By Ava Sassani, NID Intern

With more than 10,000 microfinance institutions standing as fixtures of the world’s developing economies today (Microfinance Market Outlook, 2014), microfinance, the technique of combating poverty through the opening of traditionally inaccessible financial channels, remains alive and well. Yet the relatively recent ubiquity of microfinance institutions (MFIs), coupled with a marked decline in recent years of the scholarly examination of microfinance, creates a peculiar dichotomy of uncertainty surrounding the field. Does the increase in MFIs mean microfinance has become that much stronger of a force in global development? In particular (as microfinance has for long not only been sold as a means of alleviating poverty, but also as pathway for the economic empowerment of women) how much have these institutions affected palpable, sustained change in the lives of female clients? Examination of the evolution of microfinance reveals its current state to be concerning, with a new era of increasingly commercialized MFIs deviating from their core social mission of helping the destitute. This is in large part a consequence of flawed policymaking from international agencies like the IMF, the World Bank, and the G20, who have, in a desperate effort to develop microfinance sectors across the globe, approached the issue of creating MFIs as a question of impersonal free market forces (Wry& Zhao, 2013). By ignoring the sociological context of creating MFIs in the countries most in need of poverty alleviation and female economic empowerment, the international development community has created a slew of ineffective for-profit banks that represent a regression in the long history of microfinance (Wry& Zhao, 2013).. However, by learning from key industry leaders who have resisted the for-profit trap, most notably the Grameen Bank in Bangladesh (Schriener, 2003), global development leaders can and should reconstruct the microfinance model to better serve its intended targets.

Modern microfinance ostensibly began in February of 1997, when then First Lady Hillary Clinton, Prime Minister Sheihk Hasina of Bangladesh, and a few distinguished economic scholars gathered in Washington D.C. to passionately sell, to nearly 3,000 members of the international development community, an innovative new, grassroots approach to combating poverty abroad: the then budding industry of microcredit (Yunus, 2011). The 1997 Microfinance Summit launched an ambitious effort to expand microfinance to reach the bottom 100 million most impoverished families in the world, and to establish a stable infrastructure system for said services by 2005. (The Microcredit Summit Campaign Report, 1997)

1 million families reached.

The decades that followed saw one of the most remarkable global development efforts in history.

10 million families reached.

Critics of the summit were silenced as project leaders guided the development of 52 major Microfinance Institutions across the globe, created comprehensive monitoring and oversight systems, and expanded financial services to include savings accounts and insurance, in addition to loans (Microfinance Information Exchange, 2007).

50 million families reached.

And as microfinance sectors developed, key industry leaders –most notably the Grameen Bank– began focusing on those in most dire need of their services: women. Women to this day remain not only overrepresented in the world’s poor, but also make up the worlds poorest: a natural consequence of the innumerable manifestations of century old patriarchy across the globe today. From strict gender roles relegating women to solely domestic positions, to laws barring them from inheriting modicums of property to use as collateral , women have, for centuries, been systematically cut off from the financial channels microfinance pioneers were attempting to open, positioning the industry to be an astoundingly simple panacea for combating both poverty and gender inequality(Wry& Zhao, 2013). The rapid success of Grameen (as well as Microfinance Summit Campaign) seemed to suggest to observers that timeworn injustices could be corrected by a series of strategically placed, self-sustaining institutions.  Microloans given to women would, at their best, empower intrepid female entrepreneurs to pull their households and communities out of poverty through market savvy. At their worse, the loans would simply give women a newfound individual agency that would translate to the small-scale destruction of gender-roles. This in turn would force a change in power of the purse within individual households, creating a ripe new client base for future MFIs. Either end of the spectrum was the essence of a grassroots movement affecting change.

In 2006, Dr. Muhammed Yunus, one of the original leaders who spearheaded the 1997 campaign, was awarded with the Nobel Peace Prize for his work with Grameen. The institution had retroactively become the public symbol of a successful microfinance venture through its efficiency in loan delivery and high repayment rates (a post-Yunus Grameen still boasts repayment rates of 98%)( Frequently Asked Questions about Biplot Analysis, 2014).  Yunus was lauded by economic scholars across the globe as a visionary of international development. (The Nobel Peace Prize 2006)

100 million families reached. In 2007, the Microcredit Summit Campaign Report (SOCR) revealed that, by a miraculous combination of efforts, the 1997 goals had been achieved. The century-old technique of credit unions had been transformed into a massively successful worldwide project. (Daley-Harris, 2009)

Cut to five years later, and the honeymoon phase microfinance has long enjoyed is long over.

Researchers, no longer enchanted by sunny platitudes on the novelty and ingenuity of microfinance, begin putting the 100 million microloans through rigorous trials to see just how much change has actually been affected.  Social justice groups, sociology labs, and researchers were captivated with tracking the impact of microloans (as well as other microfinance services). The conversation shifted from how to improve the industry to arguments on why the effort was a waste of resources altogether.

Now, even as the World Bank, the G20, and the IMF attempt to implement policies aimed at developing microfinance sectors in various countries, debates on effective loan delivery and infrastructure inadequacies have all but ceased. In the simplest of terms, scholars stopped asking the questions before an answer could be widely and irrefutably accepted (Wry& Zhao, 2013).

Even the casual observer of the evolution of microfinance is bound to be left with some questions. What went wrong in the evolution of microfinance that elicited an intensification of criticism?  Was microfinance doomed from its inception, or has it simply taken a wrong turn, with nobody bothering to bring it back on course?

Most importantly, what is the state of microfinance today?

In order to gain an understanding of what may or may not lie ahead for microfinance, we must first look to its ambivalently scrutinized past.

In the 1970s, the accepted framework for credit unions was a heavily subsidized scheme in which scope of service was sacrificed in favor of depth and impact per customer. These early models focused primarily on providing low-interest loans to the agricultural sector- but they were rarely successful. Lenders for state-sponsored rural development banks were driven by political motives, so unnaturally low interest rates and listless loan repayment efforts lead to wholly ineffective and costly institutions. Despite a genuine desire to affect change, the bank continuously failed to create profits. So in the 1980’s, microfinance pioneers decided to shift techniques: rather than focusing on inherently risky farm investments, lenders began targeting small enterprises in villages and towns. The old, subsidy-based approach was supplanted by a new, free-market oriented methodology that believed the characteristic interest caps and heavy subsidization would cause credit schemes to fail once more. The market approach, antithetical to the old method of lending, targeted a more profitable niche of clients, sacrificing depth and per-client surplus for breadth, length and scope of services (Schriener, 2003) (The History of Microfinance, 2006). Profitability and self-sustainability became central goals of MFI’s, with profits at non-profit institutions being returned to clients in the form of dividends. (Cull, Demirgu¨c-Kunt, and Morduch 2009).

Returning to the twenty-first century for a moment, recall the success of Grameen Bank in the “golden age” of microfinance. Even throughout the years of scrutiny that the industry faced, proponents of microfinance have clung onto Grameen, with relative success, as an exemplification of the efficacy and social impact that all MFI’s could, in theory, exhibit.  We know by now to be cautious of unsubstantiated platitudes thrown around about the simple power of microfinance, but it turns out that Grameen works because it really is quite innovative. Yunus wanted his institution to have the efficiency of an MFI operating through the market approach, while still maintaining the social impact of an MFI operating with the old subsidization model(Schreiner, 2003). Grameen’s pioneering of the “group lending” approach to microcredit demonstrates how the institution reconciled these two seemingly contradictory goals. As far as social impact, putting female lenders in small groups creates vitally important support systems for budding entrepreneurs trying to overcome the societal barriers that made them in need of microfinance in the first place.  Pragmatically, the group lending approach also realigns the broken incentive model from the early rural schemes, causing joint liability between lenders to lead to peer-pressure, resulting in consistently higher repayment rates (compared to when the group structure is not employed). (Wry, T., & Zhao, 2013)

The Grameen Bank’s effectiveness in implementation of services, an achievement most development projects with the purest of intentions (like the early rural banks) often fail to achieve, keeps the group close enough to real profitability so that subsidization of the bank is not a dire necessity; however, their effectiveness and powerful social impact are what make Grameen such a worthy investment (Schreiner, 2003).

The success of the Grameen legitimatized the once precariously new field of microfinance, making policies geared towards developing the microfinance sectors of various nations a high priority for groups like the IMF and the World Bank (Wry& Zhao, 2013).

This is where international agencies agendas fall short of intentions. Microfinance is, at its core, a type of business, therefore MFI’s are governed by the same laws as businesses. Since empirical evidence shows us that liberalized markets with free cash flow, and deregulation for easy foreign investments lead to increased business founding, economic scholars predicted that these same market conditions would lead to the development of the microfinance sectors in various countries- and they do.  However, market conditions are not the only factors at play. All industries attempting to break into a new countries market obey the laws of a sociological principle called “logics”. Logics are essentially, a shared framework of thinking among a people that can be used to predict and guide consumer and state behavior.  A new industry does well in a country when it matches, or “conforms” to the prevalent existing logic, whereas industries that violate the nation’s logics- that contradict known social norms and values of a people- fail at acquiring the necessary resources for success. For instance, a coal mining industry will be unsuccessful in a country with a strong environmentalist logic. (Wry, T., & Zhao, 2013)

This is where the fatal paradox of modern microfinance arises. When considering microfinance (as Grameen and Yunus have shown it to be) as a tool for raising the status of impoverished women, then the countries that have the strongest patriarchal logics are the ones in most dire need for MFI’s to be founded there. Consider what characteristics comprise a strong patriarchal logic: strict gender roles that are internalized and reinforced by both men and women, limited education opportunities for women, and the inability to own and inherit property to use as collateral for loans. After all, the purpose of the subsidy approach, as well as the somewhat secondary goal of the market approach, is to reach these clients who would most benefit from access to banking services. But that same logic which demands the presence of MFIs is what makes it difficult for institutions to succeed there. Contradicting a logic of patriarchy so fundamentally makes it more difficult for MFIs to attain the necessary subsidization for the Grameen-eque dual model approach, which again, functions partially thanks to its continued subsidization. (Wry, T., & Zhao, 2013)

International agencies found that neoliberal economic policies would partially overcome the paradox of logics, because a business-friendly environment would somewhat compensate for the lack of resources caused by societal factors-and they were right- in terms of the creation of MFI’s. But this new generation of microfinance institutions, the ones bread in the neoliberal marketplace, have a key distinction from the Grameen ideal: they are naturally more likely to be for-profit organizations. All efficient MFI’s must attempt to reach profitability in terms of a lack of reliance on subsidization, but the post-modern, increasingly commercialized  era of microfinance has been dominated by the creation of publically traded institutions with a responsibility of profitability to their shareholders: frankly put, the extra money a for-profit MFI makes is not put towards their social mission (Wry& Zhao, 2013).

In 2007, Mexico’s Compartamos Banco IPO made it the first microfinance bank in Latin America to become publically traded. In 2011 India’s SKS Microfinance, the largest MFI in the nation(Cull, Demirgu¨c-Kunt, and Morduch 2009)., raised a grand total of $358 million in its massively successful IPO (Yunus, 2011):  Stock took sudden extreme drop?

These companies would flaunt their earnings as an indication of hyperefficiency in the new age of microfinance: a natural and necessary progression in the industries evolution. They claim that although there is there is a responsibility for profits because of the introduction of investors, the for-profit model is more streamlined, and thus allows services to reach far more people then before.

In truth, the commercialization of MFI’s is not an advancement of microfinance, but a regression.  Groups like SKS and Compartamos simplify the methodological dichotomy Grameen has worked to achieve- diluting the careful balance to focus on a fully market-oriented approach.

Commercialization also comes at great cost to female clients. One of the early, unsubstantiated promises on the magic of microfinance as a tool against inequality was that lending to women makes financial sense (Yunus, 2011). While women are more likely to spend to money on necessary investments than their male counterparts, recall that women are excellent microfinance candidates both because they are overrepresented in the world’s poor and because they are by far the world’s poorest. So despite female clients’ comparatively high loan repayment rates, women are typically more costly to serve, and thereby do not fall into the profitable niche the commercial MFIs look to serve (Wry& Zhao, 2013).

When Dr. Yunus was awarded with Nobel Prize in 2006, in the midst of the committee’s glowing appraisal of his work lay an important warning that has seemed to, either by oversight (or more likely willful ignorance) been completely ignored: “Yunus’ long-term vision is to eliminate poverty from the world. That vision cannot be realized by microcredit alone” (Dugger, 2006).  Grameen Bank maintains unusually high client interaction with female borrowers(Morduch, 1999), uses the group lending model to create forums for women to communicate with each other about shared difficulties, and has flexible loan collection (not as lenient as the early rural models while not as harsh as the new for-profits) in order to alleviate pressure from female entrepreneurs- thereby allowing them to make a larger range of investments conducive to successful enterprises (Field, Pande, Papp 2009).  And this overall desire among leaders to do genuine good, despite potential profitability, is what kept subsidies from leaking to employee bonuses or shareholder dividends; instead, profits accumulated from efficiency allowed for low user costs and expansion of their client base (Schriener, 2003).

The strategy of Bangladesh’s Grameen Bank proved that efficiency and desire to affect change were reconcilable goals. The success of 1997 Microcredit Campaign proved to the world that near impossible development projects could be achieved under capable leadership. But microfinance has fell victim to gross oversimplification. Microloans alone were and still are treated as silver bullet remedies for poverty and gender inequality.  Researchers have failed to convey the complex social implications of MFI’s in particularly patriarchal nations, causing policymakers to approach development of microfinance sectors as a purely economic task. The regression of microfinance has caused groups like SKS to become the new loan sharks that MFI’s were built to replace, but, by recognizing this deterioration and simplification-just as Grameen help restructured the incentive model of rural schemes with group lending- we can put microfinance back on the right track, until the industries full range of services can reach all impoverished families in the world, from the original 100 million and beyond.

References

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Morduch, J. (1999). The role of subsidies in microfinance: Evidence from the Grameen Bank. Journal of Development Economics, (60), 229-248. Retrieved September 2, 2015, from http://www.nyu.edu/projects/morduch/documents/microfinance/Role_of_Subsidies.pdf

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Schreiner, M. (2003). A Cost-Effectiveness Analysis of the Grameen Bank of Bangladesh (pp. 2-36, Rep.). St. Louis, MA: Center for Social Development.

SKS Microfinance Share Price, NSE/BSE Live Stock Price & Company Profile. (n.d.). Retrieved from http://economictimes.indiatimes.com/sks-microfinance-ltd/stocks/companyid-30587.cms

Wry, T., & Zhao, E. Y. (n.d.). Culture, Economics, and Cross-National Variation in the Founding and Social Outreach of Microfinance Organizations (Rep.). Retrieved September 2, 2015, from Global Initiatives Research & Teaching Materials Program at the Wharton School website: http://www.hbs.edu/faculty/conferences/2013-paulrlawrence/Documents/ZhaoWry_markets,%20culture,%20and%20microfinance.pdf

Yunus, M. (2011, January 14). Sacrificing Microcredit for Megaprofits. Retrieved September 2, 2015, from http://www.nytimes.com/2011/01/15/opinion/15yunus.html?_r=0