Home > Political Economy > Microfinance and other development fairytales

Microfinance and other development fairytales

from David Ruccio

The Global South is littered with failed development projects. Each one of them has been designed to solve the problem of underdevelopment without criticizing or aiming to transform the basic structures that cause underdevelopment in the first place.

The latest development fairytale has been microfinance, made famous by the Grameen Bank in Bangladesh and the awarding of the Nobel Prize to its founder, Muhammed Yunus. The idea was to turn poor people, especially women, into successful informal-sector entrepreneurs by extending to them small loans. Now, however, the myths of microfinance are being effectively dispelled. 

One critique was produced by Milford Bateman and Ha-Joon Chang [pdf], and is summarized by Madeleine Bunting [ht: sg]. As Bateman and Chang explain,

the microfinance model appears to generate a set of ‘initial conditions’ that because of path dependency tend to give rise to a set of regressive local economic and social trajectories. It fails to adequately respond to the need to promote sustainable development, while it also blocks other development policies that might have more potential for sustainable impact given sufficient (similar) resources. Perhaps the microfinance model can therefore best be likened to a case of ‘bad medicine’ – it has created some temporary feel-good effects for both ‘patients’ (poor individuals, communities, countries) and ‘doctors’ (IFIs, microfinance institutions, the international development agencies) alike, but over the longer term it is likely that it has been gradually debilitating, not curing, the ‘patient’.

I’ve also just learned of a promising new book [ht: ac] by Lamia Karim, Microfinance and Its Discontents: Women in Debt in Bangladesh. Her point is that the microfinance movement, while the darling of western development agencies and academics, has been challenged on the ground, in Bangladesh and elsewhere, from the very beginning.

Certainly, among the millions of poor people who have received small loans, there are cases where individuals have improved their lot. However, the idea of microfinance as a way of ending poverty and promoting development is  based on the neoliberal myth that people and the socieities in which they live will be able to move beyond underdevelopment through individual initiative. It wasn’t to engage in land reform or change political institutions, much less challenge the ability of feudal lords and capitalist employers to appropriate and distribute the surplus.

That’s the fairytale that has sustained the microfinance movement, which is now finally being recognized as belonging to the world of make-believe.

  1. Podargus
    March 19, 2011 at 6:07 pm

    Microfinance ? Fiddling around the edges while Rome burns.

    Seems to be a common dysfunction of Homo Saps.

  2. March 20, 2011 at 3:01 am

    For once I will heartily disagree.

    I think there is nothing wrong with microfinance per se. Its great strength is that it empowers some of the extremely poor to regain a toe hold on life. Read the book The Price of a Dream by D. Bornstein. The finance goes directly to the poorest, rather than to middle men and to the corrupt elite, like so much else of the megabuck, dam-building type of “aid”.

    Nevertheless it was never going to be enough by itself, as major reforms of economies and institutions are also needed.

    If some of neoliberal persuasion have co-opted it into their arguments then the problem is with them and their simplistic view of the world, not with microfinance. It’s the feudalism and neoliberalism that should be attacked, not microfinance.

    Btw Ruccio’s quote from Bateman and Chang is at best too vague to convey much at all, at worst meaningless academic gobbledegook (I’m an academic, I can say that).

  3. Merijn Knibbe
    March 20, 2011 at 9:08 am

    The poor do life in a monetary world. This means that they do not only have an income problem but also liquidity problems. Money has to be saved for dowries, religious events, burials (which in parts of South Africa require catering several dozens of people or even more for several days) and to finance small scale enterprise or to buy a house (or something like it) or land.

    Solving liquidity problems will cost you. It takes time, you have to pay interest (sometimes even to save!), social networks are strained.

    I do not know if Grameen bank type of companies enable people to solve these problems faster and at lower cost and risk. But they do have to be solved, faster and at lower cost. Just stating that micro finance is a fairytale does not do this. What’s the alternative?

    (Back to western history: traditionally, ‘tally stick’ systems and, much later, local agricultural cooperative banks which were rooted in local social ‘everybody-knows-everybody’ networks were some of the means to solve comparable problems. By the way – when, after 1895, small scale micro cooperative banks were established in almost every village and hamlet of the Netherlands, they did, to everybodies surprise, not mainly function as micro-credit banks but from day one as micro-savings banks).

  4. Jon Cloke
    March 20, 2011 at 5:16 pm

    When I was doing my doctoral thesis on microfinance in Nicaragua 1999-2001, people like Jonathan Morduch were already beginning to write about the schism in microfinance between what they referred to as the ‘institutionist’ mentality (those people who thought the poor were just microentrepreneurs awaiting their chance to blossom as nascent capitalists) and the ‘welfarist’ mentality (those people who thought that microfinance techniques were only one amongst a set of possible tools which had to be used in conjunction with socially- and community-orientated programmes)- needless to say, when I interviewed the chaps at USAID they were all of the gung-ho Ohio University conviction. What became clear to me (after doing nearly 470 interviews with poor Nicaraguans, some of whom had access to credit and most of whom didn’t) was that a hopelessly complex situation was being reduced to a pointlessly damaging two-dimensional ideological struggle, which was why I made my thesis about the political economy of microfinance. The fact of the matter is that the poor aren’t homogeneous and that in financial terms there are things that they need far more than access to credit – for instance, in the case of Nicaragua, dependable savings accounts in a bank that won’t fold or steal their money, insurance for health costs and education costs (at that time the neoliberal regime of Arnoldo Aleman had re-introduced paying for these), insurance for funeral costs and so forth. Unfortunately, the instutionist mentality had determined that the first thing a microfinance organization must do was to become self-supporting without the use of subsidised funds, so all of the Nicaraguan institutions were following the same blinkered models which didn’t take any account of the actual needs of the poor and charged them interest rates that made their eyes water…. despite the fact that virtually all Apex funds at that time were heavily subsidised. I could go on, but the point is you shouldn’t throw the baby out with the bath water.

  5. Merijn Knibbe
    March 20, 2011 at 5:51 pm

    John,

    do you have a web adress for you thesis?

    • Jon Cloke
      March 20, 2011 at 6:10 pm

      Yer. It’s not exactly a coffee-table number, though, and I certainly wouldn’t advise dropping it on your foot… I got a bit carried away with the SPSS analysis of the household responses and you could just skip that, unless you absolutely have to. Policy implications bit remains sound, though – it’s at https://dspace.lboro.ac.uk/dspace-jspui/handle/2134/6906.

      • December 24, 2011 at 3:35 am

        Jon, I am teaching a class for Elizabethtown College in Pennsylvania, USA called Poverty in a World of Plenty–an on-line course over the holidays for adult learners. I’d love for them to have access to your thesis, but access is blocked at the link you gave. Is there any way you could make it available to our group? I think it would be very useful for their research.

        David Radcliff (dradcliff@newcommunityproject.org)
        Director
        New Community Project

  6. milford bateman
    March 20, 2011 at 11:03 pm

    Geoff Davies is confused here.

    First, it is simply not enough to say that microfinance provides a serious ‘toe-hold on life’ without quantifying the extent of this. Otherwise, I want to formally propose right now that ‘gambling is a major contributor to poverty reduction’ because I can point to a couple of people who won the jackpot and resolved their poverty situation. Our point is that there is simply no evidence from anywhere that meaningful numbers of people and communities have exited poverty. A few lucky ones maybe exit poverty, but the vast majority do not and are probably worse off. You cannot justify a policy on the basis of the few lucky winners.

    Second, the Bornstein book was seen by many people, even by microfinance supporters, as a piece of PR for microfinance rather than a serious analysis of microfinance. The book misrepresents/misunderstands microfinance in many ways, and it has little real analysis of how microfinance actually works in practise and into the longer run. So I dont think you can quote that particular book as providing any real ‘evidence’ that microfinance has a positive impact on the community.

    Third, microfinance was not so much copted by neoliberalism: it IS neoliberalism. Microfinance is (among other things) about devolving down to the poor the individual responsibility for getting themselves out of poverty in the manner that the rich do – through business. That the poor cannot do this for a number of obvious reasons is something microfinance advocates prefer not to go into though, stopping at the mere opportunity that microfinance supposedly provides. The poor had the opportunity, which is all that counts, and if they remain in poverty then it must be their fault (they were lazy perhaps) and we do not need to help them any more than we have already. This is pure Thatcherism/Reaganism (i.e., neoliberalism).

    Finally, the quote provided, from the conclusion to our article, seems to me a quite clear and concise summary of microfinance and its problems.

  7. Bosnian
    March 21, 2011 at 3:33 pm

    @milford bateman

    http://www.econ.cam.ac.uk/faculty/chang/pubs/Microfinance.pdf

    I read your paper from the link above, with coauthor from Croatia. I’ll say that you are absolutely correct and right on target.

    Otherwise, I am from Bosnia and while I was visiting my family over there few years back, I saw numerous so-called micro-lenders in my hometown Sarajevo. I was puzzled by that. Than, I read some report from USAID (which is rather social engineering institution) and realized that Citibank was major lender and behind of those micro-lenders, and they enforce its operation with help of almighty US Embassy in Sarajevo. The terms and conditions that they lay down are merciless and plainly it’s usury and debt enslavement. It has nothing to do with “community” “and reducing poverty”. They are rather loan-shark institutions. As far as I can tell, there is no difference between regular bank which are, again, imposed by EU/US and domestic ones are destroyed and micro-lenders. It appear that Citibank cut corners in order to find borrowers.

    From that report, I remember, the projects/business were quite ridiculous and I was asking myself how anybody can make any money or make sustainable or viable business. It was like reading some fiction, yet those people in desperation and enthusiasm must put apartment, or the house, some tangible assets as collateral. So, going out of business meaning going out from the apartment or house, i.e. further impoverishment.

    Of course there is agenda behind this, just as it was behind destruction of Yugoslavia, the western powers by imposing “structured adjustment policy” trough IMF, WB, EBRD and the like they created the market for own industry and for countries like Bosnia and Croatia (just to mention two) they promoting service sector and other speculative endeavors. It is well greased mechanism which works with local corrupt politicians who has no interest in overall progress. So it is the tool as well of creating dependency political and economic ones. The west embodied in EU, hidden behind various “envoys” that reside in gated and walled mansions and security apparatus do not allow any kind of genuine development and both: micro-lending and that puppet Nobel-guy are tools of neocolonial elite which promote its agenda.

  8. Jon Cloke
    March 22, 2011 at 10:33 am

    I just want to pick up on a few of the points being made here:

    “There is nothing wrong with microfinance per se” – if you understand that a substantial part of the precariousness of being poor is being denied access to mechanisms that stabilize the household economy, this is absolutely correct. Part of elite control of poor southern economies relies on restricting access to credit and formal financial services, excluding the poorest from them by various barriers to entry (minimum $200 for opening an account in Banco de America Central in Nicaragua, just as a starter) and thereby making them far more profitable. Community-based and run projects that do not try to impose a one-size-fits-all microfinance model moreover are entirely different from the USAID-run neoliberal institutions which cherrypick and take advantage of the not-so-poor for their possession of some kind of collateral and then charge them interest rates which make improving the stability of any kind of business a virtual impossibility.

    “The finance goes directly to the poorest” – well, it doesn’t, except for a few organizations. Most microfinance institutions are run on some kind of institutionist basis (see previous post) that means they can’t afford to target the poorest and therefore have to rely on cherry-picking the not-so-poor poor.

    “The poor do live in a monetary world. This means that they do not only have an income problem but also liquidity problems” – this is exactly the point. The liquidity difficulties of the poorest come from a range of socio-economic and socio-cultural issues that are little to do with poverty in the sense of not having any money, if not the marginalizing flows, processes and networks through which poverty is maintained in any given economy; these are unique to the historical and socio-cultural development of any one community/group and are linked to path dependency. Any attempt to address these culturally-specific liquidity problems (caste-based employment prejudice would be a particularly good example of this from India) needs first of all to have a sophisticated understanding of the relational networks both by which poverty is reproduced and through which it is resisted.

    “microfinance was not so much co-opted by neoliberalism: it IS neoliberalism” – well, no it isn’t, necessarily. It has been subordinated to neoliberal agendas globally and it has been rendered far less useful through an original neoliberal perception of it as the ‘silver bullet’ to poverty – see this particularly appalling piece of bullshit from 1997: ““Hillary Clinton opened the World Summit on Microcredit in Washington. The occasion highlighted the effectiveness of using tiny loans to help the most destitute people on earth pull themselves and their families out of poverty. But there is another, astonishing side of this story: the political consequences of putting capitalism to work for the have-nots. Microcredit not only liberates the poorest of the poor from hunger, it liberates them, and us, from fanatical extremists. Microcredit was invented 20 years ago in Bangladesh by Muhammad Yunus… Microcredit does what billions of dollars worth of AWACS and Patriot missiles cannot. For decades, the West has tried to defeat fanatical extremists militarily; this has been bloody, costly and highly unsuccessful. But quietly, every day, the attraction of militant Islam is being blunted, at the ballot box and in people’s hearts and minds, thanks to the economic development of the poor. We have known that micro-credit helps solve a host of in-tractable, long-term social ills related to poverty: In Norway’s arctic circle, it is helping repopulate the Lofoten Islands. In Oklahoma, thanks to Chief Wilma Mankiller of the Cherokee Nation, microcredit is helping reduce alcoholism. In Chicago, it is helping get unwed mothers off welfare.” (Jolis 1997)

    “micro-lending and that puppet Nobel-guy are tools of neocolonial elite which promote its agenda.” – this is just subordinating microfinance to a similarly prejudiced political agenda which again really ignores the agency of the poor themselves. For me, this quote sums up pretty much the way I feel about it: “Is public support for microcredit wasted or worthwhile? No one knows. Most measures of the impact of microfinance organizations fail to control for what would have happened in their absence (Sebstad, Barnes, and Chen, 1995; Von Pischke and Adams, 1980). If users borrow more than once, then they must get benefits. The question, however, is not whether microfinance is better than nothing for its users. The question is whether microfinance is better than some other development project for the poor as a whole (Navajas, Schreiner, Meyer, Gonzalez-Vegas and Rodriguez-Meza, 2000, ‘Microcredit and the Poorest of the Poor: Theory and Evidence From Bolivia’, World Development, Vol. 28, No. 2, pp. 333-346.)”.

    Finally, my own experience of being involved in a microfinance project comes from working with a small NGO in Nicaragua that provides seed money for a rotating fund dedicated to the provision of solar panel kits to rural communities without a power supply (some 80% of rural Nicaragua has no electricity supply). The original fund is paid back by each household that gets a solar panel kit at a rate they can afford, determined by a local community organization which is responsible for collecting the ‘rent’ and servicing the kits as and when needed. It also helps to train locals in how to maintain and repair the kits. Thus far the project has provided power to some 150 households in areas, using an initial seed fund input from outside but maintained and expanded through community control – it’s not perfect (over-enthusiastic ‘rent’ collectors remain a problem and we also had a problem with the quality of batteries, for instance) but it attaches an innovative funding device to an urgent and identifiable local need and demand for the kits remains high. Thus far, then, for me this is a successful use of microfinance (fingers crossed!).

  9. Lamia Karim
    March 22, 2011 at 5:32 pm

    This is Lamia Karim, author of Microfinance and Its Discontents that David notes in his post. I am from Bangladesh altho I teach and reside in the US. I have been following the recent sacking of the founder of Grameen Bank, Muhammad Yunus. Today there was an op-ed piece by David Bornstein in the New York Times. He wrote The Price of a Dream, an uncritical book on the Grameen Bank. Bornstein is more concerned about the fall of Yunus, Grameen Bank and microfinance than he is of what is happening to poor women who are getting highly indebted to these institutions. Of course, the NY Times would not print my more critical assessment of Grameen Bank and microfinance!

    One of the major contributions of my book Microfinance and Its Discontents is the production of knowledge. Who gets to speak? Who gets heard? What gets censored? What gets labeled as legitimate knowledge? In my analysis of microfinance practices of the paradigmatic institution of microfinance, the 2006 Nobel Peace Prize Grameen Bank, and three of the leading MFIs in Bangladesh, I found that a small coterie of researchers circumscribed the research field. They quoted each other, often were highly paid consultants for these NGOs, and worked both as scholars and as NGO consultants. However, these aspects of their knowledge producing selves were censored from their published documents.

    Finally, the Internet revolution has opened up the space for debate and dissent.

  10. Lamia Karim
    March 23, 2011 at 2:36 pm

    Perhaps of interest to the posters in this blog.

    The US assistant secretary for South Asia, Robert O Blake, on Tuesday said the issue centering on the removal of Professor Mohammad Yunus from Grameen Bank ‘will have some effect’ on bilateral relations between Bangladesh and the United States if it was not resolved in a respectable way.

    Read full statement at the following link:
    http://newagebd.com/newspaper1/frontpage/12642.html

  11. Lamia Karim
    March 25, 2011 at 12:53 am

    IMF and World Bank just yesterday announced that they will withhold $500 million in poverty reduction aid to Bangladesh. Ostensibly, it is about governance (like they woke up the fact of the corruption now) but diplomats say behind the scene it is about keeping the foundational institution of microfinance, the Grameen Bank, afloat. Will see how far things go. Here is the link to my op-ed that New Age had the courage to publish.

    http://newagebd.com/newspaper1/op-ed/12659.html

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