June 30th, 2017

Our first blog in this series discussed the Hunger Safety Net Programme and savings groups (SGs), for which we’ve also sought to use market based approaches. Part Two, discusses the use of a market based approach in graduation programmes.

Graduation programmes improve the lives of the poor but they do so at a cost. Getting cash or in kind support to one person so that they can buy assets and start a business costs 1452- 5500 purchasing power parity dollars[1] leaving funders and governments with a sticker shock that stops good programs from scaling.

FSD Kenya and CARE have an idea they hope will help: work with market actors, such as the government, traders, and financial service providers, to deliver a stipend, savings, skills training, transfer of a productive asset, and constant coaching on life skills, confidence building and intrinsic motivatione call this idea ‘making markets work.’

Studies in Marsabit County show that many poor people don’t have the business or technical skills they need to get jobs or create businesses that might help get them out of poverty. There are very few institutions that provide skills training besides non-profits, which are unsustainable.

Studies also show there isn’t enough financing to support viable business operations.

For SGs, we’ve tried to push for commercial delivery and eventual profitability, or at the very least sustainability. But they still require grant funding. HSNP cash stipend delivery uses a commercial financial institution to disburse government transfers.

The first step in ‘making markets work’ is understanding the market and the failures that limit engagement with it. For example, in parts of Marsabit where honey production could be an opportunity there aren’t commercial service providers which means people have to get things like bee hives, harvesting gear and packaging from either NGOs or outside the county. This means people are missing the opportunity to sell the unprocessed product in small quantities in Nairobi at a marked up price.

Essentially, we’re trying to address the reasons markets aren’t working. Do suppliers need to be nearer to the producers? Do producers need business training? How can households be better linked to markets?

Participants will also get technical support to increase skills and productivity. They could pay for training in some regions or, in others, they could be embedded into the value chain.

Another important component of the graduation model is building self-confidence and motivation through coaching and mentoring. This pilot delivers it through a self-help group (SHG). It is expected to also reduce the need for grants though it may be difficult to completely eliminate it given the need for quality control and literacy levels in the region. But still, if costs are successfully reduced, we’ll reach larger numbers.

FSD also intends to shift the delivery approach by testing the use of commercial credit through a partnership with a commercial financial institution to develop a tailored credit solution. There are concerns about loan repayment capability but the modelling of the IGAs has shown they will be profitable enough to repay loans.

This is only the beginning. We’re excited to continue reviewing this innovative approach as we learn from the failures and incorporate the successes of ‘making markets work.

1] Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that the exchange rate between two countries should equal the ratio of the two countries’ price level of a fixed basket of goods and services. When a country’s domestic price level is increasing (i.e., a country experiences inflation), that country’s exchange rate must depreciated in order to return to PPP.

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