The Forgotten Flaw of Global Development

Distribution of microcredit loans in Bangladesh - Photo Credit: Fordham Political Review

With over 10,000 Microfinance Institutions (MFIs) operating in developing economies around the world today [1], the once avant-garde industry of microcredit has expanded into a major international force for combating poverty. Yet the recent ubiquity of MFIs, coupled with a marked decline in recent years of research into the field, creates a peculiar dichotomy of uncertainty surrounding microfinance.

How much have these institutions effected palpable, sustained change in the lives of their clientele? Was microfinance doomed from its inception, or has the field simply taken a wrong turn, with nobody bothering to bring it back on course?

As Dr. Tyler Wry of the Wharton School reveals in his recent working paper, the microfinance industry’s current state is concerning, with a new era of increasingly commercialized MFIs deviating from their core social mission of helping the world’s poor [2]. Wry links this trend to a generation of failed policy-making from international agencies like the IMF and World Bank, who have approached the issue of creating MFIs as a question of purely impersonal free market forces, ignoring sociological context.

Wry’s research, however, presents more of a blueprint for the future of microfinance than an indictment of its current state.

A quick examination of the evolution of the microfinance industry reveals MFIs to still be potentially useful poverty-fighting tools [3].

In the 1970s, the accepted framework for credit unions was a heavily subsidized scheme in which scope of service was sacrificed in favor of depth and impact per customer. These early models focused primarily on providing low-interest loans to the agricultural sector, but they were rarely successful. Lenders for state-sponsored rural development banks were driven by political motives, so unnaturally low interest rates and listless loan repayment efforts lead to wholly ineffective and costly institutions [3]. Despite a genuine desire to effect change, the banks continuously failed to create profits.  So in the 1980’s, microfinance pioneers decided to shift techniques: rather than focusing on inherently risky farm investments, lenders began targeting small enterprises in villages and towns [4]. The market approach targeted a more profitable niche of clients, sacrificing depth and per-client surplus for breadth, length and scope of services . Profitability, or “self-sustainability” as it’s often referred to by the groups themselves, became central goals of new MFIs [5].

Dr. Muhammad Yunus earns his place in microfinance history (and his 2006 Nobel Peace Prize) by orchestrating Bangladesh’s Grameen Bank to have the efficiency of an MFI operating through the market approach, while still maintaining the social impact of an MFI operating with the old subsidization model [3]. This balance is best exemplified by Grameen’s pioneering of the group-lending approach, which realigns the broken incentive model from early rural schemes by placing female microcredit clients into small groups. In group-lending, joint-liability among borrowers leads to higher repayment rates. In addition, the long-term interactions between female clients foster important support systems that prevent women from yielding to societal pressures and dropping out of microfinance services all together [2]. In utilizing techniques like group-lending, Grameen retains its core social mission, while being close enough to true profitability that subsidization is only partially required.

The central issue of microfinance arises when international agencies fail to appreciate this careful equilibrium that Yunus has worked to achieve with Grameen. In his paper, “Culture, Economics, and Cross-National Variation in the Founding and Social Outreach of Microfinance Organizations”, Wry points out that microfinance, at its core, is a type of business. Thus, MFIs are governed by the same laws as businesses: liberalized markets with free cash flow, and deregulation for easy foreign investments lead to increased business founding, so these same market conditions should lead to the development of the microfinance sectors in various countries—and they do.  However, market conditions are not the only factors at play: all industries attempting to break into a new country’s market obey the laws of a sociological principle called “logics”. Logics are essentially a shared framework of thinking among a people, that can be used to predict consumer and state behavior. 
 A new industry succeeds in a country when it matches, or “conforms” to the prevalent existing logic, whereas industries that violate the nation’s logics—that contradict known social norms and values of a people—often fail to acquire the necessary resources for success [2].

And this is where the fatal paradox of modern microfinance arises. When considering microfinance as a tool for raising the status of impoverished women, countries that have the strongest patriarchal logics are the ones in most dire need of intervention by MFIs. Consider the characteristics that comprise a strong patriarchal logic: strict gender roles that are internalized and reinforced by both men and women, limited education opportunities for women, and women’s inability to own and inherit property to use as collateral for loans. After all, the purpose of the subsidy approach, as well as the somewhat secondary goal of the market approach, is to reach the clients who would most benefit from access to banking services. But the same logic which demands the presence of MFIs is precisely what makes it difficult for institutions to succeed there. Contradicting a logic of patriarchy so fundamentally makes it difficult for MFIs to attain the necessary subsidization for the Grameen-esque dual-model approach, which, again, functions partially thanks to its continued subsidization [2].

International agencies quickly found that neoliberal economic policies would partially overcome the paradox of logics, because a business-friendly environment would somewhat compensate for the lack of resources caused by societal factors—and they were right—in terms of the creation of MFIs. But this new generation of Microfinance Institutions (the ones bred in a neoliberal marketplace) have a key distinction from the Grameen ideal: they are naturally more likely to be for-profit organizations. All efficient MFIs must attempt to reach profitability in terms of a lack of reliance on subsidization. However, the postmodern, increasingly commercialized era of microfinance has been dominated by the creation of publicly traded institutions with a responsibility to their shareholders [2].

In 2007, Mexico’s Compartamos Banco’s massively successful IPO became the first microfinance bank in Latin America to become publicly traded. In 2011 India’s SKS Microfinance, the largest MFI in the nation [5] raised a grand total of $358 million in its massively successful IPO. These companies would flaunt their earnings as an indication of hyper-efficiency in the new age of microfinance, a natural and necessary progression in the industry’s evolution. They claim that, although there is a responsibility for profits because of the introduction of investors, the for-profit model is more streamlined, allowing services to reach far more people than before [6].

Groups like SKS and Compartamos simplify the methodological dichotomy Grameen has worked to achieve—diluting the careful balance to focus on a fully market-oriented approach. It is important to note that this regression to commercialization comes at great cost to female clients.

Despite female clients’ comparatively high loan repayment rates [6], women are typically more costly to lend to, and thereby do not fall into the profitable niche the for-profit MFIs are designed to serve [2].

The strategy of Bangladesh’s Grameen Bank proves that efficiency and desire to affect change are reconcilable goals. The success of 1997 Microcredit Campaign proved to the world that near impossible development projects could be achieved under capable leadership.

Today, microfinance has fell victim to gross oversimplification. Researchers have continually failed to convey the complex social implications of MFIs in particularly patriarchal nations, causing policymakers to approach development of microfinance sectors as a purely economic task.

The regression of microfinance has caused groups like SKS to effectually become the loan sharks that MFIs were built to limit.  However, by recognizing this deterioration, we can restructure and redesign the field of microfinance (just as Grameen once did) until the industries full range of services can reach all impoverished families in the world, from the original 100 million and beyond.


[1] Microfinance Market Outlook 2014 (Rep.). (n.d.). doi:10.1787/weo-2014-7-en
[2] Wry, T., & Zhao, E. Y. (n.d.). Culture, Economics, and Cross-National Variation in the Founding and Social Outreach of Microfinance Organizations (Rep.). Retrieved September 2, 2015, from Global Initiatives Research & Teaching Materials Program at the Wharton School website: http://www.hbs.edu/faculty/conferences/2013-paulrlawrence/Documents/ZhaoWry_markets,%20culture,%20and%20microfinance.pdf
[3] Schreiner, M. (2003). A Cost-Effectiveness Analysis of the Grameen Bank of Bangladesh (pp. 2-36, Rep.). St. Louis, MA: Center for Social Development.
[4] The History of Microfinance. (2006, April 14). Retrieved September 2, 2015, from https://www.globalenvision.org/library/4/1051
[5] Cull, R., Demirgüc-Kunt, A., & Morduch, J. (2009). Microfinance meets markets. Journal of Economic Perspectives, 23(1), 167-192.
[6] Yunus, M. (2011, January 14). Sacrificing Microcredit for Megaprofits. Retrieved September 2, 2015, from http://www.nytimes.com/2011/01/15/opinion/15yunus.html

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