Microfinance

This article discusses microfinance in developing nations and its sociological impacts. It discusses the variances in the development of microfinance in different parts of the world and the major models through which microfinance is administered. Emphasizing that microfinance goals are often as social as they are economic, the article explores the connections between microfinance activity and other social change–oriented action. As microfinance initiatives are frequently associated with women's empowerment movements, the gendered aspect of microfinance is discussed in detail, as well as the increasing popular conception of microfinance. Several common critiques of microfinance and various ways in which the microfinance movement must adjust in the changing global economic climate are also explored.

Keywords: Developing World; Economic Development; Formal Economy; Gender; Informal Economy; Microcredit; Microfinance; Microfinance Institution (MFI); Person to Person Lending; Poverty

Overview

The distribution of the world's wealth and resources has been a topic of interest to sociologists since the field was first imagined. Indeed, for many sociologists, access to resources is a fundamental aspect of how society functions. As the world has become more economically intertwined, sociologists now examine issues of global economic interaction between the developed and developing world as well as the relationship between local economic conditions and sociological changes. The subject of microfinance has particularly illustrated both the connections between developed and developing nations and the impact of economic policy and action on social orders and structures within a community.

What is Microfinance?

Microfinance generally refers to a variety of banking and lending activities geared toward very low-income clients, typically in developing nations. Rajdeep Sengupta and Craig P. Aubuchon (2008) have explained:

Although the terms microcredit and microfinance are often used interchangeably, it is important to recognize the distinction between the two … microcredit refers to the act of providing the loan. Microfinance, on the other hand, is the act of providing these same borrowers with financial services, such as savings institutions and insurance policies. In short, microfinance encompasses the field of microcredit. (p. 9)

Thus, microfinance can consist of micro-credit, micro-loans, micro-insurance, and micro-savings accounts, among other applications.

Ideologically, microfinance advocates often identify themselves as part of a sociological process, as well as an economic scheme, describing microfinance as

a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. ("What is Microfinance?" 2009)

Microfinance rests on the idea that stratified societies have excluded certain portions of society from economic access, which has also led to greater social marginalization. Microfinance Institutions (MFIs), which refers to any organization (nonprofit or commercially oriented) that provides financial services for the poor, administer microfinance through various projects that often incorporate specific social goals with the economic goals, for example, women's empowerment is a common aspect of microfinance projects (Consultative Group to Assist the Poor, 2009). According to Sengupta and Aubuchon, in 2008, "it is estimated that anywhere from 1,000 to 2,500 microfinance institutions (MFIs) serve some 67.6 million clients in over 100 different countries" (2008, p. 9).

The Emergence of Microfinance

Microfinance has developed differently in various parts of the world. Almost everywhere, however, it emerged from a similar social problem: lack of financial access by the poor to traditional financial services. The traditional, commercial banking sector is built on a system of credit and collateral, neither of which the poorest sections of society can provide. Low-income communities were viewed as too high-risk for banks to offer loans, and the savings and investment products at commercial banks charged fees that were prohibitive to the poor with only a small amount of money to begin with. Many of the poorest clients operated within budgets that were far lower than any traditional banking system was designed to handle; poor clients that lived on a few dollars a day needed loans of amounts smaller than the banks offered. Leading further to this exclusion was a physical lack of bank branches in the poorest, most rural communities of the world. The net result of the system was that a large portion of the world's poor were virtually excluded from the commercial banking sectors (Sengupta & Aubuchon, 2008; Yunus, 1999). This exclusion is further compounded when comparing developed and developing nations. Access, or lack of access, to traditional financial products can be seen when comparing loan availability in the developed vs. developing world. The Consultative Group to Assist the Poor has reported that in developed nations 82% of adult individuals have received some sort of loan, while in developing nations only 22% of adult individuals have received loans (Consultative Group to Assist the Poor, 2009).

The Informal Economy

Prior to the intervention of microfinance, low-income communities operated largely within the informal economy. The 'informal economy' refers to unofficial economic activity; it is unregulated, unofficial, and un-taxed. It can operate as a discrete entity from the formal economy, although frequently the two overlap and exist side by side. While some government lending schemes have been successful in providing small-scale financial services to farmers and rural poor, more frequently, low-income communities developed systems of finance based on kinship, neighbors, or cooperative agreements. The most informal of the scenarios was to borrow money from family or neighbors when needed. This led to social strains when loans were not repaid and in very poor communities or times of economic downturn, there was often no option for borrowing from family as everyone was struggling. Since the loans were unregulated and often given under quite desperate situations, the lender held a high degree of power in the relationship, and the loan recipient was often forced to accept exorbitant interest or conditions on the loan.

Cooperative Credit Societies

Cooperative credit societies are the most structured of these options, and may be seen as precursors to microfinance. In a cooperative credit society, several members of a village or town would contribute a small amount of money to a mutual savings account, and when needed, would have the right to borrow from the account. While cooperative credit societies were successful in many regards, there were also problems with local power dynamics affecting the ability of some members to access the funds when needed. In addition, in cases of severe famine or crop failure, the collective pot was not big enough to cover the needs of all members at once. Even more problematic was the scenario in which the money was not repaid — not only was the entire community unable to replace the fund, the loan defaulters would be socially excluded, even physically banished or harmed, leaving their situation more desperate than prior to the loan (Collins, Murdoch, Rutherford & Ruthven, 2009; World Bank, 2006).

In Latin America, microfinance developed in the latter 20th century with the vision that it would serve as a bridge to the traditional banking sector. Much like previous "targeted lending" schematics, clients were sought from the "economically active poor," meaning poor people that already held a small amount of assets (usually an existing business) that just needed a small loan to help transition to an economic position compatible with traditional banking. From its very beginning in Latin America, microfinance was seen more as a business than a social movement (World Bank, 2006). In Asia, Africa, and more recently Europe, microfinance has instead developed around the rhetoric of poverty alleviation, rather than business. Muhammad Yunus, founder of one of the first MFIs in South Asia, Grameen Bank of Bangladesh, describes microfinance as a social revolution, and has argued that,

Poverty is not created by the poor. It is created by the structures of society and the policies pursued by society. Change the structure as we are doing in Bangladesh, and you will see that the poor change their own lives. Grameen's experience demonstrates that, given the support of financial capital, however small, the poor are fully capable of improving their lives. (Yunus, 1999, p. 205)

Thus, while two major styles of microfinance continue to function (social and business), in most of the developing world microfinance has become more popularly associated with the social project of poverty alleviation. Microfinance can be seen as a tool toward social change through the method of economic change.

Applications

Microfinance Models

While the goals of microfinance are broadly the same from institution to institution and location to location, the methods by which microfinance is accomplished vary greatly. Different MFIs have widely variant modes of delivery, but the major models that have evolved are the cooperative model, the Grameen model and the mixed model. As a result of increasing internet technology, a new method of person–to- person lending has become popular. This internet model is in many ways a mixed model, but given the unique role of technology, it warrants separate consideration as an internet model of microfinance.

Cooperative & Grameen Models

The cooperative model is an outgrowth of the old cooperative credit societies, but takes steps to avoid some of the previous pitfalls. Like the cooperative credit societies, many members in a community combine their savings into a single account that serves as collateral for loans. Unlike previous schemes however, the cooperative model involves an MFI that maintains varying levels of control over the funds and offers more stability and recovery options for the community in the case of a loan default (World Bank, 2006). The Grameen model is similar to the cooperative model in that it requires members of a community to work together to maintain access to credit. In this method, low-income clients organize into groups of five and enter into an agreement with the bank. The first two members of the group are given a loan first, and in four to six weeks if the loan is repaid, two more are allowed to take a loan. In four to six weeks when that loan is repaid, the final member is allowed to access a loan. Each loan group is also part of a larger unit called a center, and the units meet and monitor each other within the community (Sengupta & Aubuchon, 2008). The Grameen model differs from the cooperative model in that it is based solely on credit, and the groups do not contribute to a mutual savings or require collateral.

The Mixed Model

The mixed model combines aspects of the Grameen and cooperative models, and can take various forms. Within the mixed model, a type of delivery commonly known as person-to-person lending has emerged with increasing popularity. Person-to-person lending still uses MFIs to distribute funds, but also presents an opportunity via internet websites for individuals in the developed world to make loans to specific individuals though websites or other nonprofit organizations. The loans are monitored and distributed by MFIs, but the money comes from lenders facilitated by another entity, usually a nongovernmental organization (NGO). Organizations such as the NGO Kiva have been largely successful in funding many small projects. The basic strategy in the Kiva approach is that local MFIs serve as field partners and gather information and make small loans to individuals. The information is then used to create a profile, including photos and personal information, which is uploaded to the website. Potential lenders can view individual profiles and make a loan of any amount to that individual. The NGO then combines the money and disburses it to the MFI. The funds may be used for either that specific loan or other loans; a common misperception in the process is that the lending is actually linking the individual making the loan with an individual receiving it. The individual that gives the loan via the website receives updates on the repayment by the loan recipient. When the loan has been repaid to the MFI in full, the individual that made the loan via the website receives his or her money back ("About Microfinance," 2009). Essentially, since the loans are usually already made by the MFIs before the profiles are loaded, individuals via the website are providing more of an assurance on the loan than an actual loan.

The person-to-person lending trend has contributed to a wider popular interest in microfinance in the developed world. The popularity of the idea was seen when, after a September 2007 episode of the daytime talk show The Oprah Winfrey Show featured the idea and the Kiva website, Kiva received funding within hours for every loan listed on the site (Holahan, 2007).

Issues

Microfinance & Women

Since the 1970s, microfinance has developed a great deal and gained wider popularity and usage. Indeed, the pace at which microfinance has expanded in the developing world has drastically changed the economic conditions of millions. Sociologists have studied many aspects of these changes, but more than any other issue, they have examined the relationship between microfinance and gender. Since many MFIs have social goals of empowerment of marginalized communities, and since in many patriarchal societies women represent an acutely marginalized aspect of the community as a result of social mores, a large number of microfinance projects throughout the world have targeted women as clients. In addition to the social empowerment rationale, many MFIs have argued that women make better clients in general. The data suggests that women may be more risk-averse in making investment decisions, may be more likely than men to invest the money back into the household, and have higher repayment rates (Sengupta & Aubuchon, 2008; Yunus, 1999). However, less positive issues affect women's likelihood to repay as well. MFIs have acknowledged that women tend to be more vulnerable and accountable to social norms, making the model of group repayment pressure more effective on women, and women tend to have less physical mobility in communities, which gives them fewer options to leave and makes them easier to monitor (Sengupta & Aubuchon, 2008).

The relationship between microfinance and women has led to both criticism and praise. Some microfinance projects have focused on empowering women by increasing economic independence. Some studies suggest that this first step of microfinance access can lead to greater collective behavior in women, and that the increased visibility and economic stability enables women to focus more on personal rights issues (Sanyal, 2009; McCarter, 2006). Other studies have suggested that helping women become more economically active members of the community can result in increased involvement in community decision making and may even lead to increased voice within individual households (Holvoet, 2005).

Questions regarding the benefit of microfinance's emphasis on women remain, however. Studies have also suggested that despite the high ratio of women borrowers, men predominantly control the usage of the loans once the loan is acquired. Many husbands maintain sole discretion over the funds and the women have little say in the usage once it is disbursed (Goetz & Gupta, 1996; Sengupta & Aubuchon, 2008). Critics of microfinance also argue that since microfinance is not addressing the larger social structures affecting women such as power and status within the household or occupational options for women outside of the home, it is in fact benefitting more from women's oppression than it is alleviating it. The higher repayment rate of loans by women is a great benefit to MFIs, but ultimately relies on the very social inequalities the loans claim to be addressing (i.e., lack of options for women).

Microfinance & Capitalism

Microfinance has also been critiqued with regard to other sociological concerns. Many have argued that microfinance merely extends the same neoliberal ideology that promotes the reduction in state aid for the poor in lieu of free market, profit-driven options. Microfinance can be seen to fill in the gaps at the levels of state failure to provide for all citizens, subverting a natural process of change and mobilization that could lead to greater state effectiveness. This perspective also suggests that it is ultimately the job of the state, not individual organizations, to address issues of poverty and distribution, because private organizations are not democratically governed and communities have little power to change the policies or exert any control over the direction of private companies. Furthermore, microfinance's emphasis on entrepreneurship further entrenches the capitalist, free-market ideology into the development process, and could lead to a weakened state, or create tensions within state identity. Effectively, microfinance can be seen as incorporating the poor into the capitalist system without addressing the inherent exploitation of capitalist ideology. The injection of capital at the individual level may alleviate individual poorness, but does little to affect the larger social problem of poverty (Fernando, 2006).

Regulation of MFIs

Critics of microfinance have also pointed to the unclear regulation standards of MFIs. The degree of government reporting requirements and regulations for MFIs varies highly from country to country, with some having virtually no governmental control over the actions of private lenders (World Bank, 2006). This has led to a wide range of interest rates and fees, some of which critics claim are exorbitant. Interest rates for microloans can reach as high as 40% (compared to traditional products which peak below 20%), making critics claim the MFIs are preying on the poor rather than aiding them. In response, many microfinance organizations and advocates cite the higher costs of microfinance; making many small loans, they argue, requires more manpower and upkeep than one or two large ones, and the nature of the microfinance system of highly involved lenders also requires greater manpower and infrastructure (Consultative Group to Assist the Poor, 2009).

Concerns over the costs involved with microfinance have also led to concerns over the sustainability of the trend in the long term and its ability to create sustainable economic progress within a community or the world (Reno-Weber, 2008). The financial dependence of some communities on financially instable MFIs has led to critiques that microfinance must address the systemic issues of profit and sustainability for MFIs as well as for communities.

Ideology & Culture

The global dimension of microfinance also presents some concerns for sociologists. While many MFIs are locally operated, many are international NGOs based in the developed world. Concerns in the developing world over the types of societal changes foreign NGOs envision can lead to tensions. On one hand, the foreign NGOs offer access to economic resources, but on the other hand, the cultural divide may present problems regarding western-centric visions of modernity and a definition of development that is insensitive to local culture and tradition. The relationship between foreign investors and local loan recipients is not based on an equal power dynamic, and some communities may feel pressured to make social changes they fundamentally dislike in order to gain the microfinance products. Critics of microfinance projects argue that the money of microfinance is being used to export the cultures and norms of the developed world into the developing world. This importation of western ideology and culture is particularly problematic in societies that have violent and tragic histories of exploitation by means of foreign interventions and colonialism (Fernando, 2006).

All in all, microfinance has drastically changed the way that the world interacts economically and it has made visible changes in thousands of communities across the globe. As the trend has really only emerged in full force in the latter 20th century, sociologists are still exploring the vast arena of topics microfinance raises. The ever changing global economic climate has required microfinance advocates to continually adapt and change the models of funding and delivery, and will no doubt continue to present new challenges and opportunities in the future.

Terms & Concepts

Developing World: While no strict definition of developing world exists, the term generally refers to countries with some or all of the following: low gross domestic products, low standards of living, high poverty, low infrastructure, political instability. None of these factors should be seen as definitive however; they should be seen as potential indicators of a developing country.

Formal Economy: The formal economy refers to official financial activity that is measured and recognized by a nation's government.

Global Poverty: The most common measure of global poverty as set by the World Bank uses a standard of habitually living on less than $2 a day.

Informal Economy: The informal economy refers to economic activity that occurs outside of the formal economy; it is unofficial, unregulated by the government, and untaxed.

Microcredit: Microcredit is a small loan given to a poor client.

Microfinance: Microfinance generally refers to a variety of banking and lending activities geared toward very low-income clients, typically in developing nations.

Microfinance Institution (MFI): A microfinance institution is any entity that provides microfinance services to clients.

Person to Person Lending: Person to person lending refers to a type of microfinance in which individual lenders directly choose to fund individual microloan recipients.

Poverty: Poverty indicates a financial condition in which a person or family's basic living expenses are not met or just barely achieved.

Bibliography

About microfinance. (2009). Retrieved December 1, 2009 from Kiva website. http://www.kiva.org/about/microfinance

Bezboruah, K., & Pillai, V. (2013). Assessing the participation of women in microfinance institutions: Evidence from a multinational study. Journal of Social Service Research, 39, 616-628. Retrieved November 4, 2013 from EBSCO Online Database SocINDEX with Full Text http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=91667939

Collins, D., Morduch, J., Rutherford S., & Ruthven, O. (2009). Portfolios of the poor: How the world's poor live on $2 a day. Princeton, NJ: Princeton University Press.

Consultative Group to Assist the Poor. (2009). About microfinance. Retrieved November 29, 2009 from CGAP http://www.cgap.org/p/site/c/about/

Craxton, M., & Rathke, W. (2011). Mega troubles for microfinance. Social Policy, 41, 25-32. Retrieved November 4, 2013 from EBSCO Online Database SocINDEX with Full Text http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=66723992

Fernando, J. (2006). Microfinance: Perils and prospects. New York: Routledge.

Goetz, A., & Gupta. R. (1996). Who takes the credit? Gender, power, and control over loan use in rural credit programs in Bangladesh. World Development 24 , 45-63.

Holahan, C. (2007). EBay: The place for microfinance. BusinessWeek Online, 24. Retrieved November 31, 2009 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=27264691&site=ehost-live

Holvoet, N. (2005). The impact of microfinance on decision-making agency: Evidence from South India. Development & Change, 36, 75-102. Retrieved November 31, 2009 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=16567550&site=ehost-live

Korth, M. M., Stewart, R. R., Rooyen, C. C., & Wet, T. T. (2012). Microfinance: Development intervention or just another bank?. Journal of Agrarian Change, 12, 575-586. Retrieved November 4, 2013 from EBSCO Online Database SocINDEX with Full Text http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=79957875

McCarter, E. (2006). Women and microfinance: Why we should do more. University of Maryland Law Journal of Race, Religion, Gender & Class, 6, 353-366. Retrieved November 31, 2009 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=28531898&site=ehost-live

Reno-Weber, B. (2008). Microfinance goes mainstream. Kennedy School Review, 8, 123-128. Retrieved November 29, 2009 from EBSCO Online Database Academic Search Complete http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=32997544&site=ehost-live

Sanyal, P. (2009). From credit to collective action: The role of microfinance in promoting women's social capital and normative influence. American Sociological Review, 74, 529-550. Available at EBSCO Online Database SocINDEX with Full Text http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=43540283&site=ehost-live

Sengupta, R., & Aubuchon, C. (2008). The microfinance revolution: An overview. Review (00149187), 90, 9-30. Retrieved November 29, 2009 from EBSCO Online Database Academic Search Complete. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=28513880&site=ehost-live

What is microfinance? (2009). Microfinance Gateway. Retrieved November 29, 2009 from http://www.microfinancegateway.org/p/site/m/template.rc/1.26.12263/

World Bank. (2006) Microfinance in South Asia: Toward financial inclusion for the poor. Washington DC: World Bank.

Yunus, M. (1999). Banker to poor: Micro-lending and the battle against world poverty. New York: Public Affairs.

Suggested Reading

Ali, I., & Hatta, Z. A. (2012). Women's empowerment or disempowerment through microfinance: Evidence from Bangladesh. Asian Social Work & Policy Review, 6, 111-121. Retrieved November 4, 2013 from EBSCO Online Database SocINDEX with Full Text http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=76302991

Chemin, M. (2008). The benefits and costs of microfinance: Evidence from Bangladesh. Journal of Development Studies, 44, 463-484. Retrieved November 31, 2009 from EBSCO Online Database Academic Search Complete http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=31808472&site=ehost-live

Moodie, M. (2013). Microfinance and the gender of risk: The case of Kiva.org. Signs: Journal of Women in Culture & Society, 38, 279-302. Retrieved November 4, 2013 from EBSCO Online Database SocINDEX with Full Text http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=83751469

Morazes, J. (2012). On Earth as it is in Heaven? Microfinance, social development, and faith-based approaches. Social Development Issues, 34, 18-29. Retrieved November 4, 2013 from EBSCO Online Database SocINDEX with Full Text http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=83340845

Mosley, P., & Steel, L. (2004). Microfinance, the labour market and social inclusion: A tale of three cities. Social Policy & Administration, 38, 721-743. Retrieved Dec 1, 2009 from EBSCO Online Database Academic Search Complete http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=151 181647&site=ehost-live

Swain, R., Van Sanh, N., & Van Tuan, V. (2008). Microfinance and poverty reduction in the Mekong Delta in Vietnam. African & Asian Studies, 7(2/3), 191-215. Retrieved Dec 1, 2009 from EBSCO Online Database Academic Search Complete http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=33164255&site=ehost-live

Versluysen, E. (1999) Defying the odds: Banking for the poor. West Hartford, CT: Kumarian Press.

Essay by Samantha Christiansen, M.A.

Samantha Christiansen is a historian of modern South Asia, specializing in social movements and student politics. Her work has specifically endeavored to illustrate the connections between radical politics in the developed and developing world, both in a historical context and modern setting. She is affiliated with Northeastern University in Boston, Massachusetts, Independent University Bangladesh in Dhaka, Bangladesh, and is a fellow of the American Institute of Bangladesh Studies.