Skip to main content

Microfinance cannot be considered a cure-all for global poverty

By Moin Qazi*
Access to right financial tools at critical moments can determine whether a poor household is able to capture an opportunity to move out of poverty or absorb a shock without being pushed deeper into debt.
When microfinance made its first appearance, everyone was infatuated by its narrative: Those on the left loved its stories of transformed women and direct empowerment of the poor. Those on the right loved how it promoted grass-roots capitalism, fostered a culture of entrepreneurship, and all this by doing away subsidies. Microfinance appeared to be the much awaited tool whose time had come. Everyone was charmed by its astonishing capabilities.
But as with other trumpeted development initiatives that have promised to lift hundreds of millions from poverty, microcredit has struggled to turn rhetoric into tangible success. Done right, these loans have shown promise in allowing the slightly better off among the poor to build sustainable livelihoods. The notion that microcredit has potential to spark sustained economic growth is misplaced.
It’s certainly true that if a borrower can’t invest productively enough to generate a high rate of return, he or she will be more indebted and worse off than before.
Those entrepreneurial individuals are few who use a small amount of money to catapult themselves from destitution to security, but what about the poorest of the poor as a class. Those successful enterprises are the exceptions—particularly where a microfinance organization has a good model. The success of microfinance has led to a rush of new entrants, some of whom aren’t so good at tweaking their models, and those new imitators probably have much higher failure rates.
The verdict is now out .No one should be lulled by the livelihood finance boom into believing that microfinance is a cure-all for global poverty. The problem is that not everyone is ready or able to take on debt. Some people struggling to feed their families require more basic help and financial training before they can properly handle debt. Originally developed as a nonprofit effort to lift society’s most downtrodden, microfinance has increasingly become a for-profit enterprise that serves investors as well as the poor.
Microfinance has come under increasing scrutiny in recent years. It critics have been at pains to emphasize that whilst microfinance can stabilize livelihoods, broaden choices, provide start-up funds for productive investment, help poor people to smooth consumption flows and send children to school, it can also lead to indebtedness and increased exclusion unless programmes are well designed. We must not forget the caution: “Microcredit is microdebt.”
If you substitute the word “credit” with “debt,” it’s easy to see how microfinance can create a power imbalance between a lender and a financially strapped borrower, especially if that borrower is a woman. We should be alive to its downside. When a woman fails to make her installments on time, she experiences humiliation through verbal aggression from fellow members and loan recovery officials. Default by a lone woman can result in friction among group members who are collectively held responsible for individual loans. Women who cannot pay due to unforeseen circumstances, (poor investment decisions, illness and theft of property) are subjected to public shaming by microfinance. Hence, poor women bear the social costs of microfinance, often with negative consequence. A central problem is this: In the world of microfinance, women borrowers are viewed as autonomous individuals who make independent choices in the marketplace.
But this is not the reality. Even when they possess marketable, loan-worthy skills, women often find themselves beholden to their husband and male relatives. They negotiate complex kinship and social obligations. In addition to male control, other problems affect a woman’s ability to repay a loan. Lenders may extend loans to prospective dairy-cow breeders or egg sellers without doing any market survey of how many dairy-cow breeders or egg sellers the economy of a particular area can sustain. Micro-entrepreneurs may be undone by an unexpected illness, a poor investment decision or a theft.
According to Naila Kabeer, Professor of Gender and Development at the London School of Economics ,microfinance that offers financial services to women who have some prior experience of entrepreneurship and are not engaged in it for purely subsistence reasons are likely to benefit greatly from microfinance activities, given the barriers they face in accessing formal financial institutions.
But for poorer women who are struggling to get their enterprises onto a viable basis, financial services on their own are unlikely to be enough and may even end up plunging them into debt. These women would need financial services as part of a larger package of supportive measures which address their human capital deficits, their unpaid domestic responsibilities and perhaps also lack of self-confidence and fear of taking risks.
The provision of small loans or other financial services to the poor will never work until we address the background conditions that produce poverty in the first place. The list of needed measures to create an enabling environment for poor people to improve their lives is long. There is need, for example, for a fairer distribution of productive assets such as land or putting in place pro-poor labour legislation at the national level, and a rethink of unfair trade policies and aid conditionalities which continue to disempower poor.
In recent years, economists have designed a rigorous research methodology by which researchers attempt to study the effects of microfinance with randomized control trials, the same way medical researchers test whether a new drug works better than a placebo.
The six randomised evaluations from four continents conducted by researchers affiliated with Innovations for Poverty Action (IPA) and The Abdul Latif Jameel Poverty Action Lab (J-PAL), show that microcredit does not have a transformative impact on poverty.
The results of studies, which were carried out in India, Mongolia and Philippines in Asia, Bosnia-Herzegovina in Europe, Morocco and Ethiopia in Africa, and Mexico in North America, were presented in the January 2015 issue of the American Economic Journal: Applied Economics
They conclude that while microloans can increase small business ownership and investment, they generally do not lead to increased income, investments in children’s schooling, or substantial gains in women’s empowerment for poor borrowers.
Here are the key findings:
  • None of the seven studies found a significant impact on household income.
  • Only about one in four or five households wanted a small loan.
  • Some of them used the money to grow their very small businesses. But this rarely led to higher profits.
  • And there’s no evidence it empowered women or led more children to go to school.
  • Loans do give more freedom in optimizing the ways in which people make money, consume, and invest, according to the evaluations.
Microfinance needs to shape a more responsible capitalism. It may not be an easy choice by any means, but the right choice for investors and society alike. Similarly, politicians should be wary of the bad consequences of their narrow populism. They should not overstep and attempt to throw the baby out with the bath water .This will be to the detriment of all, and particularly to the poor.

*Author of the Village Diary of a Heretic Banker

Comments

TRENDING

Vishwanath has been unfairly excluded from global list of 100 best cricketers

By Harsh Thakor  Gundappa Vishwanath scaled zones in batting artistry or wizardry unparalleled amongst Indian batsmen. The best of his batting was a manifestation of the divine. He was also the epitome of cricketing sportsmanship. Sadly 40 years ago he unceremoniously bid farewell to the International cricket world, after the concluding test at Karachi in 1982-83., in January end. Very hard to visualise a character like Vishwanath being reborn today His memories are embedded in cricket lovers today when sportsmanship and grace have virtually been relegated to oblivion with the game of cricket turned into a commercial commodity. Today agro and unsporting behaviour is a routine feature Vishy shimmered cricket’s spirituality. His behaviour on the cricket field was grace personified, No one in his age defined cricket more as a gentleman’s game, than Vishy. Vishwanath could execute strokes that were surreal with his steel wrists. His strokeplay resembled the touches of a painter’s brush,

Abrogation of Art 370: Increasing alienation, relentless repression, simmering conflict

One year after the abrogation by the Central Government of Art. 370 in Kashmir, what is the situation in the Valley. Have the promises of peace, normalcy and development been realised? What is the current status in the Valley? Here is a detailed note by the People’s Union for Civil Liberties , “Jammu & Kashmir: One Year after Abrogation of Art. 370: Increasing Alienation, Relentless Repression, Simmering Conflict”:

Reproductive, conjugal rights of women in India amidst debate of uniform civil code

By IMPRI Team  A Three-Day Immersive Online Legal Awareness and Certificate Training Course on “Reproductive and Conjugal Rights of Women in India” is an initiative of the Gender Impact Studies Center (GISC), at the IMPRI Impact and Policy Research Institute, New Delhi, and ran for three consecutive days starting from December 22, 2022 to December 24, 2022. The online paid certification was aimed to provide attendees with an enriching experience on the gender discourse with a special focus on women’s rights and the much-discussed reproductive rights in India.

Covid jabs: Pretexts cited to justify young, healthy succumbing to heart attacks

By Jay Ihsan   Truth is stranger than fiction – when dedicated doctors raised the red flag against the mRNA Covid-19 vaccines, they were persecuted and their concerns barred from being heard. These honest doctors unequivocally made it known the Moderna Pfizer vaccines injure the heart and human body. One of them, Dr Peter McCullough, an American cardiologist, has repeatedly issued the clarion call to people to reject these harmful vaccines. An equally alarmed World Council for Health said the harmful Covid-19 vaccines should be removed from the market and the global inoculation must be stopped. “In Japan the vaccines were not mandated or made compulsory. The vaccines are not safe or effective enough to mandate them. The day the vaccines go away will be a day of celebration,” Dr Mccullough had lamented during an interview with India’s media outfit, Qvive several months ago. Meanwhile, the number of people jabbed with the Covid-19 mRNA vaccines died soon after or have developed lifelong

Gender gap 17%, SC and ST levels of education between 7% to 14% below upper classes

By IMPRI Team  The treatment of school education in a holistic manner and improving school effectiveness in terms of equal opportunities for schooling and learning outcomes has been the aspiration of all and multiple challenges are faced to maintain and provide proper education. On the occasion of India@75: Azadi Ka Amrit Mahotsav, as part of its series- the State of Education- #EducationDialogue, #IMPRI Center for ICT for Development (CICTD), IMPRI Impact and Policy Research Institute, New Delhi organised a special deliberation on The State of School Education In India with Prof Muchkund Dubey, who is the President of the Council for Social Development, New Delhi. The moderator for the event, Dr Simi Mehta CEO and Editorial Director of the IMPRI. The chair of the event was Prof Jandhyala B.G. Tilak, an Indian Council of Social Science Research (ICSSR) National Fellow, the Distinguished Professor at the Council for Social Development, New Delhi and also a Former Professor & Vice-Ch

Rahul Dravid exhibited selflessness in heights unscaled by any other Indian batsman

By Harsh Thakor*  On January 11th maestro Rahul Dravid turned 50. No Indian batsmen were ever more of an embodiment of temperament or grit.as Rahul Dravid. Dravid was the best ambassador of sportsmanship in cricket in his day and age. In his time no Asian batsmen did what the doctor ordered, to the extent of Dravid. Dravid was manifestation of single-mindedess, tenacity and selflessness in sport. One hardly has an adjective to the ice coolness and craft Dravid exhibited in adjusting to the given situation. Rarely did any batsmen exhibit such a clinical o methodical approach to batting.

Data analytics: How scientific enquiry process impacts quality of policy research

By IMPRI Team  Given the multidimensionality of policy and impact research, tech-driven policy prescriptions are playing a dominant role in the 21st century. As such, data analytics have become integral in this space. IMPRI Generation Alpha Data Centre (GenAlphaDC) , IMPRI Impact and Policy Research Institute New Delhi has successfully conducted a #WebPolicyTalk 6-Week Immersive Online Hands-on Certificate Training Course on Data Analytics for Policy Research, spanning over 6-consecutive Saturdays from October 15th to November 19th, 2022. Along with this, datasets for hands-on learning were also provided for data analysis and learning. Participants were required to make a submission for evaluation at the end of the course, to obtain the certificate. This course comprised hands-on data learning sessions and various expert sessions on data discourses. The course especially catered to data and policy enthusiasts – including students, professionals, researchers, and other individuals lo

NHRC blindly followed BSF status report on fencing farmland off Indo-Bangladesh border

Kirity Roy, Secretary, Banglar Manabadhikar Suraksha Mancha (MASUM) writes an open letter of protest against the action taken status report on restriction imposed by the BSF personnel upon the villagers of Changmari near Indo-Bangladesh border: *** I have the honour to inform you that we received one action taken status report dated 11.01.2023 from your Commission in respect of the above referred case from where it is revealed that your authority closed the case based on the report of the concerned authorities. In this connection I again raise my voice as the enquiry in respect of the above referred case was not properly conducted. Hence I submit this open letter of protest for the ends of justice. From the action taken status report of the Commission dated 11.01.2023 it is reported that concerned authority submitted a report dated 18.01.2022 where it is reported that the concerned area comes under the OPS responsibility of BOP Chengmari, 62 Bn BSF and is highly susceptible to trans-bo

Great march of migrants during lockdown: Lessons not learned, missed opportunities

By IMPRI Team  A panel discussion on “The Great March of Migrants During The National Lockdown: Lessons Not Learned and Missed Opportunities” was organized by the #IMPRI Center for Human Centre for Human Dignity and Development (CHDD), IMPRI Impact and Policy Research Institute, New Delhi on the occasion of International Migrants Day, i.e December 18, 2022. Inaugurating the session, Ms Aanchal Kumari, a researcher at IMPRI, welcomed the speakers and participants to the program with an introduction to the eminent panellists. The event was moderated by Dr Devender Singh, a Visiting Senior Fellow at IMPRI. The panellists included Prof. R.B Bhagat, Professor and Head, Department of Migration and Urban Studies, International Institute for Population Sciences, Mumbai; Prof Arun Kumar, Distinguished Economist, a Former Professor Jawaharlal Nehru University (JNU), New Delhi and Malcolm S. Adiseshiah Chair Professor, Institute of Social Sciences, New Delhi; Ms Akriti Bhatia, Founder of People

Brutal assault on Delhi Univ students as fear grips present rulers on rise of dissent

By Arhaan Baaghi  Various democratic student organizations (bsCEM, fraternity, DSU, SIO, AIRSO) had planned a screening of the BBC documentary "India: The Modi Question" in the Delhi University Arts Faculty, but the guards of the university and the Delhi police along with paramilitary forcefully detained the students just because we were trying to watch a documentary that scrutinizes the role of Modi in 2002 Gujarat riots. At first when the students started screening the documentary, the electricity of the department building was cut down. Students were brutally beaten by the police and university guards. Female students were also brutally manhandled and beaten. This whole incident shows the Brahmanical Hindutva fascist nature of the government and the university authority that is working as its puppet. An activist of bsCEM was manhandled by a male security guard, who tried to pull out his T shirt. Also various female activist were dragged by male security guards and their h