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About the auth or
Milford Bateman is a freelance consultant
specialising in local economic development policy,
particularly in relation to the western Balkans.
From to , he was based at the University
of Wolverhampton in the UK, first as a lecturer in
East European economics, and then in he was
appointed senior research fellow in local economic
development. In , he moved into the business
sector to become a full-time consultant. Since ,
he has worked as a consultant for most of the major
international development agencies, for a number
of local governments in Eastern Europe, and for
several of the major international NGOs. He is also
currently a visiting professor of economics at the
University of Juraj Dobrila at Pula, Croatia.
WHY DOESN’T MICROFINANCE WORK?
the destructive rise of local neoliberalism
Milford Bateman
Zed Books
·
Why Doesn’t Microfinance Work? The destructive rise of local neo-
liberalism was first published in by Zed Books Ltd, Cynthia
Street, London , and Room , Fifth Avenue, New
York, ,
www.zedbooks.co.uk
Copyright © Milford Bateman
The right of Milford Bateman to be identified as the author of this
work has been asserted by him in accordance with the Copyright,
Designs and Patents Act,
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Contents
Preface | vi
Acronyms | x
1 Introduction . . . . . . . . . . . . . . .
2 The rise of microfinance . . . . . . . . . .
3 Microfinance myths and realities . . . . . .
4 Microfinance as poverty trap . . . . . . .
5 Commercialization: the death of micro-
finance . . . . . . . . . . . . . . . . .
6 The politics of microfinance . . . . . . . .
7 Alternatives to conventional microfinance .
8 Conclusion: the need for a new beginning . .
Notes |
Bibliography |
Index |
Preface
This book has its roots in my frustration with the huge disconnect
that exists between the heady claims made for microfinance and
the everyday reality I have witnessed for many years now. Like
many others, I was initially intrigued and then very excited by this
in novation. It seemed to oer so much to so many – employment
generation, poverty reduction, additional income, sustainable
‘bottom-up’ development, empowerment of the poor, and rising
community solidarity. These were important economic and social
development outcomes. So if it really was the case that microfinance
was behind them, then it could certainly count on my full support.
Very early on in my PhD research at the University of Bradford,
starting in late , and then over the course of more than two
years spent in the former Yugoslavia collecting material for my thesis
(‘Local economic strategies and new small firm entry: the case of
Yugoslavia’), I was steered towards microfinance. It seemed to be one
of the most obvious financial support policies I should think about.
On becoming a UK-based university lecturer in economics in ,
and also active in local economic development policy consulting
soon after, my contact with microfinance greatly increased. For
teaching purposes, I began to delve into the growing amount of
research on microfinance and microenterprises. I was able to access
the published outputs arising from many microfinance programmes.
And as part of my growing engagement in policy consulting work,
I also began to come across many microfinance programmes in the
field. Whenever I looked a little closer at microfinance policy and
programmes, however, nothing seemed to add up. It was a brilliantly
marketed and politically vital concept, but it was actually an empty
vessel.
The s were an incredibly exciting time for those of us
involved in teaching, research and consulting in the area of local
economic development. Economists were coming to a much greater
understanding of the key development ‘triggers’ in any local econ-
omy, and the various ways many countries, regions and localities
have been successful in ‘pressing them’. All the academic talk was
Preface | vii
of the importance of supporting institutions, ‘industrial districts’,
networks, local industrial policy, clusters, the Italian ‘third way’
model, commodity chains, technology development, and so on and
so forth. I began to realize, however, that the microfinance model
was an almost perfectly designed foil with regard to these important
development policies, institutions and trajectories. It was soon clear,
too, that microfinance programmes were starting to absorb the valu-
able financial resources that might otherwise have been channelled
into precisely these areas. And not just international donor funds
and government spending, but also – crucially – local savings, which
were increasingly being locked into microfinance. If poor African,
Latin American and South-East Asian countries seriously wanted to
emulate the rich Western economies or the newer East Asian ‘Tiger’
economies, and so also patiently build relatively sophisticated and
scaled-up industrial and agricultural sectors from the ‘bottom
up’, I remember thinking, the growing emphasis on microfinance
as develop ment policy was leading them in completely the wrong
direction.
Consulting assignments in the western Balkans and wider eastern
Europe from the mid-s onwards amply confirmed my deep
unease with microfinance, now in the context of post-communist
restructuring. Working and living in the western Balkans from
onwards brought me into much greater everyday contact with life
and ordinary people in countries undergoing quite fundamental
change. Almost right away I came across a local language term,
Africanizacija (Africanization). This was a tragicomic reference
to the massive proliferation everywhere across the region of the
very simplest informal microenterprises, almost all engaged in
some form of petty trade or services. In previously quite advanced
countries, there was understandable resentment at what appeared to
be a programmed return to nineteenth-century ways of living and
working. This was not at all what most people thought capitalism
and the market economy would deliver for them. Meanwhile, it
quickly became apparent that the far more productive small and
medium-sized enterprise (SME) sector was being left to wither on
the vine: the private commercial banks (now mainly foreign owned)
were simply not interested. Yet because all this activity was ‘market-
driven’, as they say, the international development agencies and their
key advisers argued that by definition an optimum development
trajectory was under way, so there was no need to worry. But just
viii | Preface
in case, governments in the region were eectively prohibited from
saying or doing anything to the contrary, not least by being threat-
ened with losing important international financial aid flows if they
did. It was all beginning to look really unhealthy to me.
I first started to publicly register my unease with microfinance
in the mid-s. I attended a couple of seminars and conferences
in order to formally express my fear that, for a number of reasons,
microfinance was very likely going to undermine the post-war
reconstruction eort in the western Balkans. I argued instead for a
solid local industrial policy response to the accelerating economic
collapse in the region, something not unlike that pioneered in
equally devastated northern Italy after . I got a rough ride at
first. Since the key international development bodies were vigorously
selling ‘market-driven’ microfinance to the new post-communist
governments in the region, this was perhaps not surprising. I well
remember receiving a pretty angry reception speaking at one event
in Sarajevo in February , organized by the Warsaw-based
Microfinance Centre (MFC). Nevertheless, my interest in micro-
finance continued. In fact, I probably became keener than ever to
put something much longer down on paper. But for the next five
years this notion was put to one side. Now employed by a large
UK-based consulting company, I was pretty much fully tied up with
work and travel right across the region. Moving on in to a
much less stressful life as a freelance consultant, however, finally
made it possible to think about carving out some serious free time
for writing. Fortuitously, too, right at this time an article on micro-
finance I was working on came to the attention of Ha-Joon Chang,
who was then co-editing for Zed Books a series on new approaches
to key economic issues. He got in touch and, after some discussion,
a book contract with Zed was raised as a possibility. Things began
to fall into place. Eventually, I managed to free up most of the
summer and autumn of , and this book is the result.
Over the years, a number of individuals have stimulated my
critical interest in microfinance and have helped me by providing
material and ‘inside’ commentary on many of the most important
issues. For obvious reasons, many of these informants prefer to
remain anonymous, but I publicly oer them my thanks now. Even
though we disagree in a number of areas, Malcolm Harper has
nevertheless been extremely supportive of my academic work and
ideas, including with regard to this book on microfinance (as well as
Preface | ix
a good friend, along with Uschi Kraus-Harper), for which I oer my
warm thanks. Others who have also provided me with useful in-
sights, data and/or comments on draft sections of this book include
Bina Agarwal, Hanns Pichler, Tom Dichter, Dave Richardson, David
Ellerman and Hans Dieter Seibel, to whom I also oer my thanks.
Elizabeth Hughes-Komljen very kindly provided important editorial
help at a time when I really needed it. I am grateful to my good
friend Alistair Nolan for taking time away from his annual holiday
to discuss with me some of the key issues I raise in the book, and
for his editorial and technical comments on some early chapter
drafts. Zed Books’ commissioning editor Ken Barlow made many
useful suggestions and comments, for which I am especially appre-
ciative. I need to thank also the anonymous reviewers of the early
book proposal, who between them provided many useful comments
and suggestions that helped kick-start the project. Vicky, Neil, Joe
and Greg Walsh helped me immensely by providing an extremely
congenial atmosphere in Halifax (UK) over the Christmas
holiday season, eectively allowing me to complete the manuscript
with only a minor delay. Finally, the biggest thank-you is to Ha-Joon
Chang for his constant encouragement and support, right from
what was an awkward book proposal stage (many thought that
critically addressing such a ‘feel-good’ subject was risky), through
to the processing of his extensive comments on each of the draft
chapters. Of course, it must be stressed that none of the above bears
any responsibility whatsoever for the misinterpretations and errors
contained in this work, which are mine alone.
Milford Bateman
January 2010
Acronyms
BDP Banco de Desarrollo Productivo (SME development
bank)
CCT conditional cash transfer
CGAP Consultative Group to Assist the Poor
DfID Department for International Development
FDI foreign direct investment
HIID Harvard Institute for International Development
IFC International Finance Corporation
ILO International Labour Organization
IPO initial public oering
MFI microfinance institution
MNC multinational corporation
SHG self-help group
SME small and medium-sized enterprise
ONE
Introduction
This book is about one component of the global financial sector
– microfinance – that in just thirty years has risen to become one
of the most important policy and programme interventions in the
international development community. As originally conceived, micro-
finance is the provision of tiny loans to poor individuals who establish
or expand a simple income-generating activity, thereby supposedly
facilitating their eventual escape from poverty.1 Its advocates claim
that microfinance has been critical to the fate of the poor in many
developing countries, creating jobs and raising incomes in the poorest
communities, helping to empower the poor (especially women), and
generally kick-starting a ‘bottom-up’ economic and social develop-
ment process. The person most associated with the ‘discovery’ of
microfinance in the s is the Bangladeshi economist and
Nobel Peace Prize co-recipient, Dr Muhammad Yunus. With his vision
of rapid and aordable poverty reduction being achieved through
microfinance, Yunus was able to convince virtually everyone in the
international development community to support his eorts. Indeed,
the next generation, he famously said in the s, would be able to
understand the concept of poverty only after having visited a ‘poverty
museum’. Here, surely, was the poverty reduction concept that all
developing countries had been waiting for.
The central argument that I will develop in this book, however,
is that microfinance is largely antagonistic to sustainable economic
and social development, and so also to sustainable poverty reduction.
Put simply, microfinance does not work. I fully accept that there are
some minor benefits to be derived from the widespread provision of
microfinance to the poor. An intervention that puts a little extra cash
into the hands of the poor in any community – and especially if that
cash is brought in from outside the local community in question –
could hardly do otherwise. But I argue that these benefits are very
minimal indeed, and anyway wholly insignificant when set alongside
the huge longer-term downsides and opportunity costs inherent in
2 | One
the operation of the microfinance model. To focus upon these few
minor shorter-term benefits is to deliberately focus on the few trees
left standing after having helped the entire forest to burn down. In
truth, once we go beyond the fabulous ‘feel-good’ PR and marketing
eort undertaken on behalf of the microfinance model, no more so
than by Muhammad Yunus himself, we find a completely dierent
reality. Sustainable local economic development trajectories are actu-
ally undermined and blocked. Local communities are structurally
weakened and destroyed. Important reserves of solidarity, mutuality
and cooperation are trashed thanks to the internecine competition
between desperate individuals ‘poverty-pushed’ into establishing the
very simplest of microenterprises. Human dignity and self-respect
are lost as the poor in developing countries are increasingly forced to
accept their permanent engagement with the most primitive, illegal,
dangerous and demeaning business activities imaginable. Overall,
those developing countries awash with microfinance – and the prime
example, of course, is Bangladesh itself – are increasingly being left
behind by other developing countries, those that have proved far
sighted enough to channel investment into the type of enterprises,
infrastructures and institutions that, when combined, have far more
potential to produce a substantive and sustainable growth and develop-
ment payback. All the while the various ways in which the poor have
in recent history been able to successfully escape grinding poverty and
achieve tolerable living standards and opportunities – by exercising
their collective capabilities through pro-poor political parties, social
movements, supportive state structures, trade unions, associations,
single-issue pressure groups, and the like – are now ruled to be com-
pletely o the agenda. The poor are instead increasingly thrown back
on to their old, and largely unsuccessful, historical mission; to attempt
vainly to rescue themselves from their own poverty and suering solely
through their own individual actions and meagre resources.
Another core argument I make in this book is that the increas-
ing commercialization of microfinance is responsible for greatly
amplify ing the destructive impact registered by the basic Grameen
Bankmicrofinance model. A central development within the world
of microfinance was the schism that took place in the s, when
the subsidized Grameen Bank model was eectively abandoned and a
completely new commercialized microfinance model – what I term the
‘new wave’ microfinance model – was ushered in as its replacement.
From now on, a microfinance institution was to be a business, and its
Introduction | 3
primary objective was to attain full financial self-sustainability and
profits as quickly as possible. Even if the poor would greatly benefit
from low interest rates and the additional net income that would
then result from any simple income-generating project, an outcome
that might in turn necessitate subsidies from the wider (richer) com-
munity, tough. Reconstituting microfinance as a for-profit business
model, however, has had quite disastrous consequences. Just as on
Wall Street, we now find ‘new wave’ microfinance increasingly defined
by unethical profiteering, greed, irresponsible risk-taking, speculation
and ‘microcredit bubbles’. PR eorts to the contrary notwithstanding,
that microfinance largely exists to promote poverty reduction is a
concept that lost any traction many years ago.
The arguments made here also have considerable implications for
theories of financial systems, and particularly how a financial system
influences economic growth, as well as its impact upon the distinct
process of sustainable economic development (where growth is based
on respect for economic, social and environmental outcomes). If we
accept that it is not simply the quantity of finance available which
determines the rate of growth and sustainable development, but also
how, where, when and in what form financial resources are deployed,
then we have here a very useful case study indeed. Many developing-
country financial systems have been very significantly restructured
towards microfinance, with the corollary being the progressive aban-
donment of lending to the small and medium-sized enterprise (SME)
sector. So how does a microfinance-dominated financial sector work,
and is it good for growth and sustainable development? With Bangla-
desh, the most famous example of a financial system structured
around microfinance, later joined by Bolivia, Mexico, Cambodia,
Uganda, Mongolia, Bosnia, Peru, Nicaragua, and many parts of
southern India, we now have important real-life country and regional
examples of microfinance ‘saturation’ to examine. While we still await
the definitive large-scale empirical work on the topic, the evidence
that has emerged so far seems to suggest that the growing presence of
microfinance within a local financial system has been quite destructive
of sustainable development and poverty reduction objectives.
Going beyond theory, I hope this book will also, finally, help
to outline important practical lessons for local communities, and
why alternatives to microfinance must be urgently fashioned. Local
communities in most developing countries have been under stress
for far too long, with the global financial crisis beginning in late
4 | One
adding massively to their existing woes. I firmly believe that
in conjunction with sympathetic and proactive higher government
structures, poor local communities could achieve far better things
than at present under microfinance. To do this we need to study and
learn from the notable successes enjoyed by other local financial sys-
tems and heterodox local microfinance models. I outline in Chapter
a number of the most interesting examples from recent history.
Of course, these examples have their problems. And replication and
adaptation of policy models are never easy: historical, economic,
cultural and political context can be crucial. But the many successes
of post- European countries and regions, and then of the East
Asian ‘Tiger’ economies from the s onwards, help to show just
what an appropriately designed ‘development-driven’ local financial
system can accomplish. It is far better that developing countries
learn from and adapt these positive ‘on the ground’ experiences,
rather than look to neoclassical economics textbooks pointing to the
theoretically possible development benefits of microfinance, bene-
fits that I argue in this book simply don’t exist in practice to any
meaningful extent.
Bringing reality back in
This book was largely put together as the most serious economic
crisis since the s was unfolding right across the globe. Now
o cially defined as ‘The Great Recession’, this latest economic crisis
meted out a very severe beating to the idea that free market capitalism
is the answer to the growing economic, social, cultural and environ-
mental problems confronting humankind. To be more accurate, we
have just seen the most recent and most fundamentalist variant of
capitalism – neoliberalism – explode before our eyes. An ideology
premised on the infallibility of self-regulated financial markets, private
ownership and unrestrained individual self-interest collapsed in late
just as spectacularly as the Berlin Wall and communism fell
at the end of . And it could even have been much worse than
this – theend of the entire global capitalist system no less, according
to the Financial Times2 – had it not been for unprecedented levels
of state intervention and company rescues, subsidies to the financial
sector running into the trillions of dollars, and Keynesian-inspired
stimulus packages propping up consumer demand right across the
globe. Even the reflexively anti-state Economist magazine had to come
clean and admit that a second and even deeper Great Depression
Introduction | 5
was only very narrowly avoided, thanks to the ‘biggest, broadest and
fastest government response in history’.3
So we are – or, at least, should be4 – in the middle of a major
episode of rewriting economic theory and policy to take into account
the sheer enormity of the destruction that has just happened, and
the human suering now left in its wake. If the Great Recession has
a silver lining to it, then, it will come in the shape of much greater
freedom to challenge and discard the core neoliberal policies that have
patently failed not just today’s generation, but also future generations
as well (thanks to truly astonishing levels of debt now bequeathed to
them). Today, there are no more ‘sacred cows’ in economic policy.
Accordingly, in this book I take the opportunity to provide my
own critical take on perhaps the most popular ‘sacred cow’ in the
international development policy field – microfinance. I will show
why it is not the solution to poverty and underdevelopment that
we were originally led to believe it would be. In fact, I suggest that
micro finance is actually a ‘poverty trap’, an ‘anti-development policy’
that ultimately destroys the potential for sustainable local economic
and social development, and so also for sustainable poverty reduction.
TWO
The rise of microfinance
‘I strongly believe that we can create a poverty-free world, if we
want to … In that kind of world, [the] only place you can see
poverty is in the museum. When school children will be on a tour
of the poverty museum, they will be horrified to see the misery
and indignity of human beings. They will blame their forefathers
for tolerating this inhuman condition to continue in a massive
way …’ Muhammad Yunus1
Largely thanks to the pioneering work of Muhammad Yunus and the
Grameen Bank that he established in Bangladesh a little under thirty
years ago, a new concept of small-scale finance was added to the finan-
cial lexicon: microfinance. In a short space of time, the microfinance
model became the international development community’s poverty
reduction policy and programme of choice. The award of the
Nobel Peace Prize jointly to Muhammad Yunus and to the Grameen
Bank he founded in , followed in August by the award of the
US Presidential Medal of Freedom, are just the most high-profile in a
long line of awards and glowing tributes to the individual most closely
associated with microfinance. Having pioneered such an important
new financial sector innovation, one that has supposedly proved to be
of enormous importance to the world’s poor, such personal awards
and celebrity are widely seen as richly deserved.
This chapter will chart the ‘discovery’ of microfinance by Muham-
mad Yunus in s Bangladesh. I will show how an idea designed to
help Yunus’s local village was turned into an international develop-
ment policy and programme behemoth. What is so extraordinary
about the Grameen Bank story is that it was based on a flawed
understanding of basic economic principles (as we shall see), and
initially it could oer nothing more than hope and good intentions
to convince the international development community to oer its
support. But it nevertheless rapidly prospered and went on to become
the enormous power and influence that it is today in international
The rise of microfinance | 7
development circles, if not – judging by the number of ordinary people
who have rallied to its cause – in everyday life too.2 Moreover, it is
even more extraordinary to find that in the course of three decades
lifting Muhammad Yunus up almost to sainthood, the international
development community actually had to insist in the meantime that
he abandon almost all of the core principles upon which he had
established the original Grameen Bank model! Yunus overwhelmingly
remains the public ‘face’ of microfinance right across the globe, but
the ‘new wave’ microfinance model that dominates today is a radically
dierent local financial model to the one he pioneered in Bangladesh
in the s.
Birth of an idea
The ‘discovery’ of what we commonly refer to today as micro-
finance is by now a well-told story.3 It starts in Bangladesh, a country
that in the s was recovering from a bloody conflict associated
with its independence from Pakistan in . In the early s,
Muhammad Yunus was chairman of the Economics Faculty at Chitta-
gong University. He obtained this position after returning from a
long sojourn in the USA, where he had been first a doctoral student
and then a university lecturer. Shocked at the appalling poverty and
human suering he found on his return, Yunus began to think about
what might be done to improve the situation.
Immediately Yunus made himself more familiar with a number of
the credit-based projects under way in the poorest communities in
Bangladesh. As he set about thinking what he was going to do next,
Yunus was able to draw inspiration and important lessons from these
projects. Perhaps the most important of the credit-based projects
under way in the early s was a form of microcredit directed
towards the poor. This project had been pioneered in the s in
East Pakistan (later to become Bangladesh) by Akhtar Hameed Khan.4
In Khan’s ‘Comilla Model’, microcredit was disbursed to poor rural
communities through village- and sector-based cooperatives. The basis
for Khan’s experiment was the urgent need for an alternative to the
rich local moneylenders and traders, who were widely seen as holding
back the rural poor through the usurious interest rates they charged.
There were many positive aspects to the Comilla Model, such as the
solidarity generated within the cooperatives, a feature that was also
projected out into the community. The Comilla Model failed to flour-
ish as much as had been hoped, however. Analysts identified several
8 | Two
reasons for this. One was that the Pakistani government continually
interfered in the project, hoping to use it as a vehicle for rebuilding
local physical infrastructure. Another problem was that of ‘elite
capture’. This occurred when the richer and more articulate members
of the cooperatives began to manipulate themselves into positions of
power in order to appropriate most of the project’s benefits.5 Still,
the Comilla Model provided an obvious reference point for Yunus
and the direction he was about to take.6
At the same time, Yunus was struck by the creativity of the poor
in his district in figuring out how to survive. This was especially so
in the case of poor women. On regular visits to the nearby village
of Jobra he saw that, alongside traditional farming activities on the
family plot, almost all poor women were engaged in some form of
tiny income-generating activity – rice-husking, raising chickens for
eggs and meat, net-making, street food preparation, petty trading, and
so on. Yunus immediately thought that if these poor individuals could
be encouraged to expand their existing income-generating activities,
or start a new line of work, their lives, and the lives of those around
them, would be improved considerably.
Expanding and establishing such income-generating activities,
however, was not easy. The returns were generally so irregular and
so small that most income-generating activities simply did not gener-
ate enough spare cash to kick-start the next economic cycle. Most
cash earned simply had to be used to fund present consumption.
By default, therefore, the economic cycle only kept going thanks to
new or rolled-over small loans from local moneylenders. The women
returned to the moneylender knowing that they would be in the very
same situation in the near future, but with no other obvious way
out. The end result was that most women barely survived from one
wretched day of toil to the next. In other words, the women in Jobra
were in a classic ‘poverty trap’.
Many free market economists have argued that the persistent
demand for informal moneylenders eectively confirms how much the
poor value such services. Moneylenders cannot therefore be viewed
as exploitative.7 But Yunus thought dierently, at least on this issue.
For a start, the turbulent rural history of his own native land, and
of neighbouring India, was steeped in class-based antagonisms. This
centrally involved poor farmers losing out to the local class of rich
moneylenders. Among other things, moneylenders traditionally used
defaults, some of which they deliberately prearranged,8 as the pretext
The rise of microfinance | 9
for seizing land owned by the poor. This dynamic partly explains
why, across the entire Indian subcontinent, the local moneylenders
typically evolved into important local landowners as well.
More importantly, Yunus’s personal experience began to extend
to the influence of the moneylenders. In several of his books Yunus
vividly recounts his shock at seeing the ‘near enslavement’ of the poor
to local moneylenders in Jobra village.9 On the spur of the moment,
Yunus asked whether he could make a quick list of all the women
in Jobra in debt to local moneylenders. He came away with a list of
forty-two names, and a collective debt of just $US. He decided to
cancel this debt out of his own pocket, and was embarrassed to be
almost royally feted for such a small service to the community.10
Liberation from the moneylender Soon Yunus’s core idea began
to take shape. He had come to the conclusion that if the poor were
to ever stand a chance of benefiting from their labour and escaping
poverty, they needed to be freed from the local moneylender. The poor
needed instead a microcredit: a small low-interest loan to establish
or expand an income-generating activity. Low interest rates were
important because they would liberate more cash for the poor, which
would put more food on the table, help educate any children, permit
some savings, and so on. With more cash free to be invested in the
microenterprise, the poor also had a much better chance of really
making their way out of their poverty. Yunus started to believe that
microcredit could form the core of a policy and programme to actively
promote poverty reduction and local development in Bangladesh.
Using his own money once again, in Yunus began an action
research experiment providing microcredit in Jobra. His initial clients
included both men and women. When it quickly became apparent that
women were far better at repaying than men, he made the important
decision to work mainly with local women. Yunus then managed
to persuade a local bank in Jobra to start oering microcredit as
part of its business in the community. In this scaled-up exercise, the
poorproved again to be exceptionally good clients. And again, women
proved to be the very best at repayment.
Further investigation shed light on why repayment was surprisingly
high in such poor communities and among women borrowers. Poor
borrowers first hoped to find their regular repayment from the results
of the income-generating activities supported by the microcredit. But
often this was not possible. The returns were not large enough, or
10 | Two
else the project had actually failed. In this case, the client would tap
into traditional family and community support networks to meet the
required repayment. Being able to access low-cost finance in future
was a benefit that clients did not want to lose. But it was largely the
fear of damage to one’s family’s reputation in the community which
drove clients to repay their microloan, howsoever they had to do it.
Moreover, women had a relatively heightened sensitivity to and fear of
bringing shame and disrepute upon their male partner and the wider
family. This accounted for the fact that women clients were by far the
most determined to avoid defaulting on any microcredit.
The existence of these family and community support structures,
and their positive impact on repayment suggested to Yunus an addi-
tional innovation – ‘solidarity circles’ (or Kendra). ‘Solidarity circles’
were groups of a minimum of five women. If an individual member
was having diculty repaying their own microcredit, the solidarity
circle was supposed to provide an environment within which the poten-
tially errant member could be helped to repay. Although it appears that
Yunus himself never suggested that these solidarity circles should cover
the repayments of any member unable to do so (i.e. joint liability), still
less expel errant members for their inability to repay their microcredit,
no real action was taken to stop this gradually becoming the common
practice.11 The solidarity circle acted as a form of ‘social collateral’
that substituted for the traditional formal collateral usually expected
of a potential client (and which the poorest often did not have). If not
exactly operating as Yunus had envisaged, at any rate this innovation
seemed to work very well in securing a high repayment rate.
The Grameen Bank was formally established by Muhammad Yunus
in . It was set up as an NGO owned by its member-clients, but
controlled by Yunus and senior managers. The authorized capital base
was contributed per cent by members, per cent by the govern-
ment of Bangladesh and per cent each by two state banks (within a
few years it became majority owned by members). Its formally stated
ambition was to provide microcredits to the poor at aordable rates
of interest, especially to poor women, which were intended to be used
to help establish or expand an income-generating microenterprise. It
was particularly important to Yunus that this new institution reach
the very poor. Grameen therefore started o with a stipulation that
eligible members were those with less than a half-hectare of land, or
assets worth less than a half-hectare of land.
The Grameen Bank took o and the number of clients grew rapidly.
The rise of microfinance | 11
As Yunus had hoped, repayment rates were extremely high. Compared
to the to per cent repayment rates achieved by the government
banks in Bangladesh,12 the per cent repayment rates said to have
been achieved by Grameen seemed impressive. The Grameen Bank
idea appeared to work, at least so far as the repayment rate angle was
concerned. Yunus had helped to show that the poor were ‘bankable’.
The Grameen Bank idea begins to catch on The Grameen Bank
was not the only experiment in microcredit getting under way in
Bangladesh in the early s. Alongside the ongoing experiments
with microcredit promoted by Akhtar Hameed Khan, two other
important institutions were also getting established alongside the
Grameen Bank, both of which soon followed Grameen by oer-
ing microcredit to the poor. The first of these organizations was
the Bangladesh Rural Advancement Committee (BRAC), founded
in by Fazle Hasan Abed, followed in by ASA, which was
founded by Shafiqual Haque Choudhury. Elsewhere in Asia, similar
microcredit operations were also under way. The state-owned Bank
Rakyat Indonesia (BRI) (People’s Bank of Indonesia) was some-
what in advance of the Grameen Bank. Established as early as ,
it provided microloans to rural families for non-farm productive
activities. In Yunus himself helped to start a Grameen-type
microcredit institution in Malaysia. In the early s in India, an
important variant of the Grameen Bank model emerged, the self-
help group (SHG) movement.13 Combining microcredit with social
empowerment, outreach and capacity-building activity, SHGs allow
small groups of women (generally no more than twenty) to come
together as a ‘solidarity group’ and, among other things, obtain a
low-cost microloan through funds passed down to them from the
formal banking sector. Meanwhile, in Latin America microcredit
operations were also being established with rapidity and enormous
enthusiasm. Microcredit quickly assumed as much importance in
Bolivia as in Bangladesh, thanks to pioneering microcredit institutions
like PRODEM, established in to provide microloans in the capital
city of La Paz. By the late s, microcredit and microenterprise
development had become the international development community’s
anti-poverty intervention of choice.14
In addition, new types of micro-services (micro-insurance, micro-
savings) were being added to the simple microcredit oer provided to
the poor by most microfinance institutions (hereafter MFIs). Among
12 | Two
other things, this eventually resulted in the coining of the now generic
term microfinance15 (which we will revert back to from now on),
aterm which better describes the evolving complex reality of very
small-scale finance. The microfinance experiment and Grameen Bank
began to enter the popular imagination too. Yunus and the Grameen
Bank became increasingly regular features on TV and radio, in busi-
ness magazines, and in major newspaper articles and editorials.
Most of the MFIs established in the immediate wake of the
Grameen Bank experiment were deliberately structured to operate as
NGOs with non-profit status. In addition, the vast majority of MFIs
were initially capitalized by government and/or international donor
funding. The thinking at the time was that, since Grameen had appar-
ently shown high repayment rates to be a real possibility, this should
mean that little ongoing funding was required to maintain an MFI.
Moreover, if Grameen was actually going to reduce poverty as much
as Yunus maintained that it would, then the initial government and
international donor ‘pump-priming’ support should be quite easily
justifiable on the basis of standard cost–benefit analysis. The initial
cost would be seen as a fantastic investment rather than a subsidy.
A key issue within Grameen was the importance of maintaining
aordable interest rates for the poor clients. Yunus had been quite
unequivocal in wanting interest rates to be kept as low as possible, in
order to allow the maximum financial space for the poor to benefit
from their hard work, and to help them reinvest if they could. Most
new MFIs naturally wanted to follow Grameen practice in this im-
portant respect, not become the despised moneylenders that Yunus
had been so keen to displace. Market-based interest rates were not
on the agenda, at least not at this stage.
The ‘problem’ of subsidies In order to maintain low interest rates
for its poor clients, however, it gradually became clear that it was not
always possible for an MFI to remain financially self-sucient. Even
with very high repayment rates, providing lots of tiny microloans to
the poor is a complicated, and thus sometimes an expensive, business.
This became manifestly clear when it transpired that the Grameen
Bank itself was actually heavily dependent upon external financial
support in order to keep its interest rates low. Because its repayment
rates were not anywhere near as high as Muhammad Yunus had been
claiming, the Grameen Bank had been in receipt of government and
international donor funds pretty much right from its establishment.16
The rise of microfinance | 13
To many in the international development community applauding the
Grameen Bank model on the basis of its financial self-sustainability,
this information apparently came as something of a surprise. The
Grameen Bank microfinance model had been promoted throughout
the s on the basis not just of its individual entrepreneurship
and self-help attributes, but also – wrongly it now turned out – on
the basis of its financial viability as well.17 To some ‘insiders’ in
the microfinance industry, however, it was generally no secret that,
because of its weaker than advertised repayment rate, the Grameen
Bank was always in receipt of subsidies.18 But this was a fact that
was largely kept quiet. As leading microfinance advocate Jonathan
Morduch admitted, ‘Grameen’s repayment rates have never been as
good as they’ve claimed [but] because Grameen has been so well-
known, nobody has wanted to risk undermining the reputation of
the idea’.19
But it was not just the Grameen Bank which was finding it dicult
to survive without constant external financial support. Many other
MFIs were in exactly the same boat. They too found that repayment
rates were generally high, but still insucient to ensure complete
financial self-sustainability. The upshot was that the majority of the
MFIs that immediately followed in the wake of Grameen were there-
fore forced, like Grameen itself, to eectively base their operations
on regular financial injections. But also, again like Grameen, most
MFIs figured that their strong desire to promote poverty reduction
in the poorest communities would more than justify any subsidy
forthcoming from the international development community or from
their own governments.
The international development community soon began to disabuse
the microfinance industry of this notion, however. The rejection
of subsidies was essentially rooted in changing politics: specifically,
the rapid ascendance of the neoliberal political project that began
in the mid-s. One of the core imperatives of neoliberalism is a
firm belief in the financial self-sustainability of all institutions that
operate in the economy and society. This belief applies not just to
private business enterprises, of course, but also to state enterprises,
government departments, local public services (e.g. health, educa-
tion), and virtually everything else in between (e.g. NGOs, voluntary
associations, clubs). Government financial support should neither be
sought nor oered, no matter what, because it will ultimately weaken
any financial institution, as well as lead to higher taxes on other
14 | Two
members of the community. The way to achieve this financial self-
sustainability imperative was through a combination of liberalization,
commercialization and privatization. Centrally this meant market-
based interest rates had to apply, rather than below-market interest
rates requiring a subsidy. Great eorts were made to commission as
much supporting evidence as possible in favour of the chosen trajec-
tory. Famously stepping up to the plate here was a group of mainly
agricultural economists based at Ohio State University in the USA,
who very conveniently provided a stream of arguments discrediting
the notion of subsidies in rural finance and state involvement overall.20
As neoliberalism rapidly emerged to become the dominant political
philosophy, the restructuring of all international development com-
munity interventions naturally began to reflect this belief as well. The
microfinance industry was to be no exception.
The ‘neoliberalization’ of microfinance begins The ideologically
driven requirement to fully commercialize and privatize microfinance
began in earnest towards the end of the s. The stated aim was to
ensure large-scale outreach without the need for subsidization. The
core methodology of commercialization was equally clear. As much
as possible, MFIs had to become conventional profit-maximizing
private financial businesses. Introducing market-based interest rates
would be paramount, cutting the need for subsidies as well as helping
to mobilize savings (through the introduction of higher interest rates
on deposits). The drive to maximize profits would also ensure that an
MFI would automatically push hard to increase the number of clients,
since it would wish to spread its fixed costs across as large a number
of microloans as possible. It was also felt important to fully incentivize
an MFI’s senior managers, which called for greater tolerance of Wall
Street-style financial reward programmes – that is, high salaries and
bonuses. It also suggested that senior sta should eventually be oered
the opportunity to obtain a significant ownership stake in their own
MFI, if not eventually to take over full ownership.
By the early s, the ‘new wave’ microfinance model was firmly
established in practice. It was formally termed the ‘financial systems’
approach, in contradistinction to the ‘poverty lending’ approach that
described the Grameen Bank. One of the very first financial institu-
tions to move in this radical new direction was the Bank Rakyat
Indonesia (BRI) mentioned earlier. BRI appeared to be a prime can-
didate for commercialization. The results of its state-subsidized credit
The rise of microfinance | 15
programmes, mainly working in the rice sector, were apparently
pretty weak. The poor only marginally benefited, and savings were
not encouraged. Most of all, BRI’s arrears and losses were quite high,
which meant the need for constant subsidies. Advisers associated with
Harvard University’s Harvard Institute for International Development
(HIID) oered to help. Importantly, HIID in the s was becoming
a recognized font of neoliberal policy wisdom,21 not least through
the troubleshooting international policy advisory work of its then
director and arch-neoliberal, Jerey Sachs.22 Given its strong neoliberal
approach to policy work, it was therefore only to be expected that
HIID would strongly push for the commercialization of BRI. The
result was the establishment in of Unit-Desa (BRI-UD), an
independent profit centre wholly owned by BRI. BRI-UD was designed
to oer so-called ‘Kupedes’ microloans based on market interest rates.
Alongside a variety of savings programmes, ‘Kupedes’ microloans
were to be provided through its own network of nearly , village
bank branches. BRI-UD rapidly grew and by the end of it had
million savers and . million borrowers.23 All the time under state
ownership,24 BRI-UD became the largest microfinance operation in
the world, and a leading example of a financially sustainable rural
microfinance programme.
Importantly, the first major transformation of a not-for-profit
NGO into a fully state-regulated for-profit financial institution (in
this case, a commercial bank) had taken place in Bolivia in
with BancoSol. The origins of BancoSol lie in PRODEM, an NGO
that was originally established in with support from the US
government’s aid arm, USAID, plus other development agency and
private sector funding. Because PRODEM felt constrained by its
inability to mobilize savings among its members and in the wider
community, it was decided to establish a separate private commercial
microfinance bank that would focus on urban clients. In return for
part ( per cent) of BancoSol’s equity, PRODEM’s loan portfolio
and sta were transferred over to the new entity. BancoSol’s success
in quickly becoming the most profitable bank in Bolivia appeared to
demonstrate that microfinance could be a very profitable business
area indeed. Meanwhile, PRODEM did not end its involvement with
microfinance, but very much continued to service its rural clients (in
PRODEM’s employees-turned-owners became wealthy individu-
als when they sold PRODEM to a Venezuelan government bank).
Other such transformations from NGO to commercial bank soon
16 | Two
followed.25 Advising on the BancoSol transformation was the US-based
NGO ACCIÓN, then working on many microfinance programmes
in South and Central America under contract to USAID. ACCIÓN
was one of the first and most important of the US-based NGOs to
stand four-square behind the commercialized ‘new wave’ MFI model.
Indeed, as ACCIÓN’s then president and CEO, Maria Otero,26 boldly
stated,27 ‘ACCIÓN created the commercial model, and the commercial
model is the one that works’.
The early experience of BRI-UD, BancoSol and of some other MFIs
having successfully moved towards commercialization was crucially
important in giving real impetus to the ‘new wave’ microfinance con-
cept. Supporters of the ‘new wave’ commercialization approach argued
that it was indeed better practice than subsidized programmes. Many
microfinance advocates began to write about an exciting ‘new world’
of commercialized microfinance opening up.28 The international de-
velopment institutions and their key supporters needed no further
proof than this. Already committed to the ‘new wave’ microfinance
concept because of its focus upon individual self-help, these additional
financial sustainability features were exactly what they were looking
for. Eorts to promote the concept and to establish ‘new wave’ MFIs
were rapidly stepped up.
As just noted, USAID was one of the main very early supporters
of the ‘new wave’ microfinance model. It had jumped in to provide
technical advice to developing-country governments, as well as helping
mobilize financial support for a large number of ‘new wave’ micro-
finance programmes. Now a core driving force behind the ‘new wave’
microfinance model, the World Bank was a little late getting into the
field. Its initial fear was that microfinance was a little ‘too amateurish
and touchy-feely’,29 and anyway too close to international NGOs
largely critical of its neoliberal policies. In the World Bank’s eyes,
this made microfinance ineligible for support. But it soon realized, as
USAID had done, that ‘new wave’ microfinance was actually perfectly
consonant with its overall mandate to address poverty while also
enforcing neoliberal policies within developing countries. Accordingly,
in the early s the World Bank moved into the microfinance field,
especially through its International Finance Corporation (IFC) arm.
In fact, the World Bank soon took the lead in aggressively pushing
for the ‘new wave’ microfinance model. One way it found to do this
was to establish the Consultative Group to Assist the Poor (CGAP),
an institution physically located within the World Bank but with a
The rise of microfinance | 17
multi-stakeholder structure. CGAP was mandated to ‘coordinate’
international donor policy towards microfinance. As in most World
Bank activities, we must remember, ‘coordinate’ is simply coded
language for ensuring that the other international agencies fall into
line behind World Bank policy. Among other things, CGAP produced
the so-called ‘Pink Book’,30 a concise explanation of the core ‘new
wave’ principles that all microfinance programmes now had to be built
around.31 Taking their cue from USAID and the World Bank, most
developed-country governments, bilateral development agencies and
international NGOs quickly began to shift their microfinance support
policy and programmes towards the favoured ‘new wave’ approach.
By the mid-s, it was possible to say that the ‘new wave’ micro-
finance model had pretty much established itself as the ‘best practice’
microfinance model.32 The international donor community now sig-
nalled to the microfinance industry that it would not help establish
any other model of an MFI, and it would also seek to transform all
existing MFIs into ‘new wave’ MFIs if at all possible. Commercial
funding bodies also began to take a look at microfinance, thinking it
might be an attractive location for profitable investment. Pretty soon,
too, profit-seeking commercial banks began their first tentative steps
towards ‘downscaling’ their lending activities into microfinance, and
so out of traditional SME lending. Importantly, even though many
MFIs still operated (and wanted to operate) as not-for-profit NGOs,
they were still encouraged to at least try to move in the direction of
‘new wave’ respectability if they possibly could, particularly by using
market-based interest rates. In terms of ‘new start’ MFIs, a ‘fallback’
argument along ‘infant industry’ lines was deployed to justify any
initial capitalization by the government or the international develop-
ment community.33
Finally, and essentially coming full circle, the original ‘old para-
digm’ MFI – the Grameen Bank – was itself forced to bow to the
inevitable. The Grameen Bank had no other option but to accede to its
transformation into a regular profit-driven financial institution. Under
intense pressure for a long time to adopt the ‘new wave’ approach,
thereby to finally attain the reality of financial self-sustainability,
and with further financial pressure thanks to a major flood that hit
Bangladesh in , major change would clearly have to come. More
prosaically, it hurt Yunus and those around him that the Grameen
Bank was becoming marginalized within the microfinance industry
that it had played the decisive role in actually establishing. As those
18 | Two
close to the Grameen Bank saw it, ‘Internationally, Grameen fell out
of fashion as industry observers, particularly in North America,
shifted their attention to other forms of microfinance’ (i.e. ‘new wave’
microfinance).34
Accordingly, in the Grameen Bank began a move to completely
re launch itself in full ‘new wave’ mode. The ‘Grameen II’ project, as
it came to be known, introduced all the required commercializing
changes.35 The advertised annual interest rate was set at per cent,
but a number of devices were used to quietly hike up this advertised
interest rate to as near the free market rate as possible. One way
to do this was through the use of an obligatory savings account,
wherein a small percentage of any microloan (. per cent) had to
remain deposited at Grameen for at least three years.36 Given that
moving towards market-based interest rates was an idea that Yunus
had originally very strongly resisted when establishing Grameen,
arguing then that what was most important was the repayment rate
not the interest rate,37 this was an important break with the original
Grameen Bank model.
Second, in order to substitute for international donor and Bang-
ladesh government funds, Grameen II also began to give savings a
much higher emphasis. Alongside the obligatory savings account just
noted was a voluntary savings plan,38 plus various other programmes
strongly encouraging the poor to deposit their savings with Grameen,
such as a pension plan. Moreover, with the poor desperate simply for
a safe place to keep their money, there was no shortage of savings.
With very little risk and low administrative costs, within a few years
Grameen was largely lending back to its poor clients the bulk of their
own obligatory and voluntary savings deposits. Importantly, with
such savings deposits attracting an average per cent rate of interest
and microloans provided at the advertised rate of per cent,39 the
margins achieved by recycling savings in this way were very healthy
indeed. (Among other things, this helps to account for why Grameen
clients soon began to come under pressure to continually ‘top up’ their
microloan, irrespective of whether they needed the cash or not.40)
Another key development associated with Grameen II concerned
the issue of joint liability within the solidarity circles. Joint liability
was an outcome that was actually not planned by Yunus, but it
nevertheless emerged semi-spontaneously in most Grameen Bank
units. Joint liability was now formally banned, however. In future,
one potentially defaulting member could no longer hold back other
The rise of microfinance | 19
members keen to expand their lending, and who would otherwise go
to Grameen’s competitors. One result was that the solidarity circles
quickly began to fall into disuse.41
In short, the original Grameen Bank microfinance model was
eectively consigned to history. Grameen Bank was now no dierent
from most other for-profit commercial banks. Its continued existence
was now predicated not upon the pursuit of poverty reduction, but
upon its own expansion and the profitable provision of financial
services to anyone willing to use them. The initial Grameen Bank
goals of working only with the very poorest, and promoting poverty
reduction, gender empowerment and sustainable development within
this specific community, have quietly been dropped in practice. PR
personnel are now largely responsible for upholding the notion that
the Grameen Bank still primarily exists to promote poverty reduction.
Yunus has helped matters by retrospectively moving the goalposts
himself, dropping all his earlier references to eradicating poverty by
individual self-help and ‘sending it to a museum’, claiming now that
all along he had been interested only in the much more modest goal of
simply ‘bringing financial services to poor women in Bangladesh’.42
The results of the Grameen II transformation so far as the inter-
national development community was concerned, however, were just
perfect. The Grameen Bank was apparently turned into a very solid
for-profit private financial organization, with no further need for
it to seek out Bangladesh government or international donor com-
munity support (i.e. subsidies). By the end of , as David Hulme
explains,43 Grameen’s client base had grown to more than five million,
adding the last . million clients in just the three years since Grameen
II was launched. Savings deposits were three times their figure.
The portfolio of outstanding loans had doubled. It had expanded
its branch network by some five hundred new branches. And, finally,
Grameen was now making a healthy profit. The commercialized
for-profit future being mapped out for the microfinance industry was
now perfectly clear to all, including to Muhammad Yunus.
‘New wave’ microfinance becomes ‘best practice’ By the endof the
s, ‘new wave’ microfinance had reached a position of unparalleled
power and influence within the international development community.
‘New wave’ microfinance was now the definition of microfinance, not
just one of a number of possibilities.44 Now that most of the awkward
Grameen Bank ‘old paradigm’ innovations had been stripped from
20 | Two
the microfinance model, Western governments, media outlets andthe
microfinance industry, paradoxically, began to raise the profile of
Muhammad Yunus and the Grameen Bank to even dizzier heights
than before. Yunus remained in huge demand as an adviser and as
a high-level speaker right across the world, and he was increasingly
active in fronting and participating in high-profile microfinance cam-
paigns everywhere.
Funding was also in full flow to help capitalize ‘new wave’ MFIs
right around the globe. Western universities began to incorporate
microfinance into most business, economics and management courses.
MBAs with a major microfinance component became commonplace.
Western charitable NGOs and foundations wishing to ‘help the poor’
could do no better than establish or help an MFI to operate in the
geographical location of their choice. High-profile private initiatives
were established to popularize and lobby for microfinance. One such
initiative was the Microcredit Summit Campaign launched in
with the active participation of Muhammad Yunus. Bringing together
nearly three thousand people from countries, it kicked o a nine-
year campaign to make microcredit available for million of the
poorest families across the developing world, and especially to women,
with the aim of helping them get involved in self-employment. Music
industry icons, Hollywood stars, world sports personalities, well-
known entrepreneurs, European and Middle Eastern royalty, current
and former politicians (notably former US president Bill Clinton) and
many other high-profile individuals began to campaign very publicly
around the world in favour of microfinance. With a genuine desire to
want to ameliorate poverty and human suering, they acted in the
belief that microfinance was a great way to do this. In recognition of
its supposed achievements in addressing poverty and underdevelop-
ment, the UN agreed to designate as the International Year of
Microcredit. Finally, saw microfinance reach its apotheosis, when
the Nobel Peace Prize was jointly awarded to Muhammad Yunus and
to the Grameen Bank he had founded.
As the new millennium dawned, moreover, two new factors
emerged with the potential to radically transform the dynamics of
the microfinance industry in the years to come. The first was a product
of the boom years of the s, which saw the rise of a generation
of mega-rich ‘new money philanthropists’ keen to use their huge
personal fortunes to leave their mark on humanity and history. One
way to do this was to support what everyone seemed to be saying
The rise of microfinance | 21
was a brilliant way of reducing poverty and suering everywhere –
microfinance. Very significant sums of philanthropic cash soon began
to find their way into microfinance programmes. Probably the most
high-profile and generous supporter of microfinance is the $USbil-
lion Bill and Melinda Gates Foundation. Other notable supporters
include eBay founder Pierre Omidyar and Dell Computers founder
Michael Dell. In fact, it almost became convention for any self-
respecting billionaire to have established some link with microfinance.
At the same time, as Smith and Furman report,45 a growing number
of the just moderately wealthy were also becoming convinced that
they could do no better for humanity than support microfinance.
These individuals were encouraged to donate cash and their time to
help the microfinance movement, or simply leave a bequest in their
will. Internet-based institutions, such as Kiva, also greatly helped to
encourage ordinary people to make a financial contribution towards
microfinance and the poor. Claiming to directly connect relatively
well-o individuals in developed countries with poor individuals in
developing countries urgently seeking a microloan, Kiva has been
able to use this ‘person-to-person’ link concept to raise several tens
of millions of dollars for microfinance.46
The second major change to aect the ‘new wave’ microfinance
industry has been the quite dramatic rise in commercial funding
since the turn of the millennium. As noted above, to all intents and
purposes the desired end-state of the ‘new wave’ MFI is to operate
as a private for-profit financial company or bank. This very much
includes a role for private investment, which would naturally expect
to generate attractive dividends and profits. One obvious attraction
of microfinance was its safety, reduced volatility and high returns
compared to other sectors. In addition, funders liked the positive PR
spin-o associated with microfinance, which also helped to motivate
sta. Potential investors thought they were not just making money,
but also helping humanity – a classic ‘win-win’ situation. Estimates
of the amount of commercial funding that has been channelled into
microfinance in recent years vary wildly. Some analysts suggest that
possibly as much as $US billion of commercial funding has been
directed its way since the turn of the millennium.47 At any rate, it is
possible to say that the amount of commercial funding is certainly
very large and – at least until the global financial crisis erupted in
– it was growing at a very fast rate. Microfinance has clearly emerged
as one of the most important forms of investment around.
22 | Two
With these two major new sources of funding for the ‘new wave’
microfinance model now coming on stream, it became increasingly
clear that the ‘holy grail’ of microfinance – total ‘saturation’ – was
becoming a realistic possibility in just about every developing and
transition country. In the very near future, virtually every poor indi-
vidual wishing to access a microloan will be able to do so. The current
group of microfinance ‘saturated’ countries noted in Chapter will
be joined by a good many more.
The ‘new wave’ microfinance model trips up But just when it
looked as though the ‘new wave’ microfinance paradigm had con-
quered all before it, it ran into the proverbial brick wall. This was
the dramatic initial public oering (IPO)48 of Compartamos,
Mexico’s largest microfinance bank. The IPO led to the exposure
of almost the complete inner workings of Compartamos. While
a number of Compartamos’s most disturbing developments were
long known to the microfinance industry, and obviously to its long-
standing advisers CGAP and ACCIÓN, the IPO exposed to the full
glare of publicity quite dramatic Wall Street-style excess, greed and
ineciency. As a result, a fundamental challenge to the legitimacy
and direction of the chosen ‘new wave’ microfinance model was set
in motion.
The Compartamos IPO and the implications it has for micro-
finance will be covered in some detail in Chapter . For now it is
important just to point out that the Compartamos episode centrally
involved charging its poor women borrowers very high interest rates
(at times over per cent). This naturally translated into very high
profits indeed, which, among other things, from the late s on-
wards, allowed for a small group of directors and senior managers
to pay themselves Wall Street-style salaries and bonuses. These same
individuals then came into a truly massive personal financial windfall
through the IPO that took place in , a couple of key individuals
netting several tens of millions of dollars each. Not surprisingly, the
Compartamos IPO sparked an intense debate within the microfinance
industry, and not a little acrimony too. Supporters of the ‘new wave’
microfinance model, centrally including both CGAP and ACCIÓN,
initially cheered the Compartamos IPO to the rooftops, arguing that
it proved commercialization was the best way to provide microfinance
to just about all of Mexico’s poor citizens. Others, however, said
that the Compartamos episode demonstrated pretty convincingly
The rise of microfinance | 23
that the ‘new wave’ microfinance model was actually a disaster in
waiting. The IPO exposed to the public almost exactly the same sort
of Wall Street savvy insiders who, in the USA, had proved so adept
at manoeuvring their way into huge fortunes at the expense of an
ill-informed client base. Pointedly, the most immediate and piqued
response to the Compartamos IPO came from Muhammad Yunus. He
called the developments at Compartamos ‘the end of microfinance’,
and argued that Compartamos had eectively metamorphosed into
the very same type of loan-sharking operation that he and others in
the microfinance industry had originally set out to close down.
Arguments raging over the Compartamos IPO were soon over-
shadowed in , however, when the global economy began to
descend into the worst economic trough since the Great Depression.
The ‘new wave’ microfinance model was hit particularly hard. As with
virtually every form of investment, commercial funding for micro-
finance began to dry up. Several private commercial banks dismantled
microfinance units established just a few years before. Crucially, it
also meant that the huge growth in consumer microloans went into
reverse. Local economies artificially inflated thanks to easily available
consumer microloans then also began to go into reverse as the level
of local demand rapidly declined. Repayment rates on microloans
also began to decline, once clients found that the dicult economic
situation had reduced their income and/or remittances. Recognizing
the diculties to be faced in and beyond, the international
donor community has already established a $US million global
fund to bail out the sector, and much more appears to be on its way.
The crux of the problem the ‘new wave’ microfinance model now
faces in the aftermath of the collapse of Wall Street, however, is not
simply impending shortfalls (possibly just temporary) in financial sup-
port for MFIs. Even if this was overwhelmingly what the microfinance
industry itself preferred to focus upon as the global crisis began to
hit home, the real problem lies elsewhere. ‘New wave’ microfinance
is not just increasingly producing manifestly adverse Wall Street-style
outcomes, it has still largely failed to produce any concrete evidence
to show that it actually works to sustainably reduce poverty. In fact,
saw two important adverse developments for the microfinance
industry. First, two teams of internationally respected impact assessors
were forced to report almost zero impact with regard to two major
microcredit programmes they had been looking at.49 Second, as we
shall recount in more detail in Chapter , the positive results of an
24 | Two
earlier and hugely influential study in Bangladesh were very awk-
wardly overturned.50 Thanks to ‘the Compartamos aair’, the hitherto
robust narrative supporting and protecting microfinance increasingly
began to come under much more serious critical scrutiny.
Before I go on to critically appraise the actual operations and de-
velopment impact of the microfinance sector in the chapters to come,
in the final section of this chapter I feel I need to briefly summarize
the basic ideas that the microfinance industry and other supporters
portray as ‘what microfinance is all about’.
The case for microfinance
In general, the most important impact of microfinance is said to
be the additional income and employment that are assumed to arise
in poor communities. This is particularly the case when it has been
possible to direct these benefits towards the most marginalized and
‘at-risk’ of the poor in the community. These benefits are obtained
through the establishment of new, and the extension of existing,
income-generating activities. This idea is very much the core of the
original Grameen Bank philosophy. Small additions to income are
valuable for immediate consumption purposes, while also opening
up the possibility of some modest reinvestment. In some income-
generating activities, new jobs are also created. Also, even where
most successful clients do not include too many of the very poor,
successful individuals using microfinance might nevertheless help to
create waged employment opportunities for the very poor and the
less entrepreneurial. Overall, some contend that microfinance is of
major importance because it gives everyone an opportunity to escape
poverty if they really want to.
A second important microfinance impact comes from the fact
that formally constituted MFIs help the poor to avoid seeking re-
course to the traditional moneylender or local ‘loan shark’. Once
again, this argu ment is very much Grameen Bank-inspired. The
lower interest rates generally associated with microfinance compared
to money lenders create the space for additional earnings in small
income-generating activities. In addition, as Davis vividly illustrates,51
moneylenders are all too often associated with the ‘dark underside’
of economic and social life, so coming into regular contact with this
world is risky for the poor. Also, many moneylending operations are
extremely profitable, but only because they use ‘high-pressure’ tactics,
if not outright violence, in order to enforce repayment on ultra- high-
The rise of microfinance | 25
interest microloans. So, helping the poor to develop a relationship
with an organization (an MFI) that has been specifically established to
assist them with lower-interest microloans and sympathetic forms of
support, rather than exploit them through ultra-high-interest micro-
loans, must be a good thing.
Third, microfinance is very widely seen as important in helping to
promote gender ‘empowerment’. This principally arises through the
increased involvement of women in the local business sector, thanks
to the opportunity to access a microloan and to establish themselves
in their own microenterprise. Many developing countries have a
history of patriarchal control and very few have significant numbers
ofwomen actively involved in business. Microfinance therefore allows
women the opportunity to begin to take part in business sector
activities, albeit the very simplest of businesses to start o with. But
with growing evidence of success, and suitable ‘role models’ to point
to, it is said that women can begin to play a much larger and more
creative role in the business economy. ‘Empowerment’ is also said to
arise from the basic fact that when women receive a microloan they
see it as their responsibility to manage and repay it, which improves
confidence and business acumen.
Fourth, microfinance is also seen as useful in helping the poor
in terms of consumption smoothing. Indeed, as we shall see, most
microfinance is now used for simple consumption smoothing. Poverty
is not simply a lack of income; it is also a lack of income at the time
it is needed. By making it possible for poor individuals to borrow
small sums of money when they most require it, and repay it when
income comes in, microfinance helps the poor to compensate for
the ups and downs of economic life as they see fit. Some important
financial outlays, such as for health and education, are made increas-
ingly possible because microfinance allows the cost to be spread over
a longer time period. Access to such items via microfinance greatly
helps the poor to improve their value on the labour market, thereby
making a sustainable escape from poverty much more likely than had
they forgone such expenditure.
Fifth, microfinance is seen as playing a role in building important
reserves of social solidarity in poor communities. Notably, it has
been argued, this is the case with regard to the famous solidarity
circles pioneered by the Grameen Bank. These solidarity circles are
said to extend the bonds of solidarity that exist in the family and
community, thanks to the constant interaction and contact between
26 | Two
poor individuals. Importantly, banks and MFIs are willing to accept
such social solidarity as a substitute for formal collateral, which the
poor simply do not have. The poor are therefore able to use their
social interaction and mutual responsibility, rather than prior reserves
of wealth, to obtain as much microfinance as they want.
These basic reasons represent the essential underpinnings to the
case that has been made for microfinance since the s. Of course,
there are many other reasons advanced to justify microfinance as a
development policy, as a quick look around the hundreds of books
on the subject will show. Moreover, the importance of each of these
reasons has shifted around as priorities have changed. For example,
as unemployment has risen, the value of the employment-generating
capacity of microfinance has been emphasized. And in some post-
conflict scenarios, the solidarity-(re)building aspect of microfinance
has come to the fore. I think, however, that I have provided the gist of
the arguments made in support of the basic microfinance model.
Conclusion
From its apparent ‘discovery’ in Bangladesh in the mid-s by
Muhammad Yunus right up to its very latest ‘new wave’ manifesta tion,
events have moved with breathtaking speed in the world of micro-
finance. I emphasized how the initial Grameen Bank idea was very
much centred on Muhammad Yunus’s idea that the poor en masse
should be encouraged to engage in tiny income-generating activities
in order to escape their poverty. The international development com-
munity found Yunus’s simple idea compelling. The politics and ideo-
logy of the Grameen Bank microfinance model, especially its stress
on individual entrepreneurship, self-help and financial res ponsibility
shown by the poor, were just what the international development
community had been looking for. And at least in terms of its narrow
objective of providing microloans to the poor at a relatively low cost,
thanks to high repayment rates, the Grameen Bank appeared to work.
The poor were found to be ‘bankable’. But then the international
development community fell out with the Grameen Bank-inspired
microfinance model, and the ‘new wave’ microfinance variant was
ushered in as its replacement. The fiscal austerity and commercializa-
tion imperatives associated with neoliberalism meant subsidies for
Grameen Bank-style MFIs simply had to come to an end, and the
more aggressive business posture of ‘new wave’ MFIs would soon
make microfinance available to just about any poor individual.
The rise of microfinance | 27
As I have shown, a very large part of the argument put forward
for microfinance actually concerns successes registered on the opera-
tional side, such as achieving high repayment rates, financial self-
sustainability, increasing the number of clients, expanding the volume
of microfinance disbursed (especially to women), and so on. None of
this is to say, however, that microfinance therefore automatically func-
tions as a sustainable development and poverty reduction instrument.
I will argue in what follows, in fact, that we actually have very little
evidence to support the contention that microfinance makes a genuine
and substantive economic and social impact in the local economy. To
start to make my case, it helps to first explore the wider narrative that
arose to project microfinance into the very heart of the international
development community’s operations and strategies, as well as to
justify microfinance in the public eye. To what extent is this public
narrative based on solid evidence, or simply assumption? I attempt
to provide an answer to this important question in the next chapter.
THREE
Microfinance myths and realities
‘The aide said that guys like me were “in what we call the reality-
based community,” which he defined as people who “believe
that solutions emerge from your judicious study of discernible
reality.” I nodded and murmured something about enlightenment
principles and empiricism. He cut me o. “That’s not the way
the world really works anymore,” he continued. “We’re an empire
now, and when we act, we create our own reality …”’ Ron
Suskind1
‘It is a far, far better thing to have a firm anchor in nonsense
than to put out on the troubled seas of thought.’ John Kenneth
Galbraith2
‘[the] current practices and ways of thinking in the (virtual)
world of microfinance, [are] in many respects a world of make-
believe.’ Otto Hospes and Hotze Lont3
Helping to promote the microfinance model within the international
development community, and also to popularize microfinance within
the wider community, has been a distinct set of ideas. This is the
public narrative. Explaining the basics of microfinance in layman’s
terms, the public narrative that began to emerge in the s turned
out to be a brilliant success. In terms of projecting the microfinance
model as the logical, humane and ‘best practice’ response to poverty,
unemployment, exclusion and human suering, it could not have
done a better job. The world rallied to support this thing called
‘microfinance’.
Even a cursory investigation of this public narrative, however,
exposes a very awkward problem for the microfinance industry: almost
all of the most basic assumptions that underpin the microfinance
model today are wrong. Many microfinance advocates are privately
becoming very uncomfortable with this growing disconnect. Some
have even gone on record with their concerns.4 The purpose of this
Microfinance myths and realities | 29
chapter is to point out that virtually all of the core assumptions that
underpin microfinance today should more accurately be described as
myths. This demonstrates just how dramatically weak the public ex-
planation and justification for microfinance actually is in practice.
The basic myths behind the microfinance model
Microfinance supports income-generating activities The original
motivation for the Grameen Bank, and still the overwhelming public
justification for microfinance programmes today, is that microfinance
helps start or expand an income-generating microenterprise. The PR
material, publications and websites of MFIs and microfinance sup-
port organizations everywhere routinely highlight a poor individual
having escaped grinding poverty with some new business line, one
that allows her to become financially self-sucient, feed her family,
and send her children to school.
As Thomas Dichter has explained,5 however, this uplifting picture
is largely a mirage. Rather, the evidence shows that for a long time
the bulk of microfinance has not actually been accessed in order
to establish or expand an income-generating activity, but has been
used instead simply to facilitate consumption spending that cannot
be financed out of current income. By the early s, the wealth of
evidence in support of this trend was overpowering. For example,
one of the earliest studies of Grameen Bank was undertaken in the
mid-s by anthropologist Aminur Rahman. He found that between
and up to per cent of microloans in a sample of
in the study village were being used for purposes other than the
income-generating activities originally specified.6 Reporting in on
its work in Bangladesh, the Goldin Institute came to a similar result,
finding that most individuals took out microloans simply to see them
through the monga season, a period of food insecurity between har-
vests.7 Most recently, Collins, Morduch, Rutherford and Ruthven also
found from their work in Bangladesh that business entry or expansion
was not the most common use of microloans.8 Estimates in India
suggest a similar situation, with some studies demonstrating that
only between one fifth and one third of microcredit disbursed is used
to underpin an income-generating activity, with the bulk going into
consumer loans.9 In sub-Saharan Africa, the Finscope country studies
all point to quite a small percentage of the clients using microcredit
for microenterprise establishment and expansion purposes. In Uganda
(where microfinance is now ubiquitous) it was only per cent, and
30 | Three
in Tanzania virtually the same.10 The overview study concludes that
‘The main reason for borrowing money is to buy food. Thereafter,
funerals, school fees and medical expenses become the most pressing
needs.’11 A whole host of studies have shown exactly the same thing
in most other countries (see also Chapter ).
Looking back, the evolution of the separate terms ‘microcredit’
and ‘microfinance’ was largely a reflection of the general trend under
way. The new term microfinance was introduced because it was no
longer possible to argue that microcredit was disbursed mainly for
business purposes. This purpose was now a comparatively minor
one compared to the other financial products oered by MFIs in the
field, including micro-insurance, savings services and microloans for
consumption purposes.
Nevertheless, some within the microfinance industry are not com-
pletely reconciled to openly admitting this significant change. They
see it as a threat to the entire legitimacy and appeal of microfinance
to the international development community, which was always very
centrally based upon the illusion of helping the poor into business
and self-suciency. If it becomes clear that most MFIs have eectively
turned into simple for-profit consumer lending operations, the fear is
that the whole microfinance concept will inevitably become tainted
by association with the sort of payday/doorstep consumer lending
operations that are routinely vilified in the developed countries. For
this reason, many MFIs seek to underplay their growing engage-
ment with simple consumer loans. As long-time poverty researcher
Stuart Rutherford notes, many MFIs prefer to keep quiet about this
change within the microfinance industry, ‘pragmatically realizing that
therags-to-riches-through-microenterprises story was valuable to the
industry as a whole’.12 Today, however, and if still only discreetly,
themajority of microfinance industry analysts concede that consump-
tion lending represents the vast bulk of their lending activity. What
may have started as a movement to fund microenterprise development
has clearly transmogrified into something else. As Beck and Ogden
summarized in the Harvard Business Review in , ‘Many heads of
microfinance programs now privately acknowledge what John Hatch,
the founder of FINCA International (one of the largest microfinance
institutions), has said publicly: % of microloans are used to finance
current consumption rather than to fuel enterprise.’
I will leave it until Chapter to discuss the implications of the
microfinance industry’s massive shift into consumption lending. What
Microfinance myths and realities | 31
we can say here right away, however, is that a central assumption of
really quite crucial importance to the establishment and continued
growth of the microfinance model – that microloans are overwhelm-
ingly used to support income-generating activities – is very largely
a myth.
Microfinance ‘empowers’ the poor Another core assumptionbuilt
into the microfinance model is that the poor are ‘empowered’ through
microenterprises. Indeed, microenterprises are said to open the way
towards a qualitative transformation in the life of the poor. Peru-
vian economist Hernando de Soto has lauded the way that a micro-
enterprise can apparently empower an individual and release the
‘heroic entrepreneur’ that supposedly lies within us all.13 Freed from
bureau cratic structures and the boss, microenterprises are also said to
represent a new form of personal and business freedom. Perhaps most
of all, microfinance is supposed to represent a magnificent chance
to promote ‘gender empowerment’ within society. This narrative is
an extremely powerful and seductive one. Empowerment is such an
emotionally loaded concept that everyone simply must be in favour
of any policy or programme intervention that seemingly extends it.
Insofar as it is claimed to be a core impact of the microfinance
concept, however, it is a wrong assumption to make. While histori-
cal experience is generally not always directly transferable, there are
nevertheless some very interesting parallels with earlier historical
episodes that help explain matters today. In particular, a careful
reading of the evidence from economic history indisputably shows
that self-employment and microenterprises have most often been
promoted as part of the programmed disempowerment of the poor.
Let us first recall a little of the early history of industrial capitalism,
beginning with the passing of the Poor Law Reform of in
England. As the economic historian Karl Polanyi shows in his classic
study of economic history,14 this was the crucial intervention that
introduced the modern institution of the labour market. Prior to
this, the ‘right to live’, if necessary with the help of local charitable
support for those unable to find gainful employment (the so-called
‘Speenhamland system’), was guaranteed by society. The Poor Law
Reform did away with this albeit minimal security. From then on,
poor individuals would have to confront labour market forces on their
own and survive in any way they could. For the majority in the s
and s, as intended, this meant quickly adapting to the rigours
32 | Three
of wage employment within England’s rapidly expanding industries
and factories. For those unable to manage either wage labour in
the new factories, or else continue to live as they had done before
(for example, as home-based weavers or peasant farmers), the only
remaining option to avoid complete penury was to move into a range
of ‘survivalist’ individual activities – what we would now call ‘micro-
enterprises’. This ‘new world’ of survivalist microenterprises was
exhaustively documented at the time by Henry Mayhew in his classic
work London Labour and the London Poor.15 Mayhew showed in
graphic detail how mid-nineteenth-century England had very rapidly
become a cornucopia of informal microenterprise ‘survivalist’ activity.
Both the old established aristocracy and the new industrial capital-
ist elites, as well as Henry Mayhew himself,16 were very supportive
of the rapid rise of these new informal ‘survivalist’ activities. The
proliferation of such activities would, for a start, justify reducing the
charitable burden then placed on the rich. Also, with more family
members contributing to the family income through such activity,
including any young children, there was likely to be much less upward
pressure on factory wages. Perhaps the most important survival aspect
so far as business elites in nineteenth-century England were concerned,
however, was their own. Supporting the expansion of petty survivalist
activities helped to steer the poor away from more transformational
activities that risked upsetting the social order. Wrapped up in the act
of merely surviving from one day to the next, the poor tended to have
very little time, energy or knowledge to get involved in anything else.
They therefore oered very little participation in the great number of
popular movements getting under way at that time – trade unionism,
cooperativism, communism-socialism, anarcho-syndicalism and those
seeking the universal franchise (the Chartists) – even though these
movements held up the very real prospect of an eventual exit from
extreme poverty and degradation. The poor were thus contained
thanks to microenterprise activity: that is, they were disempowered.
Life was made a lot safer both for the new industrial capitalists and
the old aristocracy they were in the process of displacing.
One individual who very quickly recognized the significance of
this disempowerment was Karl Marx. The lumpenproletariat, Marx
regretfully intoned – the term he coined for this class of desperately
poor individuals17 – were so docile and downtrodden, so self-absorbed
in their own immediate survival, and so thoroughly lacking in hope
for the longer term, that they could not be counted upon to play a
Microfinance myths and realities | 33
major role in the revolutionary dismantling of capitalism. Largely
thanks to the many new social movements just mentioned, which
led to the growing ‘collective capability’ to bring about the required
changes of most benefit to the poor, things did begin to change for
the better; but through successful evolution, not revolution.
But perhaps history has turned a corner. If not in the past, then
maybe today microenterprises are instruments leading to the empower-
ment of the poor? This proposition, however, does not seem to be
backed up by any evidence either. As nineteenth-century economic
liberalism was famously reborn in the s under the contemporary
rubric of neoliberalism, important elements of this disempowerment
approach quickly resurfaced in the developed countries. As David
Harvey sums up in his book A Brief History of Neoliberalism,
even neoliberals are in pretty much full agreement on what was the
central aim of the UK and US governments’ labour market policy
thrust in the s and s: to promote self-employment as a way of
disempowering organized labour in particular, and the lower classes in
general, thereby to (re-)empower the narrow business class.18 And such
policies were very successful too, as many noted labour economists
reported.19 Moreover, the US and UK governments naturally took
steps to ensure that such favoured neoliberal labour market policies
were also projected into the developing and transition countries too.
Given the US government’s eective control over policy development
in the key international development agencies, notably with regard
to the World Bank and the IMF, this was not too dicult. It should
come as no surprise to find that similar disempowering outcomes as
in the US and UK economies have thus been the overwhelming result
in almost every developing and transition country.20
So there would appear to be very little evidence of a change of
heart in relation to the historically assigned role for microenterprises,
and so also for microfinance. The huge and growing microenterprise
sector in developing countries today is, very much as in the past, the
proximate working location for the vast bulk of the most thoroughly
disempowered individuals imaginable. And as in the case of the long-
term prisoner who is incrementally provided with a few privileges
as a way of controlling any possible intention to reject the entire
experience of prison life (say, by escaping or by suicide), even if the
average poor micro-entrepreneur is aorded some minimal ‘control’
over a few trivial matters concerning her working life – when to start
work, what clothes to wear, when to take lunch, and so on – this
34 | Three
does not alter the bare fact that her overwhelming life situation is
eectively marked out by pretty much complete powerlessness. You
can control only what you are permitted to control. It is therefore
quite wrong to suggest that microfinance is associated with either a
genuine intention to empower the poor or any meaningful outcome
having been achieved in this direction.
Microfinance impact assessments ‘prove’ that microfinance works
As microfinance evolved into a generously funded development pol-
icy, microfinance advocates began to realize the limitations of the
anecdotal and individual case study approach to assessing impact.
Though often heart-warming and extremely persuasive, generalizing
sustainable impact from isolated cases is an unsatisfactory, and very
often manipulative, methodology at best. The eventual result was the
introduction of various impact assessment methodologies that would
supposedly provide a more robust analysis of microfinance impact.
USAID has been in the forefront of helping design and implement
new impact assessment methodologies based on the evaluation of
client impact versus non-client impact, with the dierence attributable
to microfinance.
Does impact assessment produce a genuine reflection of what
microfinance can achieve economically and socially? Former World
Bank sta member David Ellerman thinks not. He believes the current
impact assessment methodologies are quite fundamentally mistaken.
Ellerman essentially argues that the impact of microfinance cannot
be assessed correctly by comparing microfinance to the alternative of
‘doing nothing’. Without some reference to the real counterfactual
or opportunity cost, which would be a similar programme with the
same clients using the same resources, we inevitably come to quite
erroneous conclusions as to development eectiveness. Where one
local ‘treatment’ community receives a major new injection of funds
via an MFI, while a counterpart ‘control’ community receives nothing,
the typical gains registered in the ‘treatment’ community – more
microenterprises, higher incomes, and so on – prove very little indeed
about the power of microfinance. Generally any injection of outside
cash will improve things, even if just dropped from a helicopter.
A further important problem regarding impact assessments, as
I will discuss at some length in the next chapter, relates to lack of
concern for two key issues – displacement and client microenterprise
failure. These issues have in the past been very important counter-
Microfinance myths and realities | 35
trends associated with small-enterprise programme impact, yet they
are very largely ignored by the microfinance industry. Even the very
latest type of impact assessment, those incorporating Randomized
Control Trials (RCTs),21 largely fail to account for these two issues.
Importantly, Ellerman thinks it is not a coincidence that the current
preferred impact assessment methodologies tend to very seriously
exaggerate the potential benefits and impact of microfinance. This
arises, Ellerman claims, because a positive impact assessment – how-
soever concocted – can help to justify an intervention favoured on
political grounds, but which might have no justification on economic
impact grounds. Calling them ‘the ultimate low hurdle for aid agen-
cies’, he concludes that most impact assessments22 ‘have become a
fad in their own right, and are now entwined with microfinance as a
means to help sustain programmes that have little if any development
eectiveness’.
In a similar vein, it is not unimportant to consider who actually
undertakes most impact assessments. It is an awkward fact that the
vast majority of impact assessments have been undertaken not by
reasonably independent (but still committed, skilled and knowledge-
able) evaluators, but by committed microfinance ‘insiders’. That is,
by a like-minded community of microfinance practitioners, academic
researchers, policy advisers, boutique consultancy firms, and career
sta working within the international development agencies and
key NGOs. A growing trend is for the larger MFIs and high-profile
microfinance advocacy NGOs to co-opt senior academics and re-
searchers as board members, the better to ensure that favourable
research outputs are forthcoming and potentially critical voices can
be silenced. Inevitably, the likelihood of a comprehensively negative
impact assessment emerging from within this network of dedicated
microfinance supporters is negligible, still less a serious challenge to
the fundamentals of the microfinance model. Among other things, you
do not bite the hand (or the microfinance model or the international
development agency or your own boss) that feeds you.
Predictably, the arrival of the ‘new wave’ microfinance model in the
s then made matters worse. Under pressure to raise commercial
and international development agency funds in order to survive and
expand, many MFIs have been only too willing to exaggerate and dis-
tort important aspects of their operational performance and ultimate
impact. The Wall Street foundations of ‘new wave’ microfinance have,
quite predictably, led to Wall Street-style results. In some countries,
36 | Three
the main MFIs and their lobby groups help in preparing the industry
evaluations of the microfinance sector. This cosy arrangement is
designed to ensure that nothing disturbs the carefully created upbeat
image of the microfinance sector. It also helps that many of the largest
and wealthiest MFIs, especially the new generation of microfinance
banks, are now in a position to oer extremely lucrative contracts
and valuable ongoing research and advisory work to individual and
institutional evaluators. Just as on Wall Street past and present,23 it is
unlikely that any of today’s high-profile MFIs will find it too dicult
to secure a broadly favourable impact assessment.
Microfinance is what the poor ‘want’ and ‘need’ The poor every-
where are attempting to survive. Against a background of steadily
worsening economic opportunities around the globe for probably the
majority of the poor, especially in the world’s mega-city slums,24 it has
been getting harder and harder in recent years. The global economic
crisis that began in has not helped matters here. It is therefore
natural that the poor will try to survive by using whatever resources
they find at their disposal, including microfinance. It is quite wrong,
however, to extrapolate from the widespread use of microfinance by
the poor to conclude that they actually ‘want’ and ‘need’ micro finance,
and so fully agree with microfinance as the main or only way out of
their poverty predicament.
Consider first the widespread idea within the microfinance indus-
try that the demand for microloans simply must equate with their
being able to enhance the welfare of the client, otherwise the poor
would simply not wish to access one. The logic deployed here is
quite seriously flawed. Many products and services are demanded,
often aggressively demanded. But we also know that consumption
of some products and services ultimately destroys human welfare:
class-A drugs, tobacco, strong alcohol, images of violence and certain
categories of junk food are obvious examples. Few would argue here
that the demand for such products justifies ensuring a completely
uninterrupted supply (if necessary facilitated by microfinance!). More
specifically, what if it turns out – as is often the case, we should add
– that demand for microfinance is actually a function of a downward
spiral into deep poverty, with the poor eectively addicted to it because
they hope to stave o complete destitution. Rather like the compulsive
gambler forlornly hoping to gamble his way out of debt by enjoying
‘one last big win at the horse races’, the poor are often powerless to
Microfinance myths and realities | 37
stop their descent into a nightmare world of debt. This is why, Mike
Davis notes, it is no coincidence to find that rising poverty in many
developing countries closely correlates with the rising popularity
of various forms of gambling, lotteries and pyramid schemes, all
promising the chance of an instant exit from grinding poverty.25
The demand for microloans thus very often reflects some seriously
debilitating social dynamics. Microfinance specialist Paul Rippey calls
it right, then, when he concludes, ‘Microcredit may or may not be of
net social benefit, but the fact that people keep taking loans provides
absolutely no evidence that microcredit does more good than harm.’26
If this were otherwise, inveterate gamblers, substance abusers and
alcoholics would be most pleased.
More importantly, whenever the poor are directly asked what they
would like to see in terms of financial support, they invariably reply
that they would like something other than microfinance. There is
absolutely no debate about this. Thousands of studies, questionnaires
and surveys actually point to what the poor really want – much lower
interest rates on microloans, much longer repayment periods, much
larger loans in fact (i.e. not microloans, but small business loans) and
grace periods (especially if in agriculture, because of the agricultural
cycle). Take just the very latest evidence for this, contained in a
publication by the World Bank, The Moving out of Poverty Study.
This study was undertaken across fifteen countries in Africa, East
Asia, South Asia and Latin America, and included more than sixty
thousand interviews with the poor. A major conclusion of the study
was that ‘Microcredit can help the poor subsist from day to day, but
in order to lift them out of poverty, larger loans are needed so that
the poor can expand their productive activities and thereby increase
their assets.’27
This is quite compelling evidence that the poor are registering a
strong desire for traditional small business loans, not microfinance.
Going farther, one must also point out that if what the poor
really want are lower-cost loans, and this can only be made possible
through extensive subsidization of a financial institution, then what
is wrong with this? It is an entirely possible reality. As in the USA,
the EU states and many other countries, it is a legitimate wish that
requires only a political decision for it to come true. And there is
much evidence to show that poor communities actually do hold the
opinion that favourable financial support can and should be provided
to them, because they believe that there is no other way of facilitating
38 | Three
their escape from poverty. Referring once more to the World Bank’s
Moving out of Poverty study,28 the poor consulted in the study called
for their ‘financial isolation’ to come to an end, and for solidarity
linkages to be formed with other groups in society, especially with the
state and wealthy elite groups. The poor feel these solidarity linkages
are crucial in helping them escape poverty because:29
Poor people as a group lack cash, assets, education, market know-
how, and connections with the rich and powerful. When poor people
associate only with each other, they bring only their own meager
resources to the table. Poor people understand these constraints and
arm that ‘there is a limit to how much one hungry man can feed
another.’ The challenge is to extend these positive local traditions
of mutual help so that they reach across social lines to involve those
who can bring in new resources, ideas, and skills.
This is a powerful and eloquent statement by the poor in favour
of elite groups and the state providing them with additional financial
support over and above simple market provision. And particularly in
times of economic crisis, when we know that mutual help and sup-
port networks are most prone to breaking down among the poor,30
such cross-class and public–private solidarity linkages are even more
valuable.
Support for the idea that the poor need and want microfinance also
very often arises from the misguided romanticizing of the activities
undertaken by the poor. Microfinance advocates are routinely guilty
of this. The poor prefer individual microenterprise activity over all
other possibilities, so the argument runs, because it supposedly meets
their demands for self-respect, and their determination not to demean
themselves by relying on the ‘nanny state’ or ‘handouts’. Along these
lines, for example, Getubig, Gibbons and Remenyi make the argument
that ‘The poor need the respect and dignity that flows from identify-
ing and creating their own livelihood sources.’31 This is a serious
misunderstanding, as well as patronizing and oensive. Such blithe
statements sit very uncomfortably alongside the routinely horrendous
realities of enforced engagement with the informal sector in devel-
oping countries today, and the debilitating impact of brute market
forces vectored upon the poor and most disadvantaged members of
society. We should note that both the World Bank’s Moving out of
Poverty study just mentioned, as well as the forerunner Voices of the
Poorstudy,32 report that the poor actually see the routine lack of self-
Microfinance myths and realities | 39
respect and humiliation to be important negative aspects associated
with attempting to survive in the informal sector.
Finally, we should also add that the poor very often understand
that the best way to secure real dignity and respect is actually col-
lectively, using their most important asset – their numbers. This is
why, historically, social movements, pro-poor political parties, trade
unions, pressure groups and other forms of collective and popular
action, and latterly state activism under democratic mandate, have
proved to be the decisive factors in reducing generalized poverty and
human suering. In more recent times, of course, social mobiliza-
tion and state activism helped a large section of the working class
in the developed countries to become ‘embourgeoisified’, thereby to
constitute a new middle class.33 It is therefore hugely instructive of the
real objectives and motives in play here to find that such historically
decisive pro-poor strategies and methodologies are so often met with
opposition and ridicule, not just from neoliberal policy-makers, but
from many microfinance advocates too.34 Concerned individuals and
institutions that proclaim they have a ‘burning passion’ to help the
poor, but just so long as the poor confine themselves to the world of
individual entrepreneurship and microfinance, are clearly (if unwit-
tingly) of real service to those seeking to disempower the poor.
In short, it is a myth that microfinance has very much to do
with what the poor genuinely want or need, or that it automatically
confers dignity or respect through microenterprise activity. For a
variety of the reasons adumbrated above, the poor simply get what
they are given.
Microfinance availability is increased by formal property titles One
of the most high-profile advocates of microfinance and microenter-
prises is Hernando de Soto. De Soto first came to prominence in the
late s with his view that the microenterprise sector contained the
seeds of sustainable development in Latin America and elsewhere.35
The rather awkward failure of his signature idea was pretty clear
by the late s, however: poverty, inequality and human suering
actually increased in Latin America in the s and s in line
with, and (as Chapters and will show) at least partly thanks
to, the un restrained growth of the informal microenterprise sec-
tor. Nevertheless, De Soto managed to maintain his international
prominence in the new millennium thanks to another ‘big idea’. In
his best-selling book of , The Mystery of Capital, De Soto put
40 | Three
forward a novel concept concerning property rights and so-called
‘dead capital’. By helping the poor to secure full legal property rights
to the informal land and buildings upon and in which they live and
work, De Soto argued, the poor can bring to life a very valuable
asset, an asset that they can use as collateral in order to access almost
unlimited quantities of microfinance. This additional microfinance
would then support a massive step-up in microenterprise develop-
ment, which, in spite of all the evidence to the contrary in his native
Latin America, De Soto doggedly continues to claim is the ultimate
solution to poverty.
Perhaps not surprisingly, De Soto’s latest idea regarding property
rights was also very warmly welcomed by the international develop-
ment community. Right away the World Bank took a special interest
in the land titling issue, wholeheartedly agreeing that an additional
supply of credit will supposedly be forthcoming and that it will
usefully underpin further microenterprise development.36 Accordingly,
large sums of money have been directed into formalizing property
rights in many developing countries, starting with De Soto’s native
country, Peru. Peru attracted a major World Bank-funded project
to establish land titles – the Peru Urban Property Rights Project
( PUPRP). Most recently, the idea received a major fillip in with
the establishment of the Commission on the Legal Empowerment
of the Poor, a high-profile initiative hosted by UNDP, funded by a
range of international donors, and co-chaired by De Soto himself
and former US secretary of state Madeleine Albright.37
De Soto’s ideas linking property rights to microfinance, however,
stand on very shaky ground indeed. First of all, recall that one of
the core Grameen Bank innovations was precisely that it largely did
away with the need for the poor to present any formal collateral. In
Peru, as in most other countries in Latin America, there has been a
rapid expansion of the microfinance sector in the last two decades,
and Peru is now regarded as one of the countries most ‘saturated’
with microfinance. But Peru’s ‘saturation’ with microfinance, as in
most other developing countries, has been arrived at almost exclusively
thanks to collateral-free models. In most developing countries poor
individuals are pretty much able to access as much microcredit as
they want, and without any need for land titles (see ‘Myths behind
the “new wave” microfinance model’ below). Moreover, if the poor
in some place are not able to access as much microfinance as they
want, then it is usually because of reasons quite unconnected to the
Microfinance myths and realities | 41
land titling issue: their business idea is too risky, they are already too
heavily indebted, and so on. In Peru, for example, Pait’s study shows
that the main factor stopping women accessing even more micro-
finance than at present is ‘related to their inability to demonstrate
sucient steady cash flow or regular income’.38
Second, and quite logical in view of the previous point, to date
there has been almost no independently verified empirical evidence
to confirm that access to credit becomes far more widely available
to those holding new land titles. Thanks to PUPRP, Peru is the most
obvious first place to look for concrete evidence of a link. Carefully
following up on PUPRP, however, Kagawa found little evidence of any
link between land title consolidation and access to microcredit for
those otherwise credit constrained, concluding that ‘land titles have
not been sucient to open doors to access to credit’.39 Nor could
Calderon or Field and Torero find evidence of any link between land
titles and credit in Peruvian practice.40 Many years of field research
by leading Latin American scholar Alan Gilbert left him similarly
unimpressed by De Soto’s claims here.41 Going farther, Manji and also
Nyamu-Musembi could find no evidence of any such link emerging
in Africa either,42 while Durand-Lasserve and Selod suggest there is
little evidence to support such a link anywhere.43
In truth, just like his earlier miscalculation concerning the ‘power’
of the microenterprise sector to address poverty and human suf-
fering, De Soto’s ideologically driven notions concerning property
rights have been brilliantly marketed and sold to his international
development community supporters, even though they largely don’t
add up in practice.
Microfinance directly helps the very poorest The microfinance
model is largely seen as helping the very poorest in developing coun-
tries; those who typically have received little help in the past and are
in increasingly dire straits. Deliberately targeted at the very poor,
microfinance is there to help them more than anyone else. Micro-
finance analysts universally accept that in practice, however, most
MFIs now work with the less poor, and even with the moderately
wealthy. Hulme and Mosely began to point this out in the mid-s.44
Thereafter, the gradual establishment of the ‘new wave’ MFI model
was associated with accelerating this exclusion process. Moreover, as
we noted above, the massive shift into consumption lending by most
MFIs means that in some countries the middle classes (who make
42 | Three
the least risky and most profitable clients) actually benefit the most
from the increased supply of microfinance.
One reason for the exclusion of the very poor as clients is because
they tend to generate low profits and are also more risky to work with.
Recall from Chapter , for example, the conversion of the Grameen
Bank over to ‘new wave’ principles in . One of the most worrying
outcomes of Grameen II was that the proportion of very poor people
serviced by Grameen – its original target group back in the s –
looked set to seriously decline. Since the new for-profit emphasis meant
developing a client base composed of those most able to successfully
repay a microloan, the non-poor and moderately poor now appear to
be the focus of Grameen’s growth.45 Concerned at the PR implications
for such an iconic MFI, however, and for microfinance in general,
Grameen felt it had no choice but to introduce a special programme
for the very poorest. This was its ‘struggling membersprogramme’,
which Grameen Bank quickly began to trail as a major aspect of its
overall operations.46 But in spite of much fanfare, with just over ,
members by compared to more than million clients overall in the
same year, even microfinance advocates recognize that the programme
is no more than a token gesture at best.47
Microfinance empowers women A central thread running through-
out the microfinance industry narrative right from its establishment
in Bangladesh is that it promotes the empowerment of women. On
awarding the Nobel Peace Prize jointly to Muhammad Yunus
and Grameen Bank, the Nobel Prize Committee noted that 48 ‘Micro-
credit has proved to be an important liberating force in societies
where women in particular have to struggle against repressive social
and economic conditions. Economic growth and political democracy
can not achieve their full potential unless the female half of humanity
participates on an equal footing with the male.’
Starting with the Grameen Bank, many MFIs and microfinance
programmes took to prioritizing women as clients. To many, the mere
act of putting a microcredit into the hands of poor women signified
the huge potential that microfinance has opened up for gender em-
powerment. The idea quickly caught on. For example, the high-profile
MicroCredit Summit Campaign made ‘gender empowerment’ one of
its core aims, arguing that to achieve this objective microfinance had
to be made available far more to women than to men.49 Such is the
widely presumed positive impact of microfinance on women that in
Microfinance myths and realities | 43
Time magazine denoted it to be one of the ‘ten ideas that are
changing the world’.50 But how robust is this hugely influential gender
empowerment argument in practice?
Unfortunately, the idea of gender empowerment does not stand up
well to independent scrutiny. In fact, a distinct mythology of gender
empowerment has been created by the microfinance industry, based
upon a number of questionable assertions, critical misunderstandings
and deliberately created confusions. First of all, recall from what I
have said above that there is a lack of historical evidence to suggest
that petty microenterprise activity will substantively empower anyone,
regardless of their gender. Nor do contemporary policy-makers seem
to have changed their tune either. Especially in the USA and the
UK, neoliberal social policy models are very clearly contingent upon
the expansion of self-employment and microenterprises in order
to facilitate the ‘flexibilization’ and disempowerment of the labour
force. This is especially the case with regard to low-skilled and un-
skilled women.51 A good example of this trend is the dramatic rise
in home-based work and ‘contracting out’ to self-employed women
for services they previously undertook as a formal employee within
the same private company or public body that now contracts out to
them.52 This is an innovative and now widely adopted scheme that
arose specifically in order to exclude trade unions, thereby to extend
working hours and trim labour costs as much as possible. Sectors felt
to be particularly ripe for such treatment included textiles, healthcare
and social services. Such microenterprise development schemes were
certainly not adopted in order to improve things for those women
now forcibly recast as self-employed subcontractors. Increasingly
dependent upon ill-paid contracts regularly up for renewal, many
women have been deliberately shifted into a far weaker and less
remunerative self-employment position than hitherto – that is, they
have been disempowered.53 This, then, is a clear trend in the developed
economies following the turn to neoliberalism in the s. Is the
trend likely to be any dierent in developing and transition countries
falling under exactly the same doctrinal influences?
Consider, first, the obvious example of Bangladesh. If we leave aside
the largely self-serving PR and hype produced by the Grameen Bank
and its international donor supporters, we actually find a thriving
subculture of academic and NGO work providing a quite dierent
narrative. In a widely cited paper, Goetz and Sen Gupta showed that
women most often lost control to their male partner of any microloan
44 | Three
obtained, but they nevertheless retained the responsibility of repaying
the microloan through an increasing workload of odd jobs.54 Else-
where, the typical Bangladeshi woman’s gradual entrapment in a web
of microdebt was poignantly captured in a major consultation exercise
undertaken in ,55 with one individual keen to point out that ‘We
did not have so many loans in the past; our children and wives could
lead a comfortable life; they did only household chores under Purdah.
But now they [also] have to work out in the field to collect money
for repaying instalments.’ To many independent researchers, then,
microfinance seems most likely to have circumscribed the freedom of
women in the typical Bangladeshi community, not advanced it. These
awkward results were also backed up by Aminur Rahman’s major
study of the Grameen Bank itself. Rahman pointed out that women
were good clients mainly because of their sociocultural vulnerability,
which was expressed, among other things, by their willingness to agree
to an onerous schedule of weekly meetings.56
Most recently, Lamia Karim has bravely reported on the grow-
ing extent of social violence and public humiliation deployed to
enforce high repayment rates in Bangladesh’s main MFIs, especially
in Grameen Bank.57 She concludes from her extensive fieldwork that
Grameen Bank and other MFIs have essentially been constructed
upon the routine use and abuse of Bangladeshi women’s honour and
shame. High repayment rates are therefore not surprising under such
pressure. Karim describes ‘a local economy of shame’, and she shows
how local norms of gender cohesion and community are undermined
by the juggernaut that is microfinance. Such widespread practice
mainly leads to the subjugation of women, rather than to their
emancipation or empowerment. Importantly, Karim shows that the
ongoing commercialization of the microfinance sector has markedly
intensified these aggressive tactics, including routine pressure on the
male partner and his wider kinfolk to repay a microloan. At least one
of the major MFIs in Bangladesh, ASA, quite freely admits to using
pressure on borrowers’ husbands and male relatives to enforce its
high repayment levels on microloans taken out by women (see below).
Such a negative interpretation of microfinance in Bangladesh
strongly resonates in equally microfinance-saturated Bolivia. Many
years of fieldwork in Bolivia have led anthropologist Lesley Gill to
conclude that masculine hegemony has been strengthened by the
restructuring of local society through (among other things) micro-
credit.58 For example, she found that many MFIs choose to hire and
Microfinance myths and realities | 45
train male employees to ensure that high repayment is maintained.
As Gill sees it, the use of males in high-status jobs tends to re-
inforce the position of higher-gendered-status males compared to
the lower-gendered-status females in local society. Moreover, in the
s, the Bolivian state saw microfinance as a way of smoothing
the path towards dismantling important state capacities, in line with
the international development community’s instructions to cut costs
and restore fiscal balance. In particular, key social infrastructures of
most value to poor women were pointedly included in the institutions
slated for closure, downsizing and/or privatization. As it set about
dismantling many of Bolivia’s most important social, health and edu-
cational capacities from the s onwards, the Bolivian government
simultaneously began to enjoin Bolivian women to petition the private
sector to supply these support services instead. Poor women were told
not to worry, because the rising supply of microfinance could now
be used to facilitate the purchase of the most important services that
had been withdrawn by the state. In other words, suitably lubricated
by microfinance, responsibility for the provision of support services
of most importance to women in poverty was increasingly being
thrown back on to those very women. This is disempowerment of the
first order. Overall, Gill found that the proliferation of microfinance
was crucially important to the Bolivian state in the s and s,
because it provided the important political ‘cover’ behind which it
could deliberately withdraw from meeting its obligations to the poor,
and especially to women in poverty. In no uncertain terms, with the
help of microfinance Bolivia’s women in poverty were disadvantaged
and eectively disempowered.
The perspective from a previously well-developed transition econ-
omy is also very relevant here. Vanessa Pupavac argues that the
microfinance concept in Bosnia represents a major setback in terms
of the empowerment of women, and she finds that microfinance
in Bosnia is actually quite widely resented by Bosnian women. In
general terms, for many Bosnian women microfinance appears to rep-
resent the triumph of the West’s very limited and externally imposed
‘ vision’ for Bosnia’s post-war future, one that is marked out by the
Bosnian population’s enforced (re-)engagement with primitive forms
of informal sector employment thought to have been left behind in
the early part of the twentieth century.59 With many qualified and
highly skilled Bosnian women forced into the most primitive of
microenterprise activities simply in order to survive – petty cross-
46 | Three
border trade, street selling, primitive agriculture (keeping a cow in
the back garden), running a basement shop – resentment is perhaps
inevitable. Many Bosnian women and NGO advocacy groups also
point out another conundrum. Why was it possible to make hugely
important empowerment advances for women within the former
Yugoslavia60 – following a viciously destructive war (–), when
human capital, technology and institutions were underdeveloped,
and when the country was comparatively much less wealthy – but yet
today Bosnian women are told such advances are simply no longer
possible. Seen in this context, it is not surprising that contemporary
microfinance-driven outcomes in Bosnia are increasingly viewed as
a fundamentally backward step in terms of sustainable development
and gender empowerment.
Moreover, there seems to be no getting away from the fact that the
increasing commercial orientation of microfinance everywhere jars
with any supposed concern to empower women. This is why lead-
ing microfinance advocate Linda Mayoux argues that microfinance
programmes need to move far beyond the mere provision of micro-
loans, and start to include and financially support specific gender
empowerment components as standard. As she succinctly remarks,61
‘Unless microfinance is conceived as part of a broader strategy for
transformation of gender inequality, it risks becoming yet one more
means of shifting the costs and responsibilities for development onto
very poor women’ (my italics).
Exactly. But Mayoux herself then goes on to admit that imple-
menting this ‘broader strategy’ approach will be a very dicult task
indeed. This is particularly the case, she argues, in view of the fact
that the ‘new wave’ microfinance model’s primary concern lies with
profitability and financial self-sustainability, and not with ensuring
gender empowerment.62 For example, consider the hundreds of private
MFIs set up in Bangladesh, India and Pakistan this last decade, virtu-
ally all promising gender empowerment. Most, if not all, actually
have very little genuine concern for this issue. These new MFIs are
overwhelmingly straightforward profit-maximizing institutions, and
were established with the primary concern of enriching their investor-
owner(s). Most operate only under the cover of gender empowerment
because this is the coded language needed to ensure ‘respectability’
within the microfinance industry, thereby to increase the chances
of unlocking some additional government and international donor
financial and technical support.
Microfinance myths and realities | 47
Further evidence to back up the fears expressed by Linda Mayoux
in the quotation cited above comes from Africa, where the inter-
national development community has developed a fascination with
using microfinance to promote subsistence farms. In many parts of
Africa, the World Bank has been pushing hard for MFIs to work
with quite inecient subsistence farms, as opposed to them oering
aordable financial products suitable for small family farms that are
a far more ecient agricultural structure (this important distinction
is discussed in Chapter ). As Ambreena Manji points out,63 however,
there is a disturbing reason for this otherwise somewhat puzzling
trend. Pro moting rural microfinance is premised on a subsistence
farm realizing a competitive advantage through the extensive use of
‘non-contractable labour’, which in practice, she argues, eectively
boils down to ‘unpaid female labour’. This ‘advantage’, the World
Bank hopes,64 will oset the many disadvantages of a tiny farming unit
otherwise operating well below minimum ecient scale. The intended
result is that the average subsistence farm can now be made sustain-
able/profitable thanks to unpaid female labour, backed up by growing
quantities of microfinance. Subsistence farms will help to provide a
little extra food, maintain rural employment, deter rural–urban migra-
tion and so also help to ensure political stability. Importantly, because
financially self-sustaining (‘new wave’) microfinance can be made to
substitute for subsidy-dependent agricultural support regimes, these
benefits can be achieved at no cost to governments or to the inter-
national development community. Working with small family farms
and their related infrastructures would involve far more complicated
and costly financial interventions than ‘new wave’ microfinance can
provide, so this option eectively renders itself impossible right from
the start.65 But the unstated problem in the subsistence farming option
is, as one might suspect, the fact that women are increasingly being
expected to acquiesce to a future of unpaid labour. This result is
hardly empowering. Indeed, as Manji suggests, ‘[the World Bank’s]
global land policy over the next decade will worsen rather than
ameliorate women’s social and economic position’.66
Another awkward issue for those seeing gender empowerment
through microfinance is that in an increasing number of countries,
above all in Bangladesh itself, commercialization pressures have re-
sulted in the increasing abandonment of the solidarity circles concept
in mainstream MFIs. The important thing for most ‘new wave’ MFIs
nowadays is essentially to push out as much microcredit as possible.
48 | Three
It is best not to get bogged down in attempting to promote social
mobilization and gender empowerment through solidarity circles. Yet
recall that solidarity circles were originally portrayed by microfinance
advocates to be the most important social innovation responsible for
the empowerment of women, principally through the social capital
accumulation route.67 To those who have consistently argued in favour
of such solidarity circles, then, their ongoing abandonment by many
MFIs must surely be registered as a significant reversal in any gender
empowerment scenario. Moreover, what is taking the place of solidar-
ity circles in Bangladesh already looks pretty discouraging from a
gender perspective. For example, as the Wall Street Journal reported
in its survey of microfinance,68
Harder-headed microlenders are stealing the spotlight [in Bangla-
desh] […] One rising star is the Association for Social Advancement
(ASA), […] which boasts . million borrowers and just .% of
loans overdue, even by a week. Dispensing with borrower groups,
ASA leans on borrowers’ husbands and relatives if payments are
missed, says the managing director, Shafiqual Haque Choudhury.
To him, Grameen’s [solidarity circles] approach is an ingenious idea
that didn’t stand the test of time.
Finally, we need to reiterate our earlier comment that microfinance
advocates very often promote self-employment as the best way of
escaping poverty, often without realizing or caring that entrepre-
neurial activity is not always what women in developing countries
actually feel suited to or want to do. Many women naturally prefer
more secure, child-friendly and better-paid work in a safe and clean
environment, typically government work of some kind. These are
valid wishes. But instead, and often on the basis of wrong-headed
cultural stereotypes supporting the ‘universality’ of entrepreneurship,
Rashmi Dyal-Chand points out that women in developing countries
are increasingly being forcibly corralled into the most primitive forms
of self-employment.69
Let me sum up these and other important worries using the words
of Sally Williams, a former adviser to the central European delega-
tions to the UN Beijing Conference on Women and to UNDP on
microlending in central Asia. She had this to say:70
I would like to point out that the vast majority of the success rates of
the micro-credit programs such as Yunus’s Grameen Bank is entirely
Microfinance myths and realities | 49
based on loan payback rates rather than whether the participating
women have actually gotten out of poverty. In other words it’s the
success of the lender, not the recipient […] Most of the wee loans
at usury interest rates go to women for activities that require the
involvement of whole families. Paying the high interest from earnings
of a garden plot, a small kiosk, a phone service, or basket making
generally requires a -hour day and help from family members. […]
I won’t go into how belittled many women felt having to become a
member of a group to get a loan rather than being respected as an
individual because it places a tremendous burden on the women in
the group to pay the interest for a member who becomes ill or has
a problem in her family. We regulate predatory lending practices in
some parts of the United States. These overseas lending programs are
entirely unregulated and borrowers need protections.
Overall, the gender empowerment narrative cannot be taken very
seriously. There is little historical evidence to support the contention
that policy-makers set out to achieve, nor have they achieved, any
major advance in this regard. The glossy PR handouts and jazzy
websites of the main MFIs continue to tell many uplifting individual
stories, but most independent research points to the fact that such
examples are incredibly rare. In practice, microenterprise activity
undertaken by women most often reflects the proliferation of hyper
self-exploitative and patriarchal hegemony-strengthening outcomes –
in a word, disempowerment. In fact, microfinance is essentially used
instead to discipline and ‘soften up’ women, in order that they become
more ‘market-friendly’. Leading microfinance researcher Naila Kabeer
eectively gives the game away here when arguing that ‘women’s
access to the market [is] the primary route for their empowerment’.71
In other words – and this point is absolutely crucial to understanding
microfinance, not just in this gender context, but in general – it is
markets which are being empowered here, not women.
Myths behind the ‘new wave’ microfinance model
In the s, as I pointed out in Chapter , the ‘new wave’ micro-
finance model began to replace the original Grameen Bank-inspired
microfinance model as ‘best practice’. As the ‘new wave’ model began
its own rise to prominence, a specific subset of myths began to
emerge to order to provide the required justification for the new
arrangement.
50 | Three
Accumulating great wealth through microfinance does not mean
that the poor lose out: it is a ‘win-win’ situation A pivotal feature
of the ‘new wave’ microfinance model is the opportunity it presents to
certain individuals to make their own personal fortune. This fortune
is made not through use of a microloan, but through its provision.
This personal enrichment process transpires in a number of ways. An
individual might decide to establish her own MFI using inter national
donor and/or government financial support to do so, promising pov-
erty reduction benefits in return. An individual or group might also
decide to gradually take over an MFI in which she/they work(s) and,
again, where the initial capital was provided by the international
donor community or from public funds. Still others attempt to be-
come rich through buying into an MFI established with public or
international donor funds, which is then aggressively restructured
and turned into a highly profitable private business operation. Even
future profit streams can be appropriated through an eventual IPO.
All these techniques are part of the new method of wealth generation
favoured by up-and-coming elites in the neoliberal era that emerged
after , termed by social anthropologist David Harvey ‘accumula-
tion by dispossession’.72 Accumulating great wealth is easily achieved
by quietly converting public and collective assets and income streams
into private assets and income streams.
Advocates of ‘new wave’ microfinance contend, however, that this
private enrichment process is actually a positive development for the
poor in many ways. To get rich (to perhaps become a ‘microfinance
millionaire’, as I call them in Chapter ), one typically has to secure a
greatly increased volume of microfinance for the poor. More volume
is driven by more profit, which in turn also means more scope for
higher pay and bonuses. Both parties thus appear to benefit. The
individual admittedly becomes rich, but the poor also benefit from
the increased availability of microfinance. Is this not, then, a classic
‘win-win’ market-driven outcome?
The problem with this ‘win-win’ scenario is that in historical
practice it largely doesn’t work like this. A close parsing of economic
history tends to highlight, instead, how episodes of financial elite-
building and personal enrichment are most often detrimental to the
interests of the poor, especially to the rural poor. Personal enrichment
typically involves what has been called a ‘dualistic’ methodology.
Would-be financial elites seek to engage in a process of ‘borrowing
cheap to lend dear’, the counterpart of which is the perpetuation and
Microfinance myths and realities | 51
intensification of poverty and inequality in rural regions. Put very
simply, within the context of expensive loans, rural producers are
unable to produce their way out of poverty. The rural poor become
caught in a local ‘poverty trap’, vainly striving to produce and earn
more in order to escape their expensive loans, but never quite getting
there.
For a good description of the adverse poverty impact involved
in first constructing and then maintaining a local financial elite, we
can usefully refer to the work of Carolyn Gates, who looks at the
prototypical case of Lebanon.73 The Lebanese financial elite was
essentially created in the nineteenth century. Their starting point was
being permitted to borrow at low interest rates in Beirut, and then
lending out to the poor in the rural regions of Lebanon and Syria
at usuriously high interest rates. Thanks to such high interest rates,
however, all but a very small percentage of the rural poor found it
impossible to produce, earn and reinvest enough to eventually make
their way out of poverty. They remained poor. But meanwhile the
financial elite was able to grow steadily richer and more power-
ful through their expanding range of lending activities. Of course,
challenges to the power of the financial elite were forthcoming, first
through popular movements and then through the oces of the state.
But the financial elites were largely able to anticipate these challenges,
and to head them o before they amounted to anything. Up until
the s, in fact, government eorts to respond to the passionate
calls by the rural poor for aordable rural credit were consistently
blocked by the powerful financial elite. The result is that even today
Lebanon has still largely failed to escape a situation of generalized
rural poverty. Similar examples abound right across the world.
Accordingly, as this ‘dualistic’ financial elite-building process plays
out in developing and transition countries today via commercialized
‘new wave’ microfinance, there is no a priori reason, nor any concrete
evidence accumulated to date, to conclude that a bright future awaits
rural communities. It is therefore a myth to suppose that ‘new wave’
microfinance, and the processes leading to the sometimes spectacular
enrichment of those standing behind it, must be performing a service
that is of automatic and enormous benefit to the poor; the opposite
is actually the case.
Demand for microfinance vastly outstrips the supply One of the
most fundamental building blocks of the ‘new wave’ microfinance
52 | Three
model is the assumption that the demand for microfinance far out-
strips the ability of government and international donor-funded MFIs
to provide it. Harvard academic and former president and CEO of
ACCIÓN Michael Chu has called the presumed dierence between
demand and supply an ‘absurd gap’.74 Of course, since commercial-
ized ‘new wave’ microfinance is held to be the only way that this
‘absurd gap’ is going to be filled, this rather conveniently rounds out
the arguments in its favour. The commercialization of microfinance
thus becomes an urgent necessity in order to extend the outreach of
microfinance to as many underserved poor individuals as possible,
thereby to help them escape poverty. In addition, let us not forget
Muhammad Yunus’s oft-stated claim that ‘microfinance is a human
right’, which adds another humanitarian dimension to the urgent
quest to ensure that microfinance is available to every last adult
person.75
This very important claim to huge unmet demand is, however,
a self-serving mirage. First, simply because an individual has not
yet bought or accessed something, this does not mean that she is
a potential client. There is a world of dierence between potential
demand and eective demand. Many microfinance advocates crudely
assume that the potential demand involves every single self-employed
poor person, jumping to conclude that this would all then translate
into eective demand.76 As even the microfinance industry itself is
now grudgingly starting to admit,77 there is no evidence to support
such claims. In many of the microfinance ‘saturated’ countries, a
high percentage of the self-employed choose of their own volition
not to access microfinance. They do not do so because they can see
no proper use for it, especially at ultra-high interest rates.
Second, a serious and growing problem for the microfinance in-
dustry today is actually associated with the rapidly rising number
of client ‘drop-outs’ and aggressive competition for clients between
MFIs. That is, supply has shot way ahead of the demand. One obvious
indication of this is that MFIs everywhere are increasingly caught
up in a desperate struggle to find new clients to replace the growing
number voluntarily choosing not to take on any new microloan. For
example, Wright reports that in East Africa – a region not typically
seen as especially well covered with MFIs – client drop-outs are
nevertheless between and per cent per year.78 According to the
MicroBanking Bulletin,79 in central and eastern Europe and in Middle
East and North African countries the situation is the same; over per
Microfinance myths and realities | 53
cent of clients leave their MFIs on an annual basis. Research by the
International Labour Organization (ILO) covering the operations of
forty-five MFIs between and found ‘an astonishing degree
of client drop-out’.80
In Bangladesh, Pakistan and India there are ominous signs that the
increasingly frantic drive to obtain new and retain existing clients is
leading to a wave of ‘hard-selling’ practices. Many of the major MFIs
have been privately alarmed about the growing oversupply worldwide,
and some are now – finally – coming clean about their real fears.81
Other MFIs have been developing and refining corporate strategies
designed to work in markets where massive oversupply has been the
norm for some time.82 Importantly, nor are any of the microfinance
stakeholders consulted in the authoritative Banana Skins report
convinced of the ‘absurd gap’ argument.83 The report shows that
microfinance practitioners see their biggest concern today, as well as
the concern that has most increased over the last ten years, as the
rising level of competition for clients. Microfinance industry analysts,
observers and investors all concurred. As the report summed matters
up, ‘The main problem is too much funding rather than too little.’84
Indeed, because each MFI appears to be having more and more
diculty finding enough clients to maintain margins and survive,
the report concludes that the stage is probably being set for some
high-profile MFI casualties in the near future.
Third, it is also the case that a very significant proportion of eec-
tive demand for microfinance may be artificially stimulated. Clearly, as
John Kenneth Galbraith famously argued in his path-breaking book
The Auent Society,85 any argument made in favour of ‘satisfying
demand’ must be instantly disavowed if that demand has had to be
artificially created in the first place. Not unlike in the stunning case
of the sub-prime mortgage and credit card markets in the USA,86
in order to add additional clients MFIs are increasingly forced to
massage and hide the true cost of the microloan they wish to sell,
otherwise they simply cannot sell it. Existing MFI clients are also
increasingly pressured to take out a new or a ‘top-up’ loan whether
they really need such a loan or not. In fact, the poor are everywhere
increasingly falling into an even deeper and permanent engagement
with microdebt, with the need to cover regular, sizeable and growing
interest payments now becoming a damagingly routine fixture in
their everyday struggle to survive.87 It ‘helps’ here that loan ocers
are increasingly financially incentivized along Wall Street lines, and
54 | Three
so are generally more willing to do whatever it takes to bring in new
clients and help existing clients into possibly unwanted debt, thereby
to earn their bonuses.
Apart from a few underserved regions, it is the case almost every-
where in developing countries that the supply of microfinance has
now overshot the genuine demand by some considerable way. It is
therefore a myth to suggest that more eort is required to increase
the supply of microfinance; the opposite is probably true, especially
in those countries and regions wherein a major ‘microcredit bubble’
has clearly formed in recent years (see Chapter ).
Commercialized MFIs will always respect their social mission
Advoc ates of ‘new wave’ microfinance firmly believe that it is possible
to extensively commercialize an MFI and that it will still retain its
original mission. Some key figures involved in the development of the
‘new wave’ microfinance model were aware of the potential dangers
of ‘mission drift’, such as Maria Otero.88 But it was thought that with
sensible regulations, peer pressure and other measures, there would
be no problem at all into the longer term.
Yet evidence that ‘mission drift’ has become a serious problem
in the microfinance industry is now quite overwhelming. Numerous
research outputs point to the growing separation between an MFI’s
original poverty reduction intentions and its later abandonment of
such concerns. This feeling is backed up once more by the
Banana Skins publication noted above, which reported that micro-
finance practitioners put ‘mission drift’ in second place among the
most important problems facing the microfinance industry today.
In its previous report in , ‘mission drift’ was only marginally
mentioned. In other words, as the commercialization of micro finance
has got into its stride over the last ten years or so, its own practi-
tioners agree that the average commercialized MFI has begun to veer
significantly o course. In microfinance-oversupplied India, Arnab
Mukherji, a researcher at the Indian Institute of Management in
Bangalore, argues that ‘We’ve seen a major mission drift in micro-
finance, from being a social agency first’ to being ‘primarily a lending
agency that wants to maximize its profit’.89 It is also puzzling, if
‘mission drift’ is assumed not to be a problem, why it is that the
microfinance industry has increasingly felt impelled to establish its
own institutions to police the industry in order that clients are not
abused (see Chapter ). Just as with the recent sub-prime mortgage
Microfinance myths and realities | 55
and credit card fiascos in the USA, there is growing recognition within
the microfinance industry that commercial pressures are increasingly
forcing MFIs in developing countries to pressure and hoodwink their
clients in order to obtain new business. This is, of course, a very
serious case of ‘mission drift’.
Given the rising number of interventions designed to stop the
microfinance industry from veering away from its original mission
to reduce poverty, it is very dicult to argue that commercialization
has not aected the average MFI’s social mission in a bad way. In
fact, the ‘new wave’ commercialization model has added enormous
impetus to the ongoing abandonment of the social mission aspect
to microfinance.
High interest rates are not a problem for the poor since it is the
availability of microcredit which matters most to them, not its
price One of the original justifications for the establishment of the
Grameen Bank was that it would displace the ultra-expensive credit
typically provided by informal moneylenders. As Muhammad Yunus
concluded, ultra-high interest rates prevent poor people from earning
sucient net income to begin to escape poverty. Instead, the poor
are caught in a classic ‘poverty trap’. Yunus found this situation to
be an intolerable abuse of the poor. Nonetheless, with the arrival
of the ‘new wave’ microfinance model in the late s, this line of
argument was dropped entirely. In its place came a new understanding
that in order for an MFI to achieve full financial self-sustainability,
the poor could,90 and indeed should, be expected to pay whatever
rate of interest would fulfil this overarching condition.
There is substantial evidence to suggest, however, that high interest
rates remain a serious problem for the poor. First, one cannot get
away from the basic fact that clients will inevitably end up worse o
than otherwise would be the case under a subsidized interest-rate
regime. High interest rates always eat into the typically minimal
margins realized in a microenterprise, and this is painful for the poor.
This is why, whenever asked, the poor overwhelmingly argue that
they should not be subject to market-based interest rates, because
they will simply not be able to generate a decent surplus. We cannot
simply ignore their petitions on this issue, because there is so much
evidence to back them up. In India, for example, the large National
Sample Survey Organization reported that its latest mass survey
showed that:91
56 | Three
[a] large proportion of microcredit clients are worse o after access-
ing loans. Since higher interest rates on microcredit do not provide
scope for savings and for investing in insurance, the dominant
risk-covering factors for the poor, microcredit seldom propels the
poor out of poverty. Further, there are no businesses that can gener-
ate profit after paying an interest of 24–36 per cent on capital. (My
italics)
Moreover, careful studies of the interest-rate elasticity of micro-
credit show that the poor react very proactively to lower-priced
microfinance. Using data from a randomized trial in South Africa,
microfinance analysts Dean Karlan and Jonathan Zinman demon-
strated that the poor’s demand for microcredit is quite responsive to
interest-rate changes.92 In fact, there are many instances where the
poor feel they have to ‘shop around’ for much cheaper microcredit as
soon as they think they might be able to obtain it elsewhere. Consider
also that one of the main proximate causes of panic and crisis in
the microfinance industry is the entry of a state-owned MFI oering
reduced interest rates on its microloans, which are readily taken up
by the poor (see below). Often, too, groups of the poor continue the
long historical tradition of attempting to set up their own financial
institution able to oer much lower-cost credit. Mayoux reports that,
in Uganda, women associated with FINCA rejected the high-interest-
rate model once they had enough cash to go on their own.93
Third, we must deal with a major moral and ethical dilemma
here. High interest rates are routinely justified by the microfinance
industry not just as a way to attain financial self-sustainability, but to
ensure that an MFI can generate significant profit as well. Profits are
needed, so the argument goes, in order to expand the MFI (disburse
more microloans, open new branches, etc.), thereby to increase the
volume of microfinance available to other equally poor individuals.
This justification eectively rests on a very shaky moral imperative,
however: it is eectively asking one set of very poor individuals to
generously agree to help out another set of very poor individuals.
That is, the poor in one place and time are eectively being asked
to turn away possible subsidies and pay high (market-based) interest
rates not just to facilitate their own possible way out of poverty,
but that of other poor people too. This is hardly the most equitable
scenario. It should come as no surprise, then, to find that the poor
generally resent such unorthodox forms of wealth redistribution, as
Microfinance myths and realities | 57
we heard above when many poor individuals collectively reported to
the World Bank that ‘there is a limit to how much one hungry man
can feed another’.
And, finally, an even more disconcerting fact is that if high interest
rates are indeed ‘no problem’, then how do we explain the routine un-
willingness on the part of MFIs everywhere, and also many instances
of outright deception, when asked to clearly present their interest
rates, fees and the total charges imposed on their poor clients?94
High repayment rates ‘prove’ that borrowers are succeeding with
their expensive microloan As was emphasized in Chapter , the
success of the Grameen Bank model was very much based on the
simple fact that there was an almost complete separation of repay-
ment from the ultimate success of any micro-project. Of course, it
was largely not feasible to find out whether individual clients were
making a success of their microenterprises or not, still less to help
out in the event of any diculties. Instead, high levels of repayment
were secured thanks to various forms of social collateral (solidarity
circles, personal guarantors, etc.). In fact, it was precisely because
most income-generating projects actually fail, or at least fail to gener-
ate sucient cash to repay the microloan, that the early MFIs were
considered so astute in deciding to develop such social collateral-based
lending methodologies. Recall too from the discussion above the fact
that most microfinance is now very largely advanced for consumption
purposes, and not for income-generating projects. Precisely because
the microloan was not advanced in order to be used for any business
project, high repayment rates therefore prove very little in terms of
sustainable development and poverty reduction successes.
In fact, one of the most glaring features to arise in microfinance in
recent years is the huge divide that separates microenterprise success
and high repayment rates, and the associated fact that repayment in
the event of an unsuccessful microenterprise venture further reduces
the income and assets of the poor. To explain the disconnect between
repayment and development, we must recognize the fact that the
poor generally have fallback strategies that they deploy to repay a
microloan when the original microenterprise fails.
First, clients borrow from family and friends to repay their original
microloan. This is the easiest and least risky option in the event of
getting into diculty. But especially in cases where additional micro-
loans have been taken out to try to save the business – as gamblers
58 | Three
often continue to gamble in anticipation of ‘the one big win’ that
makes up for all the previous losses – the relative ease in obtaining
support across large family and friendship circles means that the
hapless individual often ends up in very serious debt. This has been
quite extensively documented in Bolivia, for example.95
Second, many existing clients choose to repay their original micro-
loan by taking out another (often larger) microloan from another
MFI. This turns out to be one of the principal ways that the poor
in many developing countries have become awash in microdebt. As
noted above, this has been a particularly worrying development in
Bangladesh of late, with many analysts increasingly concerned at the
dramatic rise in both loan recycling (using a new, larger microloan
to repay the old, smaller one) and multiple borrowing across several
MFIs.96 According to Mathew, a similar problem has also arisen in
India.97
Third, a range of family assets are simply sold o, from household
utensils to roofing to equipment, vehicles and machinery. Worst of
all is the fairly commonplace sale or seizure of family land, an asset
that might otherwise be used to generate a rental income or produce
enough food to ensure at least physical survival. This outcome inevit-
ably risks plunging the family into much deeper and almost certainly
irretrievable poverty. In Bangladesh, India and Pakistan, as in many
other South-East Asian countries, land seizures from defaulting bor-
rowers are very common and growing. In India, for example, it is
estimated that about per cent of farmers failing in their activities
in any one year are forced to sell or mortgage their land in order to
repay the original microloan used to advance their farming or o-farm
microenterprise activities,98 a sizeable increase on previous years.
Thanks to the above fallback strategies, high levels of repayment do
not mean that the poor are successfully escaping poverty. In fact, they
very often mean that, for reasons of shame, fear and future microloan
availability, the poor are simply drawing down other financial, physi-
cal, social and reputational assets in order to repay their microloan,
and thus getting poorer overall.
MFIs can be self-sustaining A variation on the ‘high repayment rate
equals poverty reduction’ myth just noted is the idea that MFIs can
all eventually become financially self-sustaining. Many of the most
important advocates for microfinance, especially those on the right
of the political spectrum, began to take notice of microfinance only
Microfinance myths and realities | 59
when this aspect started to become common currency. High repayment
rates were, after all, the aspect of Grameen Bank’s early operations
which alerted the international development community to its value.
The poor can be helped into business with microfinance, and they
will even pay for the costs of this financial support through high
interest rates, as just noted.
Most in the microfinance industry, however, agree with the evid-
ence showing that the bulk of MFIs are unlikely to reach financial
self- sustainability. Of the , MFIs currently estimated to be
op era ting in the world, only – per cent will become financially
self-sustaining.99 Manos and Yaron also point out that many of the
MFIs substantially underestimate their dependence upon subsidy.100 In
other words, only the largest and most aggressively commercialized
MFIs – that is, ‘new wave’ MFIs – are likely to be able to survive.
Conclusion
This chapter has shown that almost all of the fundamental build-
ing blocks that go into making up today’s microfinance model, and
which, in turn, constitute the public narrative, are largely nothing
more than self-serving myths. The microfinance industry has proved
supremely adept at ‘creating its own reality’. The implications of
this point are very significant indeed. If the microfinance industry is
unwilling, or perhaps unable, to project a broadly truthful picture of
what microfinance is all about, then we can only be led to assume that
something is wrong. The worst-case scenario is that, as on Wall Street
in the s and early s,101 a deeply flawed public narrative has
had to be deployed in order to provide cover for a growing range of
unwholesome internal practices and inecient external outcomes for
the economy and society. We therefore need to look at the evidence
on the ground to see whether such fears are legitimate or not with
regard to microfinance. That is, we need to begin to answer the much
more fundamental question: What role is the microfinance model
really playing in terms of promoting sustainable economic and social
development, and so also in poverty reduction? The next chapter
begins to seek out an answer to this important question.
FOUR
Microfinance as poverty trap
‘A Grameen-type credit programme opens up the door for limit-
less self-employment, and it can eectively do it in a pocket of
poverty amidst prosperity, or in a massive poverty situation.’
Muhammad Yunus1
‘Strikingly, years into the microfinance movement we have little
solid evidence that it improves the lives of clients in measurable
ways.’ David Roodman and Jonathan Morduch2
‘ … tiny loans usually provided under microcredit schemes do not
seem to lift large numbers of people out of poverty. Poor people
need credit that enables them to go beyond meeting immediate
consumption needs and build permanent assets.’ World Bank3
‘… it is becoming increasingly plausible to argue that the
microfinance programmes installed by aid agencies and NGOs
are not simply falling short of their hype (most observers agree
on that) but are yet another faddish form of unhelpful help, an
anti-development intervention that produces a short-run benefit
but may misdirect and undermine sustainable development and
poverty reduction in the longer run.’ David Ellerman4
The previous chapter showed that a very large part of the rationale
put forward in support of microfinance has been built upon a set of
myths, some more egregious and self-serving than others. The purpose
of this chapter is to move on from this deeply flawed narrative to
consider whether microfinance nevertheless might still ‘work’ as a
sustainable economic and social development policy.
Through support for income-generating activities the widespread
belief took hold that microfinance could play a decisive role in poverty
reduction. This was what apparently first drove Muhammad Yunus
to experiment with microfinance in the late s. Because it shared
Muhammad Yunus’s optimism and ideological commitment to indi-
vidual self-help, the international development community right away
Microfinance as poverty trap | 61
began to support a massive expansion of microfinance. Microfinance
very soon emerged as one of the most important poverty reduction
weapons in the international development community’s armoury
of policy and programme support. In the early s, Hernando
De Soto began to build a lucrative career advising the international
development agencies that the microenterprise sector was the perfect
answer to joblessness and poverty in developing countries, and mas-
sive numbers of microenterprises would soon lift the poor out of
their misery, starting in his native Latin America. Empirical work
undertaken in Bangladesh in the late s, much of it sponsored
by the World Bank, seemed to undergird the belief that microfinance
would have a positive impact on poverty and society. The widely
presumed association linking microfinance to poverty reduction and
local development remains just as strong today in the international
development community. For example, Bernd Balkenhol, the current
head of the ILO’s Social Finance Programme, considers microfinance
to be a crucial aspect of current development policy because it is
‘the strategy for poverty reduction par excellence’ (underlining in
the original).5
In many respects, then, and putting the flawed public narrative to
one side, we have here the critical issue at the heart of this book: does
microfinance really lead on to poverty reduction through sustainable
economic and social development?
What do microfinance impact assessments tell us?
An obvious first step in beginning to answer this question is to look
at the large number of impact assessments that have been undertaken
in the area of microfinance. The serious reservations I raised in
Chapter notwithstanding, impact assessments nevertheless do help
us to at least begin to understand how microfinance might work in
practice to influence development. Perhaps not surprisingly, the first
and most comprehensive impact assessments were undertaken in
Bangladesh, with the work of Mark Pitt and Shahidur Khandker most
often cited. Drawing on material from a major Bangladesh Institute of
Development Studies (BIDS) and World Bank data collection exercise
undertaken in the mid-s, Pitt and Khandker initially pointed to
strong poverty-reduction gains across a number of areas.6 This result
appeared to back up the faith the international donor community
had had in Muhammad Yunus. Almost right away, however, other
microfinance supporters disagreed with the conclusions reached by
62 | Four
Pitt and Khandker. The most important objection was lodged by
Jonathan Morduch. Using the same data, Morduch could find no
real positive impact, admitting only that such programmes seemed
to reduce client vulnerability to an extent.7 After these and other
important challenges to the way the BIDS–World Bank data were
processed, Khandker revisited the original data and methodology
used. His revised conclusion was that microfinance programmes in
Bangladesh still demonstrated a positive poverty reduction impact,
but only a weakly positive one, mainly through clients being able to
smooth their consumption and register marginal improvements in
their assets and net worth.8
In other developing countries, many studies of microfinance impact
have also been undertaken. USAID’s AIMS project financed a number
of important evaluations. As with the earliest studies in Bangladesh,
most of these AIMS studies reported reasonably positive impacts from
microfinance.9 In the same vein, a major five-year impact assessment
project, ‘Imp-Act’, found participating MFIs reporting a variety of
direct and indirect positive impacts aecting both client groups and
non-clients.10 Khalily also summarized a number of impact assess-
ments. His conclusion was that even when dierent methodologies
are involved (econometric, descriptive and case study), microfinance
programmes generally report a positive impact.11 Finally, Nathanael
Goldberg has provided a very useful summary of the results obtained
from all of the major impact assessments undertaken to date.12 His
finding was that the majority of impact assessments purport to
demon strate some sort of positive impact. Only a small minority of
these early studies suggested that there was no, or negative, impact
produced by microfinance. Goldberg concluded his overview in a fairly
upbeat fashion, claiming that ‘This review of the literature provides
a wide range of evidence that microfinance programs can increase
incomes and lift families out of poverty.’13
Yet in spite of these seemingly fairly positive results, there are still
those who remain quite unconvinced of the good news that impact
assessments are supposed to be telling us. As noted in Chapter , a
number of high-profile independent studies recently created some-
thing of a media stir by concluding that microfinance had little or
no impact, and in some cases negative impact. Following on from
several years of increasing criticism of microfinance on the margins
of the microfinance industry and in academia, the mainstream media
began to sense a change in the wind.14 Even the World Bank began
Microfinance as poverty trap | 63
to publicly express its doubts as to whether microfinance is really
an eective poverty intervention. The high-profile World Bank
publication Finance for All concluded that ‘More research is needed
to assert whether there is a robust and positive relationship between
the use of credit and household welfare, including moving out of
poverty’ (my italics).15 For an institution that has been quite pivotal
to the rise of the microfinance model, claiming that we don’t know
if the relationship between microfinance and poverty is even posi-
tive, never mind how robust it is, is a pretty radical admission. An
even more explosive media headline was to come in , thanks to
David Roodman and Jonathan Morduch (again), who revisited the
Pitt and Khandker data one more time.16 A sophisticated replication
exercise on the original data this time produced some quite astounding
results; nothing less than the complete overturning of most of the key
positive conclusions. Regarding the headline-grabbing results in the
earlier Pitt and Khandker study, results that were hugely influential
in ensuring the take-up of microfinance as a major poverty reduction
policy, Roodman and Morduch obtained the opposite signs – that
is, their results suggested negative impact. Among other things, this
meant that Muhammad Yunus’s endlessly recycled claim that ‘% of
Grameen borrowers escape poverty every year’ was now deemed to
have been quite inaccurate all along.17
Two important factors ignored by most evaluations As shown
by the important work of Roodman and Morduch, and others, a
growing number of independent analysts and institutions are becom-
ing increasingly sceptical of the veracity of microfinance impact
assessments. One of the main problems here is that almost all impact
evaluators make the key assumption beforehand that ‘microfinance
works’. This then leads impact evaluators to attempt to design an
impact assessment exercise confined to narrow issues that best help
to confirm the original presumption. In particular, the focus tends
to be upon outreach – how many individuals are actually served by
microfinance – and sustainability – is an individual MFI able to keep
itself going without the need for external support? These are both
operational factors and they refer only to the availability of micro-
finance; they do not tell us anything whatsoever about the sustainable
economic and social development impact of the microfinance model.
It would be like assuming that the widespread availability of a par-
ticular drug confirms its applicability as a treatment for the illness it
64 | Four
was designed to treat! The result is that almost all impact assessments
are quite fundamentally and, I would argue, deliberately flawed.18 In
this section I will focus on two critically important impact issues that
continue to be ignored within impact assessments. I refer here to local
‘displacement eects’ and the longer-term impact of client exit/failure.
Let me briefly discuss both important issues in turn.
Displacement effects Displacement eects are a very common factor
aecting microfinance and microenterprise programmes. Displace-
ment eects (also known as ‘spillover’ eects) refer to the jobs and
incomes lost in non-client microenterprises as a result of the entry or
expansion of client microenterprises. Two mechanisms are generally
involved here. First, the entry or expansion of client microenterprises
may be achieved only by a reduction in the local market share pre-
viously enjoyed by incumbent non-client microenterprises (and note
that in most developing countries incumbent microenterprises so dis-
placed are likely to involve just as poor and marginalized individuals
as client microenterprises). Lower sales in non-client microenterprises
obviously translate into lower margins, profits and wages. In addi-
tion, some of the non-client microenterprises will find it impossible
to survive in the now more crowded local market space, and so they
exit the local market (see the next section below). A new coee bar
opened up with the help of a microloan might simply put out of
business the coee bar metres down the road. Second, there are
also likely to be some wider price eects. The additional local sup-
ply arising in new and expanded microenterprises very often causes
a softening in the price of the product or service in question. This
hurts incumbent non-client microenterprises, which have no other
option but to face up to the lower local market price (that is, they
are price-takers). All told, the incumbent non-client microenterprise
will clearly be disadvantaged to some extent – or made poorer if
you will – as a result of the programmed entry or expansion of the
client microenterprise.
It is important to note that, in general, displacement eects are
relatively much less problematic with regard to larger enterprise
structures, such as SMEs. This is because SMEs typically locate a
much higher percentage of their customer base from outside the
immediate locality. So while displacement eects still arise – a new
SME getting started in New Delhi will take some business away
from an incumbent SME operating in Mumbai – the pain inflicted
Microfinance as poverty trap | 65
is generally diused over a wider geographical area than just the
local community. Moreover, much of economic theory holds such a
displacement process in high regard, because it constantly displaces
other less productive enterprises. This is an important industrial
upgrading process captured by Joseph Schumpeter in his notion of
‘creative destruction’.19 So, even if an SME closes down owing to
the establishment of more innovative competition elsewhere in the
region or country, such forms of displacement might have a positive
eciency-enhancing eect at the national economy level. This positive
impact, however, is generally not experienced in the microenterprise
sector. A microenterprise displacing another microenterprise in the
locality will likely mean nothing more ‘transformational’ than one
trader or café or mobile phone time-seller taking business from, or
forcing the closure of, their equally simple counterpart located in the
same street or neighbourhood.
P/W
Q/E
ds1
P1
E1E2
P2
s2
. Simple response to an increase in supply of
microenterprises
A simple supply-and-demand diagram helps to explain the basic
local market dynamics here. Figure . shows the result of an increase
in the local supply of goods and services thanks to the arrival of an
MFI in the locality and its support for new and expanding micro-
enterprises. Demand is typically relatively price inelastic. If the price
of a haircut or a coee or a counterfeit CD goes down, we tend not
to increase our consumption that much. Supply is initially at , but
66 | Four
with microfinance it shifts to . As a result of the increased supply,
prices and self-employment wages fall from to , though total
employment and output may rise marginally from to . The net
overall impact, of course, depends on the strength of the general de-
cline in prices and self-employment wages across the microenterprise
sector, oset by any additional jobs and income created in the new
microenterprises.
Because supposedly additional incomes and jobs in client micro-
enterprises might actually be fully or partially oset by income and
job losses arising in non-client-incumbent microenterprises, a micro-
finance programme might actually have no real positive impact in the
local community whatsoever.20 Crucially, most impact assessments
simply do not capture such eects. This is because the assumption is
made that the clients and the non-clients in any impact assessment are
separate, just as in medical trials when patients are given particular
drugs – the eect on one patient of taking drug A is entirely independ-
ent of the eect on another patient also taking drug A, and on the
control group patient taking the placebo. So displacement eects are
not that important. Impact assessments need not be specially designed
to capture them. But if displacement eects are important – as I will
show below that this is very much the case – then we cannot simply
ignore them. Crucially, they suggest that there is a very powerful ‘fal-
lacy of composition’ flaw inherent in the basic microfinance model.
The microfinance industry is wrongly inferring that something is true
of the whole – microfinance must create additional jobs and incomes
in the community – based on the fact that it is true for part of the
whole – microfinance can create additional jobs and incomes in one
client microenterprise.21
Displacement effects in developing economies? In the developed
economies, displacement eects have long been known to under-
mine, if not fatally compromise, microenterprise development policies
and programmes. The classic example comes from the UK in the
s. As is well known, the Thatcher government came to power
enamoured of the so-called ‘enterprise culture’. Accordingly, rap-
idly growing unemployment in the early s was addressed by a
quasi-microfinance programme – the Enterprise Allowance Scheme
(EAS) – a programme designed to increase the number of the self-
employed and microenterprises coming from the unemployed and
under employed.22 Importantly, too, the EAS had an overarching ideo-
Microfinance as poverty trap | 67
logical purpose, which was to support the microenterprise sector as
the future low-wage, non-unionized employment replacement for
high-wage, unionized forms of employment. But no matter how dear
the EAS was to the ideological project set in train by the Thatcher
government, it could not survive the damagingly high displacement
eects that soon became evident, which meant that almost no net
employment opportunities were being generated in practice.23 The
UK government was reluctantly forced to discontinue the EAS after
less than a decade of operation.
Do such damaging displacement eects also arise in developing
countries? Consider the obvious case of Bangladesh. Recall that
Muhammad Yunus initially expressed no concern for the simple
displacement-type problems I have just outlined. As the quotation I
cite at the head of the chapter indicates, Yunus founded the Grameen
Bank on the basis of his confident belief that microfinance would
work in any conceivable economic situation – poverty within a wealthy
community, or poverty in a generalized poverty situation; it did not
matter. Yunus was quite wrong on this, however. Perhaps nowhere
more so than in his native Bangladesh have the very real absorption
limits associated with microfinance-induced activity been so quickly
exposed. As early as , in fact, Ahmad and Hossain astutely
reported that the seemingly positive initial results with microfinance
in just one Bangladesh village were simply an illusion.24 If scaled
up into a major programme, they argued, it would very quickly be
subject to diminishing returns because ‘the competition among non-
crop producers would increase and the members will need to count
more and more on the markets of their own localities, which might
lead to lower prices and reduction in their income’.25
For sustainable poverty reduction to take place, Ahmad and Hossain
went on, it was necessary (among other things) for sustainable growth
to occur in the local agricultural sector. Steadily growing agricultural
productivity and incomes were first required, which would in turn lead
to a rising level of local demand for the very simple locally produced
and traded goods associated with microfinance. Yet the Grameen Bank
was not helping here. Instead, it was mainly supporting either simple
non-farm activities associated with goods and services that were
already pretty much adequately supplied (for example, shops), or else it
was supporting the most unproductive side of farming activities – that
is, subsistence farms. Ahmad and Hossain therefore felt that a local
upgrading and productivity-raising development trajectory would
68 | Four
actually become a more remote possibility thanks to the arrival of
Grameen Bank and microfinance. Overall, they were forced to con-
clude that ‘The [Grameen Bank] approach of just providing credit and
leaving the loanees on their own cannot therefore be a viable national
antipoverty programme.’26 Pointedly, Quasem later showed that most
local income generated by new microfinance-induced traders was
mainly a transfer of income from those already operating.27 Osmani
also confirmed that increasing microenterprise entry was helping to
push down returns in incumbent microenterprises to below the (then)
cost of borrowing.28 Yunus’s fundamental error in assuming that the
typical local economy in Bangladesh could easily and productively
absorb any number of new microenterprises had been pretty quickly
exposed by his own compatriots.
Notwithstanding the fact that these early studies pointed out seri-
ous flaws in the Grameen Bank model, however, there was no stopping
it. Today, a largely unproductive microfinance-driven scenario is pretty
much what one still sees in Bangladesh. With a small formal sector
(especially the public sector) and a very weak-to-non-existent social
welfare net, most poor individuals in Bangladesh eectively have no
other option but to join the growing throng of micro-entrepreneurs.
There are now, of course, abundant opportunities to tap into micro-
finance should one wish to use it. One can at least hope to come
out as one of the few lucky winners. But the result in most Bangla-
deshi cities is increasingly unfavourable. It is not easy making your
way in a hyper-competitive microcosm of informal sector activity, a
local environment marked out by high rates of microenterprise turn-
over and very low, and declining, financial rewards for most simple
micro enterprise activities. All of the most simple business areas have
already been colonized by swarms of microenterprises, with any initial
income gains made by the ‘first movers’ largely wiped out later on
as the local competition rapidly balloons. An obvious example is
the rickshaw sector. With more than , in operation in Dhaka
alone, and with the returns averaging around a dollar a day for such
backbreaking work,29 this is no longer a sector wherein one can find
an escape from poverty.
Very neatly illustrating the simple and fairly typical microfinance-
driven adverse local dynamics involved today, we can specifically refer
to one of Muhammad Yunus’s own flagship anti-poverty programmes,
GrameenPhone. Begun in , GrameenPhone is a joint venture
company formed by a non-profit member of the Grameen family,
Microfinance as poverty trap | 69
Grameen Telecom, and the Norwegian telecom company Telenor.
Telenor incurred almost no risk, while investing a very small sum
indeed (only $ million) in the establishment of the joint venture.30
The poverty reduction angle was located in the so-called ‘telephone
ladies’, teams of ladies who would access a Grameen Bank microloan
(an average of $31) in order to set themselves up in business with
a mobile pay phone selling airtime on the GrameenPhone network.
The project was a major financial success, breaking even in
and thereafter making spectacular profits. It soon became known in
financial circles as ‘the diamond in Telenor’s portfolio’.32 At the same
time, the project was also declared to be a major poverty reduction
success. It was pretty soon employing an estimated , telephone
ladies in villages across Bangladesh, all supposedly earning enough
to begin to escape poverty.33
The project’s high hopes of serious and sustainable poverty reduc-
tion, however, appeared to be dashed after just a few years. The initial
phase saw generally one or two (well-publicized) telephone ladies
operating in their village. In order to sell as much airtime as possible,
however, GrameenPhone then pushed hard to increase the number
of telephone ladies. With almost zero marginal cost, so long as the
additional telephone ladies facilitated some net marginal increase in
airtime use, and so revenue for GrameenPhone, this made perfectly
sound business sense to GrameenPhone. Importantly, unlike in the
developed economies where sales territory is the crucial variable in
terms of the success of the salesperson, it appears not to have occurred
to anyone in GrameenPhone to give each telephone lady their own
exclusive territory. Thus, where just a couple of years earlier there
had been perhaps a handful of telephone ladies in any one village,
pretty soon most villages in Bangladesh had dozens of telephone
ladies operating alongside each other in ‘telephone streets’. From its
initial plan to peak at , telephone ladies, by more than
, telephone ladies were involved. Naturally, displacement eects
began to bite. If initially (i.e. ) the yearly average income of a
telephone lady was rather ambitiously planned to be somewhere in the
range $–,, by this had plummeted in practice to around
$.34 The poverty reduction angle projected for GrameenPhone quite
quickly began to evaporate. Most telephone ladies were soon forced
into other, often unrelated, business areas in order to survive. ‘The
program is not dead,’ reported Mazharul Hannan, chief of tech-
nical services at Grameen Telecom, ‘but it is no longer a way out of
70 | Four
poverty.’35 In order to avert the damaging publicity of a growing wave
of exits and strikes, GrameenPhone was forced to begin a desperate
search to locate new business areas for the telephone ladies, such as
providing Internet services through their mobile phones.36
While still a hugely profitable business model, particularly for Tele-
nor, for the telephone ladies – supposedly a major focus of the entire
GrameenPhone project – there is now little to be gained from engaging
in such activities.37 As one Grameen Bank loan ocer said, ‘Today,
poor women who go into the phone business stay poor.’38 It appears
that once more we have to assume that the concept of the ‘fallacy of
composition’ was not fully understood, or perhaps simply ignored.
In fact, displacement effects are registered everywhere Mexico
also oers a further very good illustration of the serious problems
arising as a result of displacement eects. As so often is the case in
developing countries, with the formal sector shrinking in Mexico
in the s and s, the default option left for the poor and
unemployed was to move into some form of informal sector micro-
enterprise. The rapid growth in the number of microenterprises in
the poorest communities, however, allied to static or declining local
demand, helped to ensure few net additional jobs, and generally
always falling average incomes across the informal microenterprise
sector.39 Moreover, as Tilly and Kennedy note, it is increasingly not
just in the poorest cities and rural communities that the informal
microenterprise sector is growing completely out of hand, but also
in the rapidly growing cities.40
Just one of the huge problems arising here is that the typical local
economy in Mexico is reacting to the already bursting-at-the-seams
informal sector through downward price adjustments. Prices for most
of the very simple products and services produced in the microenter-
prise sector have been falling as ‘poverty-push’ new entry has been
rising. In addition, lower turnover in individual microenterprises, as
local market demand is shared out among a growing population of
microenterprises, has been precipitating lower margins and incomes.
This is why, following extensive liberalization in the economy from
onwards and an associated wave of new microenterprise entry
involving the newly redundant, we find that poverty levels in the self-
employed microenterprise sector rapidly increased. Even as growth
reappeared in the mid-s, poverty continued to rise in the informal
microenterprise sector.41 In many sectors and right across Mexico,
Microfinance as poverty trap | 71
many poor individuals are hugely angry at the declining margins and
wages, as well as longer working hours, brought about by the un-
remitting inflow of ‘poverty-push’ microenterprises. Violent reaction
has often followed, as was seen recently in the several-million-strong
community of mobile street vendors.42
Equally adverse displacement eects have emerged in South Africa
in recent years. With poverty levels barely changed and unemploy-
ment actually rising since the end of the apartheid system, like their
Mexican counterparts South Africa’s poorest have no other option
but to try to survive as best they can in the informal microenterprise
sector. With few other opportunities, most have been forced to fall
back on simply buying locally in order to sell locally to others equally
poor. Moreover, with many new ‘poverty-push’ entrants in these last
few years, the margins and average incomes of incumbent individual
traders have fallen considerably, especially in the major conurbations.43
Many traders also use a small wooden barrow as the primary mode
of distribution. This is a very unrewarding activity at best, and the
hundreds of thousands of ‘barrow boys’ are some of the very poorest
and most exploited individuals in the whole of South Africa. But
things were made even worse in . One of the ocial responses
to the flow of refugees coming in from crisis-torn Mozambique
and Zimbabwe was microfinance. A local MFI was provided with
addi tional funds to oer the refugees the opportunity to start a little
income-generating project of their own.44 Quite predictably, however,
many of the refugees simply copied what other poor South Africans
were doing to survive, or what they were doing back in their home
country, and so they established their own very simple street trading
or barrow operation. Unfortunately, many of the struggling local
operations run by poor South Africans were quickly displaced. The
returns from such operations began to fall. Just as in Mexico, and
also elsewhere in Africa,45 the stage was set for violent confrontation,
with many ‘barrow boys’ leading a ferocious assault on the refugee
communities.46 Failure on the part of the microfinance industry to
understand the crucial economic and social dynamics that micro-
finance programmes precipitate can often be quite lethal – literally
– for many of those involved.
Finally, the transition economies are also not short of such adverse
economic and social dynamics, though – thankfully – violence has
not yet become a feature. The Serbian economy has been struggling
since to recover from transition to the market economy, multiple
72 | Four
conflicts, political mismanagement, corruption and economic destruc-
tion. A number of UK government-funded surveys were undertaken
in Serbia in the mid-s, in order to assess what development inter-
ventions were needed to address the severe and growing local poverty
and unemployment.47 Naturally, microfinance had been mooted by
many international donor bodies as one of the solutions to rising
poverty in Serbia.48 Rather than endorse microfinance, however, the
study argued against it. This was because it found that most local
microenterprises, and many small enterprises too, were almost ex-
clusively reliant upon local demand, which often made up to –
per cent of their total sales. Further local increases in the number of
microenterprises also targeting local demand would therefore achieve
nothing more than displacing existing microenterprises struggling to
survive. Because of simple displacement eects, there would likely
be no net job creation or additional income generation within the
community thanks to new microenterprises. Accordingly, the report
recommended instead financially supporting mainly SMEs with the
potential to tap into more distant, non-local markets. Whether or not
this was its intention, by accurately highlighting the likely displace-
ment eects of simple microenterprise development, the report added
significant weight to the case against the deployment of microfinance
in Serbia as a job generation and anti-poverty measure.
A growing number of high-profile intergovernment bodies are
now finally beginning to accept the damaging impact of displace-
ment. For example, the Inclusive Cities project, a global coalition of
organizations supporting those in the informal sector, reported severe
displacement impacts in most informal sector activities.49 Following
accelerated entry into many informal occupations, it was forced to
point to increasing impoverishment and declining incomes. Displace-
ment was particularly felt in the street vending sector, everywhere one
of the mainstays for those with no other realistic employment option.
The study found that, ‘Street vendors […] experienced a significant
drop in local con sumer demand. They reported the greatest increase
in compe tition, as greater numbers of people who lost their jobs or
had to supplement incomes turned to vending as a possible source
of income.’
Perhaps the most incisive contribution in the context of displace-
ment, however, is that of Mike Davis. In his important book
Planet of Slums, Davis summed up both the limits to informal sector
microenterprise growth and the debilitating impact of displacement.
Microfinance as poverty trap | 73
He argues that it is a major policy folly to continue blindly encour-
aging expansion ad infinitum in the supply of microenterprises in
developing countries, and especially in the growing slum communities
around the globe. Recall, as Davis does, that the supply of informal
microenterprises in Latin America more than doubled in the s and
s, while poverty and suering have risen almost in tandem. More
microenterprises and the expansion of the informal sector in Latin
America, he argues, are actually associated with precipitating deeper
poverty and suering, not less. Among other things, the optimistic
late-s projections of Hernando De Soto have turned out to be
quite wrong. Similarly in most of sub-Saharan Africa and South-East
Asia. This adverse correlation has transpired, Davis argues, because
‘[the] space for new entrants is provided only by a diminution of per
capita earning capacities and/or by the intensification of labour despite
declining marginal returns’.50 The microfinance-induced entry and
expansion of microenterprises does not raise the total volume of local
business, Davis stresses, so much as redistribute and subdivide the pre-
vailing level of business between new and incumbent microenterprises.
But how can the microfinance industry simply ignore what appear
to be very serious, if not fatal, ‘spillover’ impacts precipitated by
microfinance? The answer is that everywhere in developing countries,
the microfinance industry unquestioningly makes the assumption that
a textbook version of Say’s Law operates at the local level. Say’s Law
basically holds that the unending supply of the simple non-tradable
goods and services that new or expanded microenterprises typically
provide will, thanks to market and price adjustments, automatically
call into existence sucient local demand to absorb such goods
and services. We saw above how adamant Muhammad Yunus was
that the local economy in Bangladesh could productively absorb
any number of microenterprises he managed to help into operation
through the Grameen Bank. In Latin America in the early s,
Hernando De Soto felt just the same. Beginning with Yunus, however,
and quickly followed by De Soto, the microfinance industry was quite
wrongly led towards making the fatal assumption that the typical
local economy in any developing country could elastically stretch to
painlessly accommodate any increase in the microfinance-induced
local output of non-tradable items; ergo there can be no displacement
eects.51 This misunderstanding of one of the most basic concepts
in economics – the ‘fallacy of composition’ – therefore introduced a
quite fundamental flaw into the microfinance model.
74 | Four
Client exit/failure A second important issue almost completely
ignored by the vast majority of impact assessments is that of client
exit or failure, and the associated problem of ‘survivor bias’.52 I define
client failure here as the failure of the business activity originally
financed by a microloan, in contradistinction to the mere exit of
a client from a microfinance programme. In general, most micro-
enterprise programmes encounter extremely high rates of failure.
This is especially the case when, as in most developing countries, the
individuals involved are eectively being forced into entrepreneurship
by poverty (often termed ‘poverty-push’ entrepreneurship), rather
than attracted into entrepreneurship by the possibility of some finan-
cial gain (often termed ‘opportunity/profit-pull’ entrepreneurship).
Internationally respected SME researcher David Storey notes this
when concluding that ‘the single most important fact to be borne
in mind when implementing measures for smaller firms is the high
death rate of such businesses’.53 Very much the same high death-
rate situation in small businesses has been extensively documented
in the USA by Davis, Haltiwanger and Schuh54 and, more recently,
by Scott Shane.55
The most important reason for studying client failure is that it
has the obvious potential to propel many poor individuals into even
deeper poverty than before they attempted their business project.
The problems surrounding failure naturally start with the end of an
income stream derived from a functioning microenterprise. Also lost
will be any additional loans, savings, physical assets and local reputa-
tional capital also invested in the microenterprise. Some individuals,
having failed in their original business activity, will opt to default
on their microloan, seeing the loss of their local reputation and any
collateral they might have advanced as the lesser of two evils. We
also know from the juxtaposition of high repayment rates and rising
failure rates, however, that the poor most often do not default on
their microloan. The poor will, in fact, go to great lengths to repay
any microloan, even though the original business activity for which
the microloan was accessed no longer exists. What we tend to find
overall, as I noted in Chapter , is a number of fallback strategies
that arise to ensure that the microloan is repaid. This sounds very
good indeed for the typical MFI, especially the ‘new wave’ MFI, which
can achieve a high repayment rate irrespective of what happens to
the micro enterprise. But the problem for those interested in poverty
reduction and development is that all of these fallback strategies
Microfinance as poverty trap | 75
have quite disturbing implications for the poverty status of individual
poor clients.
With these important drawbacks to microenterprise development
in mind, one would think that examination of client failure should be
a fairly high priority in any impact assessment attempting to provide
an accurate picture of the longer-term impact of microfinance. But it
is not. This appears to be another serious problem with microfinance
that microfinance advocates deliberately choose to keep quiet about
for fear of undermining the general concept. Just as with displacement
eects, one way to do this is to ensure that impact assessments are
carefully calibrated to avoid any serious consideration of such failure
issues. The result is that the microfinance industry is able to wilfully
build up a further distorted picture of microfinance-driven outcomes.
More charitably, it should be said, it is quite dicult to find those
individuals who have failed with their microenterprise project, and
quantify what happened to them. After failing, many individuals
return to their traditional homes or move abroad in search of work.
And failed clients – when they can be traced – naturally find it dif-
ficult to recount to researchers the humiliation and pain they and
their family experienced when their microenterprise project failed.
It is also socially awkward for researchers, too, who typically much
prefer to interview and publicize the uplifting success stories.
At any rate, by largely focusing upon those individual microenter-
prises that manage to survive, while failing to register the impact of
microfinance upon those that do not, most impact assessments fall
into the trap of ‘survivor bias’. This is the act of making wide-ranging
assumptions based upon an examination of a few, possibly unrepres-
entative, survivors, while simultaneously ignoring the large number
of exits or failures. This leads to some quite erroneous conclusions.
Consider, for example, the case of post-communist Poland in the
s. Poland at this time was plunged into its own ‘shock therapy’
unemployment problem. Just as in the UK in the early s, Poland’s
neoliberal policy-makers and their Western advisers thought they had
the answer to unemployment and poverty in the shape of the micro-
enterprise sector. Indeed, nearly three million new microenterprises
were registered in just a few years after the collapse of communism.
Many analysts portrayed this microenterprise-driven phenomenon to
be the key factor in the country’s rapid post- communist economic
revival.56 Much of the supposed ‘progress’, however, was not quite
what it seemed. First o, a very large number of the new registrations
76 | Four
were simply existing informal sector microenterprises tolerated under
communism, now converting over to a higher level of formality in
order to operate under capitalism.57 More important, however, was
the almost equally high rate of exit. For example, in there
were , new entrants, but oset by , exits. The total
of registered self-employed individuals peaked at per cent of the
total working population as of early . By , however, this
figure was significantly down (to per cent),58 and it continued
to decline thereafter as new entry tailed o and exits continued to
take their toll. All told, as in the similar microenterprise ‘boom-bust’
period in the UK in the s, the net result after a decade or so was
very much less net sustainable employment creation, poverty reduc-
tion and overall positive economic impact than had been excitedly
predicted as the experiment was getting under way. With hindsight,
one might actually say, the Polish microenterprise experiment was
largely a failure.59
There is also much evidence to suggest that this ‘exit’ problem
is also an acute one in developing countries. The first important
remarks on the crux issue of microenterprise failure date back to
the mid-s, to the work of David Hulme and Paul Mosley. Based
on a major data collection exercise involving nearly all of the most
high-profile MFIs around at that time, Hulme and Mosley reported
on the ‘considerable evidence […] gathered during fieldwork that a
minority of borrowers become worse o because of borrowing, that
is credit from a case study institution increased their vulnerability’.60
Hulme and Mosley also go on to provide additional evidence from a
number of countries where failure is an important aspect of the MFIs’
operation. Finding such high failure rates, Hulme and Mosley were led
to conclude that ‘there may well have been significant under-reporting
of credit-induced crisis in most studies of finance for the poor’.61
More recently, Peter Davis has warned about the negative impact
of microenterprise failure in Bangladesh. From his field research in
Bangladesh he reported that62
Ten focus groups (%) identified business losses or failed businesses
as one of the three main causes of decline. Many poor households
earn their livelihoods from small businesses and petty trading. These
ventures usually work on very slim profit margins and are vulnerable
to fluctuating prices, bad debts and cheating. Business losses often
lead to very high levels of indebtedness.
Microfinance as poverty trap | 77
Because they do not factor in the important aspect of microenter-
prise failure, and instead provide only half – the good half – of the
overall economic picture, almost all microfinance impact assessments
are quite seriously flawed. Were Las Vegas casinos to use similar
techniques to assess the poverty impact of gambling – focusing upon
the small number of punters successfully graduating from slots to
blackjack to the high-stakes roulette table, and ignoring the many
more who go home after being relieved of their cash – we would be
led into erroneously concluding that gambling represented a historic
poverty reduction breakthrough! And although Alexander-Tedeschi
and Karlan appeared to recognize the basic methodological error,63
the widespread use of such flawed impact assessment methodologies
nevertheless continued unabated. In short, client failure is potentially
a problem of some considerable magnitude, yet it is one that remains
mostly unregistered by the microfinance industry.
It has long been held of critical importance in public policy
evalu ation circles for the gains from a particular public policy to
be balanced o against the losses.64 In the context of microfinance
programmes, I have argued above, this means an impact assessment
simply must compare the overall impact (gains) made by clients
and the survivors supported by microfinance, set against the overall
impact (losses) incurred by the non-clients and the failures. If, for
example, the income and employment gains registered by the (widely
publicized) clients/survivors are actually swamped by the losses in-
curred by the (largely ignored) non-clients/failures, then microfinance
is very clearly destroying the economic and social fabric rather than
repairing or strengthening it. This would be very useful informa-
tion to have to hand. We could perhaps refine and redesign aspects
of microfinance programmes. (For example, microfinance could be
targeted mainly at those existing microenterprises seeking to invest
in their business in order to cut costs; that is, without any require-
ment for an expanded customer base to emerge. This would at least
help minimize damaging displacement and exit impacts registered
in the non-client community.) But even with such information, I
would argue that we still remain unclear as to precisely what impact
assess ments are really demonstrating with regard to microfinance.
We actually need some better way of assessing the longer-run impact
that microfinance is having upon the typical local economy and its
functioning.
78 | Four
Microfinance and key development triggers
Sustainable economic development is a complex process involving
the interplay of institutions, governments and market processes. We
do not know the exact policy recipe that best guarantees sustainable
economic and social development – if, indeed, there is one. But in
recent years we have begun to locate many of the most important and
universal development ‘trigger’ issues. Here the so-called ‘new develop-
ment economics’, a field of enquiry that emphasizes the importance of
institutions and market imperfections,65 has been particularly fruitful
in supplying important insights and advances of relevance to local
economic development policy and practice. One way of exploring the
real impact of microfinance, then, is by reference to its eect upon the
key development ‘trigger’ issues that we know underpin sustainable
local economic and social development. Accordingly, in the rest of
this chapter, I will foreground some of these core development ‘trig-
ger’ issues, and I will try to explain how the microfinance model has
impacted upon them to date in many of the supposedly ‘best practice’
country and regional examples of microfinance.
Microfinance and economies of scale One of the most important
engines driving forward sustainable economic development is the
ability of the enterprise sector to reap economies of scale. Experience
from countries such as Italy after , South Korea and Taiwan from
the s onwards, and most recently China since the early s,
shows how crucially important it is to invest in small enterprise units
(including in agriculture) that can rapidly achieve minimum ecient
scale of operations. A sucient level of initial scale and investment is
paramount to a microenterprise’s survival and eventual growth, and
thus also to it materially contributing to a local sustainable develop-
ment dynamic and to poverty reduction. Scale economies ensure a
low-cost operation and, eventually, the crucial ability to realize a
reinvestible surplus. By definition, of course, microfinance produces
microenterprises – that is, enterprises which are very small and so
do not generally (at least initially) achieve minimum ecient scale.
Nonetheless, it is vitally important to factor in the scale economies
issue because otherwise suboptimal development trajectories are a
real possibility, as I will show now.
Consider the example of India. Despite its rapid growth in recent
years, India still has huge development and poverty-related problems.
One of the most pressing of its development problems is the need to
Microfinance as poverty trap | 79
fill the so-called ‘missing middle’ that exists between, on the one hand,
the small number of large internationally well-known computing and
manufacturing companies and, on the other hand, the hundreds of
millions of ‘survivalist’ informal microenterprises.66 Put simply, India
has so far failed to nurture an innovative and growth-oriented SME
sector, one that would be capable not just of providing millions
of desperately sought-after formal sector jobs in growth-oriented
markets, but also of acting as an ecient subcontracting and supplier
base for the large-firm sector. What accounts for this failure?
One reason stretching back at least two decades is that India’s
financial sector and rising entrepreneurial class has increasingly chosen
to focus its attention upon the microenterprise sector. In the s a
raft of development-focused MFIs emerged to begin to intermediate
a growing proportion of India’s valuable financial resources (that is,
its savings and remittances) back into the informal microenterprise
sector. Adding to this supply of microfinance was a new generation
of entrepreneur-owned MFIs, which began to emerge in large numbers
from around onwards. These MFIs have little concern for sus-
tainable local development, being far more interested in maximizing
profits and shareholder value through making loans to whichever
microenterprises can support their high interest rates and short re-
payment period. Their focus is therefore upon simple high-profit and
low-risk household microloans.67 Finally, caught up in the celebratory
atmosphere surrounding microfinance and its supposed ability to ‘help
the poor’, the Indian government has mandated India’s biggest com-
mercial banks to also expand their microfinance activities, especially
through the networks of self-help groups (SHGs). Both state banks
and privately owned banks are under such pressure.
As Aneel Karnarni convincingly argues, however, this financial
sector trajectory represents a serious development setback for India.
India’s ‘missing middle’ is simply not being addressed. The hubbub
created by the activity at the ‘bottom of the pyramid’ cannot disguise
the fact that it is largely a weak force for the needed change in India
compared to a dynamic and growing SME sector. He concludes that
the growing focus on microfinance and microenterprises is quite
dramatically undermining the productivity and overall eciency of
India’s economy. ‘The average firm size in India is less than one-tenth
the size of comparable firms in other emerging economies,’ Karnarni
points out,68 and so ‘The emphasis on microcredit and the creation
of microenterprises will only make this problem worse.’
80 | Four
But it is probably in relation to the agricultural sector where the
lack of understanding of scale economies has proved to be the most
destructive scale-related outcome of microfinance. The microfinance
industry has long mooted that microfinance has an important role
to play in agriculture. The common justification has been that it
addresses the need to boost small-farm production destined for home
consumption and the local market. Many of the Grameen Bank’s first
clients were, after all, accessing microcredits to undertake simple rice
husking, milk cow rearing and chicken farming. In addition, micro-
finance has been slated to provide the basic financial resources and
productive capacity needed to gradually construct sustainable local
agricultural supply chains. In awarding the Conrad N. Hilton
Humanitarian Prize to BRAC, which, alongside the Grameen Bank,
is one of the most important MFIs in Bangladesh and in the world,
the award committee neatly summed up much of what is widely
assumed as possible thanks to microfinance:69
microfinance, the indispensable multiplier. Money to pay for a
cow. Fresh milk and something wondrous called ‘income’. The cow
became a dairy, then a milk distribution business. And the income
went back to the village. The money became seeds, then crops. And
the income went back to the village. And it became a school for
non-formal education, a boat for a fisherman, a house, a university.
The emerging evidence seems to suggest, however, that this optim-
ism is wildly misplaced. We need to recognize, first, that in both the
developed and the developing countries, the most productively and
socially ecient agricultural production structures are small family
farms.70 Small family farms are farms that essentially depend upon
family and local labour, alongside a minimum/sucient amount of
capital investment, land and/or livestock to reach minimum ecient
scale of operations. Alongside feeding the family itself, a sizeable
percentage of total production is destined for the local market. As is
increasingly coming to be understood, small family farms are more
likely to maximize the potential to adopt important techno logies
and practices that create rural employment opportunities, raise agri-
cultural productivity, relocalize the consumption of food, address
food security issues, and all without damaging nature’s goods and
services.71 As Norberg-Hodge, Merrifield and Gorelick emphasize,72
Study after study carried out in many locations all over the world
Microfinance as poverty trap | 81
show that small-scale, diversified agricultural systems have a higher
total output per unit of land than large mono-cultures. The higher
productivity of small farms is all the more remarkable in light of
the fact that large landholders control most of the best land, while
smallholders – particularly in the South – have been pushed to more
marginal plots.
As just suggested, large-scale mono-crop agriculture is quite unpro-
ductive on many fronts. In fact, in many cases it largely depends upon
government subsidies to continue. Some types of large-scale private
agriculture in developing countries are highly financially profitable,
however. But the problem here is that such plantation-type farms most
often fail to oer any real sustainable economic and social return
to the local community. For example, little meaningful or well-paid
employment is produced thanks to extensive mechanization, while the
financial returns are generally sucked up entirely by the wealthy land-
owner. The increasingly routine coexistence of successful plantation-
style agricultural projects and endemic local/regional poverty shows
the serious downside to this model.73 Nor is large-scale socialized
farming much of an answer here, as the poor agricultural performance
of many former Soviet ‘kolkoz’ and ‘sovkoz’ demonstrate.
More importantly, a strategy of promoting agricultural activity
that is centred on the tiniest of subsistence farms also cannot hope to
substantively address the crucial economic, social and environmental
issues currently facing developing countries today. While additional
outputs from subsistence-type operations are, of course, useful to
the individual/family, the fact remains that the very smallest farms
have strict limitations in terms of being able to adequately feed the
non-farm population. Thanks to the perpetual subdivision of land
that takes place through inheritance, we can see the problem in many
parts of Africa, Asia and Latin America today. The tiny plots of
land that dominate in many parts of Africa, for example, are often
unsuitable for even the very simplest of mechanization and cannot
justify capital spending on such important inputs as irrigation, and
it is unrealistic to expect significant economies of scale on both the
purchasing side (seeds and fertilizer are very expensive per unit when
bought in small quantities) and on any eventual sale of the surplus
to market (taking just a few kilograms of produce to market is
unrealistic – commercial buyers specify a minimum amount they are
willing to purchase, etc.).
82 | Four
The economically, socially and ecologically optimum agricultural
sector and rural financial policy today, then, is to focus support
upon small family farming units that have reached minimum ecient
scale. The crux problem here, however, is that microfinance is quite
unsuitable for such small family farms. Nothing much can be done
with small amounts of credit at high interest rates and over short
repayment periods. Moreover, the higher risk involved in the more
focused agricultural activities in a semi-professional family farm
deters an MFI from seeking out such clients in the first place.
Those working in the tiniest of subsistence farms, however, often
have much less resistance to working with microfinance. Often they
simply don’t appreciate the depth of the potential problems. Many
simply have an urgent need for cash to keep going, and generally have
nowhere else to go.74 At the same time, the tiniest subsistence farms
have actually been deliberately targeted by MFIs to become their
agricultural client base. Put simply, so long as subsistence farmers
can largely be made to repay their microloan through one of their
likely income streams (or made to sell their land or other assets in
the event of diculties), it is not in the direct interest of the MFI to
voluntarily stay away from such clients. In fact, given the ubiquity of
subsistence farmers in many settings and the growing competition for
clients everywhere, many MFIs eagerly look to this market segment
for new clients. In short, the microfinance sector is everywhere in
developing and transition countries managing to find an entry route
into the subsistence farming sector.
What, then, is the overall result of the microfinance sector’s move
into subsistence farming? Unfortunately, in both developing and trans-
ition countries, it is not good at all. In fact, the growing tendency
towards MFIs supporting subsistence farms at least partly accounts
for why we find the dangerous primitivization and disruption of the
agricultural sector worldwide. India is once more a good example
of all that is wrong with a microfinance-driven approach to agricul-
tural sector development. A country with a very large population of
subsistence farms, India has around million people living o the
land. About per cent of these small-scale farmers own less than
two hectares. The proportion of marginal landholders increased
from nearly per cent in / to per cent in , and they
work only per cent of the land.75 Costs have increased on these
subsistence farms, and the financial returns are inadequate.
One would be right to suppose that this marginalized sector
Microfinance as poverty trap | 83
therefore requires external state support to upgrade technology and
scale up, no less than European and US agriculture required support
to scale up and break out of its subsistence origins.76 But in India,
thanks to the gradual marketization of the Indian economy and
society in recent years, state support for such an important eort has
declined precipitately. Investment in the rural sector is now around
per cent of what it was in .77 The previous system of special
credit for farmers was phased out after , and bank lending to
agriculture has declined. In place of state priority lending came,
among other things, rafts of commercialized ‘new wave’ MFIs and
SHGs financed by loans from the commercial banks. Commercial
bank credit to MFIs received a major boost in when ICICI
Bank began to develop its so-called ‘partnership model’. This was a
way for ICICI to massively and quickly increase its lending via MFIs,
which provide loan origination, monitoring and collecting services
for a fee, but the loan stays on the books of ICICI.78 The average
loan size oered by India’s MFIs was reported in to be no more
than ,–, rupees ($–) with a maturity of one year,79 while
the average loan size in India’s large number of SHGs is not much
higher, reported in to be around , rupees ($).80 In other
words, both financial oers are pretty much unsuitable for anything
other than the most primitive of agricultural activity on subsistence
farming plots. In short, therefore, we find that while India’s small
farms began to find it dicult to access aordable credit from
onwards, India’s tiniest subsistence farms were soon being bowled
over with oers of microcredit.
By all accounts, however, the profit-driven channelling of large
quantities of microfinance to tiny subsistence farming units, most of
which are not equipped to deal with it, has precipitated a disaster. It
soon became apparent that the increased individual returns enjoyed
by India’s subsistence farms were simply too tiny and too insecure
to justify engagement with commercial microfinance. The eventual
result was the entrapment of several tens of millions of the very
smallest subsistence farms in a vicious downward cycle of depend-
ency and growing microdebt. In , for example, it was estimated
that fully half of the small farmers in India were in serious debt, the
incidence of debt higher in the main agricultural states. Quite predict-
ably, the highest figure – some per cent of farmers – was found
in microfinance-saturated Andhra Pradesh state.81 Little additional
agricultural output was actually secured thanks to this expansion
84 | Four
of microfinance. In fact, most farms in serious debt ground to a
halt. Among other things, this was thanks to the , farmer
suicides registered in India since , one of the most grotesque
statistics associ ated with the growing entry of microfinance into the
agricultural sector.82 Many analysts blamed the government of India
for allowing such an obvious microfinance ‘oversupply’ situation to
arise. As The Times of India reported in relation to the rising number
of suicides in rural communities, ‘Having been in the business of
creating self-help groups and promoting microcredit institutions, the
government cannot absolve itself of responsibility.’83 With so many
tiny subsistence farms failing, while small family farms were increas-
ingly unable to access capital on aordable terms and maturities, it
was not at all surprising that rural incomes fell by per cent in
Andhra Pradesh in the decade after .84
The massive increase in the amount of microfinance since has
also been of little help to Mexico’s peasant farmers (campesinos), who
still constitute the mainstay of the country’s agricultural sector. Since
the passing of NAFTA (North American Free Trade Agreement) in
, most small Mexican farms have had a very dicult time remain-
ing in operation. Immediately after NAFTA, subsidized US-produced
corn (maize) began flowing freely into Mexico, a development that
immediately began to negatively aect the millions of Mexico’s small
producers of corn. One possible way for the farmers to counter-attack
was to invest in order to expand and diversify. But the harsh reality
since NAFTA is that aordable finance for small farmers has become
almost non-existent.85
Instead, rapidly growing access to ‘new wave’ microfinance from
the s onwards was quickly mooted as the answer. But because
most small farmers found that it was impossible to repay the ultra-
high interest rates demanded by Mexico’s MFIs, microfinance was
of no real use to them. They therefore remained without any real
opportunity to access credit. On the other hand, the very tiniest of
subsistence farms were now oered as much financial support as
they could handle, yet (as in India) these were precisely the farms
with almost no real productivity growth or sustainable development
potential. From a sustainable-development point of view, the wrong
clients were getting the support. The result was that agricultural
productivity remained pitifully low in Mexico, and the agricultural
sector stagnated. As the World Bank warned in in A Study
of Rural Poverty in Mexico, ‘An important factor explaining low
Microfinance as poverty trap | 85
productivity is lack of working capital, which may in turn be due
to the credit restrictions small farmers face that prevent them from
using optimum quantities of inputs’ (my italics).86 Family farms
possessing some potential to commercialize and to make inroads
into local supermarket supply chains found that they too could do
nothing meaningful with microfinance, opening the door for other
US agricultural exports to Mexico. Mexico has become a major net
food importer (as recently as it was fully food self-sucient). So,
except for a very small minority able to export,87 consolida ting and
expanding the most productive small farms in Mexico has become
an almost impossible task. Thanks to the overarching shift towards
micro finance starting in the mid-s, Mexico’s agriculture sec-
tor has largely been helped to primitivize and stagnate, rather than
flourish.
In Africa, too, the agricultural development impact of microfinance
has been problematic. Microfinance industry advocates, such as the
US-based Grameen Foundation’s Alex Counts, still cling to the idea
that the rapidly rising availability of microfinance will eventually
produce some positive impact.88 But because they misunderstand
the requirements of sustainable agriculture, recommendations that
microfinance be allowed even more of an opportunity to resolve the
agricultural problem in Africa instead only add to the burden placed
on Africa’s poor farming communities. This is true especially with
regard to its unpaid women, as emphasized by the work of Ambreena
Manji I referred to in Chapter .
Consider one of the countries seeing a major improvement in
agricultural productivity in – Malawi – where a government
programme was introduced to provide subsidized fertilizer. Take-up
of the fertilizer (and also better-quality seeds) was hitherto weak on
account of the high prices of such items.89 Such important inputs
could have been quite easily purchased in Malawi prior to
using a microloan, however, as many indeed recommended. But such
important inputs were not purchased because of the high cost of
microcredit. With very high interest rates, and in spite of the general
food shortage conditions, the purchase of fertilizer using microcredit
would have tipped the small farm into loss-making territory. So, rather
than risk losing their remaining asset (their land) by defaulting on
any microloan, the poor farmers just carried on tilling away as best
they could.
In Kenya the availability of microfinance has massively increased
86 | Four
in recent years, but the end result still remains very disappointing.
Once again, the important small-farm sector has largely eschewed
microfinance, because it was seen as far too expensive. Anyway, small
farms are a risky proposition, and so avoided by MFIs in the first
place. So the rising volume of microcredit in Kenya is being chan-
nelled elsewhere. Mostly it has gone into tiny subsistence farms and
simple trade-based activities, both of which are unlikely to contribute
to long-term growth and development. As Njoroge reports,90 ‘Credit
constraints are frequently experienced by small holder farmers. In
Kenya, the second-hand clothes trader is surer of accessing a loan
than the rural farmer. Both businesses have dierent cash flows and
microfinance business model favours one over the other.’
The situation seems to be repeating itself all across Africa. As
Ehigiamusoe writes in African Agriculture,91 ‘Current trends in micro-
finance practice reveal the same neglect of agriculture. The proportion
of the loan portfolios of microfinance institutions to farmers is insig-
nificant. From Uganda through Côte d’Ivoire to Nigeria, microfinance
institutions and banks pay little attention to agricultural financing.’
Interestingly, the World Bank neatly summarizes the reason why
linking microfinance to agriculture is dicult:92
Farm enterprises are rarely able to benefit as immediately and deeply
from the most common techniques of sustainable microfinance as
are small urban traders. This diculty arises not only because of
the short-term and progressive nature of the lending relationship
but also because the relatively high break-even interest rates […]
that have to be charged for sustainable microfinance are often out of
line with the rates of return that can be achieved in most of African
farming today.
Overall, two crucial points stand out in Africa. First, most of
the microfinance mobilized across the continent appears not to have
been recycled back into the crucial agriculture sector, but into petty
trading. Africa is becoming trapped as a continent of petty traders
and nothing much else. Second, where microfinance has been made
available for agricultural sector purposes in Africa, it has been largely
channelled into the tiniest and least productive of subsistence farms,
rather than into small family farms with growth potential. Good
intentions and some rare good examples aside, the entry of micro-
finance into African agriculture has generally only contributed to its
further primitivization and overall weakness.
Microfinance as poverty trap | 87
Similar scale-related problems are common in the transition econ-
omies too. Consider, first, the results of a general project evaluation
undertaken in Croatia by a major international consulting company.93
The task was to assess the impact of the small amounts of capital
disbursed to returnees and refugees as part of a ‘start-up’ package
of support in an agricultural region heavily aected by conflict. The
conclusion was that no sustainable development impact was realized.
This conclusion was arrived at because it was found that none of
the recipients could use the financial support provided to establish
any sort of a sustainable agricultural enterprise. Instead, individual
recipients were able to undertake only simple activities commensurate
with the tiny sums of money allocated to them. This, the evaluation
argued,94 simply ‘committed the village to remaining at a level of
subsistence and denied the opportunity of building a farming com-
munity with complementarity between the farming activities’. The
credits provided were ‘too small, with too short repayment periods,
and thus inadequate for longer term investment in farm businesses
and buildings’.
This is a pretty damning picture, perfectly illustrating the general
unsuitability of microfinance to agricultural activities. But do we
find the same result when we look a little deeper into an individual
agricultural sector in Croatia? The important dairy sector is the one
obvious example to look at. With plenty of good-quality pastureland,
an excellent climate, a plentiful water supply, and solid local demand
for processed milk products, the sustainable recovery of the dairy sec-
tor was an obvious development and rural poverty reduction priority
for the Croatian government in the aftermath of the Yugoslav civil
war. It was also clear to both Croatia’s and international agricultural
specialists what had to be done to facilitate the process. For example,
a major analysis of the dairy sector in by agricultural experts
associated with the Agripolicy project concluded that,95
… as far as the economics and development of milk production are
concerned, Croatia lags far behind the EU Member States. Most
Croatian milk is produced on family farms and that production is
expensive and insucient to meet the needs of the dairy industry.
There are a large number of small farms (. cows per farm on aver-
age) with poor production capacities, , of the farms producing
only , litres each per year.
As the Agripolicy expert group saw it,96 the crucial task for the
88 | Four
Croatian government was to ensure that ‘The farms which are not
market oriented (presently almost half of all milk farms) […] dis-
appear while bigger farms with modern technology […] develop.’
Bearing in mind the need to coordinate policy across all agricultural
sectors, the Croatian government was also implored to ensure that
‘Agri cultural policy initiatives should encourage only those pro-
grammes which will ensure the long term survival of this sector in
a competitive market and/or those programmes which ensure some
desirable social benefits.’ The core recommendation provided by the
Agripolicy team, as well as by many other specialized studies an-
alysing the dairy industry, was above all for the country’s scarce
financial and technical resources to be used to rationalize the sector
on the basis of scale. In other words, for an ecient dairy sector to
emerge in Croatia, and for scarce financial and other resources to
be used eectively, the smallest dairy producers should be strongly
encouraged to quickly exit the market.
Since microfinance seems unlikely to be of any substantive use to a
farm determined to upgrade operations and meet a minimum scale of
operations, one might expect that MFIs in Croatia would be unwill-
ing to engage with the dairy sector. Not so. As my own work with
Dejan Sinković at the University of Juraj Dobrila Pula found,97 the
operations of one of the three MFIs operating in Croatia (DEMOS)
were closely focused upon engaging with dairy operations. The focus,
however, was upon supporting subsistence farms possessing one or
two cows and requiring an additional cow in order to attempt to
sell a little extra raw milk into the local ‘green market’, and/or to
the small number of local processors. As predicted, however, most
of these tiny dairy farming units were simply unable to survive at
such low levels of output. Most ran into trouble not long after ac-
cessing their microloan, and it was only because they had been able
to tap into Croatian government subsidy payments that they could
repay their microloan. The microfinance-driven increase in the local
supply of milk also contributed to reduced local raw milk prices,
thus cancelling out much of the planned additional income boost
to the MFI’s clients. Non-clients in the dairy sector were none too
happy either, of course, seeing their already minimal incomes from
raw milk production falling as well. It also didn’t help that the two
main dairy processors opportunistically took advantage of the local
oversupply. While initially agreeing to oer supply contracts to many
of the MFI’s clients, they nevertheless soon began to weed out those
Microfinance as poverty trap | 89
dairy units operating at less than minimum ecient scale (at the end
of this meant litres per day). Naturally, this mainly involved
the MFI’s hapless clients.
Importantly, however, repayment of the original microloan was
still possible. First, this was thanks to access to Croatian govern-
ment subsidies on ‘three cow and above’ farms, a factor that the
MFI had known about beforehand (even oering some clients help
to fill in the relevant forms!). Second, some clients later sold the
cow(s) purchased with the microloan and repaid that way, thus ending
their microfinance-supported income-generating project completely.
Finally, some clients liquidated other family assets in order to repay
the microloan.
In other words, we came to some pretty negative conclusions.
The MFI was clearly keen to develop a microloan portfolio in the
dairy sector. But this was not because of the development or poverty
reduction potential, but mainly because it knew that repayment could
eventually be secured by many factors other than the success of the
individual dairy unit. All in all, while the MFI achieved its overarching
goal – its own survival – the impact on the local community was quite
negative. Most of the farmers who accessed microloans were worse
o, the crucial dairy sector’s overall growth and sustainability goals
were manifestly compromised, while Croatian government subsidy
payments aimed (among other things) at creating an ecient and sus-
tainable dairy sector were eectively used to keep the MFI afloat.
Neighbouring Bosnia has also suered exactly the same problems
in the agricultural sector as Croatia, with the microfinance-driven
prolifera tion of tiny inecient producers quite eectively holding
back the establishment of an ecient agricultural sector. Among
other things, the necessary scale economies that could commercially
justify the deployment of ‘best practice’ technologies still remain
a rarity in the country.98 Nearly half of the population are small-
holders working their tiny plots of land, yet imports of fresh and
processed foods into Bosnia remain significant.99 Helping to explain
matters is Chris toplos,100 who found that MFIs in Bosnia prefer to
work withagricultural projects composed of a number of income-
generating agricultural activities, rather than just the one. The reason
for this was that no matter what happens to the particular agricultural
project established with the microloan, it could be repaid from income
arising from other activities on the family farm. The alternative for
the MFI would be support for an agricultural project that was based
90 | Four
on full-time potentially sustainable farming activities, but where there
would be no alternative income source to repay the microloan in the
event of the project getting into diculty. Delinking the loan payment
from loan use in this manner is actually very common. It is even
recommended as ‘good practice’ for the MFI,101 because the priority
within the ‘new wave’ microfinance model is always and everywhere
the financial survival of the MFI. This recommendation appears to
hold, moreover, even if this means disadvantaging the local economy
and the local agricultural sector. Even in the ‘best case’ scenario, MFIs
will still largely end up supporting only agricultural projects even more
likely than ever to be below minimum ecient scale, and so those
projects that are even more likely to be unproductive and inecient.
The end result of all this microfinance activity in the agricul-
tural sector is inevitably support for a structure of part-time and
below-minimum-ecient-scale agricultural units, which eectively
pre ordains a country’s failure to establish a sustainable, competitive
and growth-oriented agricultural sector. Put bluntly, an MFI can
clearly succeed with such tactics and become financially sustainable,
but the local agricultural sector is destroyed in the process. The
MFI then becomes a ‘cathedral’ of financial success in a desert of
rural poverty that it has itself been instrumental in creating. As even
long-time microfinance advocate Malcolm Harper concedes, the ‘too
expensive and too inflexible’ terms and conditions involved in micro-
finance are simply unsuited to agriculture.102 All the while, the most
growth-oriented and productive family farms are eectively ‘starved’
of the financial help they urgently need. The collective organizations
that have a track record of organizing subsistence farms in order to
achieve ‘collective eciency’,103 through such as agricultural coopera-
tives, also go without funding. In the context of the two absolutely
paramount considerations in developing countries today – sustainable
rural jobs growth and local food security – microfinance is a risky, if
not openly dangerous, intervention.
Summing up, by refusing to factor in the crucial issue of scale, the
microfinance industry is responsible for channelling large amounts
of scarce financial resources to many millions of individual micro-
enterprises and subsistence agricultural operations that have almost
no real growth or development potential. Eectively losing out are
those farm and non-farm units with the potential to realize far higher
productivity and social gains. All told, the focus on the tiniest of
microenterprises and subsistence farms amounts to nothing less than
Microfinance as poverty trap | 91
building a ‘house of cards’. There is therefore a huge downside and
opportunity cost here to what Thomas Dichter has called ‘the micro-
credit paradox’, a situation where ‘the poorest people can do little
productive with the credit, and the ones who can do the most with
it are those who don’t really need microcredit, but larger amounts
with dierent (often longer) credit terms’.104
Microfinance and informalization The ‘discovery’ of the informal
sector in the early s provided huge impetus behind the micro-
finance concept. The informal sector was thereafter validated as an
important aspect of the local economy in developing countries, a
sector that needed to be promoted as much as possible. By placing
itself at the service of the informal sector, microfinance was quickly
portrayed as a major development intervention too. Studies right
across developing countries show that the overwhelming majority
of an MFI’s clients are informal sector microenterprises. If it were
otherwise, and if working with the informal sector were for some
reason disallowed, then microfinance would probably cease to exist
in a matter of months. Intentionally or otherwise, microfinance is
thus intimately associated with the legitimization and support for the
informal sector everywhere across the globe. But is this microfinance-
driven informalization trajectory actually beneficial?
Of late the role of the informal sector has increasingly been reas-
sessed in terms of its contribution to sustainable development. Partly
this change of heart has been precipitated by the rather obvious fact
that the informal sector has massively expanded in the developing
economies since the early s, and in the transition economies
after , yet this development is manifestly not causally associated
with sustainable economic and social development anywhere. Quite
the opposite, in fact. The creeping informalization of the economy
in both developing and transition countries is seen as responsible for
a great many antisocial developments. It is unequivocally associated
with the delegitimization of legal process, it has undermined respect
for the tax system, it has sanctioned a casual approach towards health
and safety and environmental regulations, and it has undermined the
ability of democratically mandated governments to prohibit sharp
business practices. All of these developments undermine social capital
too, which, among other things, is also an important precondition
for business investment. Increasingly, a business either has to travel
the ‘low road’ practices of the rapidly expanding informal sector,
92 | Four
or it is forced under. Worse, other more productive enterprises (i.e.
SMEs) are also ‘crowded out’ by the informal sector. As management
consultants McKinsey report,105 ‘By avoiding taxes and regulatory
obligations, informal companies gain a substantial cost advantage
that allows them to stay in business despite their small scale and
low productivity. This prevents more productive, formal companies
from gaining market share. The result is slower economic growth
and job creation.’
Also, consider further why it is that business elites are often so
supportive of microfinance and the microenterprises that they help
create. This support might not arise because of any burning interest in
poverty reduction, but because there are important economic benefits
to the big-business sector. First, microenterprises indirectly support
the movement to a much more ‘flexibilized’ local labour market, which
will mean lower wage costs. With most developing economies experi-
encing a (sometimes vast) labour surplus, and with large numbers of
informal microenterprises one of the typical ‘poverty-push’ responses
to such conditions, the resulting heightened competition and des-
peration to survive generally lead to falling wages and deteriorating
working conditions.106 If the informal sector alternative becomes
much less attractive as an employment option compared to the formal
sector, it then becomes much easier for the formal sector business to
enforce low(er) pay in its own operations. Second, microenterprise
development directly supports the movement towards a much more
compliant and much less costly raft of informal, non-unionized local
supply chain partners, many of which are often also outside the tax
system. By opportunistically dropping their formal SME suppliers and
engaging instead with informal lower-cost microenterprise suppliers,
large firms are able to drastically cut their own labour costs, tax
bill and social responsibilities.107 On both counts, therefore, greater
informality at the bottom may thus help to further the commercial
interests of large firms at the top. As should be clear, however, both
these processes of informalization are also likely to raise the overall
level of poverty, inequality and insecurity aecting the wider local
community.
Informality is also seen as a very real threat to social peace right
across the globe, especially in post-conflict zones, mega-city slums
and areas prone to inter-ethnic strife. This is because, as Mike Davis
puts it,108
Microfinance as poverty trap | 93
Those engaged in informal sector competition under conditions of
infinite labour supply usually stop short of a total war of all against
all: conflict, instead, is usually transmuted into ethnoreligious or
racial violence … the informal sector, in the absence of enforced
labour rights, is a semi-feudal realm of kickbacks, bribes, tribal
loyalties, and ethnic exclusion … the rise of the unprotected infor-
mal sector has too frequently gone hand in hand with exacerbated
ethnoreligious dierentiation and sectarian violence.
Put simply, the informal sector simply does not possess the sort of
‘transformational power’ widely claimed for it by Hernando De Soto
and others. On the contrary, the unlimited expansion of the informal
sector, and thus brutal and limitless competition within the local
economy, is the most unlikely of precursors to increased investment.
Even if one leaves aside the moral dimension, there are precious few
examples where the increasing brutalization of poor individuals and
the intensification of their day-to-day workload and suering have
successfully precipitated sustainable economic and social develop-
ment outcomes. As Davis is forced to conclude,109 ‘DeSotan slogans
simply grease the skids to a Hobbesian hell’. These severe downsides
to informalization account for why most developing and transition
countries today are now desperately trying to ‘turn back the tide’
and, through a variety of state and non-state interventions, rein in
their oversized informal sectors.110 Extending the informal sector with
microfinance has thus come at a not inconsiderable price.
Microfinance and deindustrialization A major critique of neoliberal
policies is associated with institutional economics and the careful
study of historical development trajectories. Economists such as Ha-
Joon Chang, Alice Amsden, Robert Wade and others have carefully
charted the largely hidden history of Western capitalism and its rise
to industrial dominance. These authors demonstrate how decisive
industrial policies were to the ultimate success that today’s developed
countries achieved in the nineteenth and early part of the twentieth
centuries, as well as to the rapid progress made by the East Asian
economies since the s.
One of the leading lights in this exciting new field of enquiry,
Erik Reinert,111 likens neoliberal policy to the Morgenthau Plan being
lined up for post-war Germany in . The Morgenthau Plan was
designed by the wartime US government to deindustrialize post-war
94 | Four
Germany, with the aim of turning a previously mighty industrial
power into a primitive and poor agricultural country that could
never again challenge world peace. This was the price Germany was
expected to pay for its role in initiating the Second World War. The
idea was to obliterate all but the simplest and smallest enterprises with
little industrial development potential, backed up by a prohibition
on industrial research. The plan was quickly abandoned, however,
when it became clear that an economically successful Germany was
required to act as a buer to the possible expansion of communist
ideas emanating from the Soviet Union. Without this policy U-turn,
Germany was facing a future with a seriously stunted industrial
sector and, as intended, virtually no possibility of developing as an
industrial nation, or of making a real dent in the horrific level of
post-war poverty.
Instead, the victorious allies allowed the new post-war government
to introduce a radically dierent economic policy aimed at kick-
starting the country’s industrial renaissance. With help coming from
Marshall Plan funds, the new West German government introduced
a range of financial packages to support ‘bottom-up’ industrial de-
velopment and technology transfer in microenterprises and SMEs,
special financial programmes for new technology-intensive enterprises,
and the establishment of numerous subsidized longer-term business
loan schemes through the regional state banks (Landesbanken). Very
quickly, Germany’s microenterprise and small industrial enterprise
sector was reborn, and it soon began to thrive.112 The medium-sized
enterprise sector (Mittelstand) eectively became the core engine driv-
ing rapid post-war growth. In fact, the West German state’s concern
to promote the Mittelstand came to be known as Mittelstandpolitik
– the idea being that coordinated support for the Mittelstand could
ensure competition in the industrial sector, while also providing a vital
social and political pillar in post-war German society, particularly in
rural communities.113
I raise the issue of the Morgenthau Plan here because, in a very
real sense, we may quite easily describe microfinance as a modern-day
version of the Morgenthau Plan. In general, we know that only very
simple and unsophisticated microenterprises can service the terms and
maturities demanded by most MFIs. Typically, these microenterprises
are very simple trading, retail and service operations, with perhaps
some very small production-based operations that can add value very
quickly. Very few more sophisticated industrial microenterprises or
Microfinance as poverty trap | 95
SMEs can eectively get started or expand with the assistance of
microfinance. With microfinance today very much driven by the profit
motive, there is an inbuilt bias in favour of short-term high-profit
projects, and against longer-term projects likely to be of much more
value to the local community, but which would struggle to repay high
interest rates in their initial period of operations. Overall, to the extent
that the local financial sector shifts in favour of microfinance – as we
are indeed seeing right around the globe – the more an economy’s
scarce financial resources are directed towards ineectual short-term
projects, and away from business projects that oer far more to the
economy and society into the medium to longer term. Microfinance
as development policy very clearly facilitates the deindustrialization
of the local economy.
In a roundabout way, the general development barrier I am referring
to here has actually been consistently raised by many institutions,
especially by the UN agency UNCTAD. In its annual report,
for example, UNCTAD points to the serious lack of local industrial
impetus and institutional support in developing countries. This weak-
ness eectively consigns developing countries to a future marked out
by almost ‘no chance of nurturing the home-grown firms which are
crucial to economic success’. What is needed instead, according to
the lead author of the UNCTAD report, Yilmaz Akyuz, is ‘the
policy space: the ability to nourish, support and develop domestic
industries, and the capability to compete in international markets
and to supply the home market’.114
In transition countries the situation is slightly dierent, but no
less problematic. With a long tradition of industrial development, the
need is more to facilitate the cannibalizing of the old production and
process technologies for adaptation and reuse in new microenterprise
and SME projects. As David Ellerman has argued in relation to the
post-communist economies,115 such an industrial inheritance was of
some considerable value. It represented a pool of ‘genetic material’
that could potentially be recombined in order to build upon the best
of the past industrial investments, and not simply abandon them. A
key requirement for this process to take place, Ellerman argues, is
the presence of a supportive and long-term-focused financial regime;
which is clearly not microfinance.
The argument I make in this important section is, therefore, that the
increasing dominance of the microfinance model in developing coun-
tries is causally associated with their progressive deindustrialization
96 | Four
and infantilization. Financial support to promote enterprises with
productivity-raising potential, this being the ultimate precondition for
sustainable economic and social development, is actually disappearing
from the scene. The result is that the chances of any country creating
the preconditions for its exit from poverty and underdevelopment are
close to zero. As has been long recognized, notably in an influential
article by William Baumol,116 such a simple enterprise structure has
very little chance of eventually precipitating growth and sustainable
development. The temporary uplift often provided by microfinance (a
little extra income, a boost to consumption spending, etc.) is therefore
eectively being paid for into the longer term by the progressive
deindustrialization and stagnation of the country concerned. This
is a very high price to pay. A Morgenthau Plan-type policy is being
implemented for real.
How not to go about development in Africa? Consider, as a first
illustration of what I mean in practice, the hugely important case of
the continuing economic failure of sub-Saharan Africa. This issue
was recently the subject of a best-selling book, Dead Aid, by
Zambian economist Dambisa Moyo.117 Moyo’s book is very relevant
to the discussion here, though not because of her main thread – a
denunciation of the international community for its provision of aid
to African countries that go on to misuse it. Instead, her views are
important here because of what she argues is one of the key solutions
to the economic problems she highlights in Africa – microfinance.
Microfinance, and therefore even more rafts of microenterprises, she
argues, will hugely assist in supporting Africa’s attempt to escape
poverty and promote sustainable development. One has to say right
away that Moyo’s argument is seriously weakened by her own admis-
sion to not knowing much about the current issues and developments
in microfinance.118 Moreover, her central argument in favour of micro-
finance as a source of business investment is undermined because it
uses very misleading data drawn from PR sources.119 Such important
caveats notwithstanding, does Moyo’s thesis concerning the benefits
of microfinance still hold?
As is well known, the African continent is replete with simple
microenterprises. Many hundreds of millions of poor individuals
eectively have no other option but to attempt to try to survive
through very small-scale entrepreneurship. Support for this ‘self-help’
trajectory is provided by large numbers of international donor-funded
Microfinance as poverty trap | 97
MFIs. Increasingly, too, Africa’s own commercial banks are driven by
simple market forces to ‘downscale’ out of SME lending (and other
activities) and into the far more profitable world of microfinance.
And even though as early as the late s the very high drop-out
rate being experienced by African MFIs was becoming a cause for
concern,120 and recently the huge over-indebtedness of many poor
South Africans even forced the government to intervene,121 Moyo
nevertheless argues that Africa’s microfinance sector urgently needs
to be expanded even more.
This is a dicult argument to make, however. Framing all current
and future financial support within Africa on the basis of the prevail-
ing microfinance and microenterprise trajectory is, quite simply, not
a strategy that will provide Africa with an exit out of its current
malaise. As UNCTAD argues, and as Ha-Joon Chang more recently
argued in his best-seller Bad Samaritans, the African continent
urgently needs not more simple ‘buy cheap, sell dear’ microenterprises,
but a robust light industrial foundation that will enable its entry
into at least some mainstream production and manufacturing-based
enterprises capable of productivity growth. Africa therefore also needs
robust and far-sighted financial institutions that will help bring this
about, which would not include the microfinance sector.
So far, very much as in the past,122 the proliferation of microfinance
in Africa is associated with precluding the chances of establishing
the industrial foundations required for future growth and poverty
reduction. The continent is fast becoming instead a vast reservoir of
self-employed traders, and not much else. For instance, in Uganda,
at least partly thanks to a sizeable increase in the availability of
micro finance over the last ten years, small-scale trade now constitutes
around per cent of the urban economy.123 Similar figures and
scenarios prevail in most other African states. In Benin, when cross-
border trade with neighbouring Nigeria was prohibited in /, the
entire microfinance sector was thrown into crisis, since it turned out
that the vast bulk of microcredit in the country was being channelled
into the very simplest of cross-border shuttle trading operations.124
In Kenya, Njoroge reports that ‘Microfinance at its best pushes the
rural active poor to urban areas and creates a nation of “traders and
hawkers”.’125
Nor is it just small-scale, industry-based, relatively technology-
intensive, growth-oriented SMEs which will remain conspicuous by
their absence. Even very small-scale subcontracting industries, perhaps
98 | Four
serving larger FDI-driven enterprises operating in Africa, are unlikely
to get started with microfinance behind them. In fact, Moyo actually
raises exactly this issue herself, when lamenting the lagging share
of employment in the SME sector in Africa, including in her native
Zambia. Moyo makes the claim that the share of SMEs in Zambia is
apparently just per cent, which compares badly to the more than
per cent equivalent figure in Italy and Greece.126 She does not,
however, follow through with any discussion of one of the central
reasons why this perceived lack of SMEs has actually arisen – the
increasing profit-driven diversion of Africa’s savings and international
donor funds into the microenterprise sector, and so away from riskier
and lower-margin work dealing with the sort of SMEs she otherwise
desperately wants to see flourish.
There is also much evidence to suggest that even previously rela-
tively industrialized African economies and regions – those that made
important strides under the period of decolonization or with the
help of raw materials exports – are also collapsing back into the very
simplest of market-driven activities, greatly aided by the growing
abundance of microfinance. Nigeria is an obvious example. Despite
huge oil revenues since the s, the country has nevertheless expe-
rienced a significant deindustrialization trend since then. Unlike other
oil- and gas-rich African countries, such as Algeria and Libya (not
to mention South Africa’s apartheid-era policies that saw it forced
to develop many SMEs capable of eciently servicing an energy and
military industry cut o from world markets), Nigeria adopted a
neoliberal policy programme that discouraged proactively investing in
SMEs capable of integrating into the oil industry supply chain. And
from very early on,127 nor has there been much investment directed
towards developing a non-oil tradable sector capable of exporting.
Nigeria’s neoliberal policy programmes in the s and s em-
phasized instead only the need to cut government spending and to
deregulate the financial sector in order to ensure, among other things,
that financial support goes only to businesses capable of quickly
repaying market-based interest rates.128 Meanwhile, microfinance has
boomed since around , driven forward by rafts of new informal
MFIs. Predictably, the informal sector has also boomed, with nearly
per cent of microfinance channelled into simple trade-based micro-
enterprises alone.129
Nothing appears to have been learned, or done, in terms of im-
proving Nigeria’s chances of recycling its oil wealth and savings
Microfinance as poverty trap | 99
into ‘bottom-up’ industrialization and the gradual diversification of
its economic base. Moreover, given government measures passed in
to ensure that by microfinance becomes a very significant
chunk of Nigeria’s formal financial sector as well, an already adverse
de industrialization trajectory looks set to be considerably amplified.130
Unfortunately, then, there is very little evidence to suggest that an
African continent built upon even more microfinance than at present
will ever come to resemble any of the positive future scenarios out-
lined by Dambisa Moyo, and others in the microfinance industry. The
reverse is much more likely to be true. Most microfinance projects in
Africa are verging towards Morgenthau Plan-type interventions that
are unlikely to improve the longer-term chances of Africa escaping
poverty and underdevelopment. The minor poverty gains registered on
some counts (consumption smoothing, subsistence farms producing
additional food crops that can be consumed at home, and so on)
cannot oset the longer-run debilitating impacts associated with the
further degradation and infantilization of the local industrial and
agricultural base. The likelihood is that more microfinance will end up
accelerating the already strong deindustrialization trends in evidence
virtually everywhere in Africa. Unless changes are made, the future
for Africa is clear. As the executive director of the Johannesburg-
based Textile Federation of South Africa, Brian Brink, warns, ‘De-
industrialization is a real threat. We have to decide whether we go
down that slippery path. What happens then? We all become a bunch
of traders.’131
Microfinance doesn’t help elsewhere either Nor can we say that
Africa is the exception here. Thanks to the growing abundance of
microfinance, most other developing and transition countries are
encountering the same primitivizing and deindustrializing impetus
that is clearly under way on the African continent. The situation in
Latin America is little dierent.
There is no question that Mexico’s economic structure is increas-
ingly becoming dominated by the tiniest of informal microenterprises.
More accurately, substantial growth in the number of tiny micro-
enterprises, most spectacularly in the case of street hawking, has
come at the expense of a significant weakening of Mexico’s previously
relatively well-developed, innovative and technology-intensive SME
sector. As economist Santiago Levy points out,132 this is a major
worry with regard to Mexico’s long-term future. One of Mexico’s
100 | Four
principal problems today is low growth, and, Levy points out, it arises
at least partly because of ‘Over-employment and over-investment in
small informal firms that under-exploit advantages of size, invest
little in technology adoption and worker training.’ Put simply, as
many analysts in Mexico are arguing today, the Mexican economy
is undergoing an irreversible process of ‘changarrization’ (a reference
to the term ‘changarro’, an informal microenterprise or ‘mom and
pop store’).
A key problem here is that market-driven pressures are making
the Mexican financial sector much less interested in supporting the
sort of enterprises that Mexico really needs. For example, using
data from the National Survey of Microenterprises undertaken in
and , Woodru reported that in the second half of the
s the Mexican banking system registered a drop in loans to
microenterprises (though many microenterprises were still able to
access a microloan from other informal sources).133 Importantly, he
found that the shortage of formal bank credit in the s resulted
in the average microenterprise becoming relatively less technology
intensive and even smaller than before (usually losing any employees
it may have had, for example). Moving into the new millennium, it
then became clear that microfinance was becoming an increasingly
abundant oer in the Mexican financial sector thanks to the large
numbers of newly established MFIs. Predictably, this new supply was
overwhelmingly channelled into the very smallest of changarros, and
increasingly into simple consumer lending too. Moreover, as Mexico’s
existing commercial banks desperately tried to recover from the bank-
ing collapse of the mid-s, they increasingly sought to rebuild their
financial strength through high-profit microfinance. Pointedly, much
of the capital Mexico’s commercial banks needed for microfinance
applications in Mexico was found by reducing their exposure to the
lower-profit and more risky SME sector: bank lending to formal sector
SMEs fell in Mexico in the new millennium, going from per cent
of total lending to just over per cent in six years.134 As economist
Santiago Levy explains once more, the problem today is that ‘There
are more resources to subsidize informal employment than formal
employment’, so that ‘Mexico is probably saving less and investing
in less ecient projects.’135
Over the last two decades, therefore, the financial sector in
Mexico has quite dramatically shifted into working with the sort of
micro enterprises that lie at the heart of Mexico’s ‘changarrization’
Microfinance as poverty trap | 101
(deindustrialization) malaise, on the one hand, while progressively
abandoning the much more productive and employment-generating
SME sector, on the other. Mexico’s future as an industrial economy is
therefore coming under increasing threat from this largely profit-driven
reorientation of its financial sector in favour of microfinance. Even the
business-elite-friendly Mexico Employers Association laments these
changes and the current ‘changarrization’ trend, arguing that the
country is gradually reversing most of the important industrialization
and oil-industry-financed development gains made in the previous
couple of decades.136
In South-East Asia, too, Morgenthau Plan-style dynamics have also
been at work in the most microfinance-saturated countries. The obvi-
ous example is Cambodia. A country whose financial sector is now
pretty much dominated by MFIs and microfinance, Cambodia has sig-
nally failed to ‘take o’ in the manner of either neighbouring Vietnam
or Thailand.137 A good illustration of why this situation has arisen
involves ACLEDA, the largest MFI in Cambodia, its second-largest
bank and also (as in a growing number of countries and regions)
its most profitable bank. Clark reports that ACLEDA, founded by
UNDP in as an NGO project, has become an icon within the
microfinance industry.138 This is because, in fewer than twenty years
of operation, ACLEDA is now responsible for a very significant and
still-growing proportion of the total savings mobilization in Cam-
bodia, as well as a similar amount of total microlending activity. It
is also, as just noted, an extremely profitable institution. Following
its conversion into a private for-profit commercial bank in , its
financial performance continued to impress. International investors
began to take note, and soon a line began to form of those most
interested to get a piece of the action for their rich shareholders.139
Consider also, however, that more or less all of the local savings that
ACLEDA successfully mobilizes for on-lending (i.e. per cent as of
) are then recycled back into the very simplest of micro enterprises
– that is, mainly street hawkers, cross-border shuttle traders, simple
kiosks, fast-food stands and petty services. In , for example, more
than per cent of the loans advanced by ACLEDA went into the trade
sector alone, with only per cent of its disbursed loans going to help
upgrade and develop the hugely important agricultural processing sec-
tor.140 Meanwhile, influenced by the commercial success of ACLEDA,
the more traditional local commercial banks have also moved into
providing only highly profitable microcredit, and they now shy away
102 | Four
from traditional business project lending to an incredible degree.141
Overall, with a high and growing proportion of local savings recycled
into highly profitable microfinance programmes, as opposed to being
channelled into more productive and growth-oriented SMEs or other
eciency-enhancing projects, ACLEDA is playing an important role
in undermining the country’s desperate attempts to escape extreme
industrial and agricultural backwardness.142 ACLEDA is yet another
microfinance sector ‘cathedral in the desert’.
Finally, in eastern Europe’s transition economies, the deindustrial-
ization and primitivization of the average local economy thanks to
microenterprise development has eectively set back the region’s
development chances by decades. With hindsight, as I noted earlier,
we now realize that Poland’s ‘micro-entrepreneurship miracle’, along-
side a block on proactively supporting SMEs,143 achieved very little
of lasting economic significance. One particularly adverse outcome
was that virtually the only production-based microenterprises and
SMEsthat managed to start and/or remain in business during this
heady period (in fact, they initially proliferated) were low-value-added
‘loan system’-type business operations, especially in textiles. In addi-
tion, Poland’s lead in many promising small-scale technologies, its
highly skilled population and its immediate past history of exciting
domestic innovation activity were all largely abandoned as the source
of new sustainable enterprises.144 Thanks to the establishment of a
number of MFIs in the early s, notably Fundusz Mikro, the
already debilitating deindustrialization trajectory was accelerated.145
Surveying the long-term damage done to the Polish economy as a
result of its high-profile foray into market-driven microenterprise
development, Hardy and Rainnie could only conclude that ‘the emer-
gence of a flea market […] is no basis on which to build successful
local economic development’.146
Also within eastern Europe, the Balkans is another region where
we find an abundance of Morgenthau Plan-type trajectories in opera-
tion thanks to microfinance. In the aftermath of the Yugoslav civil
war, Bosnia’s impressive industrial enterprise sector and associated
technological/institutional infrastructure were still a significant and
very valuable inheritance. Most large technology-intensive enterprises,
however, immediately had to begin to downsize and to reduce em-
ployment. One way they attempted to do this was by encouraging
technical sta to depart after having established for themselves a new
microenterprise or ‘spin-o’ in a relatively technology-intensive area.
Microfinance as poverty trap | 103
Many of the highly skilled technical sta in Bosnia’s largest and
most innovative companies were indeed keen to depart under such
conditions, such as in the Sarajevo-based EnergoInvest. Accordingly,
business plans were prepared, ideas were tested and national and
international market contacts re-established. Almost none of these
proposals came to pass, however. The principal reason was that the
financial support was simply not there.
Because the international donor community had ensured that
Bos nia would become the Balkan ‘test-bed’ for microfinance, and
part of this strategy included the need to ensure that other com peting
financial institutions were blocked,147 potential entrepreneurs had
access to microfinance and virtually nothing else to help establish
their new business. It was either microfinance or ‘no finance’. For
most prospective entrepreneurs, those with sophisticated products
or processes, with distant break-even points and with complicated
technologies involving ‘learning-while-doing’, it was a case of ‘no
finance’. As a result, most of the large technology-intensive enterprises
in Bosnia downsized after with almost no associated boost to
the structure (quantity and quality) of the local microenterprise sector
and the local SME sector.148 A major industrial inheritance, skills base
and R&D tradition – an asset that most developing countries would
desperately like to be in possession of – was thus largely abandoned
without even a whimper. As UNDP lamented in ,149 the result is
that Bosnia has now been ‘condemned to reliance on a grey, trade-
based, unsustainable economy rather than a production-based one’.
Microfinance and ‘connectivity’ One of the most important areas
of policy research in the s was into the connections that link
enterprises together vertically and horizontally. Researchers found
that individual microenterprises and SMEs were able to successfully
overcome the disadvantage of small scale by coalescing together with
other enterprises into ‘industrial districts’. They were able to reap
so-called ‘collective economies of scale’.
One of the seminal texts on this issue is Michael Piore and Charles
Sabel’s book The Second Industrial Divide,150 which predicted
the survival and re-emergence of small firms, because they were
increasingly able and willing to link together horizontally and verti-
cally in eciency-raising networks and clusters. The large-firm system
– termed ‘Fordism’ – had reached its limit. Fordism was increasingly
being joined in many of the regions, if not entirely displaced, by rafts
104 | Four
of dynamic small firms cooperating with each other in the ‘industrial
districts’.151
The end result of these insights was a new paradigm of local
economic development policy, one that saw great value in directly
supporting the interconnections between enterprises far more than
(just) the simple internal production arrangements or capitalization
of any one individual enterprise.152 Emerging at around the same
time was a parallel concern with the need to promote subcontracting
arrangements and so-called ‘commodity chains’ as the most important
way of upgrading small enterprises. These were highly ecient forms
of inter-enterprise cooperation mainly involving vertical hierarchies
of mixed-size enterprises, and where longer-term collaboration and
risk-sharing were more important than simple short-run cost mini-
mization.153
Importantly, the eciency-raising potential of many of theseforms
of inter-enterprise collaboration very often extended to microenter-
prises. In northern Italy, for example, microenterprises were pulled
into regional and international supply chains by the famous ‘impan-
natori’ (intermediaries). High post-war levels of social capital and
solidarity in the ‘Red Regions’ helped to ensure that traditional forms
of exploitation and insecurity were minimized.154 Similarly, in post-
war Japan, as Nishiguchi recounts,155 dynamic microenterprises were
encouraged to become an important part of the industrial supply
chain. Provided by their larger partner enterprises with the very latest
technologies, secure contracts, prompt and decent financial payment
and other forms of support in order to motivate them, they were soon
able to excel in their performance (delivery times, quality, cost, etc.).
Networks of local government institutions worked alongside these
microenterprises too, helping with training, further capitalization
and new technologies. Indeed, reflecting on the successes of both the
Italian and Japanese microenterprise sectors since , Linda Weiss
was forced to conclude that ‘the core of modern micro-capitalism
is not competitive individualism but collective endeavour’.156 Some
development programmes today also recognize the crucial need to
connect microenterprises, such as through marketing cooperatives
and buyer consortia.
In contemporary microfinance policy, however, such beneficial
grass roots ‘connectivity’ dynamics are quite fanciful. MFIs today
‘succeed’ only in the narrow sense of producing rafts of new (albeit
often temporary) informal sector microenterprises. The over whelming
Microfinance as poverty trap | 105
majority of these new entrants, however, have no need, wish or
ability to meaningfully cooperate in order to begin to forge the
required productivity-enhancing horizontal (‘proto-industrial dis-
tricts’) and vertical (subcontracting) connections. Especially within
the ‘new wave’ microfinance paradigm, the additional investment
and support required to identify and support suitably ‘connectable’
microenterprises are seen as an unnecessary financial burden. What
matters to an MFI is simply whether or not a client microenterprise
can repay its microloan.
This is not to say that some forms of connectivity are not pro-
moted through microfinance. In agriculture, for instance, the concept
of ‘contract farming’ has been quite widely promoted by oering
a microcredit to potential small-farm participants. The ‘contract
farming’ system is, however, principally of benefit to the final buyer
or processor, and is not particularly meant to be of benefit to small
farmers. Microfinance is cunningly used here to avoid the need for the
final buyers or processors to make any additional investment in the
small-farm suppliers. The small farms thus also get stuck with much
of the risk involved in the event of failure. Controlling the farmers in
this way also helps to reduce costs into the longer term; for example,
by regularly switching and abandoning some farmer-suppliers as a
form of disciplining measure. Many family farms seek a way to get
around these low-return contract farming operations, in order to
develop sustainable farming operations of more benefit to themselves.
Agricultural cooperatives are the obvious mechanism. But with only
microfinance on oer, this option is typically made impossible.
Overall, then, we can say that the basic ‘raw material’ required
for local eciency-raising ‘connectivity’ is a very unlikely outcome
of contemporary microfinance programmes. Microfinance mainly
operates like a football academy that exists solely in order to turn
out players with possibly excellent individual skills, but all of whom
have no understanding of the importance of the teamwork required
to win the match.
Microfinance and import dependency One of the main sectors
microfinance has traditionally supported right across the developing
and transition countries has been cross-border shuttle trading, along
with the associated web of small-scale retail operations (shops, kiosks,
street hawking) that then sell on imported items. Such simple trade-
based activities are often initially very profitable in the aftermath
106 | Four
of conflict, natural disaster, economic collapse and so on. They are
therefore natural MFI clients because they can cover the high inter-
est rates and short repayment periods demanded. This is what is
known as a ‘pull’ factor. There are also ‘push’ factors at play here,
however, principally the ease of entry into such activities for those
with no skills, experience or cash. For example, cross-border trading
has exploded in importance in many countries, driven largely by
unemployment and abject poverty rather than by the chance to make
decent financial returns.
It is widely accepted that the instant expansion of such simple
trading activities results in some valuable additional income being
generated by those directly involved, and perhaps also some jobs
are quickly created. This is why in the aftermath of natural disaster
or conflict, the rapid rise in such activities is often tolerated and
may generate positive benefits for the local community. Until local
production can restart, for example, it is of some considerable benefit
that such microenterprises are able to access needed products from
un aected neighbouring countries or regions. Some of the cash raised
is eventually reinvested in production-based activities, which will
create local jobs and income too.
Overall, however, the longer-term impact of such developments is
seriously debilitating and largely osets the meagre initial benefits I
have just recounted. For a start, microfinance has very clearly played
an important role in promoting irreversible import dependency. One
of the most damaging features of the neoliberal programmes that
developing countries were forced into during the s and s
was the collapse in local manufacturing and agricultural production
brought about by instant trade liberalization. An ensuing flood of
(often subsidized) imports was facilitated largely by the massive
proliferation of small shuttle trading and importing ventures, many
of which were attracted away from production-based activities and
into the newly profitable area of importing. The conclusion reached
by an important study undertaken by SAPRIN in conjunction with
the World Bank157 was that the largely uncontrolled surge of imports
needlessly contributes to ‘the failure of many local manufacturing
firms, particularly innovative small and medium sized ones that gener-
ate a great deal of employment’. Microfinance support for such ‘quick
and easy to enter’ shuttle trading and importing activities thus leads to
import dependence. Local production possibilities get wiped out too.
Microfinance thus underpins an import-dependency dynamic that
Microfinance as poverty trap | 107
is pretty much irreversible. A stark illustration of what I mean comes
from the agriculture sector in post-communist Poland. After a
large shuttle trader population quickly emerged into formality and
began importing into Poland agricultural items from neighbour-
ing countries, including Germany to the west and Russia, Ukraine
and the Baltic states to the east. These nimble, mainly urban-based,
microenterprises often made small fortunes for their owners. They
also proved quite damaging, however, to Poland’s economy overall.
For example, their activities greatly helped to turn a $ million
surplus on agricultural products with the EU in into a $
million deficit by . This instant splurge of imported food items,
many of which were very cheap because they incorporated subsidies
derived from EU farm support programmes, led to farm incomes in
Poland falling very dramatically (by around per cent). By
around per cent of Polish farms were technically bankrupt and
rural poverty began a dramatic rise to new heights.158
There is also a wider ‘crowding out’ problem to factor in here.
Because simple cross-border trade is a quick payback activity, and
often quite profitable (at least in the early stages), MFIs and other
financial institutions naturally want their ‘fair share’ of the gains
from such activities. The result is that the real local cost of capital
typically rises to match the opportunity cost (i.e. the margins made
on cross-border trading). Interest rates are hiked up, of course, but
so too are hidden charges, ‘one-o’ fees, membership subscriptions,
and so on. But because small-scale manufacturing operations are
likely to be much less profitable in the short run, this phenomenon
of temporary higher local cost of capital precludes any realistic pos-
sibility of obtaining and servicing a business loan. To appreciate the
downside, one needs only to look at some of the border locations
in the Balkans, where temporarily high local capital costs arising
as a result of this ‘crowding out’ cross-border trading phenomenon
permanently destroyed both long-standing production operations
and new ventures.159
Thus seen, many of the supposed gains derived from the well-
publicized small-scale cross-border trading ventures and tiny stores
associated with microfinance are actually oset by the structural
disadvantages and distortions thereafter frozen into the local econ-
omy. Import dependence is the main outcome, which is a long-term
financial drain on any economy. Moreover, high profits and rents
earned on large import operations typically become embedded, and
108 | Four
so constitute a strong deterrent to the eventual (re-)establishment of
local production operations.
Microfinance and social capital A common claim made in the micro-
finance literature relates to the potential for microfinance to help build
and extend social capital in poor communities. Many analysts have
routinely portrayed the Grameen Bank’s famous solidarity circles as
evidence of it successfully building and extending social capital and
solidarity within the local community. Constant interpersonal inter-
action engendered through participation in solidarity circles, among
other things, is said to construct the sort of bonding and bridging
social capital described by Robert Putnam as the crucial ‘glue’ that
holds local societies together.160
From another angle, however, the supposed links between micro-
finance and social capital are largely nothing more than an illusion.
While even critics of microfinance accept that the Grameen Bank did
indeed very successfully tap into pre-existing stocks of local social
capital and local solidarity in order to ensure high repayment rates,
as Rankin argues this fact does not validate the related claim that
microfinance is also constructing social capital and local solidarity.161
We need to recall, first of all, that by recasting individual survival
as a function of individual entrepreneurial success (i.e. in a micro-
enterprise), the bonds of solidarity, shared experience and trust that
exist within poor communities are undermined. This is a truism.
And as Colin Leys has argued,162 history shows time and again that
recasting community development and poverty reduction activities as
commercial operations – the central operating principle of the ‘new
wave’ microfinance model, remember – is likely to seriously reduce
levels of local solidarity, interpersonal communication, volunteerism,
trust-based interaction and goodwill. Accordingly, it would seem
logical to expect that microfinance would be on a hiding to nothing
in terms of being able to create productive forms of social capital.
On closer inspection, this is indeed the case. In fact, it is increas-
ingly being recognized that social capital and local solidarity are more
often destroyed by microfinance than encouraged.163 Aminur Rahman
was one of the first to get to grips with the reality here. Hiding behind
high repayment rates at the Grameen Bank was a world of strong
social pressure upon female members, and the routine ostracizing of
defaulting borrowers.164 In demonstrating that the ‘shaming’ of female
loan delinquents is a routine practice in Bangladesh, Lamia Karim also
Microfinance as poverty trap | 109
shows that it greatly contributes to the crushing of any sense of local
gender solidarity and community.165 We should also recall that, thanks
to commercialization pressures, the original innovation universally
said to engender social capital within microfinance – solidarity circles
– is now being abandoned in an increasing number of MFIs.
In Latin America, the individualism and competitiveness inher-
ent in the microfinance model often clash with traditional values,
especially those of the indigenous populations. Rather than creating
so-called ‘bridging social capital’ – the sort of social capital that brings
heterogeneous communities closer together – microfinance very often
widens already wide cleavages. This is especially true with regard to
the operation of ‘new wave’ microfinance, given that many senior em-
ployees in MFIs and their supporting organizations overwhelmingly
tend to place a high value on their inclusion within the mainstream
banking system and international banking circles, rather than on
their closeness to poor clients. In Bolivia, for instance, the main MFIs
work extensively in the communities of the Aymara and Quechua.
But the MFIs also make sure that they remain both geographically
and culturally as far apart from this client base as possible. Most
documentation is in Spanish, or even English, for example, rather
than in the two native languages of the country spoken by the Aymara
and Quechua peoples. A further problem is caused by the preferred
business location. As Holman very perceptively remarks,166
the central oces or headquarters of major MFIs [in Bolivia],
with few exceptions, are located in the wealthiest banking areas of
downtown metropolises. The edifices are often fabulous colonial
mansions or luxurious skyscrapers, paid for largely with the interests
of the poor. By choosing these status symbols as headquarters, MFIs
are proclaiming their legitimacy to the regular banking industry,
but they are also creating an elitist divide between their ostentatious
wealth and their clients’ poverty. Aymara and Quechua people often
feel like the downtown banking areas of the cities are culturally
foreign and by locating MFIs’ headquarters there, the industry is
reinforcing a cultural separation from the majority of its clients.
MFIs in many parts of Africa have often been seen as taking
advantage of those in poverty and have built up very little social
capital. In increasingly microfinance-saturated Uganda, for example,
commercialized MFIs have built up a very bad reputation in the local
community. Local analysts Kau and Mutesasira report that167 ‘At the
110 | Four
moment most MFIs are perceived to be “opportunistic and uncaring”.
Successful MFIs will have to position themselves to be seen as business
partners interested in understanding customer needs and responding
to them. MFIs will need to work hard towards shedding the image of
being “vultures” preying on the clients’ financial illiteracy.’
More widely, Hulme and Mosley reporting on their research into
the impacts of several high-profile MFIs,168 including Grameen Bank,
found little evidence of class-based solidarity between borrowers,
raising the obvious possibility as they saw it that ‘the most success-
ful borrowers […] pursue individual and household strategies for
advancement based on adopting the practices of the dominant social
groups (such as purchasing land through distress sales, paying low
wages, operating exploitative tied transactions), rather than practising
solidarity with less-successful group members’.
Consider also the fact that everywhere the spectacular micro-
finance-driven rise of the informal sector has unequivocally resulted in
the destruction of social capital (see above). As Davis vividly argues,169
in today’s increasingly unregulated business space an enterprise is
forced to survive by adopting the ‘low road’ practices of the rapidly
expanding informal sector. If it does not, it goes under. Solidarity is
inevitably destroyed as the distorted business ethics and morals that
emerge under such Hobbesian conditions gradually percolate into
other enterprise structures (i.e. SMEs), institutions (i.e. government)
and across all levels of society. All of this problematizes the micro-
finance industry’s intimate association with the informal sector.
Conclusion
This chapter started by looking at the microfinance industry’s
own impact assessments. I noted that, for many obvious reasons,
most impact assessments are seriously incomplete. I pointed out
that two factors are ignored which are really quite fundamental to
the likely net sustainable impact of microfinance in the community
– displacement and client exit. The rest of the chapter was dedicated
to a closer examination of the microfinance model in practice. By
foregrounding the main ‘triggers’ that we know underpin sustainable
local economic development, and assessing what impact microfinance
has typically made within the context of each category, I was able
to begin to explain why it is that the microfinance model largely
frustrates development. I concluded not only that the presumed eco-
nomic development and poverty reduction ‘power’ of the microfinance
Microfinance as poverty trap | 111
model is far less than the international development community has
been led to believe to date, but that microfinance has been, and is,
a major contributory factor in the destruction of the main positive
economic and social development trajectories. In fact, I argue that
microfinance constitutes a very powerful ‘poverty trap’. In the next
chapter, I will go on to explain why it is that the turn to ‘new wave’
microfinance in the s has manifestly accelerated this already
deleterious trajectory.
FIVE
Commercialization: the death of
microfinance
‘The organizations that develop in this institutional framework
will become more ecient – but more ecient at making the
society even more unproductive and the basic institutional
structure even less conducive to productive activity.’ Douglass
C. North1
‘Are [neoliberals] “true believers”, driven by ideology and faith
that free markets will cure underdevelopment, as is most often
asserted, or do the ideas and theories frequently serve as an
elaborate rationale to allow people to act on unfettered greed
while still invoking an altruistic motive?’ Naomi Klein2
This chapter will explore how the move to the commercialized ‘new
wave’ microfinance in the s has created huge problems for the
microfinance model as development policy. I start by first looking back
at one important example of financial sector commercialization in the
UK financial sector. This example shows how and why it is a process
that often goes spectacularly wrong for the poor, yet always seems
to go quite well for the wealthy and powerful, a juxtaposition that
is rarely coincidental. I then move to discuss the commercialization
of microfinance that has taken place since the early s. I find that
the same dichotomy exists: enormous benefits for those promoting
the commercialization of microfinance, but not for the poor and the
poor communities at the receiving end. I end by discussing in a little
more detail one of the most spectacular episodes of commercializa-
tion, that of Compartamos in Mexico. Perhaps more than any other
recent example, this episode highlights the huge gulf between the
original high-minded goals of microfinance and the current reality.
Since Compartamos is positively viewed by many, and even described
by some as the ‘future of microfinance’, it is important to see what
lies ahead as we continue down the commercialization road.
Commercialization | 113
Background to commercialization
Commercialization is intended to create more ecient and moti-
vated organizations. In the case of a private company, the recommen-
dation in theory is very clear. As Milton Friedman famously said, ‘the
sole and only purpose of a private business is to maximise profits’.
The commercialization philosophy was central to the rush towards
privatization pioneered in the UK in the s, quickly spreading to
virtually all countries thereafter. The assumption in this case was
that the most ecient form of enterprise was possible only under
full private ownership. All forms of non-private and/or collective
ownership were defined as suboptimal.3
Much of the thinking behind commercialization and privatization
is, however, mistaken. As Chang and Grabel show,4 there is actually
little empirical evidence to back up the widely made claims for the
overwhelming superior performance at all times of privately owned
companies. Publicly owned companies are often very ecient. In
fact, under certain conditions, notably in post- western Europe
and in East Asia from the s onwards, public companies were
able to drive development forward far better than private companies
and financial institutions impelled by purely private and short-term
objectives. Note, too, that privatized companies very often do not
register the productivity gains widely predicted for them as a result
of the simple change from public to private ownership, notably in
the UK’s famous privatization experience.5
In the case of development-focused organizations, one might assume
that things would be a little dierent. In the main, such organ izations
are deliberately established as non-profit organizations pursuing a
developmental mandate, rather than profit. Neoliberals continue to
assume, however, that such organizations should also be privatized or
commercialized, so that they will also become ‘more ecient’ through
(among other things) more incentivized management. Importantly,
development organizations previously in receipt of regular public
funding would be able to forgo it, perhaps by selling their services,
thus helping to cut public spending. Even where privatization was not
legally or politically possible, such as in healthcare or other services,
if such organizations could nevertheless still be forced to act ‘as if’
they were private profit-driven bodies, then they would still register
large eciency gains.
In the majority of cases where public or non-profit organizations
have been forced into a process of commercialization, however, the
114 | Five
results have been almost universally negative, if not quite disastrous.
In many cases, the organization was stripped of its original rationale
and transformed into a vehicle whose operative goal was simply to
generate profit, among other things in order to generate high salaries,
bonuses and dividends for those having assumed control of it. Let
me illustrate in a little more detail one important commercialization
episode that encapsulates all that can go wrong with such a concept.
Because it involves the commercialization of a financial organization
quite similar in mandate and operations to an MFI, it is particu-
larly useful in helping frame the discussion of commercialization to
come.
Commercialization of the UK’s building societies It would be dif-
ficult to find a better example where commercialization has delivered
little for the vast majority but bestowed huge benefits upon ‘insiders’
and other close associates than the demutualization of the UK’s long-
established building societies (saver-owned financial institutions). The
building societies originated in the late s and the drive by the
poor and their supporters to establish a source of low-cost housing
finance. Owned by the savers, and with various checks and balances
in place to ensure that they remained dedicated to their founding mis-
sion, success quickly followed. By the early s, the UK’s building
societies had become the dominant force in housing finance, and a
very important player in the mobilization of savings, insurance and
other services of value to the poor and working classes.
The UK government’s ideology in the s, however, held that the
building societies would operate more eciently if they were taken
out of mutual ownership and restructured into private commercial
banks. This would inject more profit-driven practices and business
savvy into what were until then very conservative lending and saving
institutions. With significant support from senior managers eyeing
much larger salaries if demutualization went ahead, and egged on
by a new class of so-called ‘carpetbagger’ members eyeing up the
profits windfall to be made from a quick sale of the shares to be
distributed to existing saver-members, one by one the large building
societies were demutualized and commercialized. Initially, at least,
their new-found commercial freedoms saw them prosper in financial
and reputational terms. Looking back now, however, the whole epi-
sode of commercialization was an economic and social disaster. It
was not just a major setback for the UK economy, but a major blow
Commercialization | 115
for the poor communities wherein such organizations had arisen
many years ago.
As intended, demutualization and the creation of a shareholder-
owned private bank came with the unfettered freedom, as well as the
obligation, to pursue maximum profit. This would generate further
competition in the sector and so more eciency and a better service to
clients. Higher dividends would then ensue too. The former members
having received their allocation of free shares would, of course, be
very much better o. So far, so good.
The stage was actually being set, however, for a multitude of
commercialization-driven sins. As widely predicted, demutualiza-
tion gave the new private banks the freedom for senior managers
to hike up their own salaries and bonuses, which they predictably
did right away. The banks then began to move into high-profit but
much riskier projects and speculative activities. This move initially
hiked up profits, and so ensured high dividend payments for the new
owners. It also conveniently provided ‘cover’ for even higher salaries
and bonuses for senior managers. Meanwhile, in spite of supposedly
more competition in the sector, but with hungry shareholders to feed
and senior managers’ inflated salaries and bonuses to meet too, the
prices on many products and services gradually began to go up in real
terms. This was in contravention of the market-based justification for
demutualization paraded before the members and the general public
in the time leading up to the act itself. Former members thus had to
balance the immediate gain represented by the free shares received
on demutualization against the longer-run higher cost of mortgages
and other services. Of course, for new customers there was just a
downside (higher prices), especially first-time homebuyers finding the
cost of a mortgage higher than before.
The tragedy of commercialization finally peaked with the col-
lapse and takeover of virtually all of the main building societies
that had been established from the late eighteenth century onwards.
These institutions had accumulated many years of solid service to the
community, and particularly to poor members seeking to purchase
their own home. Their downfall was related to risky investments
designed to hike up profits at any cost. In a matter of years, a number
of long-established institutions providing real benefit to the poor
were destroyed. The global financial crisis that began in then
finally put paid to the few remaining demutualized building societies,
not one of which managed to survive as an independent entity. For
116 | Five
example, long the world’s largest building society, the northern-
England-based Halifax Building Society succumbed to the financial
crisis in a most dramatic way. After its demutualization the decision
was taken to enter into a number of takeovers and a merger that took
it into areas of business it had little prior knowledge of. It jumped
into many risky and speculative projects, especially speculation on
commercial property, which all ended up making massive losses as
the global economy began to deteriorate. Now known as HBOS, it
eventually had to be rescued from its own managers by the British
government, and it was handed over for virtually nothing to one of
its main banking rivals. Contrast this embarrassing fate with that of
the building societies that in the s chose to remain as mutual
saver-owned institutions, such as the Nationwide Building Society.
Relying on traditional safe practices of retail deposits, minimal use
of wholesale funds and almost no contact with exotic instruments
like derivatives, all of the old building societies managed to survive
the global financial crisis largely intact.
Consider now a little more of the shocking detail surrounding the
most high-profile commercialization disaster, that of the Northern
Rock Building Society in the north of England. Probably the best
account of this tragicomic episode has been provided by Larry
Elliot and Dan Atkinson, in their brilliant book The Gods that
Failed (which I will mainly draw upon now). Northern Rock was
the Newcastle-based building society that in demutualized and
converted into a ‘flashy, stop-at-nothing’ bank.6 Under the guidance
of its young dynamic managing director, it grew rapidly into one of
the major lenders in the housing market. Spectacular growth of per
cent per year was achieved, however, only by taking at least two huge
risks. First, in the absence of sucient savings from clients, Northern
Rock began to use large amounts (eventually as much as per cent)
of short-term money-market funding to expand its property mortgage
portfolio. Second, Northern Rock became infamous for its willingness
to work with the riskiest clients, on the basis that, with apparently
permanently rising property prices and accompanying economic
prosperity, such clients could eventually float o their initial debt
and repay successfully. But even in the case of default, rising house
prices should still see the bank getting its money back through the
quick sale of repossessed property.
As long predicted, the property market finally took a downward
turn in /, however, and defaults started edging up. When the
Commercialization | 117
global economy began to head in a seriously downward direction at
the end of , all short-term funds were immediately cut o. With
no alternative arrangements in place, Northern Rock plunged into
the crisis its detractors had long said was inevitable. Savers quickly
became aware that Northern Rock was unable to obtain further
funding on the money markets. This started the first full-blown run
on a British bank since . Northern Rock was immediately taken
into public ownership. A £ billion loan from the government, plus
further guarantees, was provided to stabilize the newly nationalized
bank. With UK government support, new management and a complete
change of operating philosophy, Northern Rock was able to survive.
All told, as Elliot and Atkinson conclude, demutualization and the
aggressive commercialization set in motion as a result have been
hugely damaging to the UK economy. Northern Rock was emblematic
of the debt-laden, short-termist and ultimately supremely destructive
financial system that had resulted in the UK thanks to the massive
s drive for greater commercialization.
An important lesson from Northern Rock needs to be empha-
sized in the specific context of our discussion of commercialized
microfinance. The commercialization process quite quickly destroyed
the institution’s long-standing goal of providing quality low-cost
services to members. The senior management team replaced this
historic ‘mission’ with a new central goal and a new subsidiary goal:
first, maximize short-run profit, thereby to, second, maximize (or
at least justify) the extremely generous and rising financial rewards
accruing to those same senior managers. In addition, a transparently
false public narrative was constructed to shield the shareholders and
wider publicfrom what was actually going on. Many who should
have known better bought into the idea that Northern Rock was
genuinely aiming to serve the public, even as it engaged in an increas-
ingly bizarre series of financial acrobatics to maximize short-term
profit, and as senior managers hiked up their financial rewards to
spectacular heights. Many financial analysts went along with the
deception, for no other reason than it correlated with their own
ideologically driven view that the financial sector (always) needed to
be liberalized. In short, those seeking personal enrichment strongly
favour commercialization as the required ‘cover’ to achieve this goal.
But the process of commercialization opens the door to powerful
impulses leading to ‘mission drift’, institutional chaos and even an
institution’s eventual demise.
118 | Five
The gathering storm
Let us now return to the specific issue of microfinance commer-
cialization. As noted, the commercialization drive taking place in
the late s began to produce a growing number of financially
self-sustaining MFIs around the globe. The ambition and intent were
that such examples would and should be rapidly multiplied across the
globe. Progress has been slow, however, and there are still relatively few
fully self-financing MFIs in operation around the world (see Chapter
). Nonetheless, commercialization and financial self-sustainability
remain the ultimate goals of the microfinance industry and the wider
international development community. It is clear that ‘new wave’
MFIs are already beginning to dominate the microfinance industry.
Accordingly, we need to examine what the future holds for the poor
once this global scenario transpires. So what are the results in those
localities, regions and countries that have been touched the most by
commercialized ‘new wave’ microfinance?
Bolivia’s excellent adventure Long one of Latin America’s poorest
countries, Bolivia is also the Latin American country where the ‘new
wave’ commercialization model has made the most rapid inroads. The
microfinance sector in Bolivia has been described as ‘one of the jewels
in the crown of microenterprise finance’,7 as well as the world’s most
important example of the commercialization of microfinance. By the
late s Bolivia enjoyed an extensive raft of strongly commercial-
ized MFIs. Bolivia is also home to one of the pioneering examples
of a commercialized MFI – BancoSol. If it is at all possible for any
one country to demonstrate the far-reaching poverty-reducing and
development benefits of commercialized microfinance, then it should
be Bolivia. In practice, however, other than simply delivering ‘more
microfinance’, the commercialization-driven expansion of micro-
finance in Bolivia has produced pretty much the opposite of what
was originally promised by the microfinance industry.
First, it is almost impossible to find any meaningful correlation
between the quite dramatic expansion of microfinance in Bolivia since
the late s and positive changes in the level of poverty and devel-
opment. As Vik notes,8 the emphasis in Bolivia is almost exclusively
upon the performance of the individual MFI, and the performance
indicators used often conceal (perhaps deliberately) the lack of impact
on poverty. Some researchers, notably microfinance specialist Paul
Mosley,9 do claim to have found evidence that poverty reduction gains
Commercialization | 119
through microfinance took place from the late s onwards. But it
was also admitted that much of the evidence for this understanding
was unreliable. For one thing, researchers were unable, or perhaps
unwilling, to factor in the issue of ‘drop-outs’ and failed clients, the
numbers of which began to rise quite dramatically in the late s.10
If these unfortunate individuals are eventually dumped into deeper
poverty, as I argued in Chapter is typically the case, and as much
evidence from Bolivia confirms,11 then the supposed ‘gains’ registered
from microfinance need to be significantly adjusted downwards. At
any rate, the fact is that it is widely agreed that until the advent
of the Morales government in , there had been more than two
decades of almost no progress in reducing the level of income-based
poverty in Bolivia. Real GDP per capita was actually lower in
than in the late s, and a massive per cent of the population
were living below the poverty line in .12
So, if there exists in Bolivia a robust correlation between sus-
tainable poverty reduction and a local financial system eectively
dominated since the early s by the provision of commercialized
microfinance, it remains an extremely well-hidden one. In fact, as
the new Morales government very much seems to think is the case,
there is indeed a correlation between microfinance and poverty; but
they are of the belief that it is one where microfinance exacerbates
poverty, not resolves it (see next point).
Second, as previously discussed, it matters greatly not just that
finance is available to enterprises, but also to which enterprises.
When not simply disbursing consumption loans, the overwhelming
predilection of Bolivia’s MFIs to date has been to work only with the
very simplest informal microenterprises, and to eschew contact with
more sustainable enterprise projects. The longer-term result of this
commercialization-driven preference is that it has gravely undermined
the modest light industry and agricultural production and processing
base that Bolivia had painfully built up from the s through to the
s.13 Dazzled by high repayment rates and the large profits enjoyed
by Bolivia’s MFIs, the international development community and the
microfinance industry remained oblivious to the fact that Bolivia’s
light industrial and agricultural structures were very eectively being
starved of capital on appropriate terms and maturities, and so were
gradually disintegrating. These valuable foundations were steadily
replaced by a microfinance-induced bazaar economy, alongside the
continuation of primitive subsistence agriculture for the majority of
120 | Five
Bolivians working the land. In short, commercialized microfinance
appears to have undermined the long-term fight against poverty and
underdevelopment in Bolivia.14
Third, thanks to the very rapid profit-driven expansion in the
supply of microfinance in the late s, Bolivia was plunged into
an economic crisis. Initially, as in all speculative episodes, the profit-
driven overselling of microfinance created an atmosphere of progress
and euphoria. For sure, the poor generally had more money to spend
on consumption goods thanks to microfinance, and perhaps also a
little could go into income-generating projects, or saved in order
to make the first couple of repayments. Even though it was well
known that many poor individuals were accessing multiple loans
from dierent MFIs,15 many simply seeking to repay their existing
microloan(s), the implications of this trend were largely ignored.
‘New wave’ microfinance advocates were particularly pleased with
the progress apparently being made thanks to Bolivia’s almost total
adoption of their recommendations. Inevitably, however, the turn-
around came. Large numbers of poor borrowers began to find they
could no longer repay their higher debt levels, and default rates began
to rise rapidly.
By the entire financial sector in Bolivia had plunged into crisis.
Domestic investment began to decline alarmingly. MFIs concentra-
ting on high-profit consumer microloans were particularly hard hit.
Bolivia’s microfinance sector, and the wider financial sector, began
to reel. Between and two of the largest MFIs, BancoSol
and Prodem, lost and per cent of their clients respectively. With
almost no progress to show in terms of sustainably reducing poverty
in what was Latin America’s showcase for microfinance, the Bolivian
economy and society then began to buckle under the pressure of the
immediate withdrawal of the supply of microloans. Even the most
determined supporters of commercialization were left struggling to
present an explanation as to why the ‘new wave’ commercialization
model had imploded in such a destructive manner.16
Since the microfinance collapse of the late s and early s,
things have recovered somewhat. One major result linked to the overall
failure of microfinance, however – both its earlier inability to address
poverty and promote sustainable development, and then its eventual
crisis – was that it finally brought to a head the growing popular
disenchantment with neoliberal policies. This eventually resulted in
a vote for radical change in the election, elevating to power the
Commercialization | 121
leftist Evo Morales. To those involved in the microfinance sector in
Bolivia, as well as for neoliberals in the country and everywhere else,
this was seen as a major blow.17 While not completely abandoning
commercialized microfinance – at least not yet – the Morales govern-
ment has nevertheless very definitely edged it aside as it tries to address
high poverty in Bolivia. A new Bolivian constitution passed in early
implicitly repudiates many of the traditional methodologies
and programmatic outcomes of microfinance, such as simple petty
trade-based microenterprises, and stresses instead the urgent need
to rebase Bolivia’s future upon restarting local production and the
promotion of sustainable agricultural activities.
Two new programmes are seen as important in moving away
from the negative outcomes of microfinance experienced in the two
decades before the Morales government. First, steps were quickly
taken to create a state development bank for SMEs – the Banco
de Desarrollo Productivo (BDP). Among other things, the BDP is
designed to begin to pilot the typical local economy in Bolivia away
from its reliance upon simple trade-based activities and unproductive
subsistence farming, and towards a much greater focus on supporting
meaningfully scaled-up industrial and agricultural production-based
activities. One of the major concerns in Bolivia, as noted above, was
the large and growing percentage of Bolivia’s savings (including large
remittance income flows) being recycled into very simple microenter-
prise activities, mainly petty trade-based activities.18 Those behind
the establishment of the BDP saw no way to deal with poverty in
Bolivia if there was no attempt to directly address this debilitating
trend.19 Microfinance in Bolivia eectively constituted a ‘poverty
trap’, monopolizing valuable funds that could otherwise have been
oered to the most growth-oriented enterprises. The BDP aims to
break Bolivia out of this microfinance-driven ‘poverty trap’, by sup-
porting instead the establishment of an enterprise sector based on at
least some modest levels of technology, innovation, non-local market
penetration, higher-value-added operations, scale economies, and so
on. One might describe the BDP as fully compatible with successful
East Asian development banking models, as well as the successful
Brazilian development banking model, and so a first step in the right
direction.
Alongside the BDP, a second important programme introduced
by the new Morales government involved the increasingly popular
conditional cash transfer (CCT), entitling the very poor to a small
122 | Five
cash sum on condition that they take their children for health check-
ups or ensure that they go to school regularly, for example (see
Chapter ). CCTs are slated to help the very poorest maintain a
minimum level of consumption. CCTs will also address the huge
issue of inequality in Bolivia, since they represent an elemental form
of wealth redistribution. Finally, and equally importantly, it is also
hoped that CCTs can replace the poor’s debilitating dependence upon
ultra-expensive consumption loans provided by some of the newest
and most aggressive MFIs.
Overall, Bolivia’s more-than-twenty-year experiment with com-
mercialized microfinance has thrown up almost no independently
verifiable evidence to show that it has achieved anything positive. On
the contrary, with poverty levels rising and industrial and agricultural
disintegration accelerating during microfinance’s rise to ubiquity, and
then a commercialization-induced ‘oversupply’ crisis the almost inevit-
able consequence, the massive increase in the supply of microfinance
appears to have done far more damage than it has done good. The
result is that the microfinance industry has been forced on to the back
foot. Arguing that much of the most recent damage was caused by an
influx of new MFIs serving the consumer loans sector, including one
very large MFI (Acceso FFP) that was a subsidiary of a large private
financial company based in Chile, key advocates in the microfinance
industry essentially had to condemn the increased competition and
lower interest rates that resulted.20 Yet these are two of the principal
benefits most often claimed for the ‘new wave’ microfinance model,
now being portrayed as the villains of the piece. This highlights the
desperate eort by ‘new wave’ microfinance advocates to try to pin the
blame for an oversupply-related crisis on anything but the real culprit
itself – commercialization. (It also doesn’t help their case to find that
the private microfinance sector in Bolivia is once more coming under
serious pressure thanks to the commercialization-driven oversupply
phenomenon – see below.) In the same vein, the microfinance industry
cannot credibly explain why it is that almost total microfinance
saturation in Bolivia over the last twenty years or so has produced no
palpable impact on poverty. This fact also starkly contrasts with the
rapid reduction in poverty brought about by a number of successful
programme interventions undertaken by the new Morales government
from onwards,21 including its establishment of a sizeable number
of growth-oriented SMEs and cooperatives.
Commercialization | 123
Who wants to be a ‘microfinance millionaire’? One rather obvious
outcome of the commercialization trajectory in microfinance has
been the rise of a group of ‘microfinance millionaires’. Though his
subsequent fame and public speaking and consulting services have
made him a wealthy and influential individual, Muhammad Yunus
is also noted for having extracted little personal financial reward
directly from the Grameen Bank he founded. Other high-profile
individuals in the microfinance movement are much less grounded
in altruism, however. Many private individuals in at the founding of
what was to become a major MFI have subsequently and very oppor-
tunistically moved to convert their original position as an employee
into stratospheric personal wealth. More importantly, the lure of
actually becoming a member of this exalted club has itself become
a major ‘feedback’ driver behind the increasing commercialization
of microfinance.
The first objection to this trend is a general one. Profiting so
egregiously from the suering of poor individuals is morally and
ethically wrong. In the aftermath of such catastrophic misbehaviour
on Wall Street in recent years, many would surely now agree. Of
course, some hold that big business and savvy entrepreneurs can
make healthy profits in poor communities while greatly benefiting
the poor. This is a perennially powerful ‘win-win’ idea that has not
gone away – which would be fine, if it were true. Unfortunately, the
idea was given renewed legitimacy by C. K. Prahalad, the author of
the best-selling book The Fortune at the Bottom of the Pyra-
mid: Eradicating Poverty Through Profits.22 Because Prahalad’s book
supposedly provided renewed moral and economic justification for
the activities of many entrepreneurs and multinational corporations
(MNCs) in developing countries, it became extremely popular in
politics, business and international development policy circles. Even a
cursory inspection, however, shows that most of Prahalad’s signature
ideas fall down.23 And as I point out in the next section, Prahalad’s
idea that ‘inclusive’ supply chains will greatly benefit the poor is also
usually quite mistaken. In fact, what seems to be happening is that,
in the name of advancing their cause, the poor are yet again being
taken advantage of. As noted Indian agricultural economist Devinder
Sharma indignantly describes it,24
There can be no better business opportunity than starting a
micro-finance institution with assured returns and per cent loan
124 | Five
recovery.You caneven think of trading on the stock exchange after
a couple of years. And still more importantly, you can hold your
head high and claim that you are helping the poor to come out of
the poverty trap.You don’t have to feel ashamed and morally guilty.
The elite in the society have knowingly (or unknowingly) given you a
license to loot.
Moreover, and my second point here, in truth the ‘microfinance
millionaires’ are actually very bad for sustainable local economic
development. From a moral standpoint, of course, it is for the in-
dividual to decide whether or not they are ‘repulsed by the idea of
MFIs making profits from low-income people’.25 But if the end result
of ‘making profits from low-income people’ is that such low-income
people are actually made much worse o, then it becomes an eco-
nomic development and equality issue, and it ceases to be (simply)
a moral or ethical issue. The problem is that the lure of such huge
financial rewards inevitably distorts and misdirects the institutional
response to poverty, especially rural poverty. This becomes clear if we
refer once more to the classic ‘dualistic’ financial structures found in
many developing countries, structures that are almost wholly antagon-
istic to development and poverty reduction. Financial sector ‘dualism’
did not arise to help the poor – it actually undermined their attempts
to escape poverty – but primarily to construct a new financial elite
through exploiting the poor. ‘New wave’ microfinance and the inevit-
able outgrowth of ‘microfinance millionaires’ are simply ‘dualistic’
financial structures under a dierent name.
In addition, third, we also need to remember that entrepreneur-
ship in the microfinance sector is quite dierent from conventional
productive entrepreneurship. Entrepreneurship associated with the
‘microfinance millionaire’ approach is typically founded on the risk
incurred and funds provided not by the entrepreneur hoping to make
his or her fortune, but by someone else – that is, by the international
donor community, the local government and various others. It is
wrong that, if the MFI succeeds in passing through the very risky
start-up stage thanks to crucial support from public and other exter-
nal bodies, the future ‘microfinance millionaires’ can then take over
and radically restructure the venture in order to benefit personally
from thereon in. But if the MFI fails as it goes through this risky
initial phase, those same individuals simply lose their job and walk
away otherwise unharmed, leaving the public bodies (and the general
Commercialization | 125
population, through taxation) to absorb any losses. In other words,
we are not talking about conventional productive entrepreneurship
here, but an unethical and one-sided Wall Street-style ‘accumulation
by dispossession’ process. The future ‘microfinance millionaires’ can
appropriate all future profits in an MFI, but if there are any losses
then, no problem, they are simply socialized.
Microfinance-led ‘inclusive’ supply chains: who is really meant to
benefit? A new model that has emerged in international development
circles in recent years sees the poor as an opportunity, rather than a
responsibility or burden. One of the main ways that this new model
ostensibly seeks to help the poor is through their inclusion in subcon-
tracting arrangements involving national companies and, preferably,
MNCs.26 C. K. Prahalad’s ‘bottom of the pyramid’ idea, just noted
above, has been very influential in promoting the idea of ‘inclusive’
supply chains. Some of the international development agencies have
also been active in this field, notably UNDP.27 Consider also that one
of the main costs that businesses typically incur when attempting to
expand into a new market is the setting up of a functioning supply
chain. Especially in developing countries, the opportunity for profit
may be possible only if the supply chain is established on the lowest
possible cost basis. One way that businesses in developing countries
have attempted to reduce the financial outlay and risk involved in
constructing a supply chain is to pass on the costs and risks to other
weaker parties in the supply chain (that is, the poor). Technically
speaking, this is nothing more than ecient supply chain manage-
ment.28
A growing trend here is to use microfinance in order to construct
an ‘inclusive’ distribution chain. Large national companies and MNCs
working in developing countries are now being encouraged to use
microfinance as a way of inserting individual microenterprises into
their distribution chains. This is done in order to greatly reduce the
costs and risks to the large company or MNC. The technique is
generally as follows.
The large company starts by identifying a group of poor in-
dividuals in the country in question who might wish to become
part of their distribution chain. Members of this group of poor
individuals are then helped to contact a local MFI and to obtain a
microloan, which they can use to advance-purchase some item to be
sold or simple machine to be used. The large company often provides
126 | Five
some other inputs to the new distribution chain members, such as
training, storage, billing services, and so on. Importantly, the fiction
is created that such microenterprises are independent businesses,
rather than – which is actually the case – an integral component in a
top-down-driven distribution chain with almost no ability to do any
other business outside of the supply chain. In fact, some distribution
chain agreements specifically forbid the microenterprise undertaking
business with any other party. This fiction of independence is gener-
ally needed for two reasons. First, to ensure access to a microloan,
which might be refused if it became clear that the microenterprise was
actually an integral part of a formal/legal distribution chain, and not
an independent microenterprise at all. Second, there are important
tax advantages independent microenterprises can take advantage of
that formal/legal distribution chain participants cannot, principally
opportunities for tax avoidance. Overall, the attraction of such a dis-
tribution chain arrangement is clear: the large company can establish
and operate a distribution chain at a greatly reduced cost and risk,
while the poor are oered the opportunity to become ‘independent’
microenterprises right from the start. A ‘win-win’ situation surely?
Well, this is the theory anyway. But it seems that in most cases
serious long-term problems arise which swamp most of the short-
term benefits. One very central problem that arises is that in order
to maximize sales and profits, the large company typically seeks to
quickly establish as large a number of microenterprise partners as pos-
sible. While this maximizes sales of the final good being distributed,
it also rapidly diminishes the local market share held by each indi-
vidual microenterprise. This in turn quickly forces the microenterprise
into a situation of bare survival. Of course, what we are describing
here is yet another example of the ‘fallacy of composition’ problem
raised earlier. In developed countries, as I noted in Chapter , the
issue of sales territory is a crucial issue subject to very precise legal
undertakings regarding its size, advertising commitment, rules for
those transgressing into someone else’s sales territory, and so on. But
in developing countries it seems that large companies are extremely
reluctant to agree to such conditions. The result is that, through no
fault of their own, the poor involved in the distribution chain mostly
end up in great diculty later on.
Recall once more the example raised in Chapter of the Grameen-
Phone ‘social business’. Suspicions arose early on that the business
model was actually fundamentally flawed, and that the intentions
Commercialization | 127
behind it were not what the general public and international develop-
ment community were being sold. As we saw, although the very first
wave of telephone ladies did fairly well from their microenterprises, all
those coming later did not do well at all, because by then – as could
have been expected – the local market had reached its upper limit.
Rather than generate new customers, the telephone ladies became
engaged in a desperate struggle to grab customers from each other,
with the result that the poverty-reducing benefits disappeared for
most involved. Suspicions were raised further when a dispute broke
out between Telenor and Grameen Telecom. Partly because the entire
project was so hugely profitable, Telenor decided to renege on an
initial deal it had apparently agreed to with Muhammad Yunus back
in the late s, which was to pass on free of charge its per cent
holding in GrameenPhone over to the non-profit Grameen Telecom.
The idea was that the Grameen telephone ladies would then benefit
as shareholders in a business that they had clearly had a major hand
in setting up and running. This was easier said than done. Part of
the problem was that the initial deal with Telenor was made when
it (Telenor) was under full public ownership. In the meantime, the
group was part privatized and its new private profit-seeking majority
shareholders were now very reluctant to give away the ‘diamond’ in
its portfolio. A deal was finally reached in late , prior to the
announce ment that an IPO of GrameenPhone was planned for Oct-
ober , allowing Telenor to capitalize on its ownership stake when
it chooses to do so. These delays and machinations help to illuminate
the real and conflicting motivations that too often lie behind projects
ostensibly meant to serve a social purpose but which, coincidentally
we are inevitably told, generate a huge amount of value to the MNCs
and large companies taking part.29
Similar distribution chain problems to GrameenPhone’s already
seem to be emerging in the latest social business case involving Grameen
Bank, this time with the French company Danone. In Grameen
Bank and Danone formed Grameen Danone Foods Ltd (GDFL), for-
mally one of the first multinational social businesses. Established with
a fifty-fifty ownership structure, GDFL was designed to manufacture
and distribute a yogurt product (Shakti doi), which Danone claims has
a number of health benefits as well as nutritional content. Danone put
$, of its own money into GDFL, with the rest coming from the
Grameen Bank. According to Ghalib and Hossain,30 the original deal
is that Danone expects only its initial capital to be returned after three
128 | Five
years, and any profit made in future is to be reinvested back into GDFL,
less a per cent dividend to its shareholders. As with most initiatives
concerning Grameen, the project was an instant media sensation.31
As in the case of GrameenPhone, however, a little later on it became
clear that the saleswomen were going to benefit far less than they had
initially been led to believe. What had happened? First, around ,
saleswomen were initially located to sell the yogurt locally, with each
saleswoman averaging sales of around sixty to seventy pots per day.
Partly thanks to a rise in milk prices, however, but partly also thanks
to further growth in the number of saleswomen and, initially, a weak
product (not sweet enough), average sales and earnings per seller
soon began to decline. Many of the saleswomen gave up the business
because servicing the original microloan became much harder on such
low turnover, which in turn created some repayment problems. The
initial period of well-publicized excitement and intense PR activity
soon began to give way to growing anger and disillusion among many
saleswomen in the distribution chain.32
Another problem was that low demand in rural areas precipitated a
decision to produce a much larger pot of yogurt to be sold at a higher
price, and mainly to much richer individuals resident in the capital
city, Dhaka. There is now a possibility that the urban community
will become the main market, with a gradually declining percentage
of product routed back to the rural communities to be sold at lower
prices. Moreover, we must remember that such cross-subsidization
is a useful pro-poor concept, but experience from many parts shows
that it all too often gets phased out at some future stage as com-
mercialization pressures come to the fore.
We also need to highlight the extent to which Danone has been able
to build up, very cheaply and almost risk-free, a major distribution
and ‘visibility’ platform for its future dairy product lines planned
for Bangladesh. As an entry strategy, the tie-up with Grameen has
been very useful indeed. But, we must ask, is it right that Grameen
should basically establish an MNC in a poor country that otherwise
has plenty of dairy organizations capable of servicing local demand?
In addition, Bangladesh itself and neighbouring countries are not
inexperienced in building large-scale organizational structures, such
as farmer-owned dairy cooperatives, that can work very well for
the poor as a poverty reduction tool. India’s experience with milk
cooperatives supported through ‘Operation Flood’ is the most obvious
example of the enormous potential to reduce poverty and promote
Commercialization | 129
sustainable development through collective action, thanks to pro-
active government support helping small dairy farmers to form their
own cooperatives and to thereafter expand.33 Might it not be the
case, then, that Grameen is being used as the ‘Trojan horse’ to allow
Danone to enter a market that would not otherwise take kindly to
its products? And might not the existence of the high-profile ‘social
business’ option displace organizational alternatives, such as coopera-
tives, that would be far better, as in India, in terms of promoting
sustainable poverty reduction?
Fourth, it is of real concern to many that the health benefits claimed
for Shakti doi yogurt remain to be definitively proven by anyone
outside of GDFL. This worry arises because, in Europe, Danone is
struggling to defend itself against widespread claims that it has been
cynically inventing health benefits for one of its main product lines
(a probiotic milk drink), a strategy apparently adopted as part of
an aggressive eort to build market share at all costs.34 What might
Danone’s borderline-legal actions in Europe suggest in terms of the
company’s motives in establishing its social business with Grameen
Bank in Bangladesh?
On the face of it, the GDFL experiment in Bangladesh seems like
another example of a somewhat cynical business strategy increasingly
being adopted by MNCs in developing countries, one that sanctions
the use of microfinance to build a distribution chain that is by far of
most benefit to the MNC. The MNC takes almost no risk and invests
a tiny amount of capital. The risk and investment required to build
the distribution chain are largely taken on by the poor participants
invited into the project, using a microloan. Because the project is
very neatly marketed as ‘of benefit to the poor’, a number of other
important benefits arise for the MNC. The business attracts good
publicity in the country, high-level contacts with government are
forged, and the MNC is given significant freedom to conduct busi-
ness transactions just as it wishes. Most importantly, the MNC gains
entry into a country and can begin to build up its market presence
and visibility alongside the immediate project. Meanwhile, the poor
directly involved appear to gain very little in comparison with the
MNC, and probably would have been better o had they been helped
to embark upon establishing a cooperative instead. The wider local
and national community eventually suers too, losing an important
element of local demand thanks to the eventual profit, dividend and
management fee repatriation to the rich Western countries.
130 | Five
Rather than functioning as a genuine poverty reduction opportu-
nity for the poor, Muhammad Yunus’s ‘social business’ concept is a
Janus-faced innovation. Certainly, it is a brilliant new opportunity for
MNCs everywhere. The sustainable poverty reduction side, however, is
often largely nothing more than good PR. Even if malice aforethought
is not proved, it still remains the case that much of the optimism
generated with regard to highly commercialized microfinance-driven
distribution chains and ‘social businesses’ would appear to be very
seriously misplaced.
The growing need to enforce fairness and transparency in micro-
finance One of the abiding myths of microfinance holds that a
commercialized MFI will remain true to its founding mission to
serve the poor. Microfinance is about poverty reduction, and, so the
argument runs, however this objective is reached, it still remains the
objective of an MFI no matter what happens to its organizational
structure. Some even go so far as to claim that selflessly serving the
poor is ‘in the DNA of microfinance’.35
The growing commercialization of microfinance, however, has led
to this overly optimistic scenario coming under serious review. In fact,
there is a growing realization that converting MFIs into straightfor-
ward profit-seeking businesses inevitably means that there is always a
loss, often a complete loss, of the original social mission. Above all,
in the absence of strong regulations and controls, and with so much
prior encouragement to deploy Wall Street-style methodologies and
tactics, it seems that too many profit-seeking commercialized MFIs
are all too often willing to hoodwink and abuse their poor clients.
As we will see below, the case of Compartamos has stimulated a
flurry of initiatives designed to rein in the worst practices of MFIs.
But even before this high-profile example hit the headlines, many
individuals within the microfinance industry had taken steps to try
to ensure that microfinance would not become an abuse of the poor,
and that MFIs would not simply transmute into a ‘feel-good’ version
of the sort of ‘doorstep lending’ organizations found in the developed
countries. One such body formed to try to prevent abuse of the poor
clients is the ‘Alliance for Fair Microfinance’. Established in by a
group of high-profile microfinance practitioners, including Malcolm
Harper, one of the leading lights in the microfinance field for many
years, the Alliance aims to promote client interests in an industry that
is rapidly becoming the preserve of hard-nosed professional managers
Commercialization | 131
and investors. The Alliance quickly garnered an impressive roster of
practitioner-members alongside its high-profile founder-members. It
states:36 ‘In microfinance today, growing numbers of practitioners
are relying on practices that would be considered illegal or unethical
in mature financial markets – untrue information, unlawful repos-
session, and usurious interest rates in particular. Lack of adequate
customer protection in emerging markets thus easily opens the door
to exploitation of poor people.’
There is also ‘MicroFinance Transparency’, a body formed as a
direct response to the Compartamos aair. Founded by Muhammad
Yunus and Chuck Waterfield, a long-standing microfinance adviser,
MicroFinance Transparency describes itself as a global initiative seek-
ing fair and transparent pricing in microfinance. The justification
for Yunus’s involvement was, in his own words that, ‘Microfinance
emerged as a struggle against loan sharks, so we don’t want to see
new loan sharks created in the name of microcredit.’37 Waterfield has
called the new body ‘an industry-based truth-in-lending eort’. Very
quickly the organization has put together a long list of supporters,
and financial support was quick to arrive from many international
development bodies in order to spread their message. By their own
estimates nearly per cent of the world’s microfinance clients are
now covered by their campaign.38
Another upshot of the Compartamos aair was the establishment
by a self-selected group of senior microfinance advocates of a code
of conduct for the microfinance industry. The so-called ‘Pocantico
Declaration’, named after the conference centre in New York in
which it was drafted, is essentially an attempt to save the micro-
finance industry’s reputation in the face of a growing realization that
the commercialization of microfinance has eectively subverted its
original purpose. An initiative of Deutsche Bank, the Boulder Institute
and CGAP, the Pocantico Declaration is designed to re-establish the
poverty reduction credibility of the microfinance industry within the
international development community (Compartamos’s massively
successful IPO more than established its credibility in the hard-nosed
world of the international financial community).
Seen from the outside, it is telling that even long-time microfinance
advocates feel they had better move fast to rein in the burgeoning
unethical activities of the ‘new wave’ commercialized MFI sector. This
is an obvious sign that things are not working out as the microfinance
industry promised they would. Moreover, while probably mainly
132 | Five
well meaning in intent, it remains to be seen what these campaigns,
organizations and uplifting statements can actually achieve. One pos-
sibility is that such campaigns might even end up being manipulated
and circumscribed by those they are designed to regulate. For example,
ACCIÓN, probably the most important non-state body promoting
the commercialized ‘new wave’ microfinance model, announced in
April a new ‘Campaign for Client Protection’. It maintains that
this campaign is about establishing what amounts to a microfinance
Hippocratic oath. It is not beyond the bounds of possibility, however,
that such an initiative might actually be something else; a somewhat
cynical attempt to shape, or put a limit on, the unfolding consumer
protection measures directed at commercialized microfinance (e.g.
interest rate caps). Such a spoiling tactic is not without precedent.39
All told, the deliberate injection of Wall Street’s values and
methodo logies into microfinance in the s, not least by those (such
as ACCIÓN) now taking steps to supposedly curtail otherwise entirely
predictable Wall Street-style developments, has created a financial jug-
gernaut that has now taken on a life of its own. Given this multibillion-
dollar Wall Street-style industry, with huge wealth to be made by those
who can gravitate into key management and/or ownership positions
in an MFI, as well as in the constellation of support services depend-
ent upon commercialized MFIs (research, advisory, evaluation, etc.),
changing course now will surely be determinedly resisted.
And yet another microfinance crisis emerges in Andhra Pradesh In
recent years India has made enormous progress in expanding the sup-
ply of microfinance. From the s onwards, one state stood out as
having achieved almost total saturation with microfinance – the state
of Andhra Pradesh. As Ghate recounts,40 Andhra Pradesh became
known in the s as the ‘Mecca’ of microfinance in India. It was
the HQ for the four largest MFIs and the location for more than half
of the self-help groups (SHGs) linked to banks and channelling bank
finance down as microloans to SHG members. With the blessing of
the authorities, and very much as per the commercialization model,
large numbers of private business people also began to jump into the
field of microfinance. Finally, also caught up in the general excite-
ment surrounding microfinance was Andhra Pradesh’s state-owned
SHG – Velugu – which was also encouraged to rapidly expand. The
result, according to Ghate once more,41 was that ‘ per cent of poor
households in AP had already been covered [by Velugu] by March
Commercialization | 133
[and it was aimed] to cover the rest by the end of ’. Many
in the microfinance industry, and in the Andhra Pradesh and Indian
governments, were keenly anticipating the huge poverty reduction
and development benefits that would flow from this superabundance
of microfinance.
Instead of generalized progress, however, in early the micro-
finance sector was plunged into crisis. The state government of Andhra
Pradesh raided and temporarily closed down the oces functioning
in one district (Krishna), setting o a shock wave right across India.
The raid was an immediate response to a rapidly growing number of
complaints about usurious interest rates and highly commercialized
MFIs ‘hard-selling’ microloans to poor individuals with almost no
realistic way of repaying (at least not at the interest rates that they
had originally, and perhaps unwisely, agreed to). A further aggravating
background factor was the rapidly accelerating number of suicides,
which most studies relate to rising farmer debt. In just three months
in (May–July), for example, more than four hundred farmers
committed suicide in Andhra Pradesh, and the numbers were rising
fast.
The Andhra Pradesh microfinance crisis caused many analysts
to question the previously thought immutable notion that ‘more
microfinance equals more development’, and also to warn about the
huge build-up of micro-debt elsewhere in India.42 It was bad enough
that microfinance had apparently done little to counter the increase
in rural poverty and agricultural sector distress experienced in Andhra
Pradesh in the run-up to the crisis in . But it was obviously
discomforting for many in the microfinance industry to find, yet
again, that the microfinance sector was creating serious economic
and social distress in precisely a region where it had achieved almost
total ‘saturation’. This was not an optimistic portent, particularly
for those other Indian states striving for even more microfinance. In-
deed, someother Indian states were already experiencing the negative
impacts of having achieved their own oversupply of microfinance.43
Although there were several proximate causes for the events in
Andhra Pradesh, the primary underlying force behind the crisis was
the rapidly growing commercialization of microfinance. A number
of adverse developments were involved. One was the toleration of
a very large number of multiple memberships, which most MFIs
agreed to in order to build market share. Multiple memberships in
the three largest MFIs had reached per cent by .44 Such adverse
134 | Five
market signals notwithstanding, many new private MFIs continued
to enter the market in search of their own fortune. And the banking
system, particularly the largest bank – ICICI Bank – also continued
to expand its highly profitable microfinance portfolio through SHGs.
Local informal sector lenders also began to see a rise in clients quite
openly seeking a new loan to repay other MFI loans, which, once
more, they openly accepted in order to continue building market
share (and for individual loan ocers to obtain their bonuses). In this
context, Shylendra has also reported on the rapid growth of ‘client
poaching’.45 All told, MFIs in Andhra Pradesh were widely seen as
‘behaving like businesses’ – that is, building market share at almost
any price, while also setting interest rates that were deemed by many
to be far too high for the poor clients (especially rural clients) that
they were actually supposed to be helping.
As I explained in Chapter , the agricultural sector in India,
but particularly in Andhra Pradesh, was particularly hard hit by
its engage ment with commercialized microfinance. With mounting
evidence of a crisis in agriculture, the state authorities had to com-
mission a major report to look into the problems – the ‘Report of the
Commission on Farmers’ Welfare, Government of Andhra Pradesh’,
released in late . It noted that ‘Agriculture in Andhra Pradesh is
in an advanced stage of crisis’46 and that ‘The heavy burden of debt
is perhaps the most acute proximate cause of agrarian distress. The
decline of the share of institutional credit and the lack of access to
timely and adequate formal credit in the state have been a big blow to
farmers, particularly small and marginal farmers.’47 A major problem
was that far too many of the least productive subsistence farms were
able to access a microloan, when it was clear that they could really
do almost nothing with it. Any marginal increase in productivity
was simply not enough to cover the high interest rate charges on the
microloan that gave rise to it.
The overall result of these factors was that the subsistence farmer
population in Andhra Pradesh got into a ‘microdebt trap’ in a big
way. As noted in Chapter , in it was found that per cent
of farm households in Andhra Pradesh were indebted – the highest
proportion in India – compared to around per cent at the all-India
level. Aggarwal also showed that a much higher proportion of the
loans accessed in Andhra Pradesh were for current expenditure as
opposed to capital expenditure, suggesting that not much longer-
term investment in the agricultural sector was being financed in this
Commercialization | 135
way.48 Worse, as the farmers began to slide farther into debt, they
were trapped even more into growing high-risk cash crops, rather
than crops that might be sold but could at least be used as food
for the family if not. This was because the most indebted farmers
desperately needed the cash payments to clear their expensive and,
crucially, growing debts. The combination of a more market-driven
agricultural sector associated with India’s opening up to the global
economy in the s, alongside commercialized microfinance as
the main substitute for previously aordable state credit, was thus a
deadly one for many of the state’s subsistence farmers.
The Andhra Pradesh crisis has led to a number of changes to its
microfinance model, some possibly just temporary. There was, first, a
slowdown in the expansion of microfinance in Andhra Pradesh. The
banks cut their supply of credit to the SHGs, for example. Local MFIs
also began to cut back on their operations. Second, there was a general
lowering of interest rates. The two largest MFIs – Spandana and
SHARE – announced they were cutting their interest rates from the
per cent and per cent levels that prevailed in the period –,
down to per cent and per cent in the post-crisis period.49 The
many costs and fees added on to a microloan, often imposed without
the farmer’s knowledge, were apparently also brought under a little
more control. Third, many subsistence farms were henceforth avoided
as potential clients, given that they rarely had the capacity to generate
sucient income to repay any microloan.
The most important policy lessons arising from the Andhra Prad-
esh experience, however, are the crux issues of availability and impact.
Why was it that dramatically easy availability of microfinance did
not produce the anticipated local economic development and poverty
reduction impact in Andhra Pradesh? As with the example of Bolivia
and Bangladesh, once again we find no causation leading from more
microfinance to accelerated poverty impact: in fact, once again we
find the reverse. The end result of achieving almost total ‘saturation’
of microfinance in Andhra Pradesh was not generalized economic
and social development progress, as the microfinance industry had
convinced the international development community would be the
case, but a setback to economic and social development instead.
The dramatic switch into high-profit consumer microloans The
market mechanism is often said to be superior to all other forms
of allocation mechanism, because a market-driven financial system
136 | Five
is assumed to be able to always and everywhere channel finance to
where it is of most value to society. Conversely, when the market
mechanism is suppressed or distorted in some way, the end results are
very often poor. A market-driven financial system, however, very often
produces a seriously negative impact that contravenes this market
rule. Nowhere is this more evident than in the dramatic switch into
high-profit/low-risk consumer microloans.
It is now increasingly accepted that somewhere between and
per cent of microloans are actually accessed for simple consump-
tion purposes, rather than to support income-generating activities.
This move into consumer lending has been a quite dramatic trend in
the last few years. A number of developments are responsible. Many
of the new microfinance banks, including conversions from NGO-type
MFIs, have become very heavily involved with low-risk/high-profit
consumer loans in order to ensure their financial self-sustainability.
For the same reasons, many private commercial banks in developing
and transition countries, especially foreign-owned banking groups,
have chosen to ‘downscale’ into consumer loans. Worse, there is
some evidence that the weakest banks are those most interested in
high-profit consumer microloans,50 seeing such business as perhaps
the only way to their eventual salvation but thereby introducing
more risk into the local financial system. Consider Table ., which
summarizes some of the most dramatic instances of change around
the globe in recent years.
Put simply, what we are seeing here, thanks to the commercial-
ization of microfinance, is the profit-driven diversion of a nation’s
valuable savings flows into simple ‘no-development’ uses, and con-
comitantly out of all other uses that we know are likely to be of much
high development value to society – principally SME lending. Some
microfinance advocates who accept that a fundamental change has
taken place here nevertheless respond with a casual ‘so what?’ They
point out that poor people appreciate an inclusive financial system,
so at least some benefit is derived here. This point might just make
some sense if we were to assume an unlimited amount of funds, so
that we could cover all possible demands. But if we now return to
the real world, we are confronted by scarcity, choices and oppor-
tunity costs. We need to emphasize the fact that simple consumer
loans impart almost no perceptible development impact compared to
enterprise loans. Important empirical evidence was forthcoming on
this score in , thanks to a major study undertaken by economists
. The rise of consumer microloans in selected countries
Country Comment
Bosnia In Bosnia the average real growth of credit to households
between and was about %, compared to the real
growth rate for credit to enterprises of only .%.51
Croatia Consumer microloans rose from almost zero in , but by
were almost % of GDP. Many of these consumer
microloans were taken out in euros and Swiss francs, adding a
serious element of risk relating to currency movements.52
Estonia Consumer loans have massively increased in the country since
, with the volume of consumer loans rising by % in just
one year (mid- to mid-).53
Hungary In Hungary more than a third of all bank lending by was
in the form of consumer microloans, rising from almost
nothing in .54
India Only between one fifth and one third of microcredit disbursed
in India is used for an income-generating activity.55 Microloans
as of constituted % of all commercial bank lending in
India, a large rise from just five years before. These new funds
have come from a relative decline in other portfolio assets,
including SME loans.56
Mexico The arrival of foreign banks in Mexico saw mortgage and
household consumption lending explode, going from %
in to around % of total lending by . Bank lending
to formal enterprises (SMEs) fell in Mexico in the new
millennium, going from % of total lending to just over %
in just over six years.57
Serbia From almost zero in commercial banks’ portfolios of
consumer microloans expanded nearly tenfold, eventually
amounting to almost % of total bank assets and around %
of GDP as of late . During this same period, the share of
consumer loans in total private sector credit more than
quadrupled to %. Meanwhile, funds for SMEs (except for
trade credit) are very dicult to locate, and almost non-existent
for start-ups.58
South Africa From household debt (consumer microloans) quadrupled
in volume in just five years. As many as , South African
households are now classified as ‘over-indebted’ after having
accessed a consumer microloan with no income to repay.
Ukraine Consumer loans as a category have dramatically increased
in recent years. Rising from almost nothing as recently as ,
by household loans accounted for nearly % of total
outstanding loans of the banking sector. Around % of these
retail loans were made in foreign currencies.59
138 | Five
attached to the World Bank.60 Covering forty-five countries in some
considerable depth, the study showed a significant impact on GDP
per capita growth only from enterprise-level credit, with almost no
impact registered by household microloans.
In fact, it cannot be overemphasized: consumer loans, while no
doubt of some use to the poor in terms of consumption smoothing,
are nevertheless simply not a major driver of sustainable economic
development and poverty reduction. This suggests, at a minimum, that
the benefits of both options need to be compared before we declare
which is preferable. The crux of the problem we inevitably find here
is clear, however: the vast amounts of cash increasingly being directed
into consumer microloans (savings, aid funds, investments, etc.) eec-
tively mean that the important enterprise sector is being ‘crowded
out’. This eectively ensures that the wider economy is undermined
into the longer term. A short-term palliative for thepoor individual
asconsumer thus comes at a very high price for the poorindividualas
employer/employee.
In Bangladesh, for example, one can now see that the overarching
emphasis upon microfinance as a source of consumer loans (as well as
‘no-growth’ microenterprise loans) has produced a major deleterious
eect in this ‘crowding out’ context. The supply of microfinance in
Bangladesh is reaching new heights. Just two MFIs alone (Grameen
and BRAC) account for nearly $ billion of microloans disbursed,
much of which is supported by local savings.61 Meanwhile, however,
SMEs operating in Bangladesh are finding it extremely dicult to
access capital to support their ongoing operations, while ‘start-up’
capital is an almost unknown concept. In fact, in terms of the avail-
ability of aordable capital for SMEs today, Bangladesh now stands
out as one of the worst performers compared with virtually all other
low-income countries. Research by the UK government’s DfID aid arm
summarized the situation in Bangladesh, as of , as one where62
‘The financial system – including banks, capital markets and the
micro-finance sector – is inadequate to support long term investment
financing for growth. Smaller firms, responsible for the lion’s share of
employment, have severely limited access to financial resources. Rural
areas, with the highest potential for lifting low income groups out
of poverty, are cut o from most financing mechanisms’ (my italics).
Think about this – in the most microfinance-saturated country
in the world there appears to be almost no capacity whatsoever to
meaningfully support SMEs, especially in rural areas where poverty
Commercialization | 139
is heavily concentrated (and note that ‘Grameen Bank’ in the local
language means ‘Rural Bank’). This is no coincidence. In fact, the
hugely powerful microfinance industry in Bangladesh has served to
divert attention and huge quantities of financial resources away from
one of the most important productivity-raising destinations – SME
development – and it now very eciently and profitably channels
these financial resources into ‘no-growth’ microenterprises and, in-
creasingly, into consumer microloans. The opportunity costs arising
from this ‘crowding out’ phenomenon, I would argue, and DfID
researchers seem to agree, are simply huge: microfinance is destroying
the potential for SME sector development and growth in Bangladesh,
and so therefore the longer-run possibility that Bangladesh will ever
escape underdevelopment and generalized poverty. This is probably
not the end result the international development community envisaged
when first supporting Muhammad Yunus and the Grameen Bank all
those years ago, but it is what has transpired nevertheless.
To their credit, a growing number of MFIs have finally begun
to sense that enormous dangers lie ahead if they continue to shift
financial resources into high-profit consumer loans and away from
virtually everything else. Interestingly, a number of major MFIs have
decided to make a stand on this important issue, and some have
even begun to move out of this field of lending. A few of the more
creative MFIs even use the fact that they avoid consumer loans as a
unique selling point in their marketing eort! For example, Pro-Credit
Bank Serbia, part of the global Pro-Credit group of MFIs, publicly
announces aspart of its mission statement that63 ‘Unlike other banks,
our bank does not promote consumer loans. Instead we focus on
responsible banking, by building a savings culture and long-term
partnerships with our customers.’
This statement – and particularly the use of that word ‘responsible’
– is a very dramatic admission, by one of the most prestigious MFIs
in the entire microfinance sector, that there are serious problems and
opportunity costs associated with the shift into consumer loans. Many
of the most prominent MFIs, however, including Grameen Bank, have
resorted instead to simply trying to play down the fact that they now
mainly function as consumer lending operations.
Realistically, we now need to portray microfinance and MFIs on
a par with the developed countries’ fraternity of aggressively profit-
seeking US-style ‘payday lenders’. These are profit-driven financial in-
stitutions that exist not to promote poverty reduction or development,
140 | Five
but simply to siphon o a further layer of wealth and income from
the very poor.64
‘Microcredit bubbles’ The worst-case scenario for microfinance is
that of stoking up a ‘microcredit bubble’ similar to the US sub-prime
‘bubble’ that caused so much havoc to the US financial system. ‘Micro-
credit bubbles’ appear to have already been foretasted in the case of
Bolivia and Andhra Pradesh state in India. Financial analyst Graham
Turner also points to a household consumption loan bubble of enor-
mous proportions existing in many of the world’s poorest countries,
one that when it bursts fully will inevitably create huge damage.65 Even
Muhammad Yunus was warning the London-based Financial Times
as early as mid- that66 ‘The world’s biggest banks risk creating
a subprime-style crisis for millions of the planet’s poorest people if
they continue to plough money into the booming microfinance sector.’
With rural incomes declining in spite of the ubiquity of microfinance,
many researchers are finding that the poor are simply substituting
microfinance for lost income. Accelerating contact with microfinance
has de facto become the main coping strategy for very large swathes
of Bangladesh, creating the potential for a serious reversal when the
bubble bursts.67 The Wall Street Journal also ran a series of articles
in mid- expressing its concern over the possibility of microcredit
bubbles emerging, particularly in India.68
Countries newer to microfinance have fared particularly badly
of late. In my own research and consultancy work in Bosnia, I have
long argued that microfinance has been a seriously adverse develop-
ment intervention in that country,69 not least since microenterprise
failure rates very quickly rose to endemic proportions (of those
micro enterprises established between and , World Bank
researchers estimated that just under per cent of them exited within
one year of their establishment70). Even what few marginal gains
there have been thanks to microfinance are now rapidly disappearing,
thanks to the emergence in of what microfinance supporters
describe as Bosnia’s ‘microfinance meltdown’.71 This dangerous new
development for the country is marked out by defaults now rising
very fast (above per cent in October ), commonly up to five
or more microloans held per client, increasingly frantic competition
for the few remaining individuals wishing to enter the world of
microfinance, and most MFIs now moving into loss-making territory.
Most recently it was also revealed that possibly as many as ,
Commercialization | 141
personal guarantors are now being sought out in Bosnia to repay the
microloans they (perhaps casually) agreed to personally guarantee
for friends and relatives.72 Overall, it would seem that the massive
commercialization-driven expansion of microfinance in Bosnia has
been a serious development policy error, one that other post-conflict
countries clearly need to learn from in order to try not to repeat it.
But, then, going against the wishes of the international develop-
mentcommunity and attempting to halt the expansion of micro finance
is not easy. Even countries having already experienced a ‘microcredit
bubble’ and its subsequent bursting appear to be able to do little to
prevent it reoccurring. For example, in Bolivia there are now serious
worries over the huge microloan over-indebtedness that has returned
in the last few years, mainly aecting the privately owned commercial
microfinance sector.73 The possibility of another microfinance ‘ bubble’
crisis in Bolivia is now apparently being seen as a very real one.
Overall, an increasing number of international MFIs are finally
beginning to register what others less enamoured of the microfinance
model have been saying for some time: that a dangerous ‘sub-prime-
like’ microfinance bubble has been created in many developing and
transition countries, and urgent action is now required to avoid a
major global meltdown. In general, two scenarios now beckon. First,
there is a sub-prime-style bursting of the microfinance bubble. This
outcome would be extremely bad news for the developing countries.
It would set back their poverty reduction ambitions quite consider-
ably, if indeed it did not usher in a period of extreme economic and
political turbulence. But even if, second, the current ‘microcredit
bubble’ is deflated gradually, thanks to the fallback methods I reported
above – income diversion, using remittances, raising cash from asset
sales, guarantors repaying microloans, and so on – the end result is
still likely to be pretty bad for most developing countries. Already
bueted by an economic crisis originating in the developed econo-
mies, they now find that personal consumption, wealth, income and
investment spending are all gradually declining as microloans are
retired rather than rolled over or extended. We can envisage that
(artificially inflated) employment levels will return to the pre-bubble
trend, average incomes of the poor will similarly decline, inequality
will rise (especially if forced assets sales are involved) and other
negative economic and social impacts will inevitably be felt. This
would indeed be an inglorious end to their entire commercialized
‘new wave’ microfinance episode.
142 | Five
The perfect storm – the ‘Compartamos affair’
For many, the self-destructive nature of the Wall Street-style ‘new
wave’ commercialization drive has been best captured by the case
of Compartamos, one of Mexico’s largest financial institutions.
Though Compartamos has been operating since , its IPO
brought into full view a range of practices and outcomes that had
previously been largely ignored. The result of the revelations at Com-
partamos was a major schism within the microfinance industry. On the
one side stand the ‘new wave’ commercialization proponents. Their
claim is that Compartamos shows the way forward in terms of how
best to quickly and sustainably raise the availability of microfinance.
Notable among these proponents were ACCIÓN, which was both
an investor in and an adviser to Compartamos, and CGAP, which
provided mainly technical advice. On the other side of the argument
are those appalled at what was exposed by the IPO. Particularly
troubling was the ultimate end result of Compartamos’s preference
for interest rates upwards of per cent, a policy which seemed de-
signed to facilitate mainly the personal enrichment of a small number
of in dividuals in and around Compartamos. The cold calculations
involved in securing quite dramatic levels of personal enrichment, and
the obvious counterpart losses incurred by the very poorest and most
vulnerable in Mexican society as they struggle to repay ultra-high
interest rates on tiny microloans, appear to contradict virtually every-
thing the microfinance model – and Compartamos – was originally
meant to stand for. In the wake of the IPO, a much deeper reflection
on Compartamos’s activities, strategies and poverty impact began,
as well as deeper reflection on the legitimacy of the entire ‘new wave’
microfinance model.
Compartamos was established in by a Catholic social action
group called Gente Nueva, beginning its life as an NGO (Asociación
Programa Compartamos). The original inspiration was apparently
a visit to Mexico by Mother Teresa. Helping Compartamos to get
started was a $ million package of grants and soft loans provided
by a number of international development agencies, plus some addi-
tional funds from several wealthy private Mexican supporters hoping
to benefit the poor in their country. Compartamos began to grow
quickly, serving poor rural communities in Mexico. Between
and , equity amounting to $ million was provided in order to
facilitate faster growth and to incentivize the directors and senior
managers (who also became shareholders). Those providing the funds
Commercialization | 143
included the directors, senior managers and their family and friends,
as well as a number of external advisory bodies, such as ACCIÓN
and the World Bank’s International Finance Corporation (IFC) arm.
ACCIÓN took an initial per cent shareholding that was paid for by
the US government.74 The World Bank’s IFC arm took a per cent
shareholding. CGAP provided a grant of $ million to Compartamos
in , but it did not become a shareholder.
Right from the start Compartamos’s client base was overwhelm-
ingly women ( per cent of clients). Thanks to a policy of maintain-
ing very high interest rates, over per cent for long periods of time,75
Compartamos was able to achieve full financial self-sustainability by
, and very high profits thereafter. Flush with its success, in
Compartamos transferred its operations into a regulated for-profit
finance company, known in Mexico as a ‘sofol’ (Sociedad Financiera
de Objeto Limitado). Nearly per cent of the shares of the new sofol
were retained in Compartamos AC, a social-mission NGO controlled
by the original core employees of Compartamos, now directors and
senior managers of the sofol. Into the new millennium, Comparta-
mos’s growth accelerated. Part of the reason was its very aggressive
move into urban areas with high concentrations of potential clients
(though not necessarily the poorest). It also helped that Compartamos
was able to tap into external capital. For example, it issued around
$ million of bonds on the Mexican Securities Exchange. On top of
this, Compartamos also raised a further $ million of loans from
a variety of Mexican banks and commercial institutions. In ,
Compartamos received its full banking licence. Part of the justification
for this move was so that it could begin to generate deposits. Profit-
ability in the new millennium became extraordinarily high, exceeding
that of all of its Mexican counterparts by some considerable way (for
example, $ million in ). All told, return on equity between
and averaged a massive per cent.
In the summer of , Compartamos underwent its long-planned
IPO. Thirty per cent of the existing shares were sold to institu-
tional investors, overwhelmingly located abroad. The three main
institutional shareholders at the time of the IPO were: Compartamos
NGO (. per cent), ACCIÓN (. per cent) and IFC (. per
cent), with directors and managers (. per cent) and other private
Mexican investors (. per cent) making up the remainder of share-
holders. These existing investors received $ million for the per
cent of the shares released at the IPO, of which $ million went
144 | Five
into the pockets of private shareholders (directors, senior managers,
friends and family), who also retain around $ million of shares
in Compartamos (as of the value at the time of the IPO). Several of
the directors and senior managers saw their shares in Compartamos
valued at several tens of millions of dollars each. ACCIÓN’s nearly
$million investment was valued at as much as $ million. Overall,
at the time of the IPO, Compartamos was valued at nearly $. billion.
The return on the original $ million investment was calculated at this
time to be around per cent per year, compounded for eight years.76
The reaction If initially the full ramifications of the Compartamos
IPO were lost on its main supporters, high-profile individuals like
Muhammad Yunus were in no doubt whatsoever what the IPO signi-
fied. Yunus immediately jumped in to condemn Compartamos in the
most forthright language possible.77
I am shocked by the news about the Compartamos IPO. Microcredit
should be about helping the poor to get out of poverty by protecting
them from the moneylenders, not creating new ones […] When
socially responsible investors and the general public learn what
is going on at Compartamos, there will very likely be a backlash
against microfinance. The field may find it dicult to recover if
corrections are not made.
Sam Daley-Harris of the Microcredit Summit Campaign chimed
in that microfinance was ‘in great danger of being [about] how well
the investors and the microfinance institutions are doing and not
about ending poverty’.78 Chuck Waterfield, one of the first to draw
people’s attention to the huge importance of the Compartamos IPO
to the microfinance model and its future trajectory, summed up his
feelings thus:79 ‘Not only are they [Compartamos] making obscene
profits o poor people, they are in danger of tarnishing the rest of
the industry […] Compartamos is the first but they won’t be the last.’
Initially, the greater part of the microfinance industry took the
oensive. Arguing that those against the IPO seemed not to like
profits, they fully supported the right of the canny shareholders to
secure huge profits: this was capitalism, after all. Belatedly realizing,
however, that the IPO had created a perfect storm of criticism across
the international development community, and wider still, and that
it was clearly damaging everything they had painstakingly built over
the previous thirty years or so, the microfinance industry switched
Commercialization | 145
to damage limitation mode. Key ocials in CGAP began to tone
down their earlier support for Compartamos. Explicitly referring
to Compartamos, Elizabeth Littlefield, then a director of the World
Bank and chief executive ocer of CGAP, now said that80 ‘Without
commercial foundations microfinance cannot become the profitable
business it needs to be to survive. But without firm ethical principles
and a commitment to benefit poor people’s lives first and foremost, it
will no longer be microfinance.’ Referring to the ultra-high interest-
rate policy, CGAP also had this to say in a note released just after
the IPO:81
looking at the facts available to us, it is hard to avoid serious ques-
tions about whether Compartamos’ interest rate policy and funding
decisions gave appropriate weight to its clients’ interests when they
conflicted with the financial and other interests of the shareholders.
It is not yet clear how much Compartamos’ decisions on those issues
diered from what one would expect from a purely and forthrightly
profit-maximizing company and its investors.
Some advisers to Compartamos claimed as the storm broke that
CGAP had all along argued against Compartamos’s ultra-high inter-
est-rate policy, but that they (CGAP) were simply unable to get their
own way on this key issue. Given that CGAP was extremely close to
Compartamos right from its inception, many have wondered, then,
why nothing was done to even highlight that they had reservations
about the policy of ultra-high interest rates. There is simply no record
of any action taken, or public or private admonition, to suggest that
the high-interest-rate policy (or any other policy) was not acceptable
to CGAP. Moreover, Compartamos CEO Carlos Danel is on record as
saying well before the IPO that CGAP largely went along with their
policies, stating ‘[CGAP] didn’t try to drive us in another direction
[…] They helped us do what we wanted to do, but better.’82 In truth,
CGAP really began to register its disquiet only after the IPO, when it
became clear that the whole episode was turning into a PR disaster
for itself and for the wider microfinance industry.
As one of the principal investors and advisers to Compartamos
– and, remember, the institution that former ACCIÓN president
and CEO Maria Otero says invented the commercialization model
– ACCIÓN also came under strong criticism. It also had particular
diculty trying to explain its unflinching support for Compartamos’s
ultra-high interest-rate policy. Put on the defensive, ACCIÓN could
146 | Five
only tough it out, try to contain the debate to the issues it felt strong-
est about, and generally put forward its own version of events.83 But
its long-standing support for Compartamos’s Wall Street-style tactics
was to prove dicult to live down, especially when in late Wall
Street itself began to collapse in a frenzy of greed and naked self-
interest many would argue was not unlike the behaviour ACCIÓN had
freely sanctioned in Compartamos. One form of damage limitation,
as noted above, was the founding by ACCIÓN of its ‘Campaign for
Client Protection’. Otherwise, ACCIÓN did nothing to disavow the
commercialization model: how could it, when the commercialization
model had been quite fundamental to its strategy and operations over
the last three decades, and to the ‘new world’ of microfinance it had
been instrumental in creating.
Finally, what of co-CEOs Carlos Labarthe and Carlos Danel, the
two main protagonists in Compartamos itself, and now fantastically
rich individuals thanks to the IPO? There was no word for quite some
time. But when finally pressed for a reaction to the large amount
of negative publicity, including their eective excommunication by
Muhammad Yunus from the global group of the microfinance ‘great
and good’, they eventually took to issuing a ‘Letter to Our Peers’.
In this letter they restated their rationale for promoting high interest
rates and the eventual IPO – to expand Compartamos as quickly as
possible, thereby to also expand the volume of microfinance available
to as many poor Mexicans as possible. Labarthe and Danel also
stressed that they were absolutely not driven to attempting to shape
policies, developments and events within Compartamos in order for
themselves and other senior sta to benefit personally. At all times and
in whatever they did, they insisted, they had the very best interests
of their poor Mexican women clients at heart.
Key problematic issues raised by the Compartamos episode
For those primarily interested in sustainable development and
poverty reduction, the following interrelated issues are the most con-
tentious ones to have arisen in connection with Compartamos, the
ones signalling that ‘new wave’ microfinance appears to have reached
a disturbingly negative climax.
Who cares if ultra-high interest rates damage poor clients? Per-
haps the most controversial issue surrounding Compartamos prior to
its IPO was its policy of high interest rates, at times rising above
Commercialization | 147
per cent annually; many quite justifiably saw this aspect as harming
the poor clients that it was established to help. Whichever way you
look at it, Compartamos’s clients were repaying as interest a very
large proportion of the tiny income they earned in their microenter-
prises. For those accessing a microloan for consumption spending,
the interest-rate burden on the individual and family would amount
to a considerable imposition. The justification for high interest rates
put forward by Compartamos, as just noted, has always been that
high interest rates led on to high profits, which in turn underpinned
the rapid expansion of Compartamos. With more microfinance made
available to Mexico’s poorest, so the Compartamos argument went,
more of the poor were able to escape their poverty. For example,
CGAP expressed its own toleration of the high interest policy in
Compartamos by arguing that ‘any profits were going to be used
to reach future customers rather than escaping into anyone else’s
pockets’.84 This view sounds quite positive, but it is actually a deeply
flawed and self-serving line of argument.
First, almost no concern was registered, nor evidence collected, as
to the actual impact of ultra-high interest rates on Compartamos’s
poor women clients and the wider local community. There is only
the presumption that it is benefiting these poor women and the local
community. But, to my knowledge, no real hard evidence that it is
having the presumed eect on poverty has ever surfaced.85
Second, an important equity and moral issue comes into play here.
The very poorest women in Mexico are eectively struggling to repay
their ultra-expensive microloans in order to make sure other equally
poor women in future, and elsewhere in Mexico, and even outside of
Mexico,86 can also have access to microfinance. The huge ethical and
equity implications raised by this expectation have, to my knowledge,
not been meaningfully addressed by anyone in Compartamos, or by
their main advisers, but they are quite staggering.
Third, it is accepted, even by supporters of Compartamos, that
the IPO and introduction of private investors will inevitably increase
the pressure to maintain ultra-high interest rates, not reduce them.
As we noted earlier in Chapter , CGAP itself pointedly concluded
that87 ‘In light of what the new investors have paid for their shares,
they will certainly have little sympathy for interest rate policies that
do not stretch profits to the maximum.’ There is surprisingly little
comment on the important fact that one of the most widely stated
benefits of commercialization – lower interest rates – is not actually
148 | Five
expected to transpire. In fact, commercialization is now seen as
militating against this positive development.
Fourth, given that per cent of the shares released at the IPO
were bought up by foreign institutional investors, many representing
the wealthiest citizens in the developed world, and with only per
cent sold to Mexican investors, there is a strong argument that the
resulting long-term capital outflows can only damage the poor in
Mexico. The very poorest communities in Mexico are eectively
losing local demand and wealth, which is being siphoned o to rich
communities outside of Mexico.
Fifth, Compartamos has down the years appeared to consistently
refuse to seek access to much cheaper sources of finance – savings
mobilization in particular – that would have allowed for interest rates
to have been greatly reduced. This, too, is an operational aspect that
is open to much criticism. One possible explanation put forward for
this preference is that with other types of financing it is much easier to
channel the main benefits of high profitability towards shareholders.
Employee capture Another problematic issue for many, even for
those supportive of the ‘new wave’ microfinance concept, is the lack
of transparency in Compartamos’s entire structure and operations.
While Compartamos has always claimed to be concerned to ‘keep the
transparency [with which] we began our operations [as] an NGO’,88
the reality would suggest otherwise. Just to understand the structure
and operations of Compartamos requires the services of a forensic
accountant. David Richardson of WOCCU (World Council of Credit
Unions) is one such accountant, and his study of Compartamos
is extremely revealing. Recall that one crucial issue was why the
development-focused shareholders in Compartamos – ACCIÓN and
IFC – felt unable to push Compartamos, as they say they wanted to,
to establish much lower interest rates. As major shareholders, they
seemingly had sucient power to do this. The answer to this puzzle,
however, seems to lie in who really controls Compartamos. The
main shareholder is the Compartamos NGO with . per cent of
total shares, which in turn is controlled by the directors and senior
managers in Compartamos the commercial bank. Consider, then, the
implications in Richardson’s own words:89
But what of Compartamos AC, the non-profit NGO who controlled
.% of the votes? After reviewing the ownership structure of this
Commercialization | 149
NGO, I found that three of the four founding members just hap-
pened to be stockholders of Financiera Compartamos, the Finance
Company (SOFOL). Furthermore, one of those three members was
a Full Board Member and the other two were alternate Board Mem-
bers. In other words, Compartamos, AC, the non-profit NGO who
is the largest stockholder of the Financiera Compartamos (SOFOL),
happens to be controlled by three Financiera Compartamos Board
Members who are all private investors with a vested interest equal to
.% of the company!
It might, or might not, be coincidence that such structures very
clearly appear to be working for the benefit of senior employees,
rather more than for the poor clients or the community.
Programmed financial enrichment of the senior personnel One
of the supporting arguments deployed by Compartamos was that
working with the very poor is not easy, so that they had to oset the
additional costs on servicing tiny microloans by charging ultra-high
interest rates. Following up on this claim led the aforementioned
David Richardson to once more try to find what financial data were
publicly available. For a major financial institution supported with
public funding, there was not much. But persistence paid o, and
Richardson found that Compartamos’s cost structure was indeed
extremely high, suggesting considerable ineciency. But, interestingly,
this ineciency was not because of higher branch costs or some other
factor that Compartamos management could perhaps deal with, but
mainly because costs were high in one particular area: the financial
rewards paid out to management itself. In fact, from around
onwards, the directors and senior managers rewarded themselves with
almost Wall Street-style salaries and bonus payments. Because they
show the dramatic extent of financial ineciency in Compartamos,
Richardon’s findings here are worth quoting in full.90
How can the Compartamos expense ratio be TIMES greater than
[the credit union] CPM when it has fewer employees and fewer
branch oces??? In my previous post, I made the following observa-
tion: ‘WOCCU has conducted some studies of savings deposit costs
in credit unions, and we have found that % of all costs are linked
to salaries, particularly the salaries of the executive management
team. Perhaps, in addition to huge profits at Compartamos, there
may be huge salaries as well?’ Unfortunately, salary information is
150 | Five
not available, so it is only speculation at this point. I believe it is high
time, however, that there is more transparency regarding executive
compensation in Microfinance. Even though there has been a code
of silence from the [Compartamos] IPO beneficiaries, I am pleased
to tell you that I hit paydirt the other day as I scoured the page
Spanish IPO prospectus. On page , it says that during the calen-
dar year , . million pesos ($. million dollars) were paid to
the Board of Directors and executive sta for bonuses, salaries, and
‘special compensations’. If you take the Directors and Execu-
tives and divide into $. million, you have $, dollars per
person! of these people were also stockholders in Compartamos,
so this yearly compensation was in addition to the lucrative value
of their stock. Needless to say, in a credit union, the Directors and
managers can never be stockholders who profit personally, and many
Directors are volunteers with a very modest stipend for their time
and expenses. This compensation is way o the chart for any credit
union leader.
Not content with this, as Richardson notes, the directors and senior
managers also began to generously reward themselves via dividend
payments. Owing to Mexican law dividends were not paid out from
to ,91 but after that things got a lot more interesting. Modest
dividends were paid out in and .92 By the cash dividend
was a handsome million pesos (approximately $ million), or
about one quarter of total earnings ( million pesos). The dividend
posted in May was a record, around $ million or about
cents per share. But this was then topped in , when the dividend
paid out was a new record of cents per share (around $ million
in total, but this was because the peso was devalued by per cent).93
In other words, directors and senior managers were doing very well
here too. In just a few years all of the Compartamos shareholders
received enough cash dividends in order to pay back their initial
investment of million pesos ($ million). Moreover, the remaining
per cent of the total dividend was capitalized to retained earnings,
which will ultimately benefit the shareholders when their remaining
shares are sold.
Paying out handsome salaries, bonus payments and dividends
to directors and senior managers was, and is, quite legal. The fact
remains, however, that many see this Wall Street-style strategy as out
of keeping for an institution established with public and international
Commercialization | 151
donor funds, and with a specific mandate to focus on doing everything
possible to help the poor. It goes without saying that no one from
Compartamos has consulted directly with their very poor women
clients to ascertain whether such Wall Street salaries and bonuses are
what they really want to see too.
De facto privatization of public and donor investment Recall also
that Compartamos was established with significant financial and
technical help from the international development community, which
also fully accepted the risks involved if the institution folded in its
early years. This assistance was gratefully accepted by the original
employees of Compartamos. But this social investment was then de
facto privatized by the directors and senior managers of Compar-
tamos. An initial investment by the international donor community
meant to build an institution that would operate on behalf of the
local community of the poor in Mexico was instead used to begin a
process that would lead to the private enrichment by a small group
of its original employees.
Not only is this process of wealth accumulation (‘accumulation by
dispossession’) unethical to my mind, it also gives rise to a significant
future moral hazard issue. Equally savvy individuals everywhere now
realize more than ever before that the international donor community
can quite easily be drawn into financially supporting their own indi-
vidual dreams of wealth and power, just so long as these individuals
couch their request for support in suciently catchy terms of ‘wanting
to help the poor’. Once the first chance arises, however, the original
mandate can then be kicked aside, and the institution can become
private property and subject to private enrichment goals.94 Already
in India, Bangladesh and Mexico we see the negative results: large
numbers of savvy business people canvassing donors and govern-
ments for funds in order to establish an MFI designed to enrich the
owner far more than anyone else. Compartamos is now a brilliant
role model for those also seeking to benefit from the ‘accumulation
by dispossession’ process.
‘Changarrization’ simply ignored Finally, we get to the part where
we simply must ask what Compartamos actually has achieved in
terms of its original poverty reduction and ‘bottom-up’ development
mandate. Did it, does it and will it in future contribute to sustainable
poverty reduction in Mexico? As I pointed out in Chapter , there is
152 | Five
very little evidence that microfinance is achieving anything in develop-
ment terms in Mexico. It is mainly serving to inflate the already vast
numbers of ‘changarros’. And, as I have pointed out, analysts are
becoming increasingly concerned that this ‘changarrization’ trajec-
tory represents an existential threat to the entire functioning of the
Mexican economy. So this cannot be good. Local savings, commercial
funds and donor funds that could conceivably go into far more sus-
tainable and pro-development business projects in Mexico are simply
not doing so. Put simply, entrepreneurs in possession of a somewhat
sophisticated and formal sector business project find little support.
Interestingly, there is nothing on record (that I could find) which
tells us whether or not Compartamos agrees or disagrees with the
growing assessment that Mexico’s development prospects are being
sabotaged in this manner.
Essentially, recycling local savings and commercial funding into
the very simplest of informal ‘changarros’, or else into consumption
lending, is a hugely profitable business activity for Compartamos. It
is a business activity that has continued regardless of the mounting
concern in Mexico and elsewhere that such forms of lending do not
support sustainable growth and development, but actually undermine
it. Support for the ‘changarrization’ of the local economy is there-
fore a trajectory wilfully, rather than accidentally, driven forward by
Compartamos (as by other similarly aggressive profit-driven MFIs
in Mexico, it should be added). In an obvious echo of Wall Street’s
concern for the eventual consequences for the US economy of its
risky and speculative activities – that is, virtually none whatsoever –
Compartamos has also demonstrated an apparent lack of concern for
the fact that it is likewise contributing to undermining the structural
foundations of the Mexican economy. Thus, over the longer term,
it can be argued that Compartamos is actually damaging Mexico’s
chances of enjoying sustainable economic and social development,
and so also poverty reduction.
Conclusion
The ‘new wave’ approach to microfinance rests its main a priori
case on the claim that commercialization will facilitate the largest
possible availability of microfinance at the lowest possible cost to
governments and the international donor community. Quite apart
from the fact that in this book I challenge the widespread conten-
tion that ‘more microfinance equates to more poverty reduction and
Commercialization | 153
development’, there are also serious problems associated with the
specific claims made for commercialization. In the growing number
of cases where the microfinance industry has achieved its central goal
– microfinanceis made available to anyone who might want it – even
microfinance advocates have been forced to concede that the results
have been very far from satisfactory. In fact, where microfinance
saturation has been achieved and celebration should be in order, the
broad experience is actually pretty disastrous – institutional crisis,
‘microcredit bubbles’ and local economic collapse. Moreover, exam-
ination of the Compartamos case graphically shows in detail how
commercialized MFIs are associated with a whole host of antisocial
and anti-poor developments, especially their easy ‘capture’ by senior
sta. Perhaps we should not be surprised that Wall Street-style com-
mercialized microfinance is producing mainly Wall Street-style out-
comes. At any rate, we have reached the devastating finale for the ‘new
wave’ microfinance model as a development and poverty reduction
policy. The light at the end of the ‘commercialized microfinance-as-
poverty-reduction’ tunnel is actually an oncoming train.
SIX
The politics of microfinance
‘I believe that “government,” as we know it today, should pull out of
most things except for law enforcement and justice, national defence
and foreign policy, and let the private sector, a “Grameenized private
sector,” a social-consciousness-driven private sector, take over their
other functions.’ Muhammad Yunus1
‘It was Friedman who in , with the publication of “Capitalism
and Freedom,” first proposed the abolition of Social Security, not
because it was going bankrupt, but because he considered it im-
moral.’ Interview with Milton Friedman2
The preceding chapters have called into serious question the wide-
spread claims that microfinance can play a major role in promoting
sustainable economic and social development, and so also poverty
reduction. Microfinance is, in fact, a ‘poverty trap’. This being the
case, the obvious point to raise right away is why on earth would the
international development community have wanted to help establish
microfinance, and continue to support it over the next thirty or so
years? The purpose of Chapter is to briefly address this apparent
conundrum.
To get to the heart of this issue, we first need to refer to a number
of important insights from the institutional economics field. One
very central insight is that the process of institutional development,
and the evolution of associated organizational models, is largely
contingent upon a complex interplay of economics, politics, ideo-
logy, self-interest, ethics and the exercise of power. Importantly, we
must right away reject the idea that there is a Darwinian process
that ensures the most ecient institutions or organizational models
will emerge and be sustained over time. On the contrary, as accepted
by writers as diverse as Marx writing in the nineteenth century
and, more recently, the conservative institutional theorist Douglass
North,3 we know that ‘bad’ institutions and organizational models
are often allowed to survive, and may even be encouraged, because
The politics of microfinance | 155
doing so is in the interests of the economically and politically power-
ful. Micro finance institutions have been universally promoted on
the basis that, as institutions established with an obviously positive
purpose – addressing poverty – this simple fact alone must mean that
they are, by definition, a ‘good thing’. But history, as well as many
of the arguments made in this book, demonstrates conclusively that
this need not necessarily be the case.
Going farther, Steven Heydemann very usefully reminds us of the
equally important historical fact that institutions and organizational
models are most often encouraged to change, or are blocked from
changing ‘as a result of intentional actions by economic and political
elites to preserve institutional arrangements that provide them with
significant distributional advantages’.4 In other words, institutions
may well have a laudable stated public purpose, but their real reason
for existing, changing or not changing can most often be put down
to the ‘distributional advantages’ that accrue to key individuals and
groups associated with these institutions. This important point within
the institutional economics paradigm is demonstrated almost perfectly
in the world of microfinance, as Chapter showed, by the progress
of the ‘new wave’ microfinance model since its establishment in the
s. Initially based upon an ideological (neoliberal) conviction that
commercialization simply had to be ‘best practice’, the grubby Wall
Street-style reality that quickly emerged instead pretty much confirms
the broad thrust of Heydemann’s argument.
The upshot of all this is that to really explain institutional develop-
ment, and so also microfinance institutions, we first have to expose the
hidden narrative.5 In this chapter I want to do two things to this end.
In the first section I briefly explore the motivation and views espoused
by the microfinance sector’s supremely iconic pioneer – Muhammad
Yunus. Thanks to microfinance, Yunus has come to be seen as one of
modern history’s most important and eective campaigners against
poverty. Even leaving aside for a moment the important issue of
whether or not microfinance actually ‘worked’, do his views, actions
and reactions down the years really justify this mantle? In the second
section, I go on to point out that the microfinance model is actu-
ally almost perfectly consonant with the goals and imperatives of
neoliberalism. This seems very strange. After all, neoliberalism is
certainly not a political philosophy that favours the poor. As even
its own supporters unashamedly accept, neoliberalism took shape
in the s on the basis of firm conviction that, thanks to political
156 | Six
democracy, the poor were becoming over-empowered and indulged.
The horrendous outcome, as neoliberals saw it, was the full panoply
of Keynesian-inspired forms of government intervention, progressive
taxation, excessive regulation, social welfare rights and bloated public
services. Neoliberals therefore sought to restore power to a ‘lean and
mean’ business class, using the fullest extension of market forces and
private business freedoms, alongside a hugely ‘downsized’ state, as
the way to do it. So where does microfinance fit into this schema?
Bringing capitalism to the poor to make capitalism safe for
the rich
At least until very recently,6 it would be dicult to describe
Muhammad Yunus as anything other than a very deeply com mitted
supporter of free market capitalism. As Chapter highlighted,
Y unus’s belief in microfinance is based on the fact that it helps the
poor to fully embrace the standard (neoclassical) capitalist wealth-
creation mechanism – individual entrepreneurship. The very poorest
can become micro-entrepreneurs within the local capitalist economy,
and so they will finally get their small ‘piece of the action’. Crucially,
the community will begin to escape poverty to the extent that it
becomes possible for many, if not all, of its poor inhabitants to engage
with income-generating activities. The poor do not need the state to
intervene on their behalf, or to exercise their collective capabilities to
achieve change through social movements, trade unions, and so on.
The poor certainly do not need wealth redistribution! All they need,
in fact, is individual entrepreneurship, self-help and a microcredit.
Put another way, Yunus fully supports the capitalist status quo, but
argues for a little bit more eort to include more of the poor within
its reaches in order to give it further legitimization in their eyes.
Going farther, we can see that Yunus is actually wedded to the
idea of maximizing the opportunity for the poor individual to escape
poverty. A poor individual just requires a microcredit, and she can
engage in an income-generating activity, and so hope to escape from
poverty. Yunus would appear to have little time for the idea of securing
by right a generalized poverty reduction outcome (sometimes called
the ‘basic needs approach’). No matter that this is an aspiration
that many of his contemporaries have passionately argued for – for
a long time Amartya Sen7 – it is not a vision that Yunus appears to
have shared. Instead, his understanding of poverty and local society
famously leads him to pronounce microcredit itself to be a ‘human
The politics of microfinance | 157
right’. According to this logic, Yunus does not appear to see it as a
‘human right’ to have access to a basic income, to decent employ-
ment, to basic healthcare, or even to simply the basic supply of food
which makes human survival possible. These latter benefits should
be forthcoming only on the basis of individual microenterprise suc-
cess underpinned by microfinance. This approach very firmly places
Yunus at the philosophical heart of Western neoliberal capitalism,
epitomized in the popular writings of such arch-neoliberals as Milton
Friedman8 and George Gilder.9
It is also indicative of Yunus’s distinctly rosy – some would say
naive10 – view of business and capitalism to find that he has in-
creasingly sought to partner up Grameen Bank with MNCs. It is
well-known that many anti-poverty activists, NGOs and others with
an interest in poverty reduction find his desire for intimacy with
international big business puzzling.11 As Chowdhury points out,12
Yunus has routinely worked with, and has accepted many prizes and
awards sponsored by, MNCs almost universally seen as some of the
worst oenders when it comes to the poor, to the environment and
to sustainable development.
Most recently, Yunus has begun to portray these links with MNCs
as directly advantageous to the cause of poverty reduction through
what he calls ‘social businesses’ – businesses that are ‘cause-driven’
rather than ‘profit-driven’. MNCs link up with a local business to
form a ‘social business’ with poverty reduction a key objective of this
new organization. Presenting these ideas in his book Creating
a World without Poverty, Yunus boldly claims to have made another
historic breakthrough in the promotion of poverty reduction (the
first being microfinance). One of the main ways in which ‘social
businesses’ can help to reduce poverty, Yunus argues, is by work-
ing alongside microenterprises as distribution chain participants, or
‘micro-franchises’. Grameen Bank can provide the necessary micro-
loans for poor individuals to insert themselves into the distribution
chain of a ‘social business’, with the idea being that both parties to
the transaction – but especially the poor – will do well. As previous
chapters show, however, these uplifting ideas for ‘social businesses’
and ‘inclusive’ distribution chains do not seem to pan out over the
longer term. Pointedly, so far at least, ‘social businesses’ in practice
appear to be far more about quietly benefiting the long-range strat-
egic plans of the powerful MNCs involved, while oering a few
minor benefits to the poor if they quietly go along with the whole
158 | Six
experiment (charade?). Crucially, the poor are all too conveniently
denied a range of ‘bottom-up’ organizational structures, notably
cooperative enterprises, which have far more potential to directly
facilitate poverty reduction and social inclusion.
Most damaging of all, however, is the fact that Yunus has not
been shy of providing evidence himself that brings into question his
genuine commitment to the poor. As the quotation cited at the head
of this chapter illustrates, Yunus has many times registered his sup-
port for one of the most extreme ‘anti-poor’ demands insisted upon
by neoliberal policy-makers and business elites everywhere. This is
that state institutions should be replaced by privately owned market-
driven institutions designed to respond, not to genuine human need,
but to eective demand (that is, demand backed up by purchasing
power). Yunus is eectively asking the poor to forget about building
democratically controlled public institutions that are centrally focused
upon providing products and services on a needs basis, arguing that
the poor should instead agree to leave it all to the private sector in
future (albeit a ‘Grameenized’ private sector, as he says). Yet, as I
have emphasized at various times in this book, if the last one hundred
years of history have shown the poor one thing above all others, it is
that the most important poverty-reducing advances they have secured
have virtually all arisen because of some form of state intervention
and collective provision. From public pensions, public employment
opportunities, state healthcare provision, health and safety regula-
tions, job security measures, state education, unemployment insur-
ance, through to a whole range of other public services provided by
local and central government according to need rather than wealth
or income, we find the democratic state right at the very heart of
genuine poverty reduction success. Nor has securing these hugely
important gains been easy. It required long popular struggles against
the economic and political elites, extensive social mobilization and,
eventually, democratic politics. It is also why historically economic
and political elites have been so hysterically against all forms of state
intervention and social programmes that genuinely empower the poor
(for example, the New Deal in the USA in the s).
But if Yunus’s professed dream of transferring important state
structures into private hands comes to pass, and profitability, or even
just financial self-sustainability, becomes the sole motivating force
behind these new privatized institutions, the poor will eventually be
thoroughly disadvantaged. They will have lost control of the very
The politics of microfinance | 159
institutional vehicle that in recent history has been most responsible
for helping them escape poverty.
Moreover, even if we leave aside what history and theory sug-
gest to us concerning the impact of privatization, we can always
examine instead what has been the recent experience of just the sort
of privatization projects called for by Yunus. And here the evidence
is pretty damning, to put it mildly. Even a cursory glance in this
direction would show Yunus that privatized structures have been
almost universally bad news for the poor.13 The pioneer in terms
of privatization was undoubtedly the UK in the s. Massimo
Florio’s careful study concludes that productivity did not improve
under private ownership, there were substantial welfare losses for
poor consumers (higher prices for energy, gas, water, public transport
and telephones) and there were ‘substantial regressive eects on the
distribution of incomes and wealth’.14 In the vast majority of devel-
oping countries that followed the UK’s lead, the general experience
of most privatized structures has been equally problematic. Poverty
reduction, equality, social welfare provision, employment creation,
social justice and sustainable development goals have all been set
back considerably.15 Among other things, this is why a core demand
of the growing protest movements in most developing countries (for
example, articulated through events such as the World Social Forum)
is to reverse many of the privatizations inflicted upon them. Even the
World Bank has now very publicly committed itself to rebuilding key
state institutions and ‘free at the point of use’ capacities in education
and healthcare (but without oering any mea culpa for the huge
economic and social damage inflicted in developing countries thanks
to its previous ‘full cost recovery’ mantra). Moreover, let us not forget
the fact that the drive for such privatized structures as advocated by
Yunus has not been supported by the poor, or by any of the main
anti-poverty pressure groups and international NGOs, all of which
have in fact determinedly mobilized against what Yunus has been
opining for on their behalf!
Several things become clear, then. Muhammad Yunus does not
appear to have ever harboured any of the broadly leftist ambitions
that animated many of the popular movements that emerged in
the s to challenge or circumvent capitalism and, among other
things, began to argue in favour of providing small-scale finance to
the poor as one of the ways to do this.16 Yunus appears to have had
very little truck with the counterculture anti-capitalist, environmental
160 | Six
and sustainable development movements that emerged in the s
in parallel with his own eorts in Bangladesh.17 On the contrary,
Yunus is on record time and again as seeing microfinance as a way
of supporting markets and ‘bringing capitalism to the poor’, not as
a way to genuinely empower the poor through changing the social
and power relations of capitalism in their favour. While possibly well
intentioned, Yunus’s most recent work establishing ‘social businesses’
and ‘inclusive’ distribution chains involving microenterprises is a
‘top-down’ arrangement that helps large companies achieve their
own long-run strategic business objectives far more than it is meant
to reduce poverty and exclusion. Finally, one must return to Yunus’s
quite explicit and consistent support for the most anti-poor and
disempowering aspects of contemporary neoliberal capitalism, par-
ticularly his high-level support for the privatization of democratically
mandated state institutions. This stance is a very powerful rejoinder
indeed to those arguing that Yunus is ‘a great friend of the poor’. As
John Harriss has very powerfully argued,18 those who passionately
claim to want to help the poor, but who are unwilling to challenge the
fundamentally unequal structures of power and wealth that sustain
and reproduce poverty – which I would maintain is the case here with
Muhammad Yunus – end up on the wrong side of history.
Microfinance is local neoliberalism
The microfinance model that emerged out of the Grameen Bank
experience was found valuable by the international development com-
munity, among other things, because in even the poorest community it
legitimized the simple textbook capitalist wealth-creation mechanism
– individual entrepreneurship. In future, it was hoped, the poor would
recognize this methodology as their sole route out of poverty. State
intervention, collective organization (trade unions and social move-
ments) and wealth redistribution would eventually wither on the vine
as alternatives. Through an informal microenterprise, and with the
help of microfinance, the poor could be left to individually articulate
their own exit out of poverty. From the late s, the microfinance
movement was then colonized by neoliberalism. Thereafter, the poor
themselves were also expected to pay the full costs of attempting to
secure their own escape from poverty. Paying market-based interest
rates on microloans, thus ensuring the financial self-sustainability of
the MFI, would allow governments and the international donors to
end any remaining direct financial support for the poor.
The politics of microfinance | 161
Arun and Hulme are therefore quite right to conclude that micro-
finance is not about ‘promoting alternatives to capitalism’. They are
on shaky ground, however, when they go on to add that ‘Microfinance
today is about drawing the benefits of contemporary capitalism down
to those with low incomes.’19 While bringing many of the basic
structures and methodologies of contemporary capitalism down to
the poor, the ‘new wave’ microfinance model that exists today does
this, to my mind, the better to ensure that the benefits of capitalism
continue going up to the non-poor. The progression of events and
interventions within the new world of microfinance simply cannot
be explained in any other way.
In this final section, and at the risk of some repetition, let me
nevertheless briefly summarize the various ways in which microfinance
was clinically separated from any genuinely transformational pro-poor
agenda by the dictates of the ‘new wave’ microfinance model, and
co-opted instead into the service of the anti-poor neoliberal political
project. This is where we stand with microfinance today. Whether we
remain in this position is another thing.
Microfinance is a politically acceptable policy model The micro-
finance model readily answers to one of the most pervasive and
continuing fears among neoliberals: that the poor might opt to use the
democratic process or popular pressure to demand the establishment
of state, collective and popular institutions and strategies geared up to
directly addressing their plight, perhaps through suppressing markets
in their favour. Neoliberals saw the usefulness of microfinance as a
way to permanently pre-empt such a radical trajectory. Microfinance
delegitimizes and helps dismantle all possible ‘bottom-up’ attempts
to propose alternative development policies that might be of direct
benefit to the majority, but which would circumscribe the power
and freedom of established economic and political elites. A wide
range of progressive policies can be safely removed from the public
policy agenda. Such progressive policies include wealth and income
distribution measures, land ownership reform, robust social welfare
programmes, and quality public services accessible to all on the basis
of need. The focus upon individual entrepreneurship also helps to
marginalize many other, potentially more powerful forms of owner-
ship, such as state, collective and cooperative ownership.
Similarly, microfinance can be seen as buying commitment to the
wealth-generation mechanism preferred by the rich: individual asset
162 | Six
accumulation.20 This policy direction exhibits a superficial progres-
siveness. But because it is actually predicated upon the dismantling of
the traditional and highly successful mechanisms used by the poor to
improve their position in the past, mechanisms that take advantage of
the poor’s most important asset – their vast numbers – it ultimately
undermines the situation and status of the poor.21
Microfinance thus oers to neoliberals a highly visible and ‘feel-
good’ platform upon which they can publicly claim to be addressing
the issue of poverty and inequality, but which in fact delivers up no
real possibility of this ever happening.
Promoting financial sector liberalization and privatization Micro-
finance has played an important role in the promotion of global
financial liberalization and commercialization. As Heloise Weber has
shown,22 financially self-sucient MFIs provide working examples of
‘ecient’ (i.e. subsidy-free) financial institutions, which developing-
country governments must aim to reproduce. Most recently, com-
mercial funding of microfinance programmes, including the outright
purchase of established MFIs, has increasingly separated the micro-
finance industry from its roots in the NGO sector. As a part of
the global financial complex, microfinance can be portrayed as a
humanitarian example of how the global financial sector ‘cares’ and
is directly addressing core societal problems. At least until the Great
Recession, it was hoped that this ‘public service function’ would
contribute to obtaining continued government and public support
for the ongoing liberalization of the financial sector.
Advancing the ‘minimal state’ agenda The international develop-
ment community’s mantra in the s, particularly within the World
Bank, was for public services to be privatized, or else to support
their existence on the basis of ‘full cost recovery’. The imposition
of privatization and user fees, however, has generally resulted in an
awkward decline in the ‘client’ base of most services restructuring in
this manner. Microfinance provides the poor with a way of managing
to live with such regressive policies, spreading the cost of user fees
into the longer term. Indeed, one might say that microfinance has
been consciously positioned as the permanent substitute for social
welfare spending and international donor support. Once the poor
accept that they are now in control of their individual and family
destiny using microfinance, it is much easier for the government to
The politics of microfinance | 163
fully absolve itself of continued responsibility for resolving their
predicament. For example, Shiva discusses the role of microfinance
in the privatization of the water supply industry.23 She shows how
microfinance programmes have been deliberately deployed in order to
ensure a less precipitous, and thus less politically damaging, decline
in water demand after privatization raises its price to the poor.
Microfinance facilitates lower costs for the state, the business
sector and the middle class at the expense of the poor One aspect
of microfinance appreciated by neoliberals is its association with lower
labour costs. Under conditions of intense poverty-push competition,
vast swathes of personal and other services traditionally supplied by
local microenterprises, from haircuts to last-minute groceries to fast
food, can be supplied even more cheaply. With hyper-competition
and self-exploitation on the rise in most microfinance-saturated loca-
tions, especially in the growing number of urban slums in developing
countries, one result is gradually declining prices for many of the
simple goods and services produced. The middle classes in developing
countries thus find a source of cheaper goods and services than before.
The state can also benefit from lower-cost providers of inputs, which
allows it to reduce taxes on the middle classes and business sector.
At the same time, large companies have not shied away from using
microfinance in order to help restore or expand their own profitability.
Many SMEs and larger enterprises, including MNCs, are increasingly
seeking to drop formal sector SME and/or unionized suppliers, and
are moving instead to construct supply and distribution chains based
upon non-unionized, lower-cost microenterprise suppliers. This allows
the large company to reduce its own costs at the expense of rising
poverty and informality. Such moves even give a temporary boost
to those microenterprises able to obtain contracts taken away from
higher-cost SMEs and unionized suppliers. In fact, many micro-
enterprises are given international donor support precisely to facilitate
this type of substitution. But, overall, this movement away from the
formal and organized sector is typically bad for the community in
the longer term and for the chances of poverty reduction.
Microfinance as ‘containment’ of the poor Perhaps the most impor-
tant factor of all here is the ‘containment’ role that microfinance has
been allocated within the neoliberal globalization project. It is widely
argued by neoliberals that globalization has the potential to provide
164 | Six
a major reduction in poverty. Yet in practice neoliberal globalization
policies have increasingly concentrated wealth and power into the
hands of a small number of countries, regions and corporate elites.
As Je Faux and Larry Mishel explain,24 the global economy has
seen a growing worldwide population of the unemployed, powerless,
marginalized, hyper-exploited and insecure. The Great Recession is
naturally making this situation manifestly worse. Just as was feared
would be the case right after the Second World War, notably by Robert
McNamara during his long stint as president of the World Bank,25
the world’s growing population of ‘losers’ is increasingly rejecting
the outcome assigned to them. Symptomatic of this rejection is the
rising social unrest, increased social and gang violence, the explosion
in substance abuse, increasing crime and illegal business activity, the
huge rise in pseudo-religions and cults, collapsing levels of social
capital in the community, and associated violent conflict.26
In the potentially explosive situation emerging in many develop-
ing and transition countries today, particularly acute in the growing
number of ‘mega-cities’, microfinance therefore provides a crucial
‘safety valve’. The logic is well known, and I briefly explored it in
Chapter in the context of nineteenth-century England. Those with
a few assets or a tiny income flow have at least something to keep
them busy, and also to lose should they seek to rebel against the
dominant social order. The hope is that the microenterprise sector
can therefore positively engage these people in their own immediate
survival, and dissuade them from otherwise supporting alternatives
to neoliberalism and the globalization project.
Conclusion
Many within the microfinance industry have argued that today’s
microfinance model is the direct descendant of the various forms of
small-scale finance that emerged in the early nineteenth century to
democratize and challenge the new system of industrial capitalism.27
More recently, some have seen microfinance as an intrinsic part of
the social justice, environmental and anti-globalization movements.
The argument began to evolve that Muhammad Yunus conceived of
Grameen Bank-style microfinance as the latest and most innovative
institution within these progressive traditions. In both cases, I have
shown that the opposite is actually more realistic. Both the Grameen
Bank model that emerged in the s, and then even more so the
‘new wave’ microfinance model that began to replace it from the
The politics of microfinance | 165
early s onwards, actually represent a quite fundamental schism
with the various leftist and community-driven movements support-
ing microfinance in the past. In fact, the most accurate location
for the microfinance model is within the most fundamentalist and
anti-poor variant of capitalism: neoliberalism. Microfinance is ‘local
neoliberalism’.
Because this will provide insights that are important in helping
us frame better development policies in future, we certainly need to
study the political-ideological origins of an intervention in policy
elite circles.28 Having said that, if such a study shows that the roots
of an intervention said to help the poor actually lie in a political
philosophy that actively seeks the disempowerment of the poor – as
I have argued is the case here with microfinance and its intimate
links with neoliberalism – then pro-poor improvement is largely an
inoperative concept. We need instead to completely rebuild the local
financial system upon genuine pro-poor developmental concepts and
foundations. One way to start to do this is to first examine those
local financial systems that in history and contemporary practice have
been able to make progress towards genuinely empowering the poor,
substantively reducing poverty, and ultimately promoting sustainable
economic and social development. The next chapter will explore a
number of the most interesting local financial models that stand in
opposition to both the Grameen Bank model and the later ‘new wave’
microfinance model.
SEVEN
Alternatives to conventional
microfinance
‘[R]ecognising institutional diversity should not be confused with
the argument that therefore there are no lessons to be learnt […]
It is both possible and instructive to identify some major prin-
ciples that underlie […] successful experience, and to try to adapt
the policy tools and institutional vehicles that were used to realise
those principles in order to fit local conditions elsewhere, and if
necessary devise new policy tools and institutions. Indeed, if East
Asian governments had themselves believed in the impossibility
of such institutional adaptation and innovation and had ignored
earlier success stories, it is doubtful whether we would have an
East Asian Miracle to discuss.’ Akyuz, Chang and Kozul-Wright1
The book has argued that the Grameen Bank microfinance model
and – even more so – the ‘new wave’ microfinance model have all the
required attributes of an ‘anti-development’ intervention; an inter-
vention that initially ‘feels good’ but ultimately undermines economic
and social development, and so also largely frustrates the objective
of sustainable poverty reduction. Microfinance is, in fact, a ‘poverty
trap’. An argument ranged against one particular institutional inter-
vention, however, is often said to be incomplete without at least
some pointers in the direction of what might be the building blocks
of some feasible alternative. By reflecting upon some important cases
where the local financial system has played a particularly important
role in facilitating sustainable local economic and social development,
the purpose of this chapter is to provide some of these local build-
ing blocks. While I have stressed elsewhere that economic, political,
historical, cultural and geographical context is important, nevertheless
hugely important lessons can be obtained from an examination of the
experiences of particular local financial systems with a good track
record of supporting economic and social development.
Alternatives to conventional microfinance | 167
A preliminary word on at-risk groups
Before I go on to assess a number of alternatives to the micro-
finance model, I first need to say a few words about the role of
consumption spending. I do this because microfinance is very often
said to be at its best when dealing with the most ‘at-risk’ groups
in the local community, who for whatever reason urgently require
some cash simply to survive from this day to the next. Particularly
in the aftermath of conflict, natural disaster or economic collapse,
we find microfinance proposed as the solution for large numbers of
‘at-risk’ individuals who have been plunged into extreme poverty and
privation. Microfinance is considered valuable because it very quickly
puts cash into their hands. This allows for the immediate purchase of
the basic necessities of life – food, shelter, medicine and so on. This
argument has been deployed to justify microfinance programmes in
many post-conflict settings – Bosnia, Kosovo, Iraq, Timor-Leste – as
well as post-natural disaster settings – post-tsunami Indonesia and
Sri Lanka.
In addition, consider also that the very poor hugely value the ability
to consistently obtain tiny amounts of cash which they can use to
facilitate their precarious modes of survival. The book by Daryl
Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven,
Portfolios of the Poor, is a quite superlative account of how the poor
use a whole range of lending techniques to manage their money and
survive on as little as $ a day. Individual survival is greatly helped
everywhere if the poor are able to quickly and unfussily obtain and
repay consumption spending loans.
So, even though I have argued in this book that we should dis-
qualify microfinance as an intervention with regard to promoting
sustainable economic and social development, could we not at least
allow microfinance a role in terms of quickly and perhaps consistently
supporting urgent consumption spending needs?
I think that this is also a problematic option, however. Even
if we accept that the overriding aim is to quickly provide modest
sums of cash to the most ‘at-risk’ individuals and families, there
is still a much better response to microfinance in the shape of the
conditional cash transfer (CCT). In return for generally making
some small social commitment – for example, one might have to
ensure one’s children visit the local health clinic or regularly attend
school – CCT models provide instant cash support to the most
‘ at-risk’ in dividualsand families. Rather than immediately loading
168 | Seven
up such individuals andfamilies with expensive and often unpayable
microdebt, then, the CCT model provides a way of instantly resol-
ving extreme poverty without building in longer-term indebtedness.
The limited wealth redistribution element involved does not seem
to bother many neoliberal policy-makers either, and may even be
welcomed by some.2 As even the World Bank recognizes,3 ‘Transfers
generally have been well targeted to poor households, have raised
consumption levels, and have reduced poverty – by a substantial
amount in some countries.’ Brazil’s use of targeted social programmes
(Bolsa Familia) has helped families to cope, and also to avoid having
to indulge full time in poorly rewarding and often dangerous micro-
enterprise activities. Mexico’s Oportunidades project has been widely
praised because of the many benefits it has generated for the poor.
For example, Skoufias reports that it was responsible for a sharp
decrease in poverty (around per cent), rising school enrolment,
increased expenditure on food and an improvement in adult health.4
Venezuela is also successfully working with many types of financial
support for the local community, comprising Bolsa Familia-style basic
income programmes for the very poorest. All told, compared to the
growing web of microdebt now negatively aecting the ‘at-risk’ poor
in virtually all developing and transition countries today, the CCT
option is preferable by some considerable way.
But even if some form of microdebt arrangement is nevertheless
still preferred to meet the regular and ongoing demand from the poor
for simple consumption loans, then we may still not want to involve
conventional for-profit ‘new wave’ microfinance here. The best option
instead is to support consumption spending and lending through
forms of community-based credit, such as credit unions.
Credit unions are member-owned, not-for-profit local financial
institutions with an impressive historical track record of providing
good service to the poor. They work by mobilizing savings from
members, and then recycling this cash to other members when in need.
Sometimes outside capitalization can help to establish a credit union.
But generally – if not ideally – they remain locally controlled and
locally financed institutions. Everywhere around the world, therefore,
credit unions can and do provide quick and aordable microloans to
the poor seeking to smooth their consumption. It helps enormously
that with no paid executives to support, and with the goal of serving
members not shareholders, credit unions are much less costly to oper-
ate. In short, credit unions work with a sustainable development and
Alternatives to conventional microfinance | 169
poverty reduction trajectory, rather than against it (or in favour of
personal or elite enrichment). While somewhat more organizationally
complex than the types of MFI we have discussed so far, credit unions
are nevertheless a more equitable financial mechanism for satisfying
important longer-term consumption spending needs of the poor.
Assuming that immediate consumption needs can be adequately
addressed by credit unions, we need to focus now on the really crucial
development issue here – what are the local financial models that have
unequivocally shown how to promote sustainable economic and social
development, and so are the basic building blocks of an alternative
to ‘anti-development’ microfinance? The rest of this chapter expands
upon this critical issue.
Financial sector models associated with local and regional
development success
Following the financial chaos of the Great Depression and then
the carnage of the Second World War, many financial systems lay
in ruins. Many countries and regions were forced to embark on
the reconstruction of their domestic financial systems, with a view
to promoting sustainable economic and social development. Much
success was registered, particularly in the former West Germany,
Spain, Italy, France and the Scandinavian countries. Later on, in the
s and s, a number of East Asian countries began to examine
the most successful of the Western countries and the example of
Japan too, and they soon began to develop similar financial sector
interventions to kick-start faster economic and social development
in order to catch up.
The result was a new raft of high-performing local financial
sec tor models emerging. Indeed, one might argue that these latest
examples speak volumes about the power of a suitably configured
local financial system to catalyse sustainable economic and social
development, given that the countries concerned were all pretty much
mired in abject poverty and underdevelopment when they began their
experiment. And while much experience is historically, culturally and
geographically specific, of course, these examples manifestly point to
the fact that many aspects were readily transferable and adaptable to
quite dierent conditions elsewhere. As we shall see, the East Asian
experience is crucial testimony to the importance of learning from
neighbouring experiences, and then adopting and adapting similar
policies, structures and institutional vehicles. As Akyuz, Chang and
170 | Seven
Kozul-Wright argue in the citation at the head of this chapter, without
the willingness to learn from others, we might not have had an East
Asian ‘miracle’ to even discuss.
Elsewhere in the international development community, and also
in many developing countries, however, the most successful financial
models in recent history appear to have been ignored. Instead, from
the s onwards simple neoliberal textbook models and ‘ecient
market’ theories have been mainly used as the basis for the design of
the financial sector, including the local financial sector. One important
reason for neoliberal policy-makers to take this position, and for
the wider international development community to do so too, is
a basic aversion to national and local state intervention and forms
of planning. As we shall see, central to many of the most success-
ful financial sector models are indeed proactive regional and local
governments, non-market forms of capital allocation and subsidized
interest rates, all features anathematized by neoliberal policy-makers
and the microfinance industry. As we shall see in the case of Vietnam
in particular, no matter how successful such heterodox financial
sector models may be in practice, for purely political and ideological
reasons the international development community and the micro-
finance industry have to demand that such models be discredited
and destroyed.
Anyway, let us now consider the most successful of the post-Second
World War local financial models in a little more detail.
Japan quickly recovers from the Second World War While Japan is
traditionally seen as an example of large-scale industry export success,
it is much less well known that the country’s recovery after was
very much predicated upon the construction of a highly successful
local financial system. This local financial system was an outcome
shaped by extensive local government institution-building activity,
and topped o with much central government support. Community
development policy through small enterprises prospered, and it was
later ocially cited by the Japanese government itself as one of the
‘two major pillars of Japanese economic development policy since the
Second World War’ (the other pillar being export policy).5 The im-
mediate need in the aftermath of Japan’s defeat in was to rebuild
the local community on fair and equitable lines, to help the most
vulnerable individuals (particularly demobilized soldiers) establish
new small enterprises, and to restart local industrial development. In
Alternatives to conventional microfinance | 171
post-war communities, however, the impetus of the private financial
sector is to support the least risky and most profitable ventures, which
usually means working with safe large firms or import financing of
some kind. In Japan, local and regional governments therefore had
to fill the ‘funds gap’ for microenterprises and SMEs which quickly
became apparent.
Three powerful state banks were quickly established in the after-
math of the Second World War in order to lend to SMEs, micro-
enterprises and to their associations. The Small Business Finance
Corporation provided loans to SMEs, the People’s Finance Corpora-
tion provided loans to microenterprises and the Shoko Chukin Bank
provided loans to their associations for on-lending to members.6 Com-
plementing these central financial institutions, however, was a dense
tissue of local and regional (prefectural) state-led institutions. Local
and regional governments quickly accepted the challenge of financially
supporting local economic development themselves. Through an array
of city, regional and long-term credit banks, the microenterprise and
SME sectors were oered large volumes of longer-term, aordable
credit. The resources for these measures came partly from central
government, but also partly from local savings mobilization achieved
through the local state-owned banks. It also helped, as Kitayama
showed,7 that local governments were quick to develop a wide array
of their own support programmes and ‘soft’ measures to support
the most growth-oriented locally based microenterprises and SMEs.
Numerous special loans were also provided based on certain policy
measures, such as equipment upgrading or the introduction to the
locality of new technologies.
Alongside these local and regional state-led initiatives, the state
indirectly pursued its goal through support for large numbers of
credit unions, financial cooperatives and other forms of small-scale
non-state mutual association that were also re-established after .
Two were particularly important to microenterprise development – the
mutual (sogo) banks and the credit banks (shinkin) formed outof
the larger pre-war credit unions. By , more than per cent
ofthecredit banks’ lending was to microenterprises and percentof
the mutualbanks’, compared to ‘only’ just over per cent for the
regional banks.8 Crucially, Girardin and Ping note that oversight
bylocal governments and the central Zenshiren Bank helped establish
local trust and ensured minimal fraud and speculative activity associ-
ated with depositors’ money, a feature that was to underpin the high
172 | Seven
local savings rates experienced for most of the s and s.9 As
Nishiguchi shows,10 these non-state local financial institutions became
important complementary community-based providers of funds for
new-starts and small growing enterprises outside of the state support
schemes. David Friedman usefully summed up the situation as one
where, overall,11
In eect, the Japanese created an industrial equivalent of the
American savings and loan system for the US housing market. In
Japan, however, the thrift institutions funded not home ownership
but independent factories. This redirection of capital markets toward
small firms nurtured the independent expansion of small companies
during the high-growth period.
A key aspect of the ‘bottom-up’ economic development trajec-
tory fashioned by local and regional governments in Japan was the
ecient insertion of thousands of new microenterprises and small
enterprises into industry-based supply chains. This was achieved by
local and regional governments coordinating their financial sector and
other policies in order to provide longer-term, aordable financial
support to those individuals with the ideas and motivation to enter
into small-scale industrial production and services. In addition, locally
based ocials from the famed MITI (Ministry of International Trade
and Industry) were able to use funds from the Fiscal Investment and
Loan Plan (FILP) to provide long-term subsidized loans to key SMEs,
mainly to allow for the purchase of new technologies. Sourcing its
funds from the huge postal savings system, the FILP was an important
indicator to the banks that the firms it chose to support were now
a much lower risk, and so the banks should provide any additional
funding required.12
The iconic example of microenterprise development is the Tokyo
suburb of Ota, which became a world centre for machine-tool parts
production and servicing, overwhelmingly undertaken within micro-
enterprises. As Whittaker’s in-depth study of Ota shows,13 the easy
availability of aordable longer-term local finance removed the
principal binding constraint that would otherwise have held back
the growth of Ota’s industry-based microenterprises. With growing
subcontracting demands from the large Japanese industrial com-
panies, the locality’s microenterprise sector was in a good position
to benefit from these new demands. With easily available capital
most microenterprises were able to avail themselves of all the latest
Alternatives to conventional microfinance | 173
technologies, innovations and other productivity-raising features in
order to remain at the cutting edge of their work.
The essence of the Japanese local financial systems approach,
one might say, was to use the market mechanism as the background
againstwhich local government was able to identify and then pro-
actively promote those microenterprises and SME sectors calculated
to generate most long-term benefit to the local economy. Local govern-
ments did this because the market largely failed to catalyse into
being the required sustainable development trajectory: the market
was largely a passive background force. As the Japanese economy
began to boom in the s and s, Japan’s local financial model
was continually adjusted to reflect the growing need for aordable,
longer-term capital for key microenterprises and SMEs. Without
the existence of such networks of relatively technology-intensive
microenterprises and SMEs, many of the sectors Japan was later to
almost completely dominate across the globe would simply not have
emerged. For example, the development of industrial robotics was
strongly predicated on the prior existence of rafts of highly ecient
technology-intensive microenterprises and SMEs able to producein-
puts to extremely fine tolerances and specifications.14
The Basque experience with a community development bank15 The
small town of Mondragón in northern Spain lies at the centre of one
of the most spectacular examples of sustainable ‘bottom-up’ economic
and social development. From being one of the poorest regions in
Spain and in Europe in the s, beset by economic decline and in-
dustrial collapse, political tension and inter-ethnic discord, the Basque
region developed rapidly to become one of the EU’s best examples of
sustainable and equitable local and regional development. Central to
Mondragón’s success was a community-owned financial institution.
The Mondragón model is a network of industrial cooperatives
(now termed the Mondragón Cooperative Corporation, MCC) that
in employed around , full-time worker-members. In
it was the seventh-largest corporation in Spain with a turnover of
around € billion. The beginnings of the MCC are traced back
to the mid-s and the eorts of the local Catholic priest, Father
Don José María Arizmendiarrieta, to address the crushing burden of
poverty in the region. Cooperative businesses were chosen for support
because they contained far higher potential to address the economic,
political and cultural needs of the Basque population. This included
174 | Seven
a general desire for equality, fairness, dignity and democracy at work,
plus a wish to support local solidarity and the wider functioning of
the local community.
At the core of the Mondragón model lies the Caja Laboral Popular
(CLP, Working People’s Bank), a bank established to support and
provide funding to new and established cooperative business projects.
Since its foundation in , the CLP has been very successful in
mobilizing large quantities of local savings. Appealing to a sense of
local self-suciency and patriotism was made necessary by the fact
that the political authorities in Madrid were quite unwilling to give
any real support to the region, largely on account of its opposition
to the Franco government and its wish for greater autonomy, if not
full independence, from Spain. The phrase Libreta o maleta (Open
a savings account or pack your bags) became common currency,
deployed by the MCC pioneers to bring home the point that the
Basques had to mobilize their own funds to develop their region
rather than rely on Madrid, or else local people would have no other
option but to emigrate elsewhere to find employment.
It was the supreme ability of the Mondragón model to successfully
reinvest local savings into sustainable cooperative businesses, however,
which set apart this local financial system from the rest of Spain. The
Basques have a long history of thrift, so a high local savings rate was
not something completely new. Savings mobilized by local banks in the
past, however, had typically been recycled into simple local businesses
with little real growth potential, such as retail outlets. This weak local
development dynamic was, of course, partly the reason why the region
historically remained trapped in poverty.
The CLP was determined to change things, however. It set out to
refocus local savings into much more sustainable and growth-oriented
small cooperative businesses, businesses that would create quality
forms of local employment. Another phrase was widely used by the
MCC pioneers to underpin their eort at local development – Con
todos los ahorros que depositas aquí, vamos a crear puesto de trabajo
cooperativos aquí (With all the savings you put here, we are going to
create cooperative jobs here). To that end the CLP quickly established
the División Empresarial (Entrepreneurial Division). The División
Empresarial was decisive in the successful creation and ongoing sup-
port of virtually every cooperative within the Mondragón group
thereafter. Just one of the indications of this is that since the s only
three cooperatives supported by the División Empresarial have failed.
Alternatives to conventional microfinance | 175
The ability of the Mondragón group to patiently initiate, develop
and financially support new cooperatives into successful operation
was, as David Ellerman remarks,16 a very successful form of ‘social
entrepreneurship’.
The Mondragón local financial model is held by many to be the
key to the Basque region’s massively successful expansion of coopera-
tive employment over the years. It was spectacularly successful both
in mobilizing local savings in an initially poor region, and in then
carefully reinvesting this bounty in growth-oriented local cooperative
businesses. The Mondragón model not only began to spread across
the Basque region, creating a regional success story, but it also ex-
panded elsewhere across Spain. Government ocials from the (then)
equally poor region of Valencia were some of theearliest visitors in
the s, taking back with them the core of the Mondragón financial
model. The model was then very successfully adapted to local business
conditions and business culture in the Valencia region, turning it also
into an economic and social success story by the s. In short,
lessons from the Mondragón model are important to every region
attempting to develop, but especially those attempting to recover
from conflict and exclusion.
Northern Italy’s local-regional financial model Northern Italy’s
regional and locally based financial cooperatives and other financial
institutions, especially in the region of Emilia-Romagna, played a
central role in one of the most impressive post-war reconstruction
and development episodes of all time. With regional/locally owned
and controlled financial institutions embedded with long-term devel-
opment goals, the largely destroyed regions of northern Italy were
able to successfully grow thanks to burgeoning microenterprise and
SME sectors. Key to this success was the ability to identify and sup-
port those enterprises with the best possible growth potential, and
wherein crucially important externalities (e.g. technology transfer,
innovation, export links, collective R&D) could also be reaped for
the benefit of the wider network of enterprises. Long-term aordable
financial support was crucial to supporting enterprises in the process
of rebuilding their financial strength and attempting to reinvest as
much as possible in the latest technologies and business practices.
Many of the enterprises and networks supported coalesced into the
famous ‘industrial districts’. From one of the poorest Italian regions
in the s, Emilia-Romagna rapidly emerged to become one of
176 | Seven
the EU’s ten richest regions by the s, and its capital, Bologna,
became Italy’s richest city.
One of the most important of the region’s institutions was the
cooperative. Long an established feature of the region, after the
newly elected communist-socialist governments now saw cooperatives
as institutions that could lead the way towards the ‘inclusive’ economic
and social recovery they desired. As Ammirato shows,17 with support
from sympathetic regional governments in the north the cooperative
movement was given a hefty boost. This included the region’s financial
cooperatives, which were seen as a core component of the overall
financial engine that would catalyse the hoped-for ‘inclusive’ recovery.
Another point in favour of financial cooperatives was that they were
clearly not going to engage in widespread speculative activities. A wave
of speculative activities and elite-sponsored ‘get rich quick’ schemes
would clearly undermine the fragile accommodation that had been
reached between the defeated Fascists and their wealthy business
supporters, on the one hand, and the victorious partisans and the
working classes, on the other. Allowing such processes of illegality
to continue unchecked in the northern Italian regions ran the risk of
blowing apart the nascent recovery. This was an outcome that was
eventually to transpire in the southern part of Italy, as Robert Putnam
notably pointed out.18
After , the financial cooperatives immediately began to mobil-
ize savings as best they could. This cash was then carefully invested in
traditional investor-driven businesses with obvious growth potential,
but also, as in the case of Mondragón, as much as possible in coop-
erative enterprises. The main cooperative bank in Emilia-Romagna,
Cooperbanca, had branches right across the region, and it quickly
became a mainstay of enterprise lending. The smaller cooperative
banks in northern Italy were also helped to recover and were quickly
able to provide additional support to both cooperatives and important
microenterprises. Also operating alongside the financial cooperatives
were, from onwards, networks of Artisan Funds. These Artisan
Funds were established and capitalized by the central government
in Rome, but largely managed and accessed regionally. Linda Weiss
brilliantly recounts how these Artisan Funds were quite pivotal to the
recovery and development of the local enterprise sector thanks to their
provision of long-term (ten-year) low-interest loans for machinery
purchase and workshop modernization.19
From onwards, the northern Italian regions also greatly
Alternatives to conventional microfinance | 177
benefited from a network of full and part publicly owned Istituti
di Credito Speciale or Special Credit Institutes (SCIs).20 The most
important SCIs were established right across Italy at the regional level
(Mediocrediti Regionali), and were meant to focus on providing low-
cost medium- to longer-term credit to small and medium industrial,
and especially to relatively technology-intensive, enterprises. Their
‘localness’ helped ensure that they worked close to their clients, thus
building up trust and reputation, and they could also assess their
clients better by being near to them. The SCIs established in the
region of Emilia-Romagna, for example, turned out to be particularly
proactive, transparent and well managed. The result was that a dis-
proportionate share of the central funding available was channelled
to the SME sector in this one region, leading to Emilia-Romagna
becoming one of the most developed and richest regions in Europe
by the s.
All told, the northern Italian regions hugely benefited from a local
financial system that could drive forward the process of ‘inclusive’
development through enterprise development. As in Mondragón, it
was crucially important to savings mobilization that most local finan-
cial institutions were willing and able to commit to sustainable local
development, as opposed to maximizing the returns to be enjoyed
by their external shareholders or, worse, their more visible directors
and senior managers. It was not lost on the cooperative movement
at this time that the local private commercial banks much preferred
to concentrate their funds on supporting the highly lucrative post-
war consumption goods import trade. With a firm financial base,
the financial system was then able to begin to identify and support
the most sustainable business propositions. Microenterprises were
supported where they could insert themselves into non-local supply
chains through the famous impannatori, individuals at the head
of long supply chains and ‘putting out’ networks. Noteworthy in
Emilia-Romagna was its ability to find residual value in the previously
robust military-industrial sector based in the region. With help from
the local financial system, many of the ideas, technologies, products,
processes and contacts were successfully parlayed into new, relatively
technology-intensive microenterprises and SMEs. Overall, as Guiso,
Sapienza and Zingales show,21 the much deeper and more long-term-
focused local financial system found in northern Italy accounts for
both the continual supply of new-start SMEs, and their subsequent
growth being much higher compared to other Italian regions.
178 | Seven
As already noted, many cooperatives were supported because they
had obvious advantages in terms of a higher level of fairness, equal-
ity and better working conditions. One result of the subsequent
strength of the cooperative sector was that it attracted new financial
inter ventions. After , the Italian regions added to their finan-
cialsupport for the cooperative sector with the Coop Fund initiative
(il fonde mutualistico). This new fund was financed thanks to a new
law which stipulated that all cooperatives – many now very successful
and financially strong – must contribute per cent of their profit into
developing new and expanding existing cooperatives. By all accounts,
such Coop Funds have succeeded in patiently developing new sustain-
able cooperative businesses. The cooperatives’ own membership body,
LegaCoop, also decided to establish its own version of the Coop
Fund with fourteen regional oces to utilize these new mandated
funds to support the cooperative sector. Between and , the
LegaCoop-aliated Coop Fund supported new cooperatives into
operation using $ million of equity funding and $ million of
loans, in the process creating , new jobs. Similar support provided
to existing cooperatives with growth potential deployed $ million
of funding to create , new jobs.22
Overall, the cooperative-based financial system that emerged in an
economically devastated northern Italy after was crucial to its
rapid recovery and development. Initially mobilizing both state and
non-state funds (i.e. savings), the financial system was to prove adept
at parlaying this advantage into a sustainable local development tra-
jectory based on growth-oriented enterprises, especially cooperative
enterprises. Crucially, the regional authorities and local governments
realized that they needed to drive forward the enterprise development
process based on sound economic principles, particularly the need for
scaled-up, interconnected (horizontally and vertically) and relatively
technology-intensive enterprises.
Taiwan and South Korea The rise of the so-called East Asian ‘Tiger’
economies is particularly associated with the stunning success of
two previously extremely poor countries – Taiwan and South Korea.
Superior economic performance in these countries has been largely
attributed to the varied activities of central state institutions, rather
than to local financial institutions. In South Korea it was govern-
ment’s strategic support for big business (the Chaebols), while in
Taiwan state support for agriculture and then a thriving SME sector
Alternatives to conventional microfinance | 179
made all the dierence.23 It remains the case, however, that a suitable
initial foundation for rapid economic growth and development in
these two countries was built upon successful rural transformation,
and especially small-scale economic development activities, both of
which developments were a product of very proactive regional, local
and village-level-based financial institutions.
In the s, South Korea was one of the world’s poorest countries.
Following a military coup, in the s South Korea embarked on
a new policy of achieving rapid economic and social development.
This new direction involved major changes to the financial system,
including at the local level. After , the local township and vil-
lage administrations were quick to support local farmers’ credit
unions to get started. Alongside quality extension services for farmers
and potential rural entrepreneurs, this important initiative greatly
helped to kick-start rural development and facilitate agricultural
self-suciency.24 It was important, too, that from the s onwards
the decentralized units of the major state banks were able to oer
low-cost credit to local microenterprises. The aim was to promote
rural industrialization, especially utilizing the high skills of many of
the refugees from North Korea who moved south after the conclu-
sion of the Korean War. Allowing local entrepreneurs to bypass
the traditionally usurious private lenders (the state bank loaned at
per cent per annum compared to the – per cent oered by
the private lenders) meant rural industrial projects could bring in
new and second-hand machinery from the major urban centres.25
Overall, South Korea was able to construct a solid and equitable
rural-based economic and social development trajectory that neatly
complemented the Chaebol-based industrial development eort under
way at the national level. In , after South Korea was caught up
in the Asian financial crisis, the Korean government was once more
able to embark on a new credit-driven policy approach; this time
supporting SMEs as the engine of growth. Special venture capital
funds and credit availability were increased with regard to SME invest-
ments in technology and innovation. Korea’s banks were instructed to
restructure their loan portfolios away from the Chaebols and towards
potentially high-growth SMEs.26 In this way, South Korea built up
a remarkably resilient SME sector, one that provided new jobs and
strong support for the restructuring Chaebols.
Taiwan took far more seriously than South Korea the task of
constructing a small enterprise-based economic model through
180 | Seven
appropriate forms of local financial intermediation. As in South
Korea, however, the Taiwan government was first interested in im-
proving rural agricultural productivity in order to create food self-
suciency, before switching in the s to a more export-based
development strategy. Township and village state bodies initially
began to oer support to basic local farmers’ associations, which were
able to help peasants pool their savings and thereafter oer low-cost
credit for irrigation and new agricultural technologies. Thorbecke
notes that local and village administrations soon became competent
at establishing more sophisticated rural funds and credit cooperatives
that were able to aid the savings mobilization and local investment
cycle, thereby underpinning the required industrialization drive in the
countryside.27 As Fei, Ranis and Kuo sum up,28
The farmers’ associations and credit cooperatives, set up by the
Japanese to facilitate agricultural extension programs and rice
procurement, were top-down institutions dominated by landlords
and non-farmers. As a result, most farmers did not directly benefit
from them. In government consolidated those institutions in
multipurpose farmers’ associations restricted to farmers and serving
their interests. In addition to the original function of agricultural
extension, the activities of farmers’ associations expanded to include
a credit department, which accepted deposits from farmers and
made loans to them, and to provide facilities for purchasing, market-
ing, warehousing, and processing. The associations thus became
clearinghouses for farmers, who controlled and maintained them
and viewed them as their own creatures.
It greatly helped that the number of agricultural extension ser-
vices workers in Taiwan provided by local and village administrative
units was far and away above that in other East Asian countries.29
Agricultural-sector-related SMEs also benefited from many special
bank programmes aimed at creating ecient agricultural supply
chains concerned with the processing of export items, such as canned
mushrooms and pineapples.
In terms of the wider industry-based microenterprise and SME
sector, Wade points to two main sources of funding that prevailed
early on.30 First, Taiwan enjoyed a set of banks (e.g. an SME Bank)
and bank programmes providing discounted credit to SMEs operating
in priority development areas. Second, a centrally and locally well-
regulated curb market provided large sums of capital at interest rates
Alternatives to conventional microfinance | 181
freely determined between supplier and demander. Foreign banks
were kept out of Taiwan until well into the s, and thereafter
for a long time allowed only into areas of business (e.g. savings
mobilization) the government considered would not undermine its
overall development goals. Taiwan’s huge economic success, however,
is largely based upon the expansion of its now very technologically
sophisticated SME sector. It is here that the most innovative financial
institutions were to prove crucial in establishing and then nurturing
the SME sector. Taiwan very quickly developed a comprehensive
financial structure able to support technology activity. A wide variety
of special financial support programmes were provided through the
government-owned banks to help SMEs obtain new technology and
develop new technology processes. This financial sector component
was a key part of the overall technology support structure, described
by Lall as ‘perhaps the developing world’s most advanced system
of technology support for small and medium enterprises’.31 It also
helped that larger companies receiving special discounted loans had,
in return, to proactively support subcontracting and other forms of
eciency-enhancing integration within the local SME sector.
Overall, both South Korea and Taiwan were extremely proactive
and innovative in developing local and regional financial systems
that could help them achieve their strategic development and poverty
reduction goals. Initially, the proactive financial sector programmes
undertaken by township and village administrations in both coun-
tries led to the ecient and equitable reconstitution of the local
community as a self-sucient agricultural unit. Success here then
underpinned the wider eorts to transform the local economy into
an ecient rural-industrial entity. This was then the ideal platform
for the later large-scale industrial policy interventions in South Korea,
and technology-based SME development interventions in Taiwan,
that catapulted both countries towards rapid growth and ultimately
major economic success.
Local finance crucial to China’s rise to power The Chinese eco-
nomic miracle stands as the most impressive economic development
and poverty reduction episode of the last forty years, possibly of all
time. What is often forgotten, however, is that the foundation for
China’s rapid development was established at the local level, in the
shape of rafts of highly ecient, largely production-based Town-
ship and Village Enterprises (TVEs). The TVE experiment began
182 | Seven
in the southern coastal regions of China. TVEs were largely local-
government-owned enterprises. Despite their ownership structure,
TVEs were nevertheless strongly profit-seeking, operated under hard
budget constraints and according to strict performance targets. The
number of TVEs grew very rapidly, and by nearly . million
industrial TVEs were operating.32 Initially, the profits and taxes gen-
erated by the TVEs enabled highly proactive local governments to
finance a range of increasingly sophisticated business infrastructures,
such as industrial parks, incubators and, a little later on, modern
facilities geared to foreign investors. Foreign investors began to hear
about the TVEs, and from the early s FDI began to arrive to
partner up with those TVEs capable of producing low-cost goods
and services in demand by Western consumers. This positive associ-
ation with FDI was crucial in helping China to deepen and sustain
its growth trajectory well into the s. Even though by the late
s many of the TVEs were being privatized or closed down, in
line with internal and external pressure on the Chinese government
to move much more rapidly towards a neoliberal policy orientation,
China’s experience in this specific period remains a hugely important
pointer to other countries seeking successful rural industrialization
and growth.
Even less well known is the fact that two key local financial institu-
tions essentially stood behind the TVE experiment. First, there was
the Rural Credit Cooperative (RCC) model. The RCCs first emerged
in the s as carefully controlled local units of the Agricultural
Bank of China (ABC), but became powerful local institutions in their
own right after reforms began in . RCCs were mainly owned
by farmers through equity stock. They collected deposits from rural
households and some TVEs. Initially providing loans to individuals,
from the early s onwards they mainly provided loans to TVEs.33
Second, there were the Urban Credit Cooperatives (UCCs). The first
UCC was established in Luhae County in Hebei Province in , but
by there were , UCCs throughout China.34 The UCCs had
a combination of owners, including private businesses and private
individuals, but substantial ownership by the local authorities and
local state banks was generally the norm. This was important in
incorporating the UCCs into local development plans, and to ensure
the confidence necessary to mobilize local savings.
The importance of the RCC and UCC experiment is evident in a
number of ways. First, RCCs and UCCs were well equipped to mobil-
Alternatives to conventional microfinance | 183
ize local savings. Even in China’s poorest communities this proved to
be possible. Crucially, by demonstrating that most (–per cent)
of local savings would be reinvested locally in the TVEs, and so
(hopefully) new quality local jobs would be created and sustained,
both the RCCs and UCCs were able to build trust in their operations
and in their vision of community development. (It also helped that
many farmers feared that their savings would be lost or wasted if
deposited in the large state banks, many of which were then heavily
engaged in supporting the declining heavy industries in the north of
the country.) Second, because local governments owned the TVEs, and
so stood to lose out financially if any of them failed, the process of
identifying which TVEs to establish or expand was apparently quite
quick and ecient. Highly profitable and generously local taxpaying
TVEs were a real bonus to local government ocials seeking higher
oce. By the same token, a local government ocial forced to petition
the higher authorities for financial assistance in the event of losses in
some TVE project often meant the end of any promotion chances.
Third, local governments in China realized that there was no point in
establishing some new TVE with less than the required scale or with
inappropriate technology. It therefore helped that large and aordable
enough loans were made available for local TVEs. As O’Connor
remarked, this enabled ‘new [TVEs] […] to start up on a larger scale
than otherwise (and than private enterprises), with a higher degree of
mechanization and more modern technology’.35 Initially, with Hong
Kong nicely placed as the entrepôt port, most TVEs sought financial
support to produce simple manufactured goods destined for export.
Later, in the early s, when the Chinese economy began to grow
very rapidly and to entice in large amounts of FDI, the RCCs and
UCCs were able to direct funds towards those industrial TVEs best
placed to make a productive local supply chain link with a foreign
company.
The TVE experiment reached its peak in the late s. In line
with the turn to neoliberalism in China in the s, however, the
local financial system began to come under pressure to reform in the
approved neoliberal direction. Predictably, the RCCs began to come
under pressure to privatize, often from incumbent managers simply
seeking personal gain. The pressure began to build for the RCCs to
be converted into full profit-maximizing shareholder/manager-owned
financial entities. In parallel, many of the much larger UCCs were
merged to become even larger city-based commercial banks. Some
184 | Seven
UCCs were also privatized, and subsequently lost their development
mandate as they too were forced to go in search of maximum profits
for their new local owners, most of whom were previously their direc-
tors and senior managers, now wealthy players in the new market-
driven financial system.
Most recently, with Chinese economic policy-makers now increas-
ingly in thrall to the neoliberal policy model, the Chinese government
has begun to downplay the interventionist RCC and UCC experiment
as the initial source of China’s great economic success. It is now better
not to mention that such community-driven institutions were vital to
China’s success. One reason for this is that otherwise there might be
some comment as to why the UCCs and RCCs were then privatized
and passed almost for free over to their former directors and senior
managers. Largely for the same ideological reasons – the need to sup-
press the fact of positive performance by community-driven financial
institutions – the international development community has welcomed
the direction of this reassessment by the Chinese gov ernment. As one
stick to beat the UCCs and RCCs, microfinance advocates have taken
to pointing out the often sizeable losses incurred in many of them.36
This is quite an unfair assessment. Among other things, it ignores
the fact that the risks taken supporting many potentially fast-growing
TVEs, and so the inevitable losses incurred when some of these
projects went bad (as in any Silicon Valley venture capital outfit, for
example), are actually swamped by the upside registered by those
TVEs that succeeded. In fact, one might say that on a simple cost–
benefit analysis, the UCCs and RCCs have been nothing short of a
staggering economic development success, given the TVEs’ role as the
foundation stone upon which China’s economic miracle was actually
built. Nevertheless, the Chinese government is now being solemnly
told by the international development community that its future
microenterprise and SME growth should ideally come through rafts
of ‘new wave’ MFIs, the creation of which has become one of the
international development community’s new strategic policy goals in
its engagement with Chinese policy-makers.
In spite of some operational diculties, it remains the case that the
community-based RCCs and UCCs that emerged in the early s
were the primary financial institutions behind the TVE movement,
which was in turn the engine behind China’s spectacular period of
rural industrialization and growth. Both forms of community-based
financial institution very successfully mobilized savings in poor rural
Alternatives to conventional microfinance | 185
and urban communities. These savings were then judiciously invested
back in sustainable TVEs, an enterprise format that oered real
payback to the local community in the form of secure jobs, rising
incomes for the community, high local taxes and local technology
transfer. The RCCs and UCCs therefore oer a number of important
lessons to other developing countries also seeking to mobilize and
judiciously invest scarce local capital in order to promote rapid rural
industrialization, sustainable job creation and poverty reduction.
India’s Kerala model of development India’s Kerala State has long
been famous in the international development community for its
achievement of very high levels of human development in spite of
persistently low levels of GDP growth per capita. Many are appre-
ciative of the enormous social progress made in the state, and have
contributed to the eort to tease out the precise factors responsible
for such an important outcome.37 Some attribute much of the progress
to Kerala’s proportionately quite large share of India’s huge remit-
tance income flow.38 Others, notably Amartya Sen, while generally
applauding the Kerala model, also seek to understand why per capita
growth has been lower in Kerala than in many other states in India.39
Higher wages, good working conditions and generous social provision
in Kerala are obvious deterrents to profit-maximizing mobile national
and multinational investment, which accounts for the fact that few
big companies have indeed chosen to locate in the state. Still others
see the issue of low growth per capita and high social development
as separate issues. What is important, as Parayil believes,40 is that in
spite of its low growth per capita Kerala was able to achieve by far
the best social development indicators in all of India.
Less well known about Kerala is the fact that it has pioneered its
own quite distinct microfinance model. The motivation was, at least
partly, to develop new endogenous economic activities that would
answer those critics just noted, who applaud the social development
progress in Kerala but point to its weak economic growth experience.
As in other parts of India, individuals in Kerala are encouraged to
form self-help groups (SHGs) and neighbourhood help groups (NHGs)
which then obtain ‘soft’ loans from the local cooperative banks to
match their own savings. Unlike in other states in India, the SHGs
and NHGs in Kerala come under much more pressure to formulate
and put forward only what are seen as sustainable projects, which
are then financed by the local cooperative banks. In addition, village
186 | Seven
councils consider any project within the context of the local plan that
is arrived at through popular participation. As Thomas Isaac and
Franke describe it, ‘Kerala microcredit projects [are] better than the
existing Grameen Bank counterparts’ because, among other things,
great eorts are made to ensure that individual loans ‘maximise inter-
connections and […] avoid overinvestment in any particular activity’.41
The projects funded in Kerala are then, ‘in theory at least – connected
to an overall village development plan in which the outcomes of the
loans in terms of the products have an immediate local market’.42
This shows a sophisticated understanding of two fundamental flaws
in the microfinance model that I have already highlighted – that is, the
lack of ‘connectivity’ and the ‘fallacy of composition’ issues. Initially
inspired by the broad outlines of the Grameen Bank, the Kerala model
has introduced many such fundamental modifications to try to avoid
the Grameen Bank’s fundamental flaws.
Kerala’s own brand of SHG and NHG financing of cooperatives
has to date played a quite decisive role in the economic and social
(especially solidarity-building) success of the Kerala model. Special
eorts are made to encourage and financially underpin cooperatives
wherever possible. This is because Kerala’s microfinance model is
basedon emphasizing ‘the solidarity of the SHGs to undertake pro-
duction together rather than simply using social pressure to compel
individuals to repay loans’. This collective eort and planning dif-
ferentiate the direction (if not the outcome) of the Kerala SHG model
from other SHG models in India, including the large SHG movement
in Andhra Pradesh.43 The Kerala SHG model is about moving women
away from involvement in SHGs solely in order to access microloans
for simple ‘no-growth’ individual projects, much as they would do if
working with any mainstream MFI (though interest rates are consider-
ably less via the SHG route than in commercial MFIs). Instead, the
aim is to foster collective activity that can reap some simple economies
of scale and scope, thus improving the chances of eventual success
in creating forms of sustainable employment.
By the same token, the financial sector and SHG movement in
Kerala treat the informal sector somewhat dierently than elsewhere in
India. Informal sector operations are strongly encouraged to formalize
into cooperatives whenever possible, in order to improve the chances
of empowering individuals and reducing poverty. Notably, the largest
cooperative in Kerala (and one of the largest in India) is located in
traditionally one of the weakest and most exploitative of individual
Alternatives to conventional microfinance | 187
microenterprise activities – making bidis, or traditional cigarettes.
With upwards of , members, the bidi cooperative ensures that
those involved have some power over their lives and working condi-
tions and, crucially, enjoy a much higher percentage share of the
eventual financial returns than is typical across the industry. More
widely still, the Kerala microfinance model attempts to eradicate
exploitative informal sector labour through trade union mobilization,
rather than contributing towards its legitimization and expansion as
elsewhere in India (and in developing countries in general). Kerala
stands out as one of the few locations in developing countries that
makes a deliberate eort to encourage informal sector workers to
organize and to unionize.
At least in intent, if not (yet) in terms of widespread and sus-
tainable outcomes, the Kerala microfinance model represents a very
important departure from the Grameen Bank microfinance model.
Many of the serious flaws in the Grameen Bank model have been
identified and, at least partially, corrected in Kerala. Key genuine
empowering trajectories involving the poor are oered support –
such as cooperatives, unionized workplaces, ‘connectivity’ between
otherwise weak individual enterprises, the use of planning to avoid
local overcapacity arising, and so on. Engagement with the informal
sector is accepted, but only on condition that the long-term goal is
to formalize the informal sector as much as possible. It remains to
be seen whether Kerala’s unique microfinance model, as well as the
entire Kerala development model, can succeed into the longer term.
But there are certainly optimistic portents to suggest that what has
been achieved so far for the poor might be a firm enough foundation
for its evolution into bigger and better things.
Venezuela’s popular economy experiment Starting around ,
one by one the countries of Latin America have cast o the neo-
liberal economic policy framework imposed upon them by the major
development institutions (i.e. the World Bank and the IMF) acting
in concert with the US government. Years of steadily rising poverty,
inequality, unemployment and deprivation have convinced them that
there must be an alternative. Microfinance programmes have been a
mainstay of the attempt to reduce poverty and promote ‘bottom-up’
development in Latin America à la Hernando de Soto’s vision, but
such programmes appear to have achieved very little indeed. One
result is that disillusion with microfinance has turned into a flowering
188 | Seven
of new local financial sector developments, such as in Bolivia (the
BDP experiment) and in Mexico, Brazil and Argentina (CCTs). One
country, Venezuela, stands out, however, for having charted a very
positive development trajectory – so far – thanks to a radically new
set of pro-poor local financial institutions and innovations.
Reflexively demonized by much of the Western media as ‘too
interventionist’, in truth Venezuela is simply responding to a failed
neoliberal development model that produced nothing but strato-
spheric levels of poverty, inequality and suering – all this in a country
that since the s has enjoyed huge revenues from its oil and gas
industry. At the core of the new Venezuelan model is an explosion of
‘bottom-up’ social and community-driven development programmes,
mostly financed by higher oil industry revenues. Notably influential in
the initial design of this new system was the work of Osvaldo
Sunkel, who proposed a more human-centred ‘bottom-up’ version of
the old import-substitution policy framework.44 Particular emphasis
has been placed on establishing networks of agricultural, marketing
and worker cooperatives through Sunacoop, the National Superin-
tendency of Cooperatives. As the Venezuelan government argues,
cooperatives are viewed as a central component of ‘an economic
model with a rationality centered towards collective well-being rather
than capital accumulation’.45
This preference culminated most recently () in an ambitious
plan to buy out failing, and even successful, large private enterprises
for conversion into worker and community cooperatives. There are
major programmes of support for the creation of cooperatives invol-
ving individual microenterprises as the core members, in order that
they might better reap collective economies of scale and scope (as well
as enjoy equality and solidarity). There is also a major shift towards
pro-poor public purchasing and contracting policies, such as favour-
ing the award of public contracts to businesses owned by minorities
or else those located in the very poorest communities. A decree was
issued that Venezuela’s state companies should all attempt to increase
the local content of their outputs through subcontracting with local
SMEs and microenterprises, and especially through working with
cooperatives. Part of the influence here was the obvious ‘bottom-up’
development success of Brazilian public procurement programmes
in establishing sustainable clusters and cooperatives involving many
production-related small firms.46 Crucially, ‘connectivity programmes’
in Venezuela are most often facilitated by finance made available at
Alternatives to conventional microfinance | 189
low interest rates and long repayment periods (sometimes also ‘grace
periods’), significant free training opportunities and free technical
assistance for microenterprises.
Small-scale finance is one of the core instruments through which
this new social development trajectory is meant to be realized in
Venezuela. Three microcredit banks were established to provide the
important financing needs of local businesses. These are the Banco
del Pueblo (People’s Bank), Banco de la Mujer (Women’s Bank)
and FONDEMI (Fund for Microenterprise Development).47 In addi-
tion,FONDEMI has been granted significant resources to underpin
the rafts of communal banks in Venezuela that finance small-scale
projects with the potential to develop and grow. These three core
MFIs provide a range of subsidized microcredits to appropriate busi-
ness projects. A key institution here is also the Ministerio para la
Economía Popular, MINEP (People’s Economy Ministry), which has
been described by some analysts as a popular version of the US Small
Business Administration.48 MINEP financially supports microenter-
prises, cooperatives and other productive units that are in line with
the sustainable human-centred development strategy enunciated by
the Venezuelan government. MINEP has provided major programmes
of finance for start-up worker cooperatives, typically with fewer
than ten founder-members. The financial conditions are extremely
favourable, with low interest rates and long maturities the standard
oer. The MINEP cooperative training and financing programme
was established in , and by more than , cooperative
enterprises were functioning.
Individual microenterprises receive substantial funding in Vene-
zuela through the MFIs established by the state. In contradistinction
to the ‘new wave’ microfinance model, in Venezuela financial support
is provided mainly on condition that an individual microenterprise
can somehow integrate into larger business networks in order to reap
collective economies of scale. It is widely accepted in MINEP, as well
as more widely still,49 that it is very often isolation which undermines
a microenterprise, and not its own eciency or thelack of motivation
to escape poverty of those involved. One other reason for such inter-
enterprise networking, it is hoped, is that it will also help to identify
real, not perceived, local demand gaps. Adding unwanted local supply
to already overcrowded local market sectors can therefore be avoided.
This is specific recognition that for microenterprise development
to be successful it must graduate away from the ‘no-growth’ and
190 | Seven
income-destroying informal sector microenterprise ghettos familiar
to Venezuela in the past, and still common in most other Latin
American countries today.
As noted, the Venezuelan government appears to recognize the
dangers of wrongly inflating even further already ‘saturated’ local
market sectors. Banco de la Mujer is particularly aware of this peren-
nial problem. It therefore aims to help its women microfinance clients
within a very supportive framework that identifies and targets only
genuinely sustainable businesses within the community. Unlike in
virtually all other conventional microfinance programmes, such a
‘hands-on’ approach is specific recognition that, in their own words,
simply providing the poor with access to finance is not a solution to
poverty. Rather, if vital links between microenterprises and sustain-
able forms of industrial and consumer demand are not part of the
deal, it is an abdication of responsibility towards the poor.50 With
support from Banco de la Mujer, those receiving microcredits to date
(, cooperatives and , microenterprises) have also been given
encouragement to set up their own support networks, or Popular
Networks. These associations of women are designed to provide
women with greater ‘voice’ in the community, but also to help them
to identify for themselves new sustainable project areas that are likely
to be of most benefit to women.51
Venezuela-style microfinance is thus radically dierent from both
the Grameen Bank model and the latest ‘new wave’ microfinance
model. It is much more akin, in fact, to the hugely successful ‘com-
prehensive’ microfinance support programmes pioneered in post-
Japan and northern Italy. Most noticeably, as in the northern
Italy case, much of the funding for microenterprises is actually tar-
geted at supporting cooperative enterprises. As in Japan, access to
micro finance is also made conditional upon a reasonable level of
sophistication (not just simple trade activities, for example), and
that the receiving microenterprise or cooperative possesses the ability
to integrate into supplier networks of some sort. These and other
microloan conditions have been established in order to best fulfil
Venezuela’s planned goal of promoting ‘endogenous development’,
which, according to Wilpert,52 is based on five key development prin-
ciples: using existing local capacities and addressing existing needs;
enhancing community participation and local planning (for example,
through cooperatives); promoting‘bottom-up’ forms of development
rather than ‘top-down’;promoting solidarity and cooperation more
Alternatives to conventional microfinance | 191
than competition; and, finally, using modern technology without
compromising the ecological equilibrium.
While it has been only a few years in operation, the early results of
Venezuela’s ‘bottom-up’ financial sector experiment are nevertheless
impressive. At least partly thanks to the extremely supportive local
financial system, and the resulting ‘bottom-up’ development trajec-
tory thereby established, unemployment has decreased from nearly
per cent in to just under per cent in . Interestingly,
employment in the informal sector – the traditional destination of
most micro-entrepreneurs – has actually fallen over this time period,
to just over per cent of the total labour force. The level of poverty
has also fallen, with the number in poverty falling from over per
cent in to just over per cent in , while extreme poverty
has halved, from per cent of the population to just under per
cent.53 While these advances cannot all be laid at the door of the new
local financial system, the evidence nevertheless does show that it has
been of crucial importance in helping secure the poverty reduction,
solidarity-building and sustainable job generation progress achieved.
Vietnam – a special case of ‘progress with the wrong model’
Since the early s, Vietnam has used its financial sector to
promote a ‘bottom-up’ economic and social development trajectory.
The result is that Vietnam is now universally recognized as having
brought about one of the most successful developing-country poverty
reduction episodes of the last twenty years. Poverty dramatically fell
across all categories in the period –. As measured by per
capita consumption, the poverty rate fell from just over per cent in
to just under per cent in , representing a fall of almost
per cent in just eleven years. In the context of the UN’s Millen-
nium Development Goal of halving extreme poverty in the period
–, Vietnam’s progress in reducing the poverty rate by
to one third of its level is simply astonishing.54 At least partly,
this progress has been achieved by ensuring a very pro-poor economic
policy – the Gini coecient rose only from . in to . in
55 – so that poor people have really shared in the benefits of the
Vietnamese economy’s growth and development. Duncan Green, head
of research for the UK aid agency Oxfam GB, for example, describes
Vietnam as the international development community’s new ‘poster
child’,56 an object lesson to other poor developing countries in the
way to begin to escape poverty and underdevelopment.
192 | Seven
Crucially, Vietnam’s stunning progress is intimately connected
to the operation of a number of financial sector innovations and
community-based financial institutions, alongside many coordinated
supporting policy interventions. In fact, a wide variety of small-scale
finance institutions have been established since the early s, all of
which have proved to be important in catalysing an extremely produc-
tive and sustainable enterprise development trajectory into existence.
But what is even more intriguing here is the fact that Vietnam’s
financial sector has been modelled on core principles consistently
anathematized by the microfinance industry for many years. Following
study visits to the Grameen Bank in Bangladesh in the early s,
the Vietnamese rejected the Grameen Bank model in favour of a
more proactive and developmental microfinance model similar to the
Chinese model of UCCs and RCCs just noted above. By all accounts,
if the key claims made by the microfinance industry and its supporters
since the early s are to be believed, the resulting heterodox and
supposedly ‘inecient’ microfinance system in Vietnam should have
achieved very little in terms of development and sustainably reducing
poverty. Yet, to their obvious discomfort, as we shall see below, the
exact opposite has transpired.
Major reforms to the Vietnamese economic system began in
in the shape of the policy of doi moi (renovation). Among other
things, doi moi involved an increased emphasis upon independent
small-scale family farms and private non-farm entrepreneurial act-
iv ities. Along with better-managed state enterprises, these renewed
private entities were slated to re-energize the local economy. Three
core financial institutions were established to massively increase the
flow of small-scale finance into these new private sector areas and into
poor communities. First, there is the Vietnam Bank for Agriculture
and Rural Development (VBARD). VBARD is the largest bank in
Vietnam, with a network of more than two thousand branches. Its
clientele are nearly per cent rural households. Its loan portfolio
in comprised loans for fisheries and livestock ( per cent of
portfolio), investment and working capital loans for annual and per-
ennial crops, principally rice, rubber, tea, coee ( per cent) and
handicrafts and trade ( per cent), with the remainder going into
rural infrastructure.57 Average loan size in was $,, a good
indication that the bank’s primary focus is on small enterprises and
family farms, rather than survivalist microenterprises or consumption
lending.58 VBARD provides both savings and microlending services
Alternatives to conventional microfinance | 193
mainly to the informal microenterprise sector. By the end of ,
VBARD had nearly seven million savings accounts holding deposits
of $. billion.59
Second, there is the Vietnam Bank for Social Policy (VBSP) (for-
merly the Vietnam Bank for the Poor, VBP), which mainly provides
subsidized microloans to the poor. The VBSP previously worked
through the VBARD branch network, but in it established its
own branch network. The VBSP continues the policy and directed
lending programmes previously managed by the VBP and a number
of state-owned commercial banks. Interest rates on VBSP loans are
even lower than in VBARD, as are the loan sizes.
Third, there are the People’s Credit Funds (PCFs), which were
established from onwards as the replacement for hundreds of
credit cooperatives that failed in the s.60 Established by the State
Bank of Vietnam (SBV), the country’s central bank, the PCFs are
commune-based rural credit institutions based on the Caisse Populaire
system successfully used in Quebec, Canada. By , there were
more than one thousand PCFs operating in fifty-six of Vietnam’s
sixty-four provinces, with more than . million members and total
assets of nearly $ million. Membership has also grown, from an
average of just over members per PCF in the mid-s to nearly
, per PCF today. The PCFs mobilize a quite substantial amount
of savings in the rural areas, rising to nearly $ million in .
The average deposit balance per PCF rose from $, in to
nearly $, in . Average loan size has gone up too, from just
$ in to $ in , indicating that PCFs work at the higher
end of the microenterprise market.61 The apex organization standing
above the PCFs is the Central People’s Credit Fund (CCF). The PCFs
are member-owned, while the CCF has been majority-owned by the
SBV since its inception, with the PCFs and four state banks owning
the remainder. SBV’s share in the CCF increased in from
to per cent, however, a move made prior to the CCF’s planned
conversion into a commercial bank.
Alongside these three main MFIs are a host of other organizations,
including both state- and non-state-driven institutions, which work to
provide low-cost (subsidized) credit to the poor as part of local de-
velopment and poverty reduction programmes. Specifically addressing
the needs of women in Vietnam, for instance, is the Women’s Savings
Group (WSG) system. Begun in , this programme created self-
managing revolving funds at the commune level. It is able to provide
194 | Seven
both a savings mechanism for women and a subsidized loan fund to
be accessed for important consumption spending needs. By , the
WSG system was covering per cent of Vietnam’s communes. The
WSGs also successfully disburse national government loan funds.
All told, in a relatively short time the Vietnamese government
has succeeded in constructing a comprehensive and sophisticated
framework of financial support for the vast bulk of the poor in the
country. In other words, Vietnam’s local financial system seems to have
succeeded admirably in extending outreach. A report contracted by
the UK’s DfID aid arm found that the largely state-driven supply of
small-scale finance was more than adequate for the country prior to
the new millennium,62 noting that ‘The government seems […] to be
meeting much of the demand from credit-worthy households, even at
low interest rates. The increased share of government loans in total
household borrowing between – […] supports this conclusion.’
Later on, a major two-volume report prepared for the World Bank also
backed up this conclusion, describing the situation as one where63
The quantitative outreach of microfinance (financial depth) in
Vietnam is impressive, and very few people indeed are fully excluded
from access to some form of financial service. There are under-
served niche markets of very poor people in remote and under-served
areas (ethnic minority communities) but the biggest market segment
for microfinance in Vietnam are the % poor and low-income
households that by and large already have access to some financial
services. Contrary to perceptions, the ‘unmet demand’ in Vietnam is
very small, especially within the traditional microfinance market.
Crucially, the quite dramatic poverty reduction trajectory in Viet-
nam very closely correlates to the significant volume of financial
support disbursed through Vietnam’s pro-poor local microfinance
structure. Several factors are important here. Development of the
agricultural sector has hugely benefited from the easy availability
of small-scale capital on aordable terms and maturities. Far more
than in other developing countries, small family farmers have been
able to access aordable credit in order to deploy high-yield seed
varieties, upgrade their own irrigation facilities, introduce new forms
of mechan ization and construct (often in partnership with neighbour-
ing farms) important forms of storage and small-scale processing.
Entirely new comparative advantages have been explored and under-
pinned through aordable loans, such as in the coee sector and in
Alternatives to conventional microfinance | 195
certain types of fisheries. Pivotally, reinvestment rates are also high,
because low interest rates help the farmers to retain a much larger
share of the returns from agriculture. This is particularly so in rice
farming. This is why most rice farmers have been able to eect an
escape from the traditional Asian rice sector ‘poverty trap’, whereby
high interest payments mean that the farmer remains just as poor as
in the previous year (for example, neighbouring Cambodia is hugely
held back by such problems64). With most Vietnamese households
both consuming and producing rice, the programmed local increase
in output first displaced the significant amount of rice imports. Food
consumption and security improved markedly. Next, the growing
surplus emerging from the most productive family farms was directed
into the export trade. By the mid-s, Vietnam was the world’s
third-largest rice exporter (after the USA and Thailand).
More recently, Vietnam has made great strides in supporting rural
light industrial businesses, both microenterprises and, particularly,
growth-oriented SMEs. ASMED (the Agency for Small and Medium
Enterprise Development) reports that more than , new enter-
prises were formally registered between and , a significant
increase on the previous decade. Perhaps more importantly, the cap-
italization of this new raft of enterprises is significantly higher than
that of the previous generation. Private firms are also significantly
reinvesting in their businesses. Aggregate investment by private firms
as a percentage of the overall investment has risen from just under
per cent in to more than per cent in .65 In addition,
it is the exports of Vietnam’s SMEs which account for much of the
positive economic impact made nationally.
All told, Vietnam’s microfinance model is a thoroughly heterodox
model in a number of ways, but it works spectacularly well. Summing
up some of the key dierences from the ‘new wave’ microfinance
model, these would include:66
• Vietnam’s MFIs are not privately owned, but typically public or
semi-public entities.
• They have much lower administrative expenses, partly because they
eschew large salaries and bonuses to employees, and partly because
they are subsidized by some outside bodies and the state.
• They do not borrow to fund their activities, but rely on equity,
donations and savings.
• They are mainly policy-based lenders, pushed to focus on sectors
196 | Seven
and geographic regions calculated to register most positive impact
in terms of longer-term development and poverty reduction. For
example, this accounts for why loans to petty trade-based micro-
enterprises are very much lower than in other developing-country
MFIs.
• They charge much lower interest rates that elsewhere in the world
(in between and per cent), partly because they have much
lower expenses than ‘new wave’ MFIs, and partly because the state
sees no problem investing in (subsidizing) their activities because
of the hugely important development outcomes realized to date.
But this success is hugely resented by the microfinance indus-
try Given such dramatic success in both agriculture and industry,
and without the need for the Compartamos-style exploitation deemed
necessary in developing countries to extend outreach, one might be
forgiven for assuming that the international development community
would be driven to reflect a little more on the obvious benefits of such
a heterodox microfinance model. Not a chance. In fact, from the mid-
s up to the present day, the international development community
has been quite rigid in its insistence that the Vietnamese simply must
adhere to the standard ‘new wave’ microfinance model. As they were
doing everywhere else, microfinance advocates operating in Vietnam
first tried in the early s to get the ‘new wave’ microfinance model
accepted as the basic foundation for microfinance sector develop-
ment in the country. When this eort failed, and the Vietnamese
government embarked instead on its own ‘home-grown’ microfinance
model, a rearguard action was mounted to try to reverse the decision.
Driven on by key allies in the US government and the World Bank,
the microfinance industry has not let up in its campaign against the
Vietnamese government’s heterodox local financial model.
The issue of the extensive use of subsidies in Vietnam’s MFIs has
naturally been one of the microfinance industry’s core grievances.
Right from the start, CGAP argued against Vietnam’s decision to
eschew the ‘new wave’ microfinance model, refusing to provide tech-
nical support and funds as punishment for its decision.67 Others soon
joined in the assault. Leading ‘new wave’ microfinance advocate from
as far back as the early Harvard Institute of International Develop-
ment (HIID) days, Marguerite Robinson has been a particularly
scathing critic of Vietnam’s heterdox use of microfinance.68 Regularly
predicting it would end in disaster, while failing to even mention the
Alternatives to conventional microfinance | 197
great success achieved with Vietnam’s ‘home-grown’ local financial
model in the meantime, Robinson seems to believe that poverty reduc-
tion success can be recognized and tolerated only if it involves the
right (neoliberal) ideological model.
Even today, when the evidence of significant progress is undeniable,
the eort to get the Vietnamese government to backtrack on its choice
of microfinance model continues unabated. Notably, the World Bank
and CGAP doggedly continue to make the case for the ‘new wave’
microfinance model. Further pressure was forthcoming in , for
example, when the World Bank produced a comprehensively critical
study of the VBSP.69 This was then backed up by a contracted-out two-
volume report prepared in by a group of dedicated microfinance
specialists, which – as required – gave Vietnam’s microfinance sector
a good kicking.70 The consultants’ report remains adamant that
‘the gradual elimination of subsidized credit mechanisms and other
distortions in the sector is crucial to the development of sound micro-
finance’.71 No real analysis of the manifestly positive development
impact of Vietnam’s local financial system to date is provided. It is
simply taken as given that converting to the ‘new wave’ model will
bring significant benefits for Vietnam’s economy and people. The
consultants’ report also expressed its upset at the fact that non-state
MFIs were being held back by the subsidized competition provided
by the state-driven MFIs, which was seen, without any real explana-
tion as to why, to be a very bad thing for Vietnam’s poor. Perhaps
the problem is, as the report tellingly concludes, the fact that ‘There
is still a widespread tendency for some in the Government to see
microfinance as a social tool to combat poverty.’72 How silly of
them.
Finally, local institutions in Vietnam have also been generously
funded (by such as the Ford Foundation) in order that they can
mount a lobbying blitz on behalf of the ‘new wave’ microfinance
model. The main international donor channel for some time was
the Vietnam Microfinance Working Group. With international donor
support in it converted itself into a formal association, the
Vietnam Microfinance Association (VMA), the better to lobby for
‘needed changes’. The explicitly political mission of the VMA is made
abundantly clear, however, in its vision statement, which notes that
it aims to bring about73 ‘a large and dynamic microfinance industry
of professional, sustainable and ecient institutions that oer un-
subsidized, high-quality, and demand-responsive financial services to
198 | Seven
a growing portion of the poor and low-income population of Viet
Nam, enabling the Government of Viet Nam to gradually phase out
policy lending’.
Backing up this eort is a new programme unrolled in late by
the Asian Development Bank (ADB) which aims to bring a number of
informal MFIs into the formal sector, among other things by training
them in the concept of ‘market-based microfinance’. Now ignoring the
conclusions of previous reports praising the Vietnamese local financial
system for its eective coverage (such as the two-volume DFC
report cited above), the rationale is that the current largely state-driven
MFIs have, on the contrary, ‘struggled to meet the real financial needs
of the poor, and oer limited services’.74
In spite of massive success with its own local microfinance model
to date, it really does seem that – by hook or by crook – Vietnam will
somehow be made to fit in with what the international development
community considers to be ‘best practice’.75 The microfinance model
pioneered in Vietnam clearly represents to the microfinance industry
and its supporters in the international development community ‘the
threat of a good example’.76 It needs to be repeated that Vietnam’s
heterodox local financial model was principally designed to promote
small-scale enterprises (not so much microenterprises) and scaled-
upsmall-farm projects (not so much subsistence farms), both of which
the government felt had a better chance of promoting productivity
growth and sustainable local economic and social development. And,
as we have seen, it has been an extremely successful financial model
in terms of attaining these original development goals. Of course,
there has been a financial cost to this success. Some local financial
institutions are not fully self-sustaining, and require regular govern-
ment subsidies. But this is seen as perfectly acceptable in view of the
very impressive economic and social development results that can be,
and were, achieved. Nowhere is the corrosive influence of neoliberal
politics and ideology within the microfinance industry more apparent
than in the resistance to Vietnam’s heterodox local financial model.
Conclusion
Even a cursory glance at recent (post-) economic history
reveals that there are many local financial system alternatives to micro-
finance. Crucially, once one distils the key lessons from all of these
experiences, one finds the building blocks for a very sophisticated
and proactive local financial system model – a financial model unlike
Alternatives to conventional microfinance | 199
anything associated with the Grameen Bank experiment, and with
even less in common with the ‘new wave’ microfinance model that
dominates today. While some of these experiences relate to already
advanced economies, which some might argue precludes any lessons
as regards what developing countries might be able to achieve, the
fact that many developing countries have achieved enormous success
with virtually the same model (of course, updated to take account
of today’s dierent business environment) indicates that it is broadly
transferable to other contexts.
These earlier and ongoing financial models dier from today’s
microfinance model in a number of areas: the routine willingness to
use subsidies (let us perhaps use the less ideologically charged word
‘investment’ instead); the use of sectoral targeting lending methodo-
logies; a preference for longer-term loan maturities; a drive to integrate
microenterprises into supply chains as production-based units; public
and community ownership of financial institutions; and attempts to
incorporate microenterprise and SME development into local strategic
planning processes. All of these key aspects of the financial models
described above are anathema to the microfinance model, yet they have
been made to work very well in practice. Moreover, a clue as to why
such patently good experience has been carefully incorporated into
successive financial models in some geographical regions (East Asia)
but not in most others – that is, those countries under the sway of
the Washington DC-based international financial institutions – comes
from the microfinance industry’s almost hysterical reaction to the suc-
cess of Vietnam’s heterodox local financial model. The microfinance
industry and, particularly, the Washington DC-based international
development community institutions, appear to be determined to
promote poverty reduction only so long as the policies chosen are in
full agreement with the approved ideology (neoliberalism), and almost
irrespective of whether such policies actually work or not.
This chapter has, among other things, given the lie to the oft-
repeated claim made by the microfinance industry that there are no
(or no longer) any meaningful alternatives to microfinance. Rather, I
would claim that there have always been, and still are, manifestly far
better strategic policy interventions than microfinance. The financial
support channelled through MFIs into microenterprises is not the
only use for these funds. As many of the above countries found,
it pays handsomely to try to redirect finance into more sustain-
able and developmental uses. Moreover, as the East Asian countries
200 | Seven
have sometimes brilliantly shown, and as many European countries
also demonstrated in the nineteenth and early twentieth century,77 a
country can easily learn from the experiments and successes of its
neighbours, and then turn towards fashioning its own financial sector
policies geared to its own contemporary economic, political and social
reality. It remains to be seen for how much longer the international
development community will continue to disallow developing and
transition economies similar leeway.
EIGHT
Conclusion: the need for a new
beginning
‘A true revolution of values will soon cause us to question the
fairness and justice of many of our past and present policies.
[…] True compassion is more than flinging a coin to a beggar.
It comes to see that an edifice which produces beggars needs
restructuring.’ Dr Martin Luther King, Jr1
‘Markets are not magic: Debt is not freedom: The Gods have
failed: It is time to live without them.’ Larry Elliot and Dan
Atkinson2
Over the last thirty years microfinance has become one of the most
important international development policy interventions in the field
of poverty alleviation and development. Huge amounts of inter-
national development aid, philanthropic investment and commercial
funding have been committed in its direction. Most of all, the savings
of ordinary people, especially including poor people, have increasingly
been intermediated through MFIs. The intentions appeared to be just
and the ambitions were bold. It all looked so optimistic at the start.
The initial progress looked even better. Reports began to emerge
from the pioneering MFIs that they were creating and sustaining
large numbers of jobs and income flows, local women were being
empowered as never before, and a ‘bottom-up’ development process
was emerging that would soon see the typical local economy finally
shake itself free of poverty and underdevelopment. Bangladesh was
held up as leading the way in perfecting this economic miracle cure,
a cure that Muhammad Yunus confidently said would see global
poverty completely eliminated in a generation. Under the international
development community’s wise guidance and with its financial aid,
other developing countries soon began to follow the path marked
out by the Grameen Bank and Bangladesh. Bolivia, (southern) India,
Bosnia, Peru, Cambodia, Nicaragua, Mexico, Uganda, Mongolia – all
202 | Eight
these countries expected to register similar important economic and
social gains thanks to having fairly quickly achieved microfinance
‘saturation’. And with increasingly large amounts of cash being
channelled since into the global expansion of microfinance, just
about every developing and transition country began to eagerly look
forward to similar benefits.
The aim of this book, however, has been to show how seriously
wrong this uplifting picture actually is in practice. In truth, micro-
finance represents an anti-development policy – a development policy
that largely works against the establishment of sustainable economic
and social development trajectories, and so also against sustainable
poverty reduction. For the majority of people in developing and
transition countries, their country’s diversion into microfinance has
actually undermined previous and ongoing eorts to reduce poverty,
unemployment, inequality and underdevelopment. In many ways
microfinance represents a wrong turning similar to the former Soviet
Union’s plan-driven channelling of its own scarce resources into
ine cient giant factories, huge collectivized state farms and a bloated
military-industrial complex. Microfinance is the mirror image of
Soviet-style central planning, and just as misguided and ultimately
ineective. Supremely emblematic of the many problems I have re-
counted in this book is the sad fate that has befallen Jobra, the famed
village in Bangladesh where Muhammad Yunus eectively began
the microfinance revolution back in the late s: unfortunately,
after thirty or so years of unparalleled easy access to microfinance,
its hapless inhabitants still remain trapped in extreme poverty and
deprivation.3
Let me briefly summarize the main themes and findings of the
book as follows.
Microfinance has, in a roundabout way, been present for a long
time. Movements to provide forms of small-scale finance to help the
poor began to flourish in the late eighteenth century, gathering speed
as the negative impacts of industrial capitalism began to emerge. The
result was that the nineteenth century became a century of reformist
and radical leftist experiments using forms of what we would now
call microfinance. From the s onwards, a new generation of
reformers, radicals and anti-capitalists emerged and began to argue
against ‘faceless’ corporate capitalism (and against centrally planned
communism too), and they suggested that modern society needed to
move towards a more ‘human-centred’ and environmentally sustain-
Conclusion | 203
able economic system based on smaller units, democratic principles
and using local finance. Neither of these two important traditions,
however, had much influence on Muhammad Yunus, who, picking up
from earlier microcredit experiments pioneered by Akhtar Hameed
Khan, began to promote his own version of microcredit in Bangladesh
in the mid-s. Muhammad Yunus’s contribution was to be seen as
the first to really popularize the microfinance concept as a contem-
porary development intervention. He did this, however, by pitching
the concept to those on the right of the political spectrum. Yunus’s
ideals were firmly based on validating individual entrepreneurship and
self-help and promoting the financial responsibility of the poor. The
international development community took note. Rather than fight
collectively through the state or trade unions or social movements
and other forms of social mobilization, or argue for land reform or
wealth redistribution, or vote in a pro-poor government (if you had
the opportunity), it was hoped that the poor could now be encouraged
to settle for informal microenterprise activity instead, supported by
microfinance. Thereafter, the poor could be left to themselves to ‘get
on with it’. The very few lucky ‘winners’ in the informal sector could
naturally be picked out, applauded and publicized. Meanwhile, the far
larger number of outright losers could simply be forgotten about, or
even blamed for their own poverty status (for example, they were lazy
or they made poor asset portfolio choices). The opportunity was all
that mattered. So, Yunus’s idea and ideals were never about seriously
challenging capitalism, but essentially about bringing capitalism down
to the poor in order to legitimize and strengthen it.
As the neoliberal political project gathered steam in the s,
however, it soon became clear that Yunus’s original Grameen Bank
model would not survive intact. Poverty lending was interesting only
so far as it could be financially self-sustaining. The poor simply had
to pay for their own escape from poverty. The neoliberal policy-
making establishment began to build support for its commercialized
replacement, one that would overturn most of the principles Yunus
had incorporated into the Grameen Bank as fundamental to its opera-
tion. We saw how key neoliberal-oriented institutions pushed in this
commercializing direction, especially USAID and the World Bank
(particularly through CGAP). Through USAID the US government
took the lead in oering generous financial support to those US-based
organizations willing to push the commercialization idea forward.
The challenge was notably taken up by the NGO ACCIÓN and the
204 | Eight
Harvard Institute for International Development (HIID), both of
which became central to the development of the neoliberal counter-
oensive in favour of commercialized microfinance, and in providing
important working examples too (respectively Bancosol and BRI). The
result by the early s was the ‘new wave’ microfinance model, a
financial model premised upon an MFI aggressively pursuing profit
and financially incentivizing its own sta and supporters as never
before. At a time when Wall Street began to hold the world in awe of
its supposed accomplishments and eciency, it seemed perfectly ap-
propriate for these US-based institutions to want to inject Wall Street’s
‘best practice’ methodologies, values and ambitions right into the
heart of microfinance. Within a short period of time the ‘new wave’
microfinance model emerged to become the dominant microfinance
model. Muhammad Yunus was encouraged to remain the ‘friendly
face’ of microfinance, and subsequently showered with awards, but
his original Grameen Bank model was sidelined. Microfinance was
instead eectively colonized by neoliberalism, a political creed that
even its key architects willingly and openly admit is premised upon the
eective disempowerment of the poor in favour of ‘more productive’
economic and political elites. Microfinance thus became the preferred
local strand of neoliberalism. That is, microfinance became local
neoliberalism.
More than ever before, a sophisticated public narrative was
required to shield developing-country governments and the wider
public from the political and ideological aims and, increasingly, per-
sonal greed now driving forward microfinance. A public na rrative
gradually evolved based upon a set of interwoven myths that would
project economic development, poverty reduction, empowerment and
social-capital-building at the heart of microfinance, while centrally
stressing that it ‘came at no cost to donor governments or to tax-
payers’ thanks to market-based interest rates. In fact, an ‘absurd
gap’ now exists between the reality of microfinance and the heady
rhetoric. Almost all of the main foundations of microfinance are
based on carefully crafted and deliberately maintained myths. The
current public narrative surrounding microfinance is as close to actual
reality as the Walt Disney film The Lion King is to daily events in the
Serengeti National Park. Going farther with the jungle metaphor, I
pointed out that the main current ‘elephant in the room’ so far as
microfinance is concerned is that a very large and growing percentage
of microfinance (estimates range from between and per cent)
Conclusion | 205
is now channelled into simple consumption spending. Few in the
microfinance industry wish to publicly acknowledge that this is in
fact the case, however. Having established microfinance on the basis
that it helps a poor person start a microenterprise – the overwhelm-
ingly dominant image any ordinary member of the public has about
microfinance – the reality that this is an increasingly rare occurrence
cannot now be exposed for fear of destroying the entire edifice of
microfinance.
Most important of all, I pointed out that we do not find that
the basic Grameen Bank microfinance model made anywhere near
the positive contribution to poverty reduction and development its
supporters claim that it did and does. One core reason for the ‘absurd
gap’ between the myth and the reality is that impact assessments are
specifically designed to avoid discussion of two key downside factors:
displacement and client exit. In terms of the first factor, we saw that
Muhammad Yunus founded his Grameen Bank microfinance model
on a misunderstanding of the ‘fallacy of composition’. Yunus wrongly
believed that a local version of Say’s law existed – that an unlimited
number of microenterprises could be productively floated into the
worst recesses of local poverty and deprivation, starting in Bangla-
desh. The local supply of the products and services produced by this
rush of new local microenterprises would always and automatically
create the local demand to secure their purchase. This fundamental
error was quickly exposed in Bangladesh, but it was largely kept
quiet in order not to undermine the validity of the Grameen Bank’s
claims to be pioneering individual entrepreneurship and self-help
among the poor as the solution to poverty. Promoting the required
ideology of self-help was far more important to the international
development community than whether or not microfinance actually
worked for the poor (or even just better than other possible policy
options). In terms of the second factor – client exit – we know from
many country experiences that this factor signally undermines the
longer-run success of any microfinance programme. But, again, this
important downside to microfinance was, and is, largely ignored for
fear of how deep it might actually go.
Not least because impact assessments contain some very funda-
mental flaws, then, we assessed the microfinance model’s real contri-
bution to economic development in terms of the eect upon the key
development ‘triggers’ that we pretty much know underpin sustainable
local economic and social development. The key global finding is
206 | Eight
that with regard to almost all the core ‘triggers’ of importance, the
microfinance model makes a quite negative impact. Some minor posi-
tive impact in some areas – such as providing important immediate
help for ‘at-risk’ individuals recovering from conflict, natural disaster
or economic collapse – cannot make up for the significant downsides
registered elsewhere in the local economy over the long term. The
industrial and agricultural base of many developing countries – a base
often put together at huge cost and long-term sacrifice – has been
largely undermined by the microfinance sector’s failure to appreciate
the importance of scale, connectivity, formalization, technology and
innovation. The local economy has been helped to become import
dependent. Valuable reserves of social capital have been plundered
and destroyed by the microfinance sector simply in order to ensure
high repayment levels, thereby to secure an MFI’s financial survival.
Increasingly, too, the objective is to maximize profits, thereby to
inflate salaries and bonuses for MFI sta, as well as dividends for
shareholders.
Importantly, the most valuable local enterprises in the SME
sector have, not coincidentally, been starved of the appropriate funds
necessary to get started and to upgrade. Indeed, all those countries
at the forefront of the microfinance revolution have extreme diculty
in mobilizing financial support with which to develop their crucially
important SME sectors. With microfinance such a well-regarded
finan cial intervention, and then later on such a hugely profitable
one too, there is no sense at all for a market-driven privately owned
local financial system to work with the SME sector. The gradual and
inexorable primitivization and weakening of the typical local economy
in microfinance-‘saturated’ countries, regions and local ities, as micro-
finance is prioritized over all forms of SME finance, is therefore almost
inevitable. This may even be called an ‘Iron Law of Microfinance’.
As if the above development problems were not enough, analy-
sis of the current ‘new wave’ microfinance model, and the specific
economic and social trajectories it has set in motion, reveals an even
more depressing picture. As a commercially oriented institution, the
typical MFI may indeed be able to ‘pay its own way’, but it does so
only by abandoning the few recognizable benefits generated by ‘old
paradigm’ microfinance of the Grameen Bank kind. Ideologically
driven and, increasingly, greed-driven ‘new wave’ microfinance deep-
ens the microfinance ‘poverty trap’. It increasingly sucks up resources
from the poor (from the bottom of the pyramid) in order to benefit
Conclusion | 207
two groups: first, institutional investors, many based in rich countries;
and, second, key employees/owners of an MFI itself, among other
things helping create the new antisocial phenomenon I denoted as the
‘microfinance millionaires’. Once the institutional shareholders and
the managers and directors have taken their cut, the scope for poverty
reduction is minimal. Importantly, no matter what the poor might
say they want, high interest rates must be maintained as much as
possible in order to keep the tribute flowing up to both these groups,
and also to avoid any possibility of tribute flowing from the wealthy
down to the poor in order to keep an MFI in operation. In addition,
the profit-driven expansion of an individual MFI inevitably risks
giving rise to an over-accumulation of capacity overall, which brings
us to the growing problem of ‘microcredit bubbles’. The bursting of
these ‘microcredit bubbles’, whether gradual or instant, results in a
major economic reversal and havoc within the poorest communities.
It is increasingly coming to be accepted that there is no concrete
evidence to support the widespread and long-standing claims that
microfinance is positively associated with sustainable economic devel-
opment and poverty reduction impacts. This is in spite of more than
thirty years in which, for obvious reasons, the microfinance industry
has been desperately trying to locate just such important evidence.
In fact, virtually the only achievement ‘new wave’ microfinance can
legitimately lay claim to is that it can increasingly ‘pay its own
way’. This claim means little, however. Many of the very best public
interventions require investment or subsidies (if you will), but cost–
benefit analysis proves beyond a doubt that the investment/subsidy
was worthwhile. Moreover, one is also naturally tempted to say, the
tobacco industry can also pay its own way, yet most sensible people
still realize that the expansion of ‘big tobacco’ over the last fifty years
has been nothing short of a monumental disaster for humankind. In
both cases – microfinance and tobacco – financial self-sustainability
achieved thanks to a powerful addiction to a well-marketed product
tells us absolutely nothing about the real long-term value of that
product to the individual or the local community. I concluded that
the Pandora’s box that is commercialization has been opened, and it
cannot now be easily closed. Wall Street-style antisocial trajectories
are now the norm. The ‘new wave’ microfinance model’s claims to
be a poverty reduction tool are now dead in the water.
All of the above problems naturally pose the question as to why
the international development community willingly supported, and
208 | Eight
continues to support, microfinance. I briefly explored this conundrum
in Chapter . Initially, the microfinance concept was publicly ‘sold’ to
the international development community by Muhammad Yunus on
the hope that meaningful amounts of jobs and income would result.
The real initial attraction to the international development community,
however, was that microfinance would help validate the notion that
individual entrepreneurship through informal sector activity could
be projected as the only legitimate way for the poor to attempt to
escape their poverty. Fighting against all manner of state-driven and
collective responses to poverty, especially against communist-socialist
movements in developing countries, the rich developing countries saw
in the Grameen Bank a practical way forward. Here was a highly
visible and ‘feel-good’ way of appearing to support the poor in
developing countries, while in reality greatly limiting their current
and future options to make substantive pro-poor changes to their
own society, changes that had to be resisted because they would
inevitably disadvantage economic and political elites. As the neoliberal
revolution got into full swing from the mid-s onwards, the poor
themselves were then given the added burden of actually covering the
cost of the microfinance revolution under way. The drive to remove
subsidy and to promote dependence upon market interest rates instead
was a global imperative of neoliberalism. Its application within the
world of microfinance was to be expected at some stage, no matter
the impact upon the poor.
An important overarching hope in neoliberal policy elite circles
is that, with microfinance to hand, the poor will in future present
much less of a challenge to capitalism, and therefore to the power and
privilege enjoyed by economic and political elites. The hope is that
the poor will come to see their individual salvation solely through the
lens of petty market interaction. We know, however, that poverty is
essentially a function of a lack of power and political organization.
I therefore pointed out that the poor will achieve little if they accept
their newly assigned role as ‘micro-entrepreneurs’, and so, as they are
meant to do, increasingly shy away from challenging the fundamental
structures of power and privilege. The poor in the past have achieved
many important pro-poor gains and material improvements. But,
except for a tiny few cases, these gains have not come about through
individual entrepreneurial action, but through democratic politics,
social movements, pressure groups, trade unions and the like. To use
Amartya Sen’s construction,4 the poor have been able to obtain the
Conclusion | 209
important ‘collective capabilities’ that best help ensure that develop-
ment and growth are firmly pro-poor. Job security legislation, a
public health service, the minimum wage, public employment, state
pensions, state education and training services, and so on and so
forth, have all played their crucial part in meeting the needs of the
poor in society for a more secure and dignified working life. But
those promoting microfinance, starting with Muhammad Yunus, have
consistently avoided addressing the key issues of power and politics.
Even the much-vaunted ‘solidarity groups’ that are an outgrowth of
many microfinance programmes are very largely designed to support
and remain within the orbit of existing power and political structures,
not to fundamentally challenge such structures on behalf of the poor.
On this reading, therefore, other than giving the surface appearance
of activity, eort and concern, microfinance is preordained to achieve
almost nothing for the poor. To use the parlance made famous on
the US presidential election campaign trail, microfinance is no
more than ‘lipstick on the pig’.
Finally, I outlined a number of important heterodox experi-
ments with local finance. In contrast to both Grameen Bank-style
microfinance and the ‘new wave’ microfinance model that followed,
these local financial models have over time incontrovertibly produced
positive impacts for the poor, and for local society in general. I showed
that these local financial models provide the fundamental building
blocks of a far more developmental and pro-poor local financial model
than the two microfinance models considered here. The suggestion
was that there is much to learn from these important examples.
Indeed, if the dominant ‘new wave’ microfinance model is to be
phased out, here is where developing and transition countries should
start to look in order to find the building blocks for its replacement.
Some indication of why learning from such financial models remains
dicult today, however, is provided by the very final example, that
of Vietnam. In spite of overwhelming evidence that Vietnam has
achieved important poverty reduction gains thanks to its heterodox
microfinance model, the international development community has
mounted a long and, at times, hysterical campaign to get Vietnam
to abandon it and adopt the ‘new wave’ model in its place. If this is
the reaction to very obvious success with a particular local financial
system, but one unacceptably built around non-neoliberal principles,
then this clearly shows what is really driving certain sections of the
international development community and the microfinance industry.
210 | Eight
What appears to count much more here is the politics and the ideo-
logy, and not whether the poor are really being helped to improve
their lives. This is a profoundly disturbing final observation to make
on the activities and objectives of the key international development
organizations and the main supporters of microfinance today.
Concluding thoughts
For those with an interest in seeing sustainable economic and
social development in developing countries and elsewhere, certainly
including myself, it is thoroughly discomforting to have to conclude
that microfinance does not work. Would that it were otherwise. It
hurts even more to realize that the microfinance model not only does
not work, it is also known not to be working. To a large extent,
microfinance has been supported and protected on account of its
supreme serviceability to the international development community’s
preferred societal model of neoliberal capitalism. What counts here
is not so much achieving genuinely sustainable development and
poverty reduction (though it would help!), but ensuring the unques-
tioned application of market forces, fiscal discipline and personal
financial responsibility, all to be vectored through private individual
entrepreneurship. Even though it is through exercising their collec-
tive capabilities that the poor have in the past registered the most
social progress and the greatest improvement in their material living
standards, it is hoped that in future they will nevertheless come to
accept the abandonment of such a strategy.
Progress for the poor, if any, is henceforth to be secured on an
individual basis through petty individual entrepreneurship, and based
upon their own meagre resources topped up with a little microfinance.
Safe in the knowledge that their own power and privileges can now
no longer be challenged by collective eort and social mobilization,
economic and political elites in the developed countries can rest easy.
The poor can be left everywhere to fight it out among themselves as
to who might emerge with a tolerable life. Of course, a few individual
‘success stories’ will be identified and carefully promoted in order
to maintain the impression that much progress is being achieved by,
and on behalf of, the poor. All the time, however, it is apparent that
the poor are really being forced back into their historic isolation and
powerlessness, which portends little real advancement in reality. This is
a profoundly depressing scenario, but it most accurately explains the
international development community’s rationale and strong support
Conclusion | 211
for microfinance during the last thirty years or so better than any
other explanation.
In a very real sense, then, the microfinance model represents one
more example of the ‘kicking away the ladder’ approach vividly
described by Cambridge economist Ha-Joon Chang in his award-
winning book of the same name.5 As Chang describes it, history
shows that the developed countries achieved their great success
through many varied forms of state intervention allied to social
mobilization strategies (for example, powerful trade unions, as in
Scandinavia). History also shows, however, that the rich developed
countries have routinely acted to dissuade the developing countries
from using these same policies and interventions. One of the most
basic reasons is, as Chang maintains, that ‘Already established coun-
tries do not want more competitors emerging through nationalistic
policies they themselves used in the past.’6 Extensive state intervention
helped a small group of countries to develop and become rich, but
then these same now-rich countries had a very powerful reason to
promote free markets and non-interventionist policies in developing
countries in order to keep their own position of wealth and strength
intact. Essentially, by denying to developing countries the chance to
use their own resources to build their own industries and agricultural
sectors in the way the rich developed countries had done in the past,
and still do, it is possible to maintain the existing highly unequal
global economic and social order.
Seen in this context, then, it is quite clearly not the case that the
poor in developing and transition countries have been generously and
selflessly oered the microfinance model to better their lot. Instead,
microfinance is simply one more strand in the ongoing attempt to
impose neoliberal policies around the globe, policies that are designed
to work – first and foremost – in favour of economic and political
elites in the developed economies. Put simply, the poor need to be
encouraged to focus their energies and commitment on individual
petty entrepreneurship aided by microfinance. They will then be
more likely to eschew the radical pro-poor policies, democratically
elected pro-poor governments and progressive social movements that
history shows can greatly help their cause, but which will end up
jeopardizing the business and political interests of the developed
Western countries.
So, finally, to the hugely important question: Where do we
need to look to find the local financial models that can replace the
212 | Eight
underachieving and politically suspect microfinance model? As just
noted, Chapter briefly summarized a range of local financial poli-
cies and microfinance programmes with obvious potential to serve
the poor far better than either the Grameen Bank model or its ‘new
wave’ replacement. Through the auspices of proactive state and non-
state community-based institutions, local finance can become instead
a powerful tool that can really help build and underpin sustainable
local economic and social development, and so bring about sustain-
able poverty reduction. In the aftermath of the eective collapse of
the neoliberal policy model in late following the bankruptcy of
Lehman Brothers, and in the context of the ‘Great Recession’ that
this historic event quickly precipitated, such community-driven local
financial models are now a good deal more realistic than they have
been for some considerable time. And as probably never before in
recent history, unfortunately, they are certainly required.
Notes
1 Introduction
The original term was actually
microcredit, but this was subsumed
into the broader term microfinance
in the early s. The world
largely knows the phenomenon as
‘microfinance’ so I will largely use
this term as the generic descriptor
inthis book.
For example, see ‘The future of
capitalism’, an excellent two-month
series of major articles and think-
pieces, web-based discussions and
video presentations produced by the
Financial Times starting in April
.
See ‘The Great Stabilisation’,
The Economist, December .
Already the attempt by eco-
nomic and political elites to ensure
‘business as usual’ has started,
including unprecedented amounts
of cash flowing into lobbying bodies
working on behalf of Wall Street’s
remaining financial institutions.
See ‘Wall Street steps up political
don ations, lobbying’, Wall Street
Journal, October .
2 The rise of microfinance
Remarks from Dr Muhammad
Yunus’s acceptance speech given
on the occasion of his receiving
the Help for Self-help Prize of
the Stromme Foundation, Sep-
tember , in Oslo, Norway.
See Newsletter of the Microcredit
Summit Campaign, (), November/
December .
As Hulme and Moore suggest,
microfinance is perhaps the sole
development policy that the ‘average
person in the street’ might know a
little about. See Hulme and Moore
().
For example, see Yunus (),
Yunus with Jolis (); see also
Counts (); Dowla and Barua
(); Hulme (). As I write, a
film version of the life of Yunus is in
preparation.
See Nasim Yousaf, ‘Dr Akhtar
Hameed Khan – the pioneer of
microcredit’, The Frontier Post
(Pakistan), September , www.
thefrontierpost.com/News.aspx?
ncat=bn&nid=&ad=--.
The standard text on the
‘Comilla Model’ is Raper ().
For example, see Yunus (:
).
A key text expounding this
view is Von Pischke et al. ().
This is when the moneylender
takes on a particular client with the
express purpose of eventually taking
over their land. The practice has
been called ‘debt farming’ by Roth
(). See also the discussion in
Robinson (: –).
For example, see Yunus
(:).
See Yunus (ibid.: ).
For example, see the illumi-
nating discussion in Rutherford et al.
(: –).
See Counts (: ).
214 | Notes to 2
For an excellent discussion of
the SHG concept and, in particular,
the similarities to and dierences
from the Grameen Bank model, see
Harper ().
See Levitsky ().
See Seibel (). In practice,
however, the terms microfinance,
microcredit and microloans are all
pretty much interchangeable.
See Morduch ().
A typical example would be
Jackelen ().
Personal communication with
Malcolm Harper.
Quoted by Daniel Pearl and
Michael Phillips in their article
published in the Wall Street Journal,
November .
For example, see Adams et al.
(). While ideologically bang on
target, however, David Hulme and
Paul Mosley reported that much of
the beating doled out by the Ohio
School was quite seriously misplaced
– see Hulme and Mosley (: vol.
, ch. ). For a more recent and very
eective rebuttal of many of the key
Ohio School ideas, see Chang ().
It was somewhat ironic, as
Naomi Klein points out, that HIID
ran into its own financial scandal
typical of the extensively deregu-
lated ‘grab what you can’ business
environment that it was promoting
on ideological (neoliberal) grounds.
Some of HIID’s US sta working
in Russia on its privatization
programme were found to be using
their inside knowledge to make
stock market investments through
their wives and girlfriends. The US
government sued Harvard University.
This eectively forced HIID to close
down in June , and Harvard
University was then subject to the
largest ever US government fine
levied against a US academic institu-
tion ($. million). See Klein (:
).
Sachs has famously aban-
doned his earlier neoliberal posture,
and now strongly promotes much
greater state and international donor
community intervention, as well as
subsidies for many pro-poor services.
For example, see Sachs (). This
conversion has not always been
accepted uncritically. For example,
development economist Erik Reinert
refers to Sachs as now mainly
involved in ‘palliative economics’,
which Rienert describes as the
desperate attempt by Sachs to fix the
many problems directly caused by
his earlier neoliberal policy advice.
See Reinert ().
See Robinson ().
In November , however,
per cent of BRI’s shares were sold
to the public through an IPO.
See Drake and Rhyne (:
ch. ).
In August Maria Otero
was appointed US Under-Secretary
of State for Democracy and Global
Aairs in the administration of
President Barack Obama.
Quoted in ‘Millions for
millions’, New Yorker, October
.
See Otero and Rhyne ().
Personal communication with
Tom Dichter.
See Donors’ Working Group
on Financial Sector Development
and the Committee of Donor Agen-
cies for Small Enterprise Develop-
ment at the World Bank ().
The ‘Pink Book’ also had a
companion volume – the ‘Blue Book’
(see Committee of Donor Agencies
Notes to 2 | 215
for Small Enterprise Development
) – which regulated the estab-
lishment and operation of Business
Development Services (BDS) institu-
tions. Produced by almost the exact
same institutions (and even some of
the same individuals) as the ‘Pink
Book’, the ‘Blue Book’ pretty much
set out the very same commercializa-
tion guidelines for the approved
establishment and operation of
BDS providers. It is germane to the
present analysis of commercialized
MFIs to note that the results of
commercialized BDS provision were
very poor indeed almost everywhere.
In eastern Europe, for example, a
major evaluation of EU-financed
SME programmes in the s (see
EU ) found that most of the
EU-financed commercialized BDS
institutions soon arrived at one of
three outcomes: they closed down
because poor clients could not
aord to pay for their commercial
services; they shifted into unrelated,
but typically more lucrative, areas
of consulting work (such as work
for MNCs, governments and for the
international development agencies
themselves); or, finally, they oppor-
tunistically converted into an RDA
to be funded in future by the EU. See
also Bateman ().
For example, see Otero and
Rhyne (); Ledgerwood ().
For example, see Armendáriz
de Aghion and Morduch (:
ch.).
See Rutherford et al. (: ).
The story of Grameen II
is comprehensively dealt with by
Dowla and Barua ().
Withdrawal of this savings
amount is possible after the three
years are up, but savers must still
keep a minimum balance of ,
taka, or the withdrawal must be no
more than one half of the amount
in the account, whichever is larger.
For an explanation and examples of
how such obligatory savings schemes
work in practice to significantly raise
interest rates, see Mitra ().
See Counts (: ).
This account was also initially
capitalized with . per cent of any
microloan provided, but withdrawal
is thereafter possible unless the client
is on a bridge loan or flexible loan
product.
See Rutherford et al. (: ).
See Collins et al. (: ).
See Rutherford et al.
(:).
See Yunus (: xi). When it
became apparent that poverty was
not being reduced as much as had
been claimed it would be, and when
in many places poverty was actually
becoming even worse, ‘moving the
goalposts’ in this manner became a
very common fallback feature right
across the microfinance industry.
See Hulme (: ).
For example, the ILO now
defines microfinance to be ‘… the
provision of financial services to the
poor on a sustainable basis’ (my
italics). See p. of the ILO Circular
: Organization: Microfinance
for decent work: organization and
responsibilities of the Social Finance
Programme (SFP), January .
See Smith and Furman ().
As David Roodman reported,
however, it turned out that there
was a serious element of deception
involved in the way that Kiva
raised funds for the microfinance
movement. See ‘Kiva is not quite
what it seems’, David Roodman’s
216 | Notes to 2 and 3
Microfinance Open Book Blog,
October , blogs.cgdev.org/
open_book). See also ‘Confusion
on where money lent via Kiva goes’,
New York Times, November .
See Leleux and Constantinou
().
An initial public oering is
the first sale of shares by a company
to the general public and investors.
The IPO provides capital for the
company to expand and develop.
See Karlan and Zinman
(); Banerjee, Duflo, Glennerster
and Kinnan ().
See Roodman and Morduch
().
See M. Davis ().
3 Microfinance myths and
realities
The famed New York Times
journalist Ron Suskind is interview-
ing a White House aide about the
policies of George W. Bush. See
‘Faith, certainty and the presidency
of George W. Bush’, New York
Times, October .
See Galbraith ( []:
).
See Hospes and Lont (: ).
For example, see Gulli ();
Morduch ().
See Dichter ().
See Rahman (: ).
See Goldin Institute (: ).
See Collins et al. (, esp.
ch. ).
See ‘Microcredit: why India is
failing’, Forbes, November .
Finscope is an initiative of the
FinMark Trust and is the most com-
prehensive national household survey
focused on financial services needs
and usage across the entire South
and southern African population.
FinMark Trust, press release,
December .
Rutherford is quoted in
‘ Microcredit loans “used to buy
food”’, Financial Times, June
.
See De Soto ().
See Polanyi ().
See Mayhew ( []).
Interestingly, as Tom Dichter
points out, years before the
UN Year of Microcredit, Henry
Mayhew himself was behind an
initiative to set up a ‘loan oce
for the poor’. This initiative was
designed to give the poor grants and
soft loans to help them do better
in the netherworld of survivalist
microenterprises that Mayhew so
eloquently documented. See Dichter
(: ).
The term lumpenproletariat is
first defined in a book by Karl Marx
and Friedrich Engels completed in
but first published in – see
Marx and Engels ( []).
See Harvey (, esp. ch. ).
For example, see Blanchflower
and Freeman ().
For example, see Breman
(, ); Breman and Das
(); Roy and Alsayyad ().
See Karlan and Goldberg
().
See Ellerman (: ).
As we now know with awful
clarity (for example, see Kansas
), because the main ratings
agencies were keen to pick up as
much work as possible from Wall
Street’s investment banks, they were
very easily influenced into declaring
an AAA rating on huge amounts of
worthless investment instruments
(e.g. sub-prime mortgage-backed
assets).
Notes to 3 | 217
See UN-Habitat ().
See M. Davis (: ).
See MFI Solutions and La
Colmena Milenaria (: ).
See News Release
no.//PREM, World Bank,
March .
See World Bank ().
Ibid.: .
For example, see Agarwal
().
See Getubig et al. (: ).
See World Bank ().
US economist Paul Krugman
shows that the US government’s
New Deal in the s was quite
decisive in creating a middle class
in America – see Krugman ().
Larry Elliot and Dan Atkinson point
out that Britain’s welfare state did
the same for the UK after – see
Elliot and Atkinson (: ).
For example, Graham Wright
ludicrously conflates the socially
constructed demand for microfinance
with a wise rejection by the poor of
class politics and social mobilization.
As he argues on their behalf, ‘it is
hard to escape the conclusion that
“class struggle” is not the best way of
empowering the poor, and that the
poor themselves have found much
more eective, non-confrontational
ways of achieving the same ends’ –
see Wright (: ).
See De Soto ().
For example, see World Bank
().
See High-Level Commission
on the Legal Empowerment of the
Poor ().
See Pait (: ).
See Kagawa (: ).
See Calderon (); Field
and Torero ().
See Gilbert (: –).
See Manji () and Nyamu-
Musembi ().
See Durand-Lasserve and
Selod ().
See Hulme and Mosley
().
See Hulme (: –).
For example, see Barua (:
–).
Ibid.: .
Released October ,
Oslo.
For a range of documents,
go to www.genfinance.info/Micro
CreditSummit.html.
See ‘Women’s work’, Time,
March .
See Standing (); Ehren-
reich ().
See Antonopoulos ().
See Toynbee ().
See Goetz and Sen Gupta
().
See Goldin Institute (: ).
See Rahman ().
See Karim ().
See Gill ().
See Pupavac ().
The level of gender equality
and extent of participative and
gender-sensitive social services
structures in the former Yugoslavia’s
system of ‘worker self-management’
was one of its most positive char-
acteristics – for example, see Seibel
and Damachi ().
See Mayoux (: ).
Ibid.: .
See Manji (: ch. ).
See World Bank ().
For example, see Doran et al.
().
Ibid.: .
See Rankin ().
See ‘Grameen Bank, which
pioneered loans for the poor, has
218 | Notes to 3 and 4
hit a repayment snag’, Wall Street
Journal, November .
See Dyal-Chand ().
See Williams ().
See Kabeer (: ).
See Harvey (: –).
See Gates ().
See Robinson (: n. ).
See Yunus with Jolis ().
For example, see Langer
().
See CGAP ().
See Wright ().
See MicroBanking Bulletin,
April , p. .
See Balkenhol (: ).
See ‘The poor in debt: Oiko-
credit’s concern in microfinance’,
Oikocredit press release, December
.
See Duquet ().
See Centre for the Study of
Financial Innovation ().
Ibid.: .
See Galbraith ( []).
Sub-prime loans were
extended with very little concern
for eventual repayment because
the banks made their money from
immediately securitizing and selling
mortgage-backed securities on to
other parties, who in turn sold them
on to yet other parties. An excellent
description of the way that things
got out of hand is by the Financial
Times journalist Gillian Tett – see
Tett ().
For example, see CARE
(a, b).
See Otero (: –).
See ‘A global surge in tiny
loans spurs credit bubble in a slum’,
Wall Street Journal, August .
Some researchers have shown
that the rate of return on tiny
projects can often be quite high,
so that high interest rates need not
always be a problem. For example,
see De Mel et al. ().
Reported in ‘Death by
microcredit’, Times of India, Sep-
tember .
See Karlan and Zinman
().
See Mayoux (: ).
In Mexico, for example, the
huge Bank Azteca chain actually
went to court rather than comply
with a new law requiring banks to
inform clients of the total financing
costs and real interest rates they
were being charged for microcredit.
Bank Azteca sought a protective
order, which was granted by a
federal judge – see ‘The ugly side
of Mexican microlending’, Business
Week, December .
See Brett ().
See ‘The dark side of micro-
credit’, New Age Extra, August–
September .
See Mathew ().
See Newman (: ).
See Allen ().
See Manos and Yaron
().
See Stiglitz ().
4 Microfinance as poverty
trap
See Yunus (: ).
See Roodman and Morduch
(: ).
See World Bank (: ).
See Ellerman (: ).
See Balkenhol (: ).
See Pitt and Khandker ();
also Khandker ().
See Morduch ().
See Khandker (, ).
See AIMS ().
See Copestake et al. ().
Notes to 4 | 219
See Khalily ().
See Goldberg ().
Ibid.: .
For example, see ‘Small
change – billions of dollars and
a Nobel Prize later, it looks like
“micro lending” doesn’t actually
do much to fight poverty’, Boston
Globe, September .
See World Bank (: ).
See Roodman and Morduch
().
See ibid.: –.
See Johnson ().
See Schumpeter ( []).
One should remember that
for the non-producers, of course, the
declining prices on locally produced
goods and services are actually a
benefit. See Tschach ().
For some illustrations of
how the ‘fallacy of composition’
operating at the global level also
seriously undermines international
development strategies, see Mayer
().
Launched in , the EAS
was a small monthly cash grant
set at just above the value of the
unemployment benefit forgone.
Those claiming the EAS allowance
had to prove they had an additional
£, ($, in ) of their own
to invest in their microenterprise.
Starting with just , EAS micro-
enterprise entrants in the period
–, the number of entrants
rose quickly, peaking in –
when in that period alone more than
, individuals were encouraged
to set up their own microenterprise
with EAS support – see Storey (:
).
Employment specialist
Chris Hasluck () reported that
displacement eects were very high
indeed, eectively meaning almost
no net jobs were being created. In
some sub-sectors, such as ‘hairdress-
ing and beauty’, Hasluck found
that the rate of displacement was
approaching per cent – that
is, for every new EAS-supported
microenterprise an equivalent reduc-
tion in employment was registered
in a non-EAS microenterprise in the
same locality. Even worse, incumbent
non-EAS microenterprises generally
registered a noticeable decline in
their turnover, income and profits,
thus serving to undermine the
existing microenterprise base.
Storey and Johnson () and
then Storey and Strange ()
reported that displacement eects
were most striking in those regions
marked out by the highest levels of
unemployment and poverty (e.g.
the Midlands, north-east England),
which suggested that in a situation
of deep poverty and severe economic
problems a microenterprise-led
policy had very limited applicability
as either enterprise development or
poverty reduction policy.
Ahmad and Hossain ().
Ibid.: .
Ibid.: .
See Quasem (: ),
quoted in Hulme and Mosley (:
vol. , p. ).
See Osmani ().
See Seabrook (: –).
See INSEAD ().
See Cohen (: ).
See INSEAD (: ).
See Counts (: ).
See ‘Unplanned obsolescence’,
Fast Company, , September .
Ibid.
See Yunus (: ).
Such ‘telephone ladies’ are
220 | Notes to 4
now a ubiquitous feature in most
developing countries, with similar
minimal employment and income
creation impacts for the poor being
registered compared to the huge
benefits garnered by the savvy
telecommunications companies
involved. Mexico and Colombia are
good examples.
Report and quotes contained
in Fast Company magazine, ,
September .
See Popli ().
‘Even in the industrial
powerhouse city of Puebla’, Tilly
and Kennedy note, ‘[the] head of
the union of vendors at the informal
Hidalgo Market reports that unem-
ployed job seekers have increased
the group’s ranks by ten percent in
the last year alone.’ See Tilly and
Kennedy ().
See Popli ().
International Press Service
(IPS), Mexico City, September
.
See CSID ().
See ‘Give them a better life’,
The Economist, May .
Significant intra-community
violence was also seen in Kenya
in and , for example.
As Charles Njoroge reported, this
development was predictable, since
‘Creating millions of jobs through
hawking and trading is a mirage
and a source of sustained conflict
in urban areas.’ See Business Daily
(Nairobi), April .
See ‘Violence spreads around
Johannesburg’, International Herald
Tribune, May ; ‘Thousands
flee as hatred spreads’, Guardian,
May .
See Birks Sinclair and Associ-
ates Ltd ().
See ILO (, a).
See ‘No cushion to fall
back on: the global economic
crisis and informal workers’, www.
inclusivecities.org.
See M. Davis (: ).
Even today, in the context of
the global recession, many current
and former World Bank and IMF
labour market economists still
optimistically look to the informal
economy to easily absorb a sizeable
proportion of those recently made
unemployed – see ‘The rise of the
underground’, Wall Street Journal,
March . The ILO seems to
have more of a grasp on reality here,
reporting that expansion of the
informal sector is inadvisable as well
as unfair, since ‘As was the case in
previous crises, this could generate
substantial downward pressure on
informal-economy wages, which
before the current crisis were already
declining’ – see ILO (: ).
Some researchers are will-
ing to accept that it is a serious
omission, however. For example,
summarizing a vast amount of
impact data, researchers Sebstad
and Cohen right away point out
that ‘One limitation of the field
study data is that the researchers did
not interview or other wise include
significant numbers of the program
dropouts, or former clients, of the
MFI programs’ (see Sebstad and
Cohen : ). Nonetheless, I
can find no major research project
or impact assessment that has gone
on to examine what this might
ultimately mean in terms of the
long-run sustainable development
impact of microfinance.
See Storey (: ).
See Davis et al. ().
Notes to 4 | 221
See Shane ().
See Johnson and Loveman
(). The foreword to the book
was provided by Jerey Sachs.
Moreover, a quite significant
percentage of those designated
as ‘self-employed’ were actually
in dividuals who had been summarily
fired from their formal position
and invited to continue as a self-
employed contractor. This was
principally undertaken so that the
company could save on taxes and
social contributions, and also – sadly,
in the home of the iconic Solidarity
trade union – in order to expel trade
unions from the workplace and so
reduce any pressure for higher wages
and better working conditions.
This arrangement continued to be
a major economic and social (and
statistical) problem for the Polish
government right into the s.
For example, see ‘Poland’s informal
economy: a false self-employment
scandal’, ICFTU Online, /,
January .
See Heinegg et al. ().
It was only with Poland’s
accession to the EU in that
the dramatic rise in rural poverty
and unemployment (which reached
almost per cent in ) was
finally brought under some sort of
control. Among other things, the
prospect of EU accession in the early
s meant the arrival of significant
EU ‘pre-accession’ structural funds,
while accession itself in
unlocked even more structural funds.
In addition, accession opened up
the immediate possibility for almost
two million Poles to move to work in
western Europe (mainly going to the
UK and Ireland). Even after Poland’s
accession to the EU, for some time
the country stood out as the sole
new entrant continuing to experience
rising poverty.
See Hulme and Mosley (:
vol. , pp. –).
Ibid.: .
See P. Davis (: ).
See Alexander-Tedeschi and
Karlan ().
For example, see Mishan
().
An excellent analysis can be
found in Jomo and Fine ().
For example, see ‘With all its
talent, India wonders why innova-
tion is elusive’, International Herald
Tribune, December .
See Intellecap ().
See Karnarni (a: ).
Press release announcing the
award of the $.-million Conrad N.
Hilton Humanitarian Prize for
to BRAC.
See Pretty ().
See Pretty ().
See Norberg-Hodge et al.
(: ).
Obvious examples here
include the commercially successful
large-scale vineyards and wineries
in parts of South Africa, which is
also the location for the highest
concentration of poverty in the
country (see Du Toit ), and
Kenya’s horticultural export sector,
which is fantastically successful for
its mainly European owners, yet the
local workforce receives poverty-level
wages (see Pollin et al. ).
This is the famous ‘adverse
selection’ concept articulated by
Joseph Stiglitz and Andrew Weiss
in their seminal paper – see
Stiglitz and Weiss ().
See Posani (: ).
See Chang ().
222 | Notes to 4
See Tata Institute of Social
Sciences (: ).
See Ghate (: ).
Reported in ‘Can financial
inclusion drive a rural recovery?’,
Wall Street Journal, September
.
See Kumar and Golait (:
).
See Posani (: ).
See Shiva ().
See ‘Death by microcredit’,
Times of India, September .
See Patel (: ).
See ‘Why poor farmers in
Mexico go hungry’, International
Herald Tribune, March .
See World Bank (a: ).
Farmers possessing large
farms near the US border, with
access to large loans and with solid
supply links, actually did very well in
the s, producing large quantities
of fresh vegetables and fruit for sale
in US markets. See Patel (: ).
See ‘Microfinancing gains
pace in Africa’, New York Times,
May .
See ‘By disregarding
Western advice, Malawi becomes a
bread basket’, International Herald
Tribune, December .
See Business Daily (Nairobi),
April .
See Ehigiamusoe ().
See World Bank (: ).
See WM Global Partners
().
Ibid.: –.
See Agripolicy (: ).
Ibid.: .
See Bateman and Sinković
().
For example, see Agripolicy
().
See Bosnić ().
See Christoplos (: ).
For example, see IFAD (:
–); Doran et al. (: ).
See Harper (: ).
See Schmitz ().
See Dichter (: ).
See ‘The hidden dangers of
the informal economy’, McKinsey-
Quarterly, August .
For example, see ILO
(b).
See Rainnie ().
See M. Davis (: ).
Ibid.: .
An excellent summary can
be found in Guha-Khasnobis et al.
().
See Reinert ().
For the example of Baden-
Würtemberg, see Cooke and Morgan
(: ch. ).
See Braun ().
Reported in ‘Free-for-all on
trade will harm everyone, says UN’,
Guardian, October . The
document referred to is UNCTAD
().
See Ellerman ().
For example, see Baumol
().
See Moyo ().
Asked by a magazine
interviewer to respond to the fact
that ‘there has been much criticism
of microfinance of late’, her reply
was, if nothing else, succinct – ‘Has
there?’ See ‘Interview with Je Chu’,
Fast Company magazine, April
.
Moyo makes the important
claim for Grameen that its
microloans are taken out ‘mainly
for power tillers, irrigation pumps,
motor vehicles, and river craft
for transportation and fishing’
(Moyo : ), which gives the
Notes to 4 | 223
strong impression that Grameen
Bank is mainly engaged in local
productive investment projects. This
sentence used by Moyo is actually
taken from a paper by the Grameen
Foundation’s development director,
Lamiya Morshed, presented to the
MicroCredit Summit in (see
Morshed : ), which also refers
in the same sentence to the ‘More
than , micro-enterprise loans
amounting to US$ million’. If we
divide $ million by ,, how-
ever, we get an average loan figure of
just $, which would suggest that
not very much serious investment in
capital assets has taken place, and
that the microloans associated with
the mechanized equipment noted
above are probably outlier examples.
A more representative figure of
what Grameen does is the average
loan size in the whole of Grameen
Bank’s operations, which, according
to the Mix Market survey in ,
was less than $ (see www.
mixmarket.org/mfi/grameen-bank/
data). This $ figure is in line with
evidence from elsewhere that most
of Grameen’s lending today is really
for consumption purposes, and not
for income-generating activities, still
less for motor vehicles, river craft,
and so on.
See Hulme ().
In it was reported
that household debt (household
microloans) in South Africa had
quadrupled in just five years. As
many as , South African
households are now classified
as ‘over-indebted’ after having
accessed a household microloan for
consumption spending or a simple
income-generating project. These
unfortunate individuals are part of
the larger total of million South
Africans the government has now
classified as ‘debt-stressed’, forcing
the National Credit Regulator to
urgently register an additional
debt counsellors to try to cope with
the accumulating misery. See Busi-
ness Day newspaper, May .
See Bond (a).
See UN-Habitat (: ).
See ‘Benin microfinance
sector: from prosperity to crisis’,
Corinne Riquet, CGAP Microfinance
Blog, June .
See Business Daily (Nairobi),
April .
Moyo (: –).
See Gelb and Bienen (:
).
See Isola ().
See Anyanwu ().
In the Nigerian govern-
ment launched a new policy measure
aimed at massively increasing the
amount of formal microcredit as a
share of the total amount of credit
disbursed by the financial system.
The plan is to increase the share of
formal microcredit as a percentage
of total formal credit from its then
around per cent total to at least
per cent by , and, second, to
increase the share of microcredit as a
percentage of GDP from . per cent
to at least per cent by . See
Central Bank of Nigeria ().
See ‘South Africa in danger
of deindustrialization’, Bloomberg,
September .
See Levy ().
See Woodru ().
See Dos Santos (: ).
See Levy ().
Quoted in IPS NewsNet,
September .
Of course, this is not to say
224 | Notes to 4
that development strategies other
than microfinance are not making
a dierence in Cambodia; they are.
But where Cambodia has indeed
successfully developed of late – as
in construction, textiles and tourism
– this has required large amounts of
investment going into longer-term-
focused projects, often mobilized
by members of the Cambodian
business and political elite on the
international capital market. In
other words, what little development
has taken place can generally be
accounted for by factors other than
microfinance.
See Clark ().
In December , the huge
Jardine Matheson Group acquired a
. per cent stake in ACLEDA – see
‘Jardine Matheson Group acquires
.% stake in ACLEDA Bank Plc’,
FMO News, December ,
www.fmo.nl.
See Bateman (). Note
that with three out of five Cambo-
dian families depending on their
land and rice farming for a living, a
major opportunity to support these
people would be through accelerated
development of the rice processing
sector, particularly through invest-
ments in milling (where much of the
value-added is made).
A survey in by the
World Bank’s Mekong Private Sector
Development Facility (MPDF)
found almost no loans in SME
capacities, and a grand total of just
eleven medium- to longer-term loans
advanced across the twelve banks
interviewed. See MPDF ().
Plus in it was reported
that rising numbers of MFI clients
in Cambodia are being forced to
sell their land and farms in order to
try to repay their microloan, thus
making them much poorer than
ever before. See ‘Cambodia joins
microloan clean-up’, Asia Times
Online, August .
Leszek Balcerowicz, the
main architect of the ‘shock therapy’
programme in Poland, argued
strongly against any forms of state
intervention to support SMEs.
His view was that stabilization,
privatization and liberalization were
all that were required in Poland to
establish a sustainable small and
medium enterprise development
trajectory. See Balcerowicz (:
).
Haudeville, Dabic and
Gorynia remark upon the high
level of technologies, skills and
innovation activity in Poland prior to
and note that, unlike in some
other transition economies, almost
none of this valuable inheritance was
utilized or built upon in Poland after
– see Haudeville et al. .
Of the more than ,
loans disbursed by Fundusz Mikro
between and March ,
amounting to over $ million
in total, per cent of the loans
went to traders, per cent to
small-scale services and per cent to
production (data accessed at www.
funduszmikro.pl).
See Hardy and Rainnie
(: ).
For example, the interna-
tional community refused to allow
plans to go forward for an SME
Development Bank. This was a
plan advanced by some of Bosnia’s
best economists and which would
use part of the revenues from the
privatization process to stimulate
new industry-based SME projects
Notes to 4 and 5 | 225
and technology transfer. See Bate-
man ().
See Bateman ().
See UNDP ().
See Piore and Sabel ().
Of course, many of the
original insights behind the ‘indus-
trial district’ model can be traced
back to the great English economist
Alfred Marshall. See Marshall
().
Key publications, associated
with the International Institute for
Labour Studies, include Pyke et
al. (); Pyke and Sengenberger
(); Pyke ().
See Gere and Wyman
().
See Becattini ().
See Nishiguchi ().
See Weiss ().
See SAPRIN (: ).
See Andor and Summers
(: ).
See Bateman ().
See Putnam et al. ().
See Rankin ().
See Leys ().
See Bateman ().
See Rahman ().
See Karim ().
See Holman (: ).
See Kau and Mutesasira
(: ).
See Hulme and Mosley
(: vol. , p. ).
See M. Davis ().
5 Commercialization: the
death of microfinance
See North (: ).
See Klein (: ).
Such as local government
ownership, mixed public and private
ownership and cooperative owner-
ship.
See Chang and Grabel (:
ch. ).
For example, see Florio ().
See Elliot and Atkinson (:
ch. ).
See Aliaga and Mosley (:
).
See Vik ().
See Mosley ().
See Schreiner ().
For example, see Brett ().
See Weisbrot and Sandoval
().
This was an inheritance
associated with Latin America’s
Import Substitution Industrialization
(ISI) concept of development, an
idea developed within the Economic
Commission for Latin America
(ECLA) and most associated with its
director, the Argentinian economist
Raul Prebisch.
Notably John Brett – see Brett
().
The proportion of clients
taking loans from multiple institu-
tions increased from per cent
in to per cent in . See
Vogelgesang (: ).
See Rhyne ().
See Loehrer ().
It also needs to be remembered
that most formal bank credit has
been traditionally appropriated by
the tiny handful (only fifty to sixty)
of farming families owning per
cent of Bolivia’s cultivable land, and
a few large export- oriented agro-
businesses – see Bolivia: Two years of
‘post-neoliberal’ Indigenous national-
ism – a balance sheet, www.bilaterals.
org, accessed August .
Discussion with Carlos
Marcelo Diaz Quevedo, director
of BDP, at the KfW Microbanking
seminar held at the Frankfurt School
226 | Notes to 5
of Finance and Management,
Frankfurt, July .
See Rhyne ().
The indications are that the
level of poverty in Bolivia has been
coming down quite rapidly since
– see ECLAC (: ).
See Prahalad ().
For example, see Karnarni
(b); Crabtree ().
See ‘Devinder Sharma’s
negative assessment of microfinance
institutions’, India Microfinance,
November , indiamicro-
finance.com/blog/microfinance/
microfinance-articles/devinder-
sharmas-negative-assessment-of-
microfinance-institutions.html.
See Arun and Hulme (: ).
See Wenner (: ).
See UNDP ().
For example, see Chopra and
Meindl ().
A number of other issues
added even more to the general feel-
ing of unease over what the social
business concept was actually
demonstrating with this example.
First, GrameenPhone was levied a
$ million fine for non-payment of
local taxes on some of its services,
a somewhat curious oversight for a
company supposedly operating in
the interests of the poor (see ‘Noble
laureate’s VIOP controversy’, www.
weeklyblitz.net, accessed July
). Second, in Danish TV
researchers revealed that many local
suppliers to GrameenPhone were
working under pretty horrendous
conditions, with routine use of child
labour. Some analysts argued that
because they were hidden from the
public view, whereas the famous
telephone ladies were in full view of
the media, there was little concern
for these suppliers and their working
conditions. See ‘Telenor, Peace Prize
winner caught in labour scandal’,
Aftenposten, May .
See Ghalib and Hossain
().
See ‘Saving the world with
a cup of yogurt’, Fortune-CNN,
March .
In early French television
reported on many of the disgruntled
sellers involved in the scheme, as
well as on the aggressive loan ocers
charged with recovering the micro-
loans in default – see ‘The crushing
burden of microcredit’, France 24,
April .
‘Operation Flood’ was an
Indian government programme
that ran from to . It
successfully created a national
dairy industry integrating India’s
small farmers – most of whom were
women – into an ecient network
of village dairy cooperatives,
commercial dairy processors and
distributors, all backed up with
new technologies to ensure quality
and eciency. In little more than a
decade, India was converted from a
major milk-importing country into
a major dairy producer and global
dairy exporter. Meanwhile, the
small-scale farmers involved through
their cooperatives (in per
cent of the farmers operated less
than five hectares of land) have been
able to build a successful farming
operation, with many escaping the
poverty and insecurity that hitherto
plagued their lives. See IFPRI (:
ch. ).
In Europe Danone is coming
under serious pressure to retract the
health claims it has long made for
its so-called ‘probiotic’ milk drink,
Notes to 5 | 227
because there is simply no independ-
ent scientific foundation to back
these claims up. Danone maintains
that its own in-house scientists have
produced evidence suggesting posi-
tive health benefits, but this evidence
has not been verified by any outside
independent body. The matter
eventually went to the European
Food Safety Authority (EFSA).
The UK’s Guardian reported that
‘EFSA has published five opinions
on probiotics’ claims [and] all five
opinions on probiotics published so
far have been negative’. The lack of
any independent support to back up
its claims notwithstanding, Danone
has in the meantime used its huge
marketing power to create significant
demand for probiotic milk on the
basis of its presumed health benefits,
and it has established an ecient
supply chain to distribute the
product across Europe, allowing it
to forge a dominant market position
in Europe in an ultra-high-profit
niche product line. Yet, the Guardian
report concluded, ‘the fact is, nearly
a decade after they achieved mass
consumption, we are still waiting
to hear whether EFSA’s scientists
think they work or not’. See ‘Are
probiotics really that good for your
health?’, Special Report, Guardian,
July .
See Robin Ratclie, Presen-
tation to the th MFC Conference
of Microfinance Institutions,
–May , Belgrade.
Quoted in Stanford Social
Innovation Review, June .
Quoted in ‘Setting standards
for microfinance’, Business Week,
July .
See www.mftransparency.com,
accessed June .
Either directly or through
proxies, the tobacco, pharmaceuti-
cal, fast-food and alcohol industries
are famed for getting involved in
programmes designed to control or
regulate the consumption of their
products, the self-serving aim being
to as far as possible block such
measures, or at least to dilute and
shape them to their own advantage.
See Ghate ().
Ibid.: .
See Rozas ().
A special workshop held in
March reported that in the
state of Tamil Nadu ‘Debt exists in
the case of most families in Tamil
Nadu economic and social life,
numerous surveys have shown that
% of these families are indebted,
and that in more than % of cases,
outstanding debts exceed annual
income.’ Among the key themes of
the workshop were ‘over-lending’,
‘taking out a loan in order to repay
a loan’ and ‘over-confidence in the
joint guarantee’ (www.ifpindia.org/
Workshop-on-Overindebtedness-
and-its-eect-on-village-economy-of-
Pazhaverkadu-region.html, accessed
June ).
See Ghate ().
See Shylendra ().
See Commission on Farmers’
Welfare (: i).
Ibid.: ii–iii.
See Aggarwal ().
See Ghate (: ).
See Sirtaine and Skamnelos
(: ).
See Chen and Chivakul (:
).
See Kraft ().
See Baltic Economies Weekly,
, July .
See Dos Santos (: ).
228 | Notes to 5
See ‘Microcredit: why India is
failing’, Forbes, November .
Reported in The Times of
India, September .
See Dos Santos (: ).
See IMF ().
Reported in Stratfor Global
Intelligence, May .
See Beck et al. ().
See Hulme and Moore ().
See DfID (: –).
See www.procreditbank.rs/
about_mission, accessed June
.
Graphic descriptions of the
damage done to the poor by payday
lenders in the USA (for example,
see Parrish and King ) suggest
similarities with the local dynamics
we find in developing countries
today, but dynamics that are
eectively sanctioned by the inter-
national donor community. As even
one radical free market supporter
felt impelled to ask, ‘Why is giving
high-interest loans to the inner-city
poor considered exploitative in the
United States but wonderful and
compassionate in Bangladesh?’ – see
Tucker ().
See Turner ().
See Financial Times, July
.
For example, see Gehlich-
Shillabeer ().
See ‘A global surge in tiny
loans spurs credit bubble in a slum’,
Wall Street Journal, August ;
also ‘For global investors, “micro-
finance” funds pay o – so far’, Wall
Street Journal, August .
See Bateman (, a).
See Demirgüç-Kunt et al.
(: ).
See ‘Microfinance meltdown
in Bosnia: could we have averted the
crisis?’ SEEP Network, report on
track session at the MFC Confer-
ence, November , Belgrade.
See ‘Balkan loan guarantors
struggle to pay others’ debts’,
Reuters RPT-FEATURE, August
.
See ‘Increasing risks in micro-
finance: a case study of Bolivia’,
BlueOrchard.com, www.blue
orchard.org/.../blueorchard/.../_
Increasing%Risks%in%
Microfinance, .
‘In , Compartamos
teamed up with investor/partner AC-
CIÓN to apply for an innovations
grant from USAID. The US $million
grant was disbursed through
ACCIÓN in three parts: $,
purchased equity in Compartamos,
$ million was lent to Compartamos
by ACCIÓN as subordinated debt,
and $, was extended as a
technical assistance grant.’ See
CGAP (: ).
See Waterfield (). See also
CGAP ().
Much of this information is
from CGAP ().
Remarks by Muhammad
Yunus, Microcredit E-News, (),
.
Comments reported in the
New York Times, April .
Quoted in ‘In Mexico, the
success of microfinancing presents
big problems’, International Herald
Tribune, April .
Quoted in The Times of
London, July .
See CGAP (: ).
See Duggan and Goodwin-
Groen (: ).
See ACCIÓN ().
See comments by Richard
Rosenberg at finance.groups.yahoo.
Notes to 5 and 6 | 229
com/group/MicrofinancePractice/
message/.
As I write, however, a major
$ million social impact evaluation
of Compartamos is under way by a
team led by Professor Dean Karlan
of Yale University. The first results
are expected in .
ACCIÓN has publicly stated
that the huge financial windfall it
made at the IPO ($ million) plus
the regular dividend payments it
receives on the shares it kept at the
time of the IPO (in around
$. million) will all be invested in
extending microfinance to other
poor individuals across the globe.
See CGAP (: ),
www.cgap.org/p/site/c/template.
rc/...
Comments by Carolina
Velazco, Manager of Strategic Plan-
ning at Compartamos, reported in
Dow Jones Newswires, June .
See posting by Dave Richard-
son, July , www.microfin.
com/dfnpostings.
Comments by Dave
Richardson under the heading
‘Compartamos IPO issues – nagging
questions – part ’, DFN website,
July .
See the Compartamos IPO
document, April , p. .
See posting by Dave
Richardson, ‘Dividends paid to
share holders’, DFN Discussion,
July .
See posting by Dave
Richardson, ‘Compartamos results
in Mexico’, DFN Discussion,
October .
On many of the discussion
websites for microfinance in recent
years it is perhaps not coincidental
that there has been a marked rise in
enquiries from individuals wanting
to set up their own MFI, and with
no attempt to hide the fact that very
clear personal financial enrichment
goals are in mind.
6 The politics of microfinance
See Yunus with Jolis (:
).
See San Francisco Chronicle,
June .
See North ().
See Heydemann (: ).
See Scott ().
In an interview with an
Indian-based magazine in in
the context of the global economic
meltdown and rapidly rising pov-
erty in developing countries, Yunus
expressed deep despair with global
capitalism, and he wondered aloud
whether it could ever genuinely
allow poverty to be meaningfully
addressed. See Microfinance Focus,
April .
See Sen ().
See Friedman and Friedman
().
See Gilder ().
For example, Yunus accepted
an approach from the Monsanto
Corporation of the USA to jointly
promote biotechnology products
in Bangladesh, such as GM seeds.
International and local NGOs and
environmental activists (notably
Vandana Shiva) were shocked at
such a tie-up, given that it was very
widely felt that Monsanto’s products
were already inflicting serious
damage on poor rural communities
and destroying biodiversity (see Patel
: –). Without comment
Yunus abandoned the project soon
afterwards – see New International-
ist, , July .
230 | Notes to 6 and 7
For example, see Bond
(b).
See Chowdhury ().
See Leys (); Elliot and
Atkinson ().
See Florio (: ).
See Shiva (); Stiglitz
(: esp. –); Chang and Grabel
().
For example, see Birchall
().
For example, see Schumacher
(); De Sousa Santos ().
See Harriss (: ).
See Arun and Hulme
(:).
The work of Michael Sher-
raden in the USA has been extremely
important in popularizing this
methodology of individual advance-
ment. See Sherraden ().
For example, see Ellerman
().
See Weber ().
See Shiva ().
See Faux and Mishel ().
See George and Sabelli (:
ch. II).
For example, see Putnam
et al. (); Chua (); Collier
().
For example, see Seibel
().
See Hossain and Moore
().
7 Alternatives to
conventional microfinance
See Akyuz et al. (: ).
CCT is in the tradition of
‘targeted’ social policy that can in
the long run make it more dicult
to instal a universal welfare state.
Thanks to Ha-Joon Chang for point-
ing this out to me. See also Wood
().
See World Bank (: ).
See Skoufias ().
See MITI (: ).
See Whittaker (: ).
See Kitayama ().
See Whittaker (: ).
See Girardin and Ping ().
See Nishiguchi ().
See Friedman (: ).
See Weiss (: ).
See Whittaker ().
See Porter (: –).
Much of this section is
drawn from a study trip the author
made to Mondragón in under
contract to UNDP – see Bateman et
al. ().
See Ellerman ().
See Ammirato ().
See Putnam et al. ().
See Weiss ().
Recent changes to the bank-
ing structure in Italy have removed
the SCIs as a separate category of
financial institution.
See Guiso et al. ().
See Logue ().
The seminal texts are Amsden
(); Wade (); and Chang
().
See Whang ().
See Han (: ).
See Prasad and Gerecke
().
See Thorbecke (: –).
See Fei et al. (: –,
quoted in Das Gupta et al. (:
–).
See Wade (, ).
See Wade (: esp. ch. ).
See Lall (: ).
See O’Connor ().
See Girardin and Ping (:
–).
Ibid.: –.
See O’Connor (: ).
Notes to 7 | 231
For example, see Robinson
(: ).
For example, see Parayil
(); Veron ().
For example, see Rajan and
Zachariah ().
See Sen (: ).
See Parayil ().
See Thomas Isaac and Franke
(: ).
Ibid.
See EDA (). The
state-driven SHG operating in
Andhra Pradesh, however – Velugu
– attempts to promote very similar
collective development methodolo-
gies to those aimed for in Kerala’s
SHGs. See ‘Promising approaches
to engendering development’,
siteresources.worldbank.org/INT-
GENDER/Resources/Velugu.pdf.
See Sunkel ().
Quoted in Piñeiro Harnecker
().
See Tendler (: ch. ).
See Wilpert (: ).
See Sugar ().
See Weiss ().
See Pearson ().
See Wynter and McIlroy
().
See Wilpert (: ).
See Albert ().
See Vietnamese Academy of
Social Sciences ().
Reported in ‘From poverty to
power: a conversational blog written
and edited by Duncan Green’,
Oxfam International, October
.
See Green (); see also
the comments in ‘From poverty to
power: a conversational blog written
and edited by Duncan Green’,
Oxfam International, October
.
See Banking with the Poor
Network in collaboration with the
SEEP Network (: ).
See DFC (a: ). Recall
from Chapter that average loan
size in Bangladesh is well under
$.
DFC (b: ).
The credit cooperatives failed
largely because they were weakly
regulated. Among other things,
many were ‘captured’ by inside
managers keen to inflate profits
through ‘pyramid-style’ practices,
thereby to maximize their own
financial rewards – see O’Connor
(: ).
See Seibel (: ).
See McCarty (: ).
See DFC (b: ).
See Bateman (b).
See EU ().
See Banking with the Poor
Network in collaboration with the
SEEP Network (: ).
A typical comment is
‘CGAP will not provide capital to
microfinancing institutions here
[in Vietnam] because the required
sustainability and a business plan
do not exist’, report from a UNDP-
sponsored monthly meeting of the
donor working group on poverty
held on March , quoted in a
report by Financial Times Informa-
tion, March .
See Robinson (: ).
See World Bank (b).
See DFC (a and b).
See DFC (b: ).
See DFC (a: ).
See Vietnam Microfinance
Working Group, Vietnam Micro-
finance Bulletin, , July .
See ‘ADB, Japan help
Viet Nam transform, diversify
232 | Notes to 7 and 8
micro finance services’, ADB press
release, October .
There are, however, some
signs of ‘push-back’ on the part
of the Vietnamese government. In
September , for example, the
government announced the establish-
ment of its own high-profile micro-
finance advisory body, the ‘Working
Committee on Micro finance’, which
will report to the State Bank of
Vietnam. See ‘Government sets up
Working Committee on Micro-
Finance’, Vietnam Business Finance
News, September .
This is a term Oxfam once
famously used in the context of
Nicaragua’s successful pro-poor
economic and social reforms in
the early s, reforms that were
blocked by the US government for
fear that other countries would
follow in the same leftist direction.
See Chomsky (: ).
See Chang ().
8 Conclusion: the need for a
new beginning
‘Beyond Vietnam – a time
to break silence’, Speech delivered
at a meeting of Clergy and Laity
Concerned, Riverside Church, New
York, April .
See Elliot and Atkinson (:
back cover).
In celebration of Muhammad
Yunus being awarded the Nobel
Peace Prize in , one of the main
Dhaka newspapers (the Bhorer
Kagaj) decided to run a major story
on the current situation in Jobra. Un-
fortunately, it turned out that Jobra
village has been unable to escape
generalized poverty, not least because
most of the initial microcredit recipi-
ents supported by the Grameen Bank
and other MFIs ended up failing in
their plans for a microenterprise.
This apparently included the very
first client of Grameen Bank, Sufiya
Begum, who was widely praised by
Muhammad Yunus himself for her
advice and fortitude (see Yunus :
–), but who died in abject poverty
in after all her many income-
generating projects came to nothing.
The one major structural change
of note in Jobra, the newspaper
ominously reported, was a growing
indebtedness problem. Finally,
those Jobra inhabitants who were
found to have meaningfully escaped
poverty were all associated with one
or more family members working
in the Gulf states. See ‘The Jobra of
Yunus: poverty there has not found
itself in an archive’, Bhorer Kagaj,
March . The original source
is Chowdhury (: –).
See Sen ().
See Chang ().
Ibid.: .
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Index
Acceso FFP organization (Chile),
ACCIÓN organization (USA),
, , , , , ,
–, ; Campaign for Client
Protection, ,
accumulation by dispossession, ,
ACLEDA organization (Cambodia),
–
Africa: development in, –;
microfinance in,
Agency for Small and Medium
Enterprise Development
(ASMED) (Vietnam),
agriculture, , ; cooperatives,
; in Cambodia, ; kolkoz
system, ; role of microfinance
in, –; state support for, ;
subsistence farming, see also
suicides by farmers
Ahmad, Q. K., –
Akyuz, Yilmaz, , ,
Albright, Madeleine,
Alexander-Tedeschi, G.,
Alliance for Fair Microfinance,
–
alternatives to microfinance,
–, ,
Amsden, Alice,
Andhra Pradesh state, ;
Commission on Farmers’
Welfare, ; microcredit bubbles
in, ; microfinance crisis,
–; saturation of microfinance
in,
Arizmendiarrieta, José María,
Artisan Funds (Italy),
Arun, T.,
Asian Development Bank (ADB),
Asian financial crisis,
Association for Social Advancement
(ASA), ,
at-risk groups, –
Atkinson, Dan,
Balkenhol, Bernd,
Banana Skins report, ,
Banco de Desarrollo Productivo
(BDP) (Bolivia),
Banco de la Mujer (Venezuela), ,
Banco del Pueblo (Venezuela),
BancoSol (Bolivia), , , , ,
Bangladesh, , , , , , ,
; land seizures in, ;
microenterprise in, (failure of,
); microfinance in, , –;
study of, –
Bangladesh Institute of Development
Studies (BIDS),
Bangladesh Rural Advancement
Committee (BRAC), , ;
Conrad N. Hilton Humanitarian
Prize,
Bank BRI Unit-Desa (BRI-UD), ,
Bank Rakyar Indonesia (BRI), ,
–,
barrow traders,
Basque region, ; community
development bank in, –
Baumol, William,
bazaar economy,
Benin, microfinance in,
bidi cooperative (Kerala),
Bill and Melinda Gates Foundation,
254 | Index
Bolivia, , , ; debt in,
; economic crisis in, ;
microcredit bubbles in, ;
microfinance in, , , (new
wave, –)
Bologna,
Bolsa Familia (Brazil),
Bosnia: consumer microloans
in, ; microenterprise in,
–, –; microfinance
in, (meltdown of, );
overindebtedness in,
bottom-up development, , ,
–
Boulder Institute,
Brazil, ,
Brink, Brian,
building societies: commercialization
of, –; remuneration of
managers in,
Caisse Populaire (Quebec),
Caja Laboral Popular (CLP) (Spain),
Cambodia, ; microfinance in,
capabilities of the poor, ,
Central People’s Credit Fund
(Vietnam),
Chaebols (South Korea), ,
Chang, Ha-Joon, , , , ,
; Bad Samaritans,
changarrization, –, –
child labour,
China, ; local financing in, –
Choudhury, Shafiqual Haque, ,
Christoplos, I.,
Chu, Michael,
client exit/failure, –, –, ,
; examination of, ; in East
Africa, –
client poaching,
Clinton, Bill,
code of conduct of microfinance
industry,
collateral, elimination of,
collective organization, , ,
Collins, D. et al., Postfolios of the
Poor …,
commercialization: of microfinance
sector, , –, , , , –
; (as the death of microfinance,
–; background to, –;
social mission of, –); of UK
building societies, –
Commission on the Legal
Empowerment of the Poor,
commodity chains,
communities, weakening of,
Compartamos bank (Mexico),
–, , , , –,
; commercialization of, ;
damaging eects of,
conditional cash transfer (CCT),
–, –
connectivity, –, ,
Conrad N. Hilton Humanitarian
Prize, awarded to BRAC,
Consultative Group to Assist the
Poor (CGAP), –, , ,
, , , , , ;
criticism of Vietnam, ; Pink
Book,
consumer microloans, –, ,
, , , switch to, –
consumption: funding of, , ;
smoothing of,
contract farming system,
cooperatives, , , , , ,
–, , ; financial, ,
Cooperbanca (Italy),
Counts, Alex,
creative destruction,
credit unions, –
crime, increasing,
crisis, world economic, –, , ,
Croatia: consumer microloans in,
; dairy sector in, –; project
evaluation in,
cross-border shuttle trading, , ;
in Poland,
Index | 255
cross-subsidization,
crowding out problem,
current expenditure, financing of,
dairy sector, in Croatia, –
Daley-Harris, Sam,
Danel, Carlos, ,
Danone company, –
Davis, Mike, , –, ; City of
Slums, –
Davis, Peter,
Davis, S.,
debt, , , , , , , , ,
; as pretext for land seizure,
–; in Bosnia, ; in India,
–, ; of farmers,
default on debt, , ,
defaulting borrowers, ostracizing
of,
deindustrialization, –, ; in
Africa, ; in Mexico, –; in
Nigeria,
Dell, Michael,
demutualization of building
societies,
Department for Industry and
Development (DfID), , ;
report on Vietnam,
Deutsche Bank,
development triggers see triggers of
development
Dichter, Thomas, ,
disempowerment: of the poor, ,
, ; of women,
displacement eects, –, –,
; damaging, ; in developing
economies, –
distribution chains, non-unionized,
dividends, payment of,
doi moi policy (Vietnam),
drop-outs,
dualistic financial structures,
Dyal-Chand, Rashmi,
East Asian development model, ,
,
economies of scale, ,
Ehigiamusoe, G.,
elite capture,
Ellerman, David, –, , ,
Elliot, Larry, ; et al. The Gods
that Failed, –
Emilia-Romagna, –
employee capture, –
employment-generating activity,
empowerment, ; myth of, –;
of the poor, , –, , ; of
women, , (myth of, –)
see also gender empowerment
endogenous development
(Venezuela),
EnergoInvest organization (Bosnia),
Enterprise Allowance Scheme (UK),
entrepreneurship: in microfinance
sector, –; individual,
Estonia, consumer microloans in,
failed clients see client exit/failure
fairness, in microfinance, –
fallacy of composition, , , ,
, ,
family and friends, borrowing from,
–
family assets sold,
family farms, , ,
farmers’ associations,
Fei, J. C. H.,
finance sector, privatization of,
FINCA International, ,
Finscope studies,
firm size, in India,
Fiscal Investment and Loan Plan
(FILP) (Japan),
flexibilization of labour force, ,
Florio, Massimo,
food security, ,
Ford Foundation,
Fordism, reaches limits,
256 | Index
Franke, R. W.,
free at the point of use,
Friedman, David,
Friedman, Milton, , ,
full cost recovery,
Fund for Microenterprise Develop-
ment (FONDEMI) (Venezuela),
Fundusz Mikro,
Galbraith, John Kenneth, ; The
Auent Society,
gambling, popularity of,
Gates, Carolyn,
gender empowerment, –; in
Bosnia, ; used as cover,
gender solidarity,
Gente Nueva organization,
Germany, –
Gilbert, Alan,
Gilder, George,
Gill, Lesley, –
Goetz, A. M.,
Goldberg, Nathanael,
Goldin Institute,
government support, not sought,
Grabel, I.,
grace periods,
Grameen II project, –,
Grameen Bank, , , , , ,
–, , , , , –, ,
, , , , , , ,
, , , , ; becomes
regular financial institution, ;
client base of, ; conversion
to new wave principles, ;
establishment of, ; growth
of, –; marginalization of,
–; marketing of, ; model
of, (flaws in, ; rejection of,
, ); Nobel Prize awarded
to, ; principles of, ; receipt
of subsidies, ; relation to
poverty reduction, ; struggling
members programme, ; study
of,
Grameen Danone Foods Ltd, –
Grameen Telecom, –,
GrameenPhone, –, –
Halifax Building Society,
demutualization of,
Haltiwanger, C.,
Hannan, Mazharul,
Hardy, J.,
Harper, Malcolm, ,
Harriss, John,
Harvard Institute for International
Development (HIID), , ,
Harvey, David, ; A Brief History
of Neoliberalism,
Hatch, John,
health and safety at work,
healthcare, ; of children,
Heydemann, Steven,
Holman, D.,
honour and shame, aecting women,
Hospes, Otto,
Hossain, M., –
Hulme, David, , ,
Hungary, consumer microloans in,
ICICI Bank, ; partnership model
of,
Imp-Act project,
impact assessments, –, , , ,
, ; scepticism about,
impannatori, ,
import dependency, –,
incentivization of managers,
Inclusive Cities project,
inclusive supply chains, –, ,
income-generating activities, , , ,
, –
India, , ; consumer microloans
in, ; financing in, –;
land seizures in, ; microcredit
bubbles in, ; microcredit in, ,
–; milk cooperatives in, ;
Index | 257
missing middle in, –; over-
supply of microfinance in,
individual asset accumulation,
industrial development, process of,
–
industrial districts, –
infant industry approach,
informal sector, ; contribution
to development, ; ‘discovery’
of,
informality, threat to social peace,
informalization, –
interest rates, , , , , ;
cutting of, ; fluctuations in,
; high, , , , , , ,
, , , , , ,
(damage to clients, –); low,
, , , , , , , ;
market rates, , , ; myths
about, –
International Monetary Fund (IMF),
,
International Year of Microcredit,
Istituti di Credito Speciale (Italy),
Italy: local-regional financial models
in, –; microenterprise in,
Japan, ; microenterprise in, ;
recovery from Second World War,
–
Jobra village, Bangladesh, –,
joint liability, in solidarity circles,
–
Kabeer, Naila,
Kau, E.,
Karim, Lamia, ,
Karlan, Dean, ,
Karnarni, Aneel,
Kendra see solidarity circles
Kenya: microfinance in, –,
Kerala State, microfinance in, –
Keynesianism, ,
Khan, Akhtar Hameed, , ;
Comilla model, –
Khandker, Shahidur, –,
King, Martin Luther,
Kiva institution,
Klein, Naomi,
Kozul-Wright, R., ,
Kuo, S. W. Y.,
Kupedes microloans,
Labarthe, Carlos,
land: ownership of, ; sale of, ;
seized through debt, –; sub-
divisions of, ; titling of, –
Landesbanken,
Lebanon, loan structures in,
LegaCoop (Italy),
Lehman Brothers,
Levy, Santiago, –
Leys, Colin,
Littlefield, Elizabeth,
loan ocers, incentivization of,
loan use, delinked from loan
payment,
loans, traditional,
local and regional systems, , ,
, ; in China, –; in
Italy, –
Lont, Hotze,
lumpenproletariat, –
Malawi, microfinance in,
male hegemony, strengthening of,
–
managers, bonuses of,
Manji, Ambreena,
Marshall Plan,
Marx, Karl,
Mayhew, Henry, London Labour and
the London Poor,
Mayoux, Linda, –,
McKinsey report,
McNamara, Robert,
mega-cities,
Merrifield, T., –
Mexico: Compartamos aair,
–; consumer microloans
in, ; microenterprise in,
–, –; microfinance in,
258 | Index
–, –; National Survey of
Microenterprises,
Mexico Employers Association,
microcredit: as human right, ;
paradox,
microcredit bubbles, , –, ,
Microcredit Summit Campaign, ,
microenterprise: ghettos of, ; in
Bangladesh, (failure of, );
in Bosnia, –; in India, ; in
Italy, , ; in Japan, , ;
in Mexico, –; in Poland, ;
in South Africa,
microfinance: addiction to, ;
alternatives to see alternatives to
microfinance; and connectivity,
–; and deindustrialization,
–; and economies of scale,
–; and import dependency,
–; and income-generating
activities, –; and
informalization, –; and
poverty reduction, ; and social
capital, –; antagonistic to
development, , ; as a way of
supporting markets, –; as
anti-development policy, ;
as containment of the poor,
–; as empowering the poor,
–; as human right, ; as
local neoliberalism, –, ;
as politically acceptable model,
–; as poverty trap, , –,
, , , ; associated
with lower labour costs,
; bubbles see microcredit
bubbles; case for, –;
coining of term, ; collapse
of, ; commercialization
of see commercialization of
microfinance; consonant with
neoliberalism, –; demand
for, –; disillusion with, ;
eect on poverty reduction,
–; failure of programmes,
–; impact assessments of,
–; in Africa, –; in Andhra
Pradesh, crisis, –; lowers
costs for the state, ; marketing
of, ; myth of empowerment
of women, –; myth of
helping the poorest, –;
myth of self-sustainability of,
–; myth of wanting by the
poor, –; myths and realities
of, –; neoliberalization
of, –; new wave see new
wave microfinance; oversupply
of, ; politics of, –;
programme interventions, ;
public narrative of, , , ;
relation to property titles, –;
rise of, –; undermines poverty
reduction,
microfinance millionaires, –,
MicroFinance Transparency
organization,
micro-insurance,
microloans, true costs of,
micro-savings,
milk cooperatives, in India,
Ministerio para la Economía Popular
(MINEP) (Venezuela),
Ministry of International Trade and
Industry (MITI) (Japan),
mission drift of microfinance
industry, –
Mittelstandpolitik,
Mondragón Cooperative
Corporation, –
moneylenders, ; class of, –;
liberation from, –
Morales, Evo, , ,
Morduch, Jonathan, , , ,
Morgenthau Plan, –, ,
mortgages,
Mosley, Paul, , ,
Mother Teresa,
Moyo, Dambisa, ; Dead Aid, –
Mukherji, Arnab,
Index | 259
multinational corporations, –,
multiple borrowing,
Mutesasita, L. K.,
Nationwide Building Society,
neighbourhood help groups (Kerala),
–
neoliberalism, , –, , ;
collapse of, ; disenchantment
with, ; failures of,
neoliberalization of microfinance,
–
new development economics,
new wave microfinance, –, , ,
, , , , , , , , ,
, , , , , , , ,
, , , , , , ,
, , , , , , ,
; as ‘best practice’, –; in
Bolivia, –; myths of, –;
problems of, –
Nigeria, deindustrialization in,
Nishiguchi, T.,
non-governmental organizations
(NGOs), , ; transformed into
commercial banks, –
Norbert-Hodge, H., –
North, D., ,
North American Free Trade
Agreement (NAFTA),
Northern Rock Building Society,
–; taken into public
ownership,
Ohio State University,
Omidyar, Pierre,
Osmani, S. R.,
Ota (Japan), machine-tool
production in,
Otero, Maria, ,
outreach,
Oxfam,
Pakistan, , ; land seizures in, ;
microfinance in,
Parayil, G.,
patriarchy, ,
payday lenders,
pension plans,
People’s Credit Funds (PCF)
(Vietnam),
People’s Finance Corporation
(Japan),
Peru, saturated by microfinance,
–
Peru Urban Property Rights Project
(PUPRP),
petty entrepreneurship,
Piore, Michael, with Charles Sabel,
The Second Industrial Divide,
Pitt, Mark, –,
Pocantico Declaration,
Poland: cross-border shuttle trading
in, ; microenterprise in, –
Polanyi, Karl,
poor, , , , ; and
building societies, ;
containment of, –; eects of
interest rates on, –; helping
of the poorest, –; invited into
capitalism, –; management
of money by, ; organization
of, ; romanticization of, ;
undermining status of, ;
women, creativity of,
Poor Law Reform, –
Popular Networks (Venezuela),
post-conflict scenarios, ;
microfinance in,
poverty, reduction of, , , , ,
, , , , , , , –,
, , , , , , ,
, , , ; in Bolivia,
; in Poland, ; in Venezuela,
; in Vietnam, success of,
–; state at heart of,
poverty-push microenterprise, –
poverty trap, ; of rural poor, see
also microfinance, as poverty trap
power and politics, issues of,
260 | Index
Prahalad, C. K., ; The Fortune at
the Bottom of the Pyramid,
privatization, , , , ,
–, , ; in the UK, ,
; of financial sector, ; of
water supply, –
Pro-Credit Bank (Serbia),
pro-poor policy, , ,
PRODEM organization (Bolivia), ,
,
profit, maximization of,
property titles, formal, –
Pupavac, Vanessa,
purdah,
Putnam, Robert, ,
Qasem, M. A.,
Rahman, Aminur, , ; study of
Grameen Bank,
Rainnie, A.,
Randomized Control Trials,
Ranis, G.,
redistribution of wealth,
regulation of lending programmes,
Reinert, Erik,
repayment, , , , , , ;
rates of, , , , , , ,
(high, –); relation to
development, ; responsibility of
women,
rice sector, poverty trap,
Richardson, David, –
rickshaw sector, in Bangladesh,
right to live,
Rippey, Paul,
Robinson, Marguerite,
Roodman, David, ,
rural areas, cut o from financing,
Rural Credit Cooperatives (RCC)
(China), –
rural jobs, growth of,
Rutherford, Stuart,
Sachs, Jerey,
sales territory, issue of,
SAPRIN study,
savings, ; emphasis on, ; local,
, , ; mobilization of,
, ,
Say’s Law,
school attendance,
Schuh, S.,
Schumpeter, Joseph,
self-employment, ; among
women, , ; expansion of, ;
promotion of, ,
self-help group (SHG) movement,
,
self-help groups, , , , ; in
India, ; in Kerala State, –
self-respect of the poor,
self-sustainability, –, , ; of
microfinance, myth of, –
Sen, Amartya, , ,
senior personnel of institutions,
enrichment of, –
Serbia: consumer microloans in, ;
microfinance in, –
shakti doi yoghurt product, –
shame associated with debt default,
Shane, Scott,
SHARE organization (Andhra
Pradesh),
Sharma, Devinder, –
shinkin banks (Japan),
Shiva, Vandana, –
Shoko Chukin Bank,
Sinković, Dejan,
Small Business Finance Corporation
(Japan),
social businesses, , ; concept
of,
social capital, –
social mission: loss of, ; under
commercialization, –
Sociedad Financiera de Objeto
Limitado (sofol), ,
sogo banks (Japan),
Index | 261
solidarity, , –, ,
solidarity circles, , , , ;
abandonment of, –; and
gender perspective, ; issue of
joint liability, –
Soto, Hernando de, , , , ,
, , ; The Mystery of
Capital, –
South Africa: consumer microloans
in, ; microenterprise in,
South Korea, ; financing in,
–
Spandana organization (Andhra
Pradesh),
Speenhamland system,
spillover eects, ,
start-up capital,
state: intervention by, , ;
minimal, agenda for, –
Storey, David,
street trading, , –; in
Mexico,
street vendors, aected by
displacement eect,
sub-prime mortgages, ,
subsidies, problem of, –
subsistence farming,
suicides by farmers, in India, ,
Sunacoop (Venezuela),
Sunkel, Osvaldo,
survivalist activities,
survivor bias, ,
Suskind, Ron,
sustainable development, ,
Taiwan, ; financing in, –
Tanzania, microcredit in,
taxation: avoidance of, ; respect
for, undermined,
Telenor company, –,
Thomas Isaac,
‘Tiger’ economies of East Asia,
Township and Village Enterprises
(TVE) (China), –
trade unions, , , , ;
exclusion of,
transparency, in microfinance, –
triggers of development, –,
–
Uganda: microcredit in,
(saturation of, –); petty
trading in, ; women in,
Ukraine, consumer microloans in,
United Kingdom (UK),
microenterprise in, ;
development policies for, –
United Nations (UN),
UN Conference on Trade and
Development (UNCTAD),
UN Development Programme
(UNDP), ,
UN Millennium Development Goals,
Urban Credit Cooperatives (UCC)
(China), –
USAID, , , ; AIMS project,
Velugu organization (Andhra
Pradesh),
Venezuela: income programmes in,
, –
Vietnam: criticisms of, –, ;
success in poverty reduction,
–,
Vietnam Bank for Agricultural and
Rural Development (VBARD),
–
Vietnam Bank for Social Policy
(VBSP), ,
Vietnam Bank for the Poor (VBP),
Vietnam Microfinance Association
(VMA),
Vietnam Microfinance Working
Group,
Wade, Robert,
wage employment, –
Waterfield, Chuck, ,
262 | Index
Weiss, Linda, ,
Williams, Sally, –
women, ; and microcredit, , ,
, ; disempowerment of, ,
; empowerment of, (myth
of, –); farm work of, ; in
self-employment, ; prioritized
as clients, ; responsibilities
shifted to, ; shaming of, –;
telephone ladies, –; unpaid
work of,
Women’s Savings Group (Vietnam),
–
Woodru, C.,
World Bank, –, , , , ,
, , , , , , ,
, , , , ; doubts
on microfinance, –; Finance
for All, ; International Finance
Corporation (IFC), ; Moving
Out of Poverty Study, –;
report on Vietnam, ; study of
consumer credit, ; Study of
Rural Poverty in Mexico, –;
Voices of the Poor study,
World Council of Credit Unions
(WOCCU), ,
World Social Forum,
Yunus, Muhammad, , , –, ,
, , , , , , , ,
, , , , , , ,
, , , –, , ,
, , , , ; awarded
prizes, (Nobel Peace Prize, ,
, ; US Presidential Medal of
Freedom, ); condemnation of
Compartamos, ; Creating a
World without Poverty, ; role
as adviser,
Zambia,
Zenshiren Bank (Japan),
Zinman, Jonathan,
