KYEGEGWA, Southwest Uganda — Economist Dean Karlan came to a remote part of Uganda to check on a program he helped design to lift people out of extreme poverty. The program uses the “Graduation Approach”: give very poor households a small asset grant (often about $200) plus coaching to start a microbusiness — raising animals, farming, hairstyling, selling clothes — and aim to move them into sustainable livelihoods. Graduation programs have shown success in some 20 countries and been called a “promising ladder from poverty.”
Karlan, founder of Innovation for Poverty Action and formerly chief economist at USAID, introduced an innovation for a large-scale program in Uganda. Instead of only individual grants, his design gave block grants of roughly $4,000 to groups of about 20 households to manage jointly. Groups set rules for borrowing limits, interest rates and repayment schedules. Members could borrow larger sums than the standard $200; interest paid on loans would be shared among all group members. The idea: reward higher-performing members while supporting the most vulnerable, creating a faster on-ramp to larger, more stable incomes.
The program — SMILES (Sustainable Market Inclusive Livelihood Pathways to Self-Reliance) — is run by the AVSI Foundation with a $28 million donation from the IKEA Foundation and made 14,000 households eligible, including refugees and local Ugandans. AVSI hires and trains coaches; Innovation for Poverty Action monitors progress through to the program’s planned end in 2027 and beyond.
At a two-year check-in, Karlan was surprised: about half the block grant funds were still sitting untouched in bank accounts. People were borrowing far less than they could. Conversations with participants revealed multiple reasons.
Goat farming and caution
One participant, 23-year-old refugee Jacquerin Kabanyana from the Democratic Republic of Congo, used $74 from the program to buy two goats. In two years he more than doubled his weekly income to about $13, repaired and expanded his home, and added sheep and chickens to his livestock business. Yet when Karlan asked why Kabanyana didn’t borrow more — enough to buy four goats at once — Kabanyana said he wanted to test the market and his ability to manage the business before scaling up.
Other group members echoed caution. Some reported that local markets had slowed because many refugees had previously received monthly cash from the World Food Programme, funded in part by the U.S.; those payments were cut in a 2025 overhaul of foreign aid. With less cash circulating, demand in markets fell, reducing the appeal of borrowing to expand. Others said borrowing required a long trip to a distant bank, sometimes a full-day errand, and some distrusted the bank.
Emotional and practical barriers
At a group meeting, a woman named Antoinetta Justine stood up and pointed to the group’s tin box holding records and some cash for emergencies. “You see this money here? It’s where our hearts are. It feeds our families. That’s why we are more responsible about it,” she said. For many households living on the edge, the priority is preserving scarce resources. The perceived risk of taking a loan — and potentially losing even that small safety net — weighs heavily. Karlan called this a “double whammy”: the ultra-poor need capital to grow but also must be willing to take on risk; for them the costs of failure are especially severe.
Karlan and AVSI coaches encouraged larger borrowing, pointing out that more borrowing could generate more income and thus more interest to share. But responsibility, fear, and short-term shocks trumped that logic for many.
Why the block grant?
Karlan’s rationale for the block grant was to allow faster scaling for those who could productively use more capital while preserving group-based support for the most vulnerable. The group structure is meant to let effective entrepreneurs “play more minutes” so the whole group benefits, similar to a coach allocating more time to top players to win a game. Interest payments effectively redistribute gains to the group.
The U.S. aid shift and urgency to squeeze more impact
There is added urgency to finding efficient ways to help people graduate because of shifts in U.S. foreign aid. Before January 2025, USAID was becoming a major funder of graduation programs; funding for such programs had risen substantially while Karlan was chief economist. But the Trump administration’s overhaul of foreign aid cut or reprioritized many programs. NPR reported a separate USAID-funded graduation program in Uganda that was terminated just as it was about to launch, leaving thousands without expected support. Development assistance and poverty programs have not appeared prominently in the administration’s new foreign aid strategy, and USAID’s role in funding graduation work has diminished. In that context, Karlan said, making each dollar work harder — for example, through innovations like block grants — could help serve more communities with less funding.
Tweaks and adaptations
After listening to participants and coaches, Karlan and AVSI decided to tweak the program to address practical barriers and build confidence. Instead of requiring borrowers to visit a physical bank, participants will be able to access block-grant loans via mobile money wallets, which are widely used in many lower-income countries. Coaches will continue to encourage borrowing and help build trust and financial management skills, with the expectation that group cohesion and repeated interactions will increase use of the block grant over time.
Community suggestions reflected this confidence and ambition. At one meeting, group leader Tumurhiwe Justine joked that Karlan, addressed respectfully as “jubu jubu” (high authority leader), should help them get a tractor for farming. Karlan replied that they could buy one themselves — pointing out the unused block grant funds in the bank — and the room erupted in laughter and nods.
Conclusions
The experience in Uganda highlights that giving money alone is not always enough. Even when larger, collective capital is available, people living in extreme poverty may refrain from borrowing for reasons that combine market conditions, logistical barriers, distrust, and the deep psychological weight of risk when survival is precarious. Program design can evolve — simplifying access through mobile money, strengthening coaching, and adapting to macro shocks — but solutions must account for both financial and nonfinancial constraints. In an era of shifting donor priorities, finding ways to “squeeze more juice” from available funds may be essential to help more households move up from extreme poverty.