lara, S.B. Squire, S. Theobald, R.
       Thompson, and R. Tolhurst, (2004), Vulnerability to Malaria, Tuberculosis,
       and HIV/AIDS Infection and Diseases, The LANCET Infectious Diseases Vol.4
Canadian Aids Society, (2004); Positive Statement
Costigan, A., W.O. Odek, (2002), Income Generation for Sex Workers in Nairobi, Kenya
       Business Uptake and Behaviour Changem, International AIDS Conference, Spain.

Dunn, E., and G. Arbuckle, (2000), ―The Impact of Microcredit: A Case Study from
      Peru‖ Assessing the impact of Microenterprise Services, Washington DC, USAID

Johnson, S., and T. Kidder. (1999) ―Globalization and gender—dilemmas for
      Microfinance Organizations‖, Small Enterprise Development, Vol. 10, No. 3.

Kantor, P., (2000) ―Are Economic Outcomes Enough? Incorporating Empowerment
       Outcomes into a Definition of Micro enterprise Success: Evidence from India‖,
       Manuscript, University of Madison-Wisconsin
MicoSave Briefing Note No. 2 on ―HIV/AIDS – Responding to a Silent Economic
      Cisis‖.


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Nattrass, N. (2004), The Moral Economy of Aids in South Africa, UK., Cambridge
       University Press.

Norwood, C., (2005), Macro Promises of Microcredit – A Case of eSusu in Rural Ghana,
     Journal of International Women Studies

Stillwaggon, E. (2001), AIDS and Poverty in African Nations, 272(20): 22


Weinreich, S. and C. Benn, (2004), AIDS- Meeting the Challenge: Data, Facts and Back-
       ground, World Council of Churches, Geneva.




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