Global South Development Magazine

One year ago, in the autumn of 2009, the image of microfinance that I was harboring for years changed dramatically. There was a time when we would take professor Mohammad Yunus, the founder of the Grameen Bank, virtually as the Messiah of the developing world who could use his magic wand of microfinance and lift the ‘third world’ out of poverty and pave the way to prosperity. I remember there was also a time when our blogs would be crammed with speeches and interviews of successful microfinance practitioners and we would urge our viewers to spread the holy message of microfinance so that the poor could free themselves out of poverty and get empowered. However, while the world still kept rejoicing

the miracles of microfinance, my understanding about this internationally loved system changed to a greater extent when I spent three months in northern Bangladeshi villages studying microfinance and talking to hundreds of microfinance ‘beneficiaries’ who had been accustomed to microfinance institutions and agencies for decades.

After my stint of three months in Bangladesh; the land of microfinance pioneers with millions of active microfinance service users, informally known as the motherland or the Mecca of microfinance, I came to realize that microfinance was being practiced in a different way than most of us knew through the world media. The Novel Peace Prize somehow sanctioned the practice of microfinance as a noble concept that helped the poor, but it was apparently visible that the prize didn’t compel the practitioners to adopt pro-poor strategies and sustainable working methodologies. I also found that microfinance was riddled with miraculous myths which the rest of the world almost blindly believed. I was still in Bangladesh when we were preparing for the first issue of Global South Development Magazine. The UN Climate Change summit in Copenhagen had been the centre of global attention and we decided to write our cover story on that topic instead. Finally, we have been able to write a cover story on microfinance and our regional editors and country correspondents from different parts of the world have extensively contributed to it. They have shared their personal experiences with microfinance and have reported what they have witnessed in their regions. Had it been published a year ago, there is no doubt; it wouldn't have been so wide and extensive. The following pages will present a vivid picture of microfinance in different parts of the world and hopefully will also raise a stimulating debate on the topic. The first few pages will present my own findings in Bangladesh in a jargon-free language and the story will continue with other articles and interviews that have made this

issue of Global South Development Magazine a special issue.

Microfinance: a global darling

 In search of various alternatives to help the poor, especially of the developing world, come out of poverty; microfinance emerged as one of the most applauded and almost unanimously celebrated interventions for poverty reduction since the 70s. Apparently, there have not been sufficient studies to testify these anecdotal claims, but many donor agencies, non-governmental organizations, microfinance institutions and governments across the globe continue to regard microfinance virtually a genuine innovation to help the poor and, more specifically, as an impeccable tool for

women’s empowerment. Though different microfinance schemes follow different patterns and aim at achieving different results, a majority of microfinance institutions (MFIs) have always been underscoring women’s empowerment and poverty reduction, two major targets of the Millennium Development Goals (MDGs), as their primary and most prioritized goals of microfinance interventions.

Primarily, my observation and findings were aimed at finding out the nature, as well as, the extent of the alleged link between microfinance and women’s empowerment.

 Women’s empowerment

 My own study and some other recent studies done in different parts of the developing world suggest that though long-term microfinance beneficiaries do participate in difference microfinance schemes for several years, there has not been any significant increment to the choices they have and the level of control and power they possess. During my own study also, it was found that the long-term microfinance beneficiaries did exercise a slightly improved opportunity of social mobility and an added value of selfworth, but miserably failed to secure an enhanced economic future and challenge the longstanding issues of gender disparity and powerlessness. My findings concluded that the link between microfinance and women’s empowerment is not as strong as generally perceived.

It was also clearly seen that only one intervention such as microfinance or adult education cannot dramatically change the lives of the women who have historically been oppressed in the traditional patriarchal society. Moreover, empowering an individual apparently seemed to be a complex phenomenon, which was affected by many factors such as, educational opportunities, the upbringing, family support, marital status, age and even ethnicity. 

Moreover, microfinance was taken as a pure and transparent financial service by both, long-term as well short-term, beneficiaries and irrespective of its impact on economic betterment or empowerment, microfinance was valued by the poor. The fact that many women have continued to participate in the group meetings, borrow credit, deposit savings for more than a decade also illustrates that they have found microfinance as a valuable and worthy service, but only a financial one.

Outreach and financial needs of the poor

It was found that many microfinance agencies provided financial services to the most disadvantaged and neglected populations in Bangladesh, though, some MFIs chose not to work in some particular areas, such as the flood affected Char areas. However, their presence in other parts of Bangladesh was very visible. Almost everywhere, one of the most fascinating aspects of microfinance institutions (MFIs) is that they have virtually replaced the traditional and often oppressive money lending system practiced for ages and the MFIs have provided financial services to the poor neglected by so called market oriented formal financial institutions.

Nevertheless, field experiences show that the money that is distributed as credit is far less than the actual need or the demand of the poor. It is often common for microfinance practitioners to

utter the worries of their own sustainability when such issues are brought up. The fear of their own sustainability is compelling many MFIs to implement strict measurement criteria while assessing the credit consumption capacity of the poor. 

Microfinance is often advocated as a whole industry entirely dedicated to women, and this gender preference is obviously admired by donor agencies, but excluding some exceptions, it was found that women were likely to get lesser loans in comparison to their male counterparts who were regarded as more credit-worthy and were provided larger amounts. This trend was visible in a number of ‘world-famous’ MFIs too. Microfinance is often seen as a magic bullet for all types of poor and all types of families, but it was apparently seen in Bangladesh that microfinance does not have equal or similar impact on all service users. Better-off families are able to bear larger risks, make more productive investments and get higher returns, whereas, extremely poor families, incapable of managing even a smaller risk or family crisis, are bound to face severe problems to thrive, if not head to a total failure.

 Control and Participation

 The issue of the control of microfinance schemes and their participation is a crucial one. Though userparticipation has been advocated a lot by NGOs as well as MFIs, in practice, it is still found that microfinance schemes are developed as ‘products’ and marketed in their working areas, however, the service users are not consulted in designing such ‘products’. Their participation in decision making of service delivery is also neglected.

A minimalist or holistic microfinance?

 Well, it is not very just to point fingers at MFIs and make bumpy generalizations, but no matter how they are advertised, microfinance schemes we have seen in many parts of the developing world are either minimalist or kind of holistic, the former being most prevalent and virtually indifferent to the actual needs of the poor. As its name says, a minimalist microfinance does give money to the poor, often in high interest rates, but neglects other important aspects. Many case studies show that a minimalist microfinance has many limitations and, thus, cannot contribute effectively to financial and social empowerment of the poor. If the focus of the MFIs is on poverty eradication and empowerment, not merely on providing financial services to the poor, instead of a minimalist microfinance, a holistic microfinance with vigorous educational and skill-training opportunities should be devised and implemented. It would certainly be wise to look for new models of microfinance where the poor are not necessarily entrepreneurs, but active stakeholders.

Motivation & Micro-entrepreneurship

 During my own study in Bangladesh, it was found that a majority of the beneficiaries did not have any plan, motivation or idea to develop themselves entrepreneurs. For a considerable number of women, microfinance seemed to be mere one of the survivalist activities they had adopted in their harsh everyday reality. This clearly shows that tapping the motivation of the poor has still proved to be challenging for many NGOs and MFIs. In many disaster affected areas, we have seen that microfinance often goes together with relief tents and biscuits, but examples show, microfinance or credit programs don’t give productive results when applied in disaster affected areas where people are, in fact, expecting relief instead of credit. The experience with the short-term beneficiaries in my study in Bangladesh shows that people facing natural disaster or serious family crisis generally tend to have low level of motivation and lack entrepreneurial spirit and the credit offered on such occasions is very likely to be used for consumption purposes instead of producing something. Though credit for consumption itself is a valuable ‘product’ for many poor people, for instance, for those who are facing temporary or seasonal unemployment, but it’s not preferred by all types of beneficiaries, such as disaster hit people who are fighting for survival and

rehabilitation.

 Access and interest rate

 The interest rate is probably the most discussed issue in the microcredit world. There is a well formulated myth that MFIs, despite their own owes and hardships, charge very little interest from the poor, which is not true in many many instances. Unless they have received subsidies from government or donor agencies, MFIs do set interest rates that are very high, in some cases even up to 60%. Despite high interest rates they charge, many MFIs fail to do enough work on building capacity of the poor. Skill trainings and other additional services such as home-to-home technical assistance remain inadequate and inconsistent. Some beneficiaries receive more than a dozen trainings, sometimes with no apparent needs, while others participate scarcely once.

On the other hand, in many cases, a total dependency on microcredit seems to be counterproductive. Families with other earning members and fairly good amount of land are more likely to succeed than the landless or the

hard-core poor.

Credit use

 Procuring a loan for consumption or for other members of the family, such as the husband or a son, is also practiced widely. Though women are put at the forefront, credit procurement, in fact, is taken as a family affair and men are also active players of credit use and repayment. Credit obtained by women is not necessarily used by women.

Towards a better microfinance

 Microfinance won’t go away easily and there is no strong reason for why it should go away. However, better microfinance practices are needed should it be continued as a tool for economic empowerment of the poor.

Compared to the institution based banking model of microfinance, village based cooperative modeled microfinance groups were found to be more effective and functional in my study area in Bangladesh.

On the other hand, microfinance institutions should be willing to make necessary changes in the way how they have been working. In many case studies it has been found that credit is sought for one purpose and used for something else. For instance, the money obtained for vegetable cultivation could be used for a daughter’s wedding. Instead of only distributing credit and collecting savings, microfinance institutions should be aware of what their service users are doing and how they are progressing in their income generating activities.

Many NGOs and MFIs might have microfinance schemes in the same region, but often there is a complete lack of cooperation between them. MFIs don’t take each other as stakeholders, but virtually as business competitors.

Microfinance practitioners admit that almost no information is shared between them which results into serious ‘overlapping’ and those who actually need credit might remain unnoticed. MFIs should be ready to share relevant information and work in an integrated manner as after all what they want to achieve is the same: poverty reduction and women empowerment. Similarly, many case studies from Bangladesh as well as from other parts of the world show that skill trainings and additional services which are supposed to be combined with a loan are either missing or not enough. Even if they are present, excluding some exceptions, such trainings normally last from one to four days without having a significant impact on the knowledge of the poor. It would certainly be productive and farsighted to design and implement a relatively long training period and educational programme with specific objectives.

MFIs have been traditionally assessing the success of their microfinance programmes basically in the light of the repayment rate and self sustainability, whereas, the real impact on the beneficiaries is not adequately prioritized. It is important that MFIs should promote independent academic studies and research in order to testify the anecdotal claims promulgated and happily cherished by them. It was found during my study in Bangladesh that microfinance filed organizers (MOs) who were constantly in contact with the service users seemed to have possessed sufficient financial management skills, but weren’t trained enough to effectively help the beneficiaries in their income generating activities. By training the MOs effectively, MFIs can effectively address the technical assistance issues and guidance needed for their beneficiaries. Poverty in many developing countries seems to be directly linked with the issue of land ownership and, similarly, patriarchy and traditional norms seem to be fuelling the oppression and subjugation of women. It’s important that NGOs/MFIs as agents of social change should be working more towards addressing structural problems by building pressure and raising public awareness. 

Donor Agencies and Microfinance

 Donor agencies admire microfinance. That’s for sure. Let’s not discuss here the cause behind the intimate affair between donors and microfinance institutions, but like in an ordinary love affair, they too, at times, have tussles and unrealistic expectations. Field experiences show that

donor agencies have failed to recognize minimalist microfinance solely as a basic financial service to the poor. They should exempt from harboring unrealistic expectations. Minimalist microfinance is not a panacea. In addition, there seems to be a growing expectation amongst donor agencies that MFIs should be selfsustainable and at the same time they should be able to cater a quality service, and provide training and educational activities for the service users. That, however, seems to be practically untenable. If microfinance is to succeed and bear more productive results, there should be a plenty of skill trainings and educational opportunities organized for the poor, and MFIs should get enough support for such endeavors. If donor agencies help MFIs to set up a separate comprehensive training/educational unit intended for microfinance service users, there is no doubt that more productive results will be achieved and a meaningful process of empowering the poor will begin. The focus should be on building capacity of the poor, not merely on raising income of the poor. Similarly, there should be more support to ‘pro-poor’ research activities and initiatives. For instance, during my stay in Bangladesh, a local media reported that a

scientifically developed high-yielding variety of paddy was found to be immensely beneficial in alleviating the harsh effects of the Monga, a seasonal famine in northern Bangladesh. Similar attempts should be encouraged, funded and facilitated by the donor agencies.

As has already been realized by some microfinance practitioners, development workers, donor agencies and academicians, there needs to be alternative models of microfinance in the coming days. Though there should not be an alternative for providing basic financial services to the poor, when it comes to entrepreneurship and involves different stages of production, pricing, promotion and distribution, mostly the illiterate and unskilled poor seem to have found it difficult to compete

in the vibrant market economy, bear and deal with different types of risks and fare in a successful way. An alternative or complementary model of microfinance could provide subsidized credit and financial support to university graduates, who are also often collateral-less, but might possess different skills, knowledge and entrepreneurial spirit; and in turn, they could train and employ the poor. Dozens of poor people interviewed during my stay in Bangladesh wished to have a job instead of the opportunity to become entrepreneurs. (Author can be reached at manoj.bhusal@silcreation.org)