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Introduction
Microfinance in its basic definition refers to a concept of providing small loans to the underprivileged people to help them in establishing a range of income generating activities with an aim of getting them out of poverty. For more than 30 years, microfinance has been touted as an important model of financing that has the capacity to provide poverty solutions in developing countries and marginalised communities. Zamagni and Zamagni confirm that since its inception and with the enormous support from major world governments such as the US and institutions such as the World Bank, microfinance models have become one of the most popular poverty reduction strategies1. The concept receives millions of dollars from the international community since microfinance institutions strive to establish banks for the poor as a group, which has been adversely ignored or underserved by the mainstream financing models. The model is credited with supporting self-help and individual entrepreneurship with the premise that the model is the only way the worlds poorest people will emerge from poverty.
However, over the last few years, the world is yet to be freed from the yoke of poverty. In any case, the poor people have become inferior, despite the continued uptake of microfinance strategies across different parts of the world. In line with this turn of events, critics have come out to disapprove the effectiveness of microfinance models. According to Roodman and Morduch, they have instead labelled them (models) as anti-developmental and neoliberal tools for continued dominance of the worlds richest over the worlds poorest people2. To many critics, the models have failed consider key factors of poverty. Instead, they have led to an increase in inequalities, exploitation, and under-development in the societies that the concept is aimed to help. This paper critically discusses the microfinance model with an aim of showing that it has had a destructive effect on communities and that it has stood out as a neoliberal tool of domination by the worlds well off over the unfortunate people.
Background to the Microfinance Model
The history of microfinance or microcredit is a long one that can be traced back to the biblical times. However, the modern microfinance movements encompass diverse range of institutions, including individual moneylenders and formal institutions such as building societies, credit unions, village banks, state-owned banks for small and medium-sized enterprises, friendly societies, social venture capital funds, and specialised SME funds among other institutions. According to Weber, in the 18th and 19th century onwards, the emergence of these institutions was fuelled by the desire to change the lives of the poor people because of their disadvantaged positions that had been witnessed following the industrial capitalism of the west3. Therefore, the main objective of the microfinance and its related activities was to empower the poor people to overcome the challenges of exploitation under an elite-dominated economic system by genuinely enlarging the scope of their economic and social activities under their ownership and control.
In the 1970s, as Roodman and Morduch confirm, a new movement of the microfinance model emerged under the influence of a US-educated Bangladesh-born economist, namely Dr Muhammad Yunus4. He carried out experiments in the mid 1970s by providing microcredit in the village of Jobra in Bangladesh. After the experiments, which he found successful, Weber reveals how Yunus went ahead to assert that microcredit was an effective poverty alleviation tool that would greatly benefit the poor and most significantly, women in these poor settings5. Further, with the apparent success of Grameen Bank, a microfinance institution, which he established in 1983, Yunus was convinced that he had found a solution to poverty not only to the Bangladesh population but also to the global people. He further claimed that his model of microcredit was an important tool for promoting capitalism in developing countries by taking it down to the underprivileged citizens6.
Through the microfinance, the poor had a chance to become successful micro-capitalists by acquiring an own piece of the capitalism action. With proper adoption of the concept across the world, Moyo says that Yunus was so confident to the extent of predicting that poverty would be eliminated in a generation and that children would go to poverty museum to learn about poverty since they would have no idea of it7. To him, the solution was as simple as establishing and operating an informal microenterprise. The poor would be effectively on their way out of poverty. With the support of the international donor community, Grameen Bank was formed to promote self-help and individual entrepreneurship. Hence, the model was copied throughout Bangladesh and then across the world. To many proponents, the world had found a bottom-up development model that offered the real solution to poverty.
As put forward by Yunus, the model did not last for long before challenges emerged. Although they were supportive of self-help and individual entrepreneurship, neoliberal policymakers started expressing reservations on the financing of the Grameen Bank microfinance Model. As Karnani observes, for continued support of subsidised financial aid and loans to the poor, the success of the model was dependent on continuous flow of subsidised capital that was essentially provided by the local government and/or international development community8. Policymakers were comfortable with the continued use of extensive government and donor subsidies to keep the supposedly non-stat market-driven microfinance sector alive. According to Duvendack, the World Bank, which is largest neoliberal institution, took important steps towards changing and phasing out the original Grameen Bank Model of subsidised microfinance9. Therefore, the lasting clarification to the crisis of financial support in the microfinance segment was a declaration to restructure the microfinance division into classified for-profit unsupported commercial plan. The new model was quickly popularised and lauded for its potential to bring huge benefits to the poor.
In the 1990s, this innovative neoliberalised revenue-based microfinance framework was commented as the finest trade exercise as an alternative of the previous Grameen Bank plan. It soon became the official definition of microfinance. Hence, it gained a lot of power and influence. By the time of the new millennium, even the Grameen Bank ran out of options. It effectively restructured itself in 2002 under its project titled Grameen II 10. The period of 2000 up to 2006 was marked by years of microfinance. Growth in the sector was exponential. Later, as Liv reveals, growth was not only witnessed in Bangladesh but also in other nations such as India, Bolivia, Cambodia, Nicaragua, Mexico, Sri Lanka, Peru, Mongolia, and Bosnia11. These nations were termed as microfinance saturated, meaning that the poor class had the ability to access microcredit in whatever amounts and at any given time. Indeed, the world was experiencing a very promising era and a journey towards poverty eradication.
In 2007, things took a major turn in the world of the microfinance industry. In this time, Mader reveals how Mexicos largest microfinance institution, namely Banco Compartamos, had its Initial Public Offering (IPO)12. However, it instead revealed the high levels of greed and profiteering by the top management of the institution. The situation led to worldwide condemnation and criticism. In this time, according to Cypher, instead of success stories of the number of people who had been alleviated from poverty, IPO revealed how the top management team was keen on rewarding itself from the proceeding of the poor, especially women, who had been quietly charged up to 195% interest rates for their microloans13. Soon, the rot in the Banco Compartamos was revealed to go beyond the top management of the institution. It extended to the shareholders, investors, advisors, and business partners of the bank. For instance, major beneficiaries from IPO were external investors such as the US-based ACCION and Maria Otero as Compartamos advisor who managed to amass a fortune from the proceedings of the poor14.
Since then, the microfinance model of poverty eradication has been on the decline. It has become more commercialised by perceptive managers, shareholders, and neoliberal investors who are keen on exploiting the poor to enrich themselves. More studies have been carried to show and disapprove other works that support the poverty eradication capability of the microfinance model15. Indeed, to many critics, the World Bank together with its cocoon of neoliberal nations and institutions knew all along that the model had no tangible benefits to the poor. However, it went ahead to popularise it to benefit rich nations and institutions in the west16. According to Duvendack, a research that was funded by the UK government to review evidence of the benefits of microfinance concluded, The current enthusiasm for microfinance is built on foundations of sand 17.
The Reasons for the Failure of the Microfinance Model
Based on a fundamental and noble desire of addressing poverty as a major problem in the 21st century, the model has unfortunately experienced major hurdles. It can be effectively termed as a failure in its entirety. In fact, the only people it has managed to help are the rich ones who have found a new way of expanding their fortune. Therefore, it is important to ask serious questions on why such a well-intended model has failed to eradicate poverty in the world as it was expected18. The models seemingly brilliant simplicity, scope, and humanity are based on some fundamental misunderstandings of basic economic and social development principles. As such, the repercussions of the principally flawed model have been profound in the short and long-term, especially in terms of the welfare of the poor people.
The economics of supply and demand are central to the success of enterprises in any economy. In the third world, involvement with micro-business activities is a long-standing reality, which is mostly referred to as informal sector. Since the introduction of neoliberal structural adjustment programmes, the informal sector has grown as a share of the economic activities, including employment and production of goods at the expense of the formal sector19. Since the formal sector is stagnated, more poor people are forced to informally produce a wide range of simple goods and services that are sold in equally poor neighbourhoods of the community. As it is evident, the informal sector has failed to alleviate poverty levels in the developing world. The core problem here is that although it is easy to produce simple goods and services, the main challenge lies in the purchasing power of those who are targeted by such products and services. According to Mader, the main challenge in poor communities is not the lack of supply of products and services, but the need for spending power to access the goods and services20. Therefore, the notion that finances through the microfinance institutions support more enterprises in the poor communities is farfetched and indeed an inconsideration21. For instance, initial critics of Yunus microcredit model claimed that the Bangladeshi markets were already saturated with small enterprises that were struggling. This position was a clear indication that there was no sufficient demand to support more enterprises that would be established through microloan financing.
While opening doors for more microcredit enterprises, the microfinance model addressed only one side of the poverty, namely supply, while leaving out demand side. This situation was a grave mistake. The effect was the sprouting of more enterprises and more goods and services with the hope that demand would create itself. According to Roodman and Morduch, the few successful microfinance-backed enterprises do not indicate the overall demand in the community22. They only experience such success at the expense of other enterprises that witness reduced sales.
Typically, small-scale and informal microenterprises experience high rates of failure across the world. Such a fact is also true for microenterprises that are financed through microcredit. This observation is a major problem for obvious reasons. Loans must be repaid. When a microenterprise is failing, the evidently poor entrepreneurs face major dilemmas on how to repay their loans. Many of them opt to deplete their savings while others end up using the few remaining family resources, including land, to repay their outstanding balances. The result is even more poverty, indebtedness, and hopeless to the affected people. An example is the case of India where numerous people have lost their lands and other vital family resources. The situation has been aggravated by deliberate over-indebting or financing of high-risk projects by micro-financial institutions with the hope of later taking over the lands from clients who default in what is now referred to as debt farming23. The failed microenterprises have a major risk of leaving a large number of members of a community in more poverty.
South Africa provides a good example where failure of microenterprises has been a social and economic calamity for the poor people. From 1994, the end of apartheid ushered in a new era where members of the poor black communities were encouraged to take microcredit to support their microenterprises24. These efforts were made, despite the overwhelming evidence that enough microenterprises were available in the country and that new ones would not have achieved the expected success. The informal microenterprise activity was already thriving since it had been greatly promoted by the white government. Hence, goods and services were available and hence the lack of the need to have new enterprises25. The result of an increase in the number of microenterprises in the post-apartheid era was drastic.
Self-employment incomes were experiencing enormous downward pressures. From 1997-2003, self-employment incomes dropped at a rate of 11% per year. Therefore, it was evident that the microcredit way of financing was not the way out of poverty. In fact, it had left even more people poorer26. Many blacks later viewed microcredit as a means of improving their standards of living where finances were borrowed to purchase basic survival commodities that would not be covered by the current income. The result was a high level of individual indebtedness in the black community, which even threatened the stability of the nation. Even in Jobra, the home of microfinance, 30 years after its introduction, nothing much has changed. The community was poorer than its previous situation.
The other major reason why microfinance has failed to alleviate people from poverty can be attributed to its characteristic of de-industrialising and infantilising of the local economies. The situation supported the fact under the entrepreneurship theory, which holds that the new, creative, and technically innovative ideas and institutions are central to the economic growth and development of nations27. Consequently, for developing nations to reduce poverty and develop in a sustainable manner, it is important to strive to understand new and innovative technologies, as well as modern industrial processes28. Such technologies and industrial processes are vital in establishing innovative capabilities in domestic microenterprises and SMEs that are highly profitable and globally competitive. However, the nature of microfinance is that reluctance is evident in terms of supporting the sophisticated and obviously high-risk microenterprises.
Further, the high-interest rates and maturity periods that are demanded by most MFI are a hindrance to possibility of higher production based operations microenterprises29. Therefore, the focus on small low production enterprises such as retail shops, trading, and service operations that can add value quickly has indirectly discouraged the sprouting of high returns from high production long-term technology-based microenterprises. Such an approach has created an economy where many of the microenterprises (80%) comprise simple operations-oriented businesses and malls. The middle gap hosts very few mid-ranged enterprises. Low skilled and no-technology small enterprises have not done much to help the economies of the people and/or nations in the poverty alleviation process.
Microfinance as a Neoliberal Concept
In the 1990s, led by the United States, the World Bank, international development organisations, and developed nations pushed for reforms to the Grameen Bank Model of microfinance citing inefficiencies in its concept of depending on subsidised government and donor funds. According to Harvey, the notion that microfinance is ideology-free and is solely to the best interests of the poor people is farfetched, owing to the reforms from the World Bank30. Previous reforms that focused on commercialisation of the microfinance sector were indeed in line with the tenets of neoliberalist ideologies, which advocated a focus on economic activity through individual initiatives, control, and ownership of organisations by the private sector. Further, Hulme asserts that through these reforms and with the financial support of the USAID and the World Bank, the microfinance model was changed into a for-profit business model that was overseen by the light touch regulatory bodies31. The idea was that by turning the microcredit institutions into for-profit organisations, they would become self-sustaining and hence cost effective to governments and the international community while at the same time opening numerous opportunities for poverty eradication through the bottom-up development.
The new model of microfinance resonated well with what was politically acceptable to the developed nations in their quest to continue their control over the developing nations. For instance, under the new microfinance model, institutions are given the leeway to exploit the poor through high-interest rates, which effectively cancel any benefits that the poor people should have anticipated from the micro loans. A good example is in the case of Banco Compartamos, which continues to charge some of its poor women customers up to 195% interest rates32. With such exploitation, the line between microcredit facilities and other capitalist and neoliberal financial institutions becomes very blurred. In addition, when neoliberal financial institutions such as the World Bank support such institutions through the light touch regulations, it is easy to note who the masters of the concept are33. South Africas Capitec, whose success as microfinance can be attributed to its continued exploitation of the poor, duplicates the same case34. Such focus on the poor and their overexploitation through exorbitant interest rates and over-indebtedness is a clear indication of neoliberal influence on the model, which has been turned into cash by the few rich members of the society.
Another major sign of neoliberalist effects of microfinance is through its ability to expand the informal sectors to the extent of leading to de-industrialisation and primitivisation of the economy. Since microfinance focuses on simple and non-technology high-value return ventures, it has effectively shut down the door for innovativeness and growth of industries and long-term technology-driven ventures35. Such primitivisation of the economy ensures that such countries have little or long-term manufacturing institutions. The situation is not only destructive to an economy but also promotes dependency on developed nations for manufactured and industrial goods that the informal sector cannot produce. A good example is the case of Bolivia where massive commercialisation of microfinance has led to rapid de-industrialisation, which has run out of control, yet the governments hands are tied. The case has already left the microfinance sector to manage itself as a for-profit sector. Consequently, with such reforms in the microfinance, there is no hope for the poor people, whose exploitation by these neoliberal microfinance institutions is likely to continue for a longer period, owing to the support that is provided by neoliberal institutions such as the World Bank and allied nations such as the US.
Conclusion
The concept of microfinance is both destructive and neoliberal. It offers no reprieve for the worlds poorest people whom the rich class continues to exploit. While Muhammad Yunus first conception of microfinance had a better chance, its disregard by the World Bank and the USA and subsequent introduction of reforms pushed it in a downward spiral fall that it could never recover. The increased indebtedness that is fuelled by high-interest rates has left many communities even poorer as evidenced in Bangladesh, Mexico, India, South Africa, and Bolivia among other regions where microfinance is saturated. Indeed, the concept has all signs of neoliberalism starting from its turn into for-profit making and regulations that have turned it from a poverty eradication tool to a profit-making tool for the rich class that has disregarded the poor people. While focusing on the informal sectors, micro-financial institutions have led to de-industrialisation of developing nations. The situation has effectively ensured that developing nations continue to depend on the developed ones for industrial products that their primitive informal sectors cannot make. Therefore, it is the high time for the microfinance model to be revised with a focus on the poor people.
Bibliography
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Duvendack, M., What is the evidence of the impact of microfinance on the well-being of the poor?, EPPI-Centre, University of London, London, 2011.
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Footnotes
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S. Zamagni & V. Zamagni, Cooperative Enterprise: Facing the Challengeof Globalisation, Edward Elgar, Cheltenham, 2010, p. 87.
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D. Roodman, & J. Morduch, The Impact of Microcredit on the Poor in Bangladesh: Revisiting Evidence, Working Paper Number 174, Cambodia Institute of Development Study, Phnom Penh, 2009, p. 31.
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H. Weber, The Imposition of a global development architecture: the case of microcredit, Review of International Studies, vol. 28 no. 3 (2002), p. 537.
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Roodman & Morduch, p. 62
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Weber, p. 541
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Roodman & Morduch, p. 67
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H. Moyo, Dead Aid: Why Aid is Not Working and How there is a Better Way for Africa, Farrar, Strauss and Giroux, New York, NY, 2009, p. 17.
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A. Karnani, Fighting Poverty Together: Rethinking Strategies for Business Government and Civil Society to Reduce Poverty, Palgrave MacMillan, New York, NY, 2011, p. 12..
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M Duvendack, What is the evidence of the impact of microfinance on the well-being of the poor?, EPPI-Centre, University of London, London, 2011, p. 56.
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Roodman & Morduch, p. 69
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D. Liv, Study on the Drivers of Over-indebtedness of Microfinance Borrowers in Cambodia: An In-Depth Investigation of Saturated Areas, Cambodia Institute of Development Study, Phnom Penh, 2013, p. 75.
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P. Mader, Financialising Poverty: TheTransnational Political Economy of Microfinances Rise and Crises, Palgrave Macmillan, London, 2014, p. 18..
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M Cypher, Mexicos Economic Dilemma: The Developmental Failure of Neoliberalism, Boulder, London, 2010, p. 14..
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Cypher, p. 34
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Mader, p. 29
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Cypher, p. 21
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Duvendack, p. 75
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Cypher, p. 45
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Moyo, p. 53
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Mader, p. 32
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Liv, p. 82
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Roodman & Morduch, p. 71
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Mader, p. 45
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Moyo, p. 59
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Liv, p. 92
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Zamagni & Zamagni, p. 93
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Karnani, p. 25
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Mader, p. 47
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Zamagni & Zamagni, p. 98
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D. Harvey, A Brief History of Neoliberalism, Oxford University Press, Oxford, 2006, p. 16
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D. Hulme, The Story of the Grameen Bank: From Subsidised Microcredit to Market-based Microfinance: BWPI Working Paper 60, Palgrave Macmillan, London, 2008, p. 26.
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Duvendack, p. 67
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Weber, p. 545
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Mader, p. 51
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Karnani, p. 32
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