KYEGEGWA, Southwest Uganda — When economist Dean Karlan traveled to a remote corner of Uganda to check on a poverty-reduction program he helped design, he found a surprising sight: half the money in a group bank account lay untouched. Members of the program weren’t borrowing as much as the rules allowed.
The program uses the Graduation Approach, a straightforward idea: you need some capital to start earning. Traditional graduation projects give ultra-poor households a small asset grant (roughly $200), plus training and coaching to launch microenterprises in farming, animal rearing or services. These programs have delivered positive results in about 20 countries and earned praise as a promising route out of extreme poverty.
Karlan, founder of Innovation for Poverty Action and formerly USAID’s chief economist, tested a twist in Uganda. Rather than handing out individual grants, groups of about 20 households received a single block grant of roughly $4,000 to manage together. Each group set its own borrowing rules, interest rates and repayment terms. The idea: let members access larger loans than an individual grant would allow, pool interest earnings to reward successful entrepreneurs, and protect the most vulnerable from being left behind.
The project, called SMILES (Sustainable Market Inclusive Livelihood Pathways to Self-Reliance), is implemented by AVSI Foundation with a $28 million gift from the IKEA Foundation. About 14,000 households, including refugees and local Ugandans, are eligible. Innovation for Poverty Action is monitoring outcomes through the program’s planned end in 2027 and beyond.
Karlan’s visit focused on why many groups were not tapping the block grant. He sat in twice-monthly group meetings where coaches review members’ businesses. One participant, 23-year-old refugee Jacquerin Kabanyana, fled war in the Democratic Republic of Congo in 2018 and lives with extended family in a single-room hut. Before the program, occasional day labor left his household surviving on about $5 a week and often skipping meals.
Kabanyana used program support to start raising and selling goats. Early on he said a $74 grant helped get him started; later he reported, ‘I took out 500,000 shillings (about $140) to buy two goats.’ Over two years he more than doubled his weekly income to about $13, began building a larger home and diversified into sheep and chickens. Still, when Karlan asked why he didn’t borrow enough to buy four goats at once, Kabanyana explained he preferred to ‘first see how the market is’ and expand cautiously.
Many group members voiced the same caution. Some refugees had previously received monthly food cash from the World Food Programme, financed in part by the U.S.; those transfers were cut amid the Trump administration’s 2025 overhaul of foreign aid. Participants said the aid reductions reduced local market activity and left customers with less money, shrinking demand and making entrepreneurs reluctant to take loans to expand.
Practical hurdles mattered too. Several people complained the bank holding the block grant was far away—an all-day trip for some—or that they distrusted formal banks. In one meeting a tin box with the group’s records and a small emergency fund sat in the center of the room; members pointed to it as their safety net. ‘It’s where our hearts are. It feeds our families,’ one woman said, explaining why they treated those local savings with special caution.
Karlan and AVSI staff recognized a deeper reason beyond logistics: risk aversion. For households on the edge, preserving what little they have is a survival strategy. Taking financial risks is terrifying when a failed investment could mean missed meals. ‘What we’re seeing clearly is that it’s deeper than you need money to make money,’ Karlan said. ‘You also need to be able to take on risk to make money. And that’s a double whammy for someone who’s poor.’
The block-grant design was meant to speed the path to larger, steadier incomes. It rewards high performers—borrowers who generate profits shoulder part of those gains through interest payments—while still keeping support for the most vulnerable. Karlan compared it to a coach who maximizes playing time for the best players to help the team win. But in this team dynamic, trust, confidence and local market conditions determine whether people are willing to borrow and invest.
The bigger funding picture added pressure. Before January 2025, USAID had been increasing support for graduation models, with significant additional funding under Karlan’s watch as chief economist. After the U.S. policy shift deprioritized certain foreign aid programs, some USAID-funded graduation projects were halted—one in Palabek was canceled just as it was about to start. With traditional funders stepping back, program designers felt pressure to extract more impact from limited resources and to find scalable approaches.
After talking with participants and coaches, Karlan and AVSI adopted practical changes. To remove the barrier of long trips to the bank, groups will be allowed to borrow from the block grant via mobile money—the electronic wallet system widely used across lower-income countries. Coaches will continue building trust, encouraging members to try small experiments and helping households manage risk. AVSI’s director of programs, Rita Larok, has been gently urging groups to use the funds more actively, reminding them that ‘this money is supposed to help you make more money.’
There were lighter moments too. In one meeting a group leader dubbed Karlan ‘jubu jubu,’ a Runyankore term for a high authority, and asked if he could help them buy a tractor. Karlan replied they didn’t need outside authority—the block grant was already sitting in the bank; what they needed was the confidence and coordination to borrow and invest together.
Karlan and the project team hope that as group members work together, trust will deepen and the block grants will be used more effectively. Over time, successful borrowers could expand their businesses, generate income and pass along benefits that help others graduate out of poverty. But the Uganda experience shows how fragile progress can be: global policy shifts, weak local demand, distance to financial services, distrust of banks and the severe downside of risk for subsistence households all shape the decision to borrow.
The SMILES program will continue to track results, and Karlan believes the block-grant model—with practical tweaks like mobile money access and persistent coaching—can make graduation programs more efficient and reach more communities even as some traditional funders pull back. For participants such as Kabanyana, the cautious approach is not mere timidity but a practical response to harsh realities: access to capital is necessary but not sufficient—the ability to bear risk when failure could mean going hungry is equally crucial.