Microfinance in development discourse: Mission drift, absolute failure or simply misunderstood?
On 28th October 2013, the BBC ran a headline “The Bangladesh poor selling organs to pay debt” http://www.bbc.co.uk/news/world-asia-24128096 and as if this wasn’t bloodcurdling enough, the story carried alongside an equally disturbing photograph. The photo shows the scarred torso of one Mr. Mohammad Moqarram Hossen, a microfinance client whose accumulating debts had forced him to sell off one of his kidneys to repay microcredit loans. As the story carried on, this was, but one example of what had become a common phenomenon among Bangladeshi microfinance clients. To many people, this was reminiscent of that summation in Bloomberg BusinessWeek’s storyline of 12th December 2007; “The Ugly Side of Microlending” (Epstein and Smith, 2007) and by large measure confirms what critics have upheld for a long time – that microfinance is not good for the poor. In the commentaries that followed, many readers had passed their verdict: microfinance is a failure and the better alternative for eradicating extreme poverty is social protection. I would like to take a fairer look at the two approaches.
Microfinance and social protection have been dominant paradigms on the poverty alleviation landscapes for some time. While the former’s ‘proven’ contribution to poverty alleviation became a folklore of the early 1990s – based on the much celebrated achievements of Muhamad Yunus’ Grameen Bank to use ‘pocket change-sized loans’ to transform over 2 million Bangladeshi peasants into budding entrepreneurs, the role of social protection has not been that visible (Khandker 1996). Microfinance, notably, is the later version of its earlier form – microcredit – the provision of small credit services (typically below 100$) to poor people for microenterprise development. What makes it ‘finance’ was the result of subsequent adjustments when additional services such as savings, insurance, transfer services and other similar garnishings were introduced out of realisation that credit wasn’t the only need of the poor.
Social protection on its part was more or less a spontaneous response to widening income inequalities brought forth by the drawbacks of global neoliberal market forces and their failure to guarantee quality livelihoods for everyone. It is thus no wonder that the major proponents behind social protection campaigns have always tended to be in some way linked to the Brettonwood institutions like the World Bank, IMF and IFC; to whom social protection is a passionate crusade to salvage the damaged reputation of the capitalist dogma. Its promoters, notably the World Bank would conveniently point at some of its key achievements such as in Kyrgyzstan whereby it was noted in 2003 that without social protection, extreme poverty head count would have increased by 24%, poverty gap by 42% and the severity of poverty by 57% (World Bank 2003).
My interest at this point is to re-examine the roles usually attributed to either of the two approaches within the scope of international development; especially the claim held by some, that microfinance makes a deeper contribution to poverty alleviation while social protection plays a palliative role to blunt the biting effect of poverty on very vulnerable people.
The initial expectation when microfinance first burst on the development scene in the 1970s was that its main mission remained foremost that of reducing poverty among low income people by providing them unprecedented access to credit or seed capital for investments. The last part of this narrative was particularly appetizing to the World Bank and its associated institutions that had been grappling with ways of delivering sustainable poverty reduction strategies in developing countries without much success. The botched rural credit schemes of the 1950s and 1960s had already left its mark on the pride of economic ideologues within the Bank who had hitherto thought credit schemes delivered through governments of fragile states would certainly generate the ripple effect of agricultural and enterprise initiatives leading to imminent growth. What few of the experts saw at the time was the glaring omission of the much needed linkages such as enterprise skills, developed markets, delivery channels and financial literacy that was necessary to spur real economic bubble. Of course, sceptics of the World Bank’s interventions were quick to point that its real intention was to quickly spread the bounds of the market economy in support of the capitalist infrastructure by expanding financial markets; and much less, improved livelihoods for the poor.
It was no wonder that the dawn of microfinance did not see an immediate acceptance by the World Bank as it was seen by then as another wasteful attempt to work with the poor. However, the allure of microfinance was later to show in its potential to economically empower poor people and yet remain profitable at the same time; that is, doing well by doing good. This was the antidote that the Bank was waiting for. Thus working with US financial agency ACCION with direction of USAID, an initial experimentation with Bank Solidarido in Bolivia, where an NGO PRODEM was successfully converted into a profitable microfinance for the poor, promoters of microfinance got the much needed proof to convince all and sundry that this was the ‘magic bullet’ for fighting poverty. It is my conviction that this is where the seeds of later criticisms, ridicules and bashing of microfinance were sown, for, any seasoned development interventionist would almost certainly agree that no single intervention can alleviate poverty on its own hence such a claim was, to a large extent, redundant. This claim set high expectation for microfinance initiative and within a short period of time, Consultative Group to Assist the Poor (CGAP) – an agency within the World Bank was set up with a mandate to spearhead the quick spread of microfinance portfolio throughout the developing world.
Microfinance – More sinned against than sinned?
I draw on the Shakespearean expression in King Lear to postulate a soul searching question on as to whether microfinance is perhaps being judged too harshly than it deserves. To get to the bottom of this we need to invoke the major tenets of the classical microfinance theory of change. First, it assumes that poor households access microfinance services (mainly loans, savings and micro insurance), second; they invest this money into microenterprise activities and thirdly they run these microenterprises as profitable ventures which they use to boost household consumption, thus leading to poverty reduction.
It is basically clear that microfinance has not been wholly successful in delivering on all the three fronts because, as observed in the recent Microcredit Summit 2013, the world is still short of its target of overall financial inclusion. Millions of people globally still lack access to the much needed credit and microfinance does not attend to the needs of the marginal poor like the terminally ill and the elderly. Again, not all those who access microenterprise loans use them for the intended purposes. Evidence shows that most microenterprise clients use the loans for household consumption smoothing including buying food, paying school fees and medical bills. Due to lack of adequate business skills, many microenterprise loan borrowers hardly see any profit out of their businesses. But can we therefore say microfinance has failed in its mission or should we blame ourselves for not having set the right mission for microfinance?
To answer this we need to go back to the initial role of microfinance as understood in the beginning: Rather than being seen as a magic bullet for poverty reduction, microfinance should be seen as a means of reducing vulnerabilities of the poor to extreme effects of poverty. Hence just like social protection, it plays a palliative role of building the poor’s resilience to cope with adversities of survival and other life’s challenges. However, unlike social protection, it places resilience mechanisms in the hands of the poor themselves as they acquire business skills and are able to build assets which can be transformed into further bulwarks against multiple difficulties. Although its dividends on women’s empowerment will always remain debatable, it nevertheless constitutes a welcome surprise.
Khandker, S.R. (1996) Grameen Bank: Impact, Costs and Programme Sustainability. Asian Development Review, (14)1, pp. 65-85.
The BBC World Service (2013) The Bangladesh Poor Selling Organs to Pay Debt. BBC Online, published on 28th October 2013; Available online at: http://www.bbc.co.uk/news/world-asia-24128096
Epstein, K and Smith, G. (2007) The Ugly Side of Microlending. Bloomberg BusinessWeek Magazine. December 12th, 2007.
World Bank (2003) The Contribution of Social Protection to the Millennium Development Goals, Washington, DC: World Bank