Economist Dean Karlan observed that approximately 50% of a $4,000 block grant, provided to groups of about 20 people in a poverty alleviation program in Uganda, remained undisbursed.
The program, which is based on the Graduation Approach, aims to lift individuals out of extreme poverty by providing financial grants and coaching to establish small businesses. Karlan's innovation introduced block grants managed jointly by groups, allowing members to borrow larger sums and distribute interest earnings among themselves.
Participant Observations
During a two-year check-in, participants provided multiple reasons for not fully utilizing the available funds:
- Market Conditions: Jacquerin Kabanyana, a refugee from the Democratic Republic of Congo, increased his weekly income from approximately $5 to $13 over two years through livestock farming after receiving an initial $74 loan. However, he reduced his subsequent loan request due to observed reduced market activity.
- Aid Cutbacks: Several group members attributed the decline in market activity to cutbacks in World Food Programme aid, which had previously provided monthly cash to refugees. This aid is scheduled to be phased out by spring 2025, following a foreign aid policy change by the Trump administration.
- Logistical Barriers: Some participants cited the significant travel distance and time required to reach a physical bank for loan transactions.
- Distrust of Institutions: A general lack of trust in banking institutions was also expressed.
- Risk Aversion: Antoinetta Justine, a participant, stated that the group's pooled funds represented their financial security and expressed a reluctance to deplete them, highlighting a broader fear of financial risk.
Rita Larok, AVSI's director of programs, encouraged participants to borrow more to increase collective interest earnings.
Economic Analysis and Program Adjustments
Karlan noted that the fear of risk is a significant barrier for individuals living in extreme poverty, as the consequences of business failure can be severe. The block grant model was designed to accelerate income generation and provide a more stable financial foundation, with interest payments rewarding high-performing members.
The Trump administration's overhaul of foreign aid policy led to a reduction in USAID funding for graduation model programs, including the termination of a similar program in Uganda.
In response to participant feedback and observations, Karlan and the AVSI team decided to implement adjustments:
- Mobile Money Access: Participants will be able to access funds via mobile money, an electronic wallet system, to reduce travel burdens.
- Enhanced Coaching: Coaches will continue to encourage participants and build confidence in managing and utilizing the funds.
During a meeting, a group leader, Tumurhiwe Justine, requested assistance in acquiring a tractor. Karlan suggested that the group could finance such a purchase using their existing, unutilized block grant funds.
The Sustainable Market Inclusive Livelihood Pathways to Self-Reliance (SMILES) program, funded by a $28 million donation from the IKEA Foundation, aims to support 14,000 households. The program is managed by the AVSI Foundation, with monitoring by Innovation for Poverty Action, and is scheduled to conclude in 2027.