- Development & Aid
- Economy & Trade
- Human Rights
- Global Governance
- Civil Society
Tuesday, October 26, 2021
Vani S. Kulkarni is with the Department of Sociology, University of Pennsylvania, and Raghav Gaiha is with the Global Aging Programme at Harvard School of Public Health.
PHILADELPHIA AND BOSTON, Oct 7 2015 (IPS) - Mohammad Yunus, the founder of Grameen Bank in Bangladesh, transformed the lives of millions of poor women through unsecured micro loans or micro credit to self-help groups. Microcredit evolved into microfinance that also includes savings and basic forms of insurance and transfer mechanisms. Within a few years, microfinance became a global phenomenon. Although microfinance continues to grow, the enthusiasm for it shows signs of waning.
In recent years, there has been a great deal of scepticism regarding the “miracle” of microfinance. Critics have questioned whether the rhetoric has moved far ahead of the evidence, with some even suggesting that microfinance can spell the death of local economies. Meanwhile, its defenders present robust evidence to substantiate their claims that microfinance delivers enormous benefits. We argue that the miracle is largely intact but needs strengthening.
According to data from MIX, which tracks microfinance institutions (MFIs), there is a solid and growing base of microfinance providers, with a global loan portfolio amounting to US$ 81.5 billion in 2012 with an outreach of 91.4 million low income clients. Women make up 80 per cent of the clients of the world’s largest 34 microlenders. Yet half of the world’s adults still do not have accounts in financial institutions and 76 per cent of the poor are unbanked. When you add all this up, the case for vigorous expansion of financial inclusion in the SDGs is patently obvious.
Recent shift of the focus to financial sustainability raises serious concerns about dilution of the outreach of microfinance [for example, the number (breadth) and socioeconomic level (depth) of the clients served by MFIs.] That the trade-off exists is undeniable but little is known about its extent. It is often emphasised that large-scale outreach to the poor on a long term basis cannot be guaranteed if MFIs are not financially sustainable. Consequently, donors, policy makers, and other financiers of microfinance have shifted from subsidising MFIs towards financial sustainability and efficiency of these institutions.
Analysis of a large cross-section of countries reveals that MFIs providing mainly individual loans are more profitable, but the fraction of poor borrowers and of women in the loan portfolio is lower than in institutions that concentrate on group lending. Moreover, MFIs that provide individual loans increasingly focus on wealthier clients, a phenomenon that is often referred to as “mission drift,” while this is less so for the group-based MFIs. So the importance of institutional design in reducing the trade-off cannot be overlooked. Besides, sustainability is feasible without mission drift by reducing costs and gaining efficiency through innovative use of information and communication technology.
Research has documented that social networks help the diffusion of microfinance. A survey in Guatemala demonstrated that individuals imitate the choices made by other members of the same network – in this case a household’s access to credit was closely related to membership in a church network. In another example, a majority of representatives of financial institutions in India concurred that self-help groups (SHGs) were more likely to be successful in villages with a high density of social networks and associations.
Not only do SHGs benefit from the presence of networks, they themselves also contribute to trust, reciprocity and associational capital (such as through strengthening of local institutions). Moreover, presence of successful SHGs induces quicker formation of other SHGs at a much cheaper cost and the self-reinforcing process gathers momentum over time.
Group lending not only reduces transaction costs of small loans but also ensures high repayment rates. However, group liability may also impose a “cost.”
The incentive for group participants is to reduce the risk taken by their fellow members, since participants do not benefit from the upside of any risky investment, but are liable for the downside. As a result, members of a group may impose excessive risk aversion. Our analysis of selected Asian countries – especially India – offers insights.
Drawing upon Indian evidence, assortative matching into poor and rich groups was reported by about 71 per cent of members of SHGs.
Few believed that the poor were excluded because of high interest rates and/or stringency of financial discipline. However, remoteness of villages, absence of functioning local institutions and lack of awareness of benefits of group lending were identified as major impediments in covering larger segments of the poor – especially by representatives of financial institutions.
A cross-country analysis establishes robustly that gross loan portfolio (GLP) of MFIs benefits not just the poor but also the poorest. In other words, GLP of MFIs is negatively associated with the incidence, depth, and severity of poverty. Hence sustained flows to MFIs may help avert accentuation of poverty as a consequence of the slow and faltering recovery of the global economy.
Much of micro evidence (such as that which is gathered at the household level) on poverty reduction is mixed. A striking case is that of Bangladesh, where the impact in some studies is positive and large, while in others the impact has been insignificant or weak. In Peru, it is the “better-off” rather than the core poor who benefit most from microfinance. By contrast, there is a substantial positive effect on a multi-dimensional welfare indicator in India. In China, while microfinance is welfare enhancing, the main beneficiaries are the non-poor. Experimental evidence for Thailand, the Philippines and India (Hyderabad slums) suggests that the (relatively) affluent benefit more.
An important insight for Bangladesh and elsewhere is that the exit from poverty requires longer-term participation. Household entrepreneurs require time to achieve productive efficiency or to earn higher returns from self-employment activities. Since existing members of microcredit generally obtain larger amounts, MFIs should be encouraged to offer larger loans sooner rather than later.
Before the 2004 Tsunami in Sri Lanka, access to microfinance helped income convergence among the borrowers – a process that was disrupted by this natural disaster. However, microfinance loans after the Tsunami helped in reducing the income gap between those who were hit by it and others who were not. This process of recovery was fast. There is thus strong evidence for the effectiveness of microfinance as a recovery tool.
Women in higher loan cycles of Kashf’s microfinance programme in Pakistan experienced a significant increase in empowerment compared to their counterparts in the first loan cycle. Being in a higher loan cycle affects the ability of a female borrower to decide how to use the loan. Microlending thus leads to higher financial empowerment. Besides, there was social empowerment as mobility restrictions were much fewer among them.
A detailed analysis for India has a much broader focus on women’s empowerment and offers a positive role of microfinance. A large majority of SHG participants themselves reported that they had gained self-confidence, greater respect within the family, a more assertive role in family decision-making, a more important role in children’s health and education and that there was a reduction in domestic violence. In the broader community sphere, however, a considerably lower share of respondents gave a positive response.
But these indices of empowerment do not reveal the “costs.” Higher incomes and a broadening of spheres of activities entailed greater responsibilities for women and extra hours of work. In the absence of reallocation of domestic responsibilities, some of the welfare gains from extra incomes earned were partly offset by longer hours of work.
In conclusion, while the miracle of microfinance has eroded somewhat with financial sustainability overriding social goals, there are ample grounds for optimism about recreating it.
IPS is an international communication institution with a global news agency at its core,
raising the voices of the South
and civil society on issues of development, globalisation, human rights and the environment
Copyright © 2021 IPS-Inter Press Service. All rights reserved. - Terms & Conditions
You have the Power to Make a Difference
Would you consider a $20.00 contribution today that will help to keep the IPS news wire active? Your contribution will make a huge difference.