Minding the gap between rhetoric and reality of microfinance
In the gamut of poverty eradication tools and strategies, microfinance continues to occupy a position of prime importance in terms of longevity and global reach. The methodology developed by famed Bangladeshi economist, Dr. Muhammad Yunus of the Grameen Bank, made grandiose promises of eradicating poverty within a couple of generations. However, the evidence produced by scholars and development researchers increasingly point to the fact that the overall effect of microfinance has been negligible.
To understand what has made microfinance a resilient model despite all the criticism, one has to understand the underlying need that microfinance tries to fulfill. Poor people still need a range of financial services as much as any other segment of the population, and when access is made available, they are willing to pay for reliable financial services. In addition, for people traversing the volatile and challenging terrain of poverty, any additional room for manoeuvre, any additional control, can be extremely valuable. This is where microfinance can become a stop-gap measure that can become useful in the short-term to obtain essential goods. However, beyond this, it is highly questionable whether microfinance can make the great structural changes it promises.
An increasing number of scholars are suggesting that in many instances, microfinance ends up making poverty worse. A large number of microfinance loans are used as consumption loans, and many households in Sri Lanka are consumed with debt as a result of these debt instruments that are heavily marketed in poverty stricken villages by representatives of microfinance institutions. Lending rates have spiralled out of control and can only be labelled as predatory, while such actors previously labelled loan sharks are now simply known as microfinanciers.
A director at a leading financial institution, reflecting on some of the failures of microfinance in Sri Lanka, ruminated that, “We made the mistake of thinking that we can make everyone an entrepreneur”. Others still hang on to isolated anecdotes of success, where individuals have been able to transcend their simple livelihoods and become entrepreneurs of note, employing multiple people and gaining access to capital markets. This however, does not prove anything in terms of the poverty or prowess of microfinance as a poverty reduction strategy. Furthermore, this mindset has been one of the reasons why the meta-studies on the impact of microfinance have been sparse. Frequent studies have acknowledged placement bias and self, peer, and lender selection of participants as major obstacles in assessing the impact of microfinance in communities.
In addition, individuals who are still championing micro-finance, often end up in a false debate with other fellow practitioners regarding the delivery model, with some of them claiming that the non-profit model is a responsible option as it does not encourage profiteering, thus reducing the incentive for representatives to induce unnecessary lending. However, a closer look reveals that non-profits inevitably need to become for-profit oriented institutions, due to the economic limits that are imposed such as inadequate lending reserves, which can translate into dangerous debt to equity ratios, and the reluctance by banks to lend to non-profit institutions.
There is also a fundamental flaw in the manner in which microfinance attempts to tackle poverty. It attempts to do this based on the goodwill of western donors, and a further de-politicisation of development. It tries to side-step the more complex issues of the effects of structural adjustment programmes, the effects of government austerity programmes, the decline and absence of social protection, and instead attempts to place the responsibility of ‘coming out of poverty’ solely on the doorstep of the poor, making the current iteration of microfinance a product of neoliberalism oriented development thinking.
While the individual responsibility narrative appealed to neoliberal ideologues, the promise of empowering women through micro-credit initiatives, appears to have been constructed to gain the support of progressive voices who are unable to mount a criticism, when facing the individually selected narratives of successful women entrepreneurs. However, as other evidence suggests women are left destitute due to failed enterprises and unmanageable levels of debt as a result of microfinance. Even many of the women who repay have criticised the extreme pressure placed on them by institutional representatives, and in the cases of group lending, by other members themselves.
Does this mean that we should abandon microfinance altogether? The answer rests squarely on how well, complimentary protection mechanisms such as state subsidies, and welfare support can be provided to cushion the impact of small business failures. In addition, the Central Bank needs to be more active and institute more robust policies centered on microfinance to regulate existing practices. A call for a separate microfinance credit bureau has been one of the proposals suggested by some to curb excessive borrowing. We will undoubtable see more tools such as social bonds, social entrepreneurship that promise to end poverty within a generation, but without addressing some fundamental questions of income inequality, asymmetries of power relationships and political representation, poverty eradication will be remain a distant fantasy.
(WALK the LINE is a monthly column or the Development Page of the Business imes contributed by CEPA, an independent, Sri Lankan think-tank promoting a better understanding of poverty related evelopment issues. CEPA can be contacted by visiting the website www.cepa.lk or via info@cepa.lk)