The business of poverty reduction - is microfinance doing more harm than good?

Microfinance aims to alleviate poverty by providing poor people with a route into entrepreneurship. This award-winning paper offers a critical analysis of the role such market-based approaches to poverty reduction play in developing countries. It finds their impact can be less positive than is often thought.

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Global poverty is big business. In the United States alone the poverty industry, comprising payday loan centres, pawnbrokers, credit card companies and microfinance providers, is worth tens of billions of dollars and it’s from the poorest in society that this money is generated.

Around the world it’s estimated there are 1.2 and 1.5 billion people living in extreme poverty. Many millions who face the most crippling levels of poverty reside in so-called developing countries and it’s in these territories that people have increasingly turned to microfinance. In essence, microfinance involves the provision of small loans to the poor with the aim of lifting them out of poverty. According to many researchers and policy makers, microfinance encourages entrepreneurship, empowers the poor (particularly women in developing countries), increases access to health and education, and builds social capital among vulnerable communities.

For more than twenty years microfinance has been viewed as a key poverty reduction strategy. However, more recently its real value and impact have been questioned, with both economic and social problems linked to it. Findings of the study Microfinance and the business of poverty reduction: Critical perspectives from rural Bangladesh suggest these concerns are well founded.

The research reports the results of an ethnographic study of microfinance in three villages in rural Bangladesh, all of which had been targeted by microfinance organisations. It focuses on households and individuals and documented the experience of microfinance borrowers over time. The study involved observations of borrower meetings, focus groups and in-depth interviews, and was conducted by two teams of researchers and their locally based associates. Data collection focused on subjective experiences arising from a life of poverty, such as feelings of vulnerability and helplessness. The study approached the problem of poverty reduction schemes from the perspective of the receivers of microfinance rather than from the supply side, the microfinance organisations themselves.

It found that microfinance has led to increasing levels of indebtedness among already impoverished communities and exacerbated several dimensions of vulnerability, these being:

1) Economic vulnerability – The study finds that microfinance clients had little success in escaping poverty. Loans were primarily used for necessities such as food and medicine, home repair, or education, rather than income generating activity. Added to that, the income generating schemes advocated by providers and NGOs, specifically agricultural ones, did not yield profitable results. When borrowers took out further loans from alternative providers to pay off existing loans, they found themselves trapped in a spiral of debt. Microfinance can therefore exacerbate poverty, the very thing it is supposed to combat.

2) Social vulnerability – Communities that have strong familial and social networks are considered better equipped to deal with poverty. “Solidarity groups” consisting of family, friends and associates often stuck together and supported family members dealing with debt. However, due to the fear of debt default, surveillance increased within and between groups of borrowers and led to an erosion of trust, even amongst family members. Aggressive repayment tactics from lenders often involved public shaming of defaulters which adversely affected their social ties with both community and family. The “solidarity groups” that were the basis of the social collateral of microfinance loans thus led to an erosion of bonding social capital.

Additionally, one of the fundamental aims of microfinance, the empowering of women, was also undermined. The research finds that it is men who generally use the loans provided and simply use women as a front to obtain them. Often in these cases, when there is a default on the loan, the women were placed in the position of blame. They find themselves scapegoated, rather than empowered.

3) Environmental vulnerability – the findings indicate that traditional farming practices in the villages are increasingly supplanted by income generating schemes encouraged by microfinance providers and NGOs, such as maize growing. As well as a high occurrence of crop failure due to inexperience and the generally unsuitable weather conditions, there is also evidence that maize growing has an adverse effect on the quality of the region’s soil and thus on the viability of future farming. The aggressive promotion of non-traditional cash crops can result in environmental vulnerabilities and threats to sustainable farming.

The results challenge the prevalent perception that microfinance generates income, empowers women and builds social capital in poor communities. The study builds a grounded theory of the vulnerability and social capital dimensions of poverty arising from microfinance activity. It explains how the vulnerabilities and powerlessness arising from poverty are exacerbated and why communities living in the trap of extreme poverty are unable to escape it through microfinance. The research also questions the role of NGOs as institutional agents of poverty alleviation.

This study was awarded Paper of the Year 2017 by Human Relations journal. The published version of the paper is available for download at the link below.


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