2005 was the "International Year of Microcredit", celebrating an industry thought by some to be a panacea for the developing world. In Why Doesn't Microfinance Work? : The Destructive Rise of Local Neoliberalism , Milford Bateman, a research fellow at the Overseas Development Institute, attempts to highlight how this much-lauded tool is flawed but has managed to maintain such a central place in development discourse for more than thirty years.
The concept is to extend credit facilities to a range of people who do not have the collateral to gain credit elsewhere. It is built upon the idea that the poor are entrepreneurial, and claims to alleviate poverty and empower women. However, recent events have seen the industry's lustre fade - including a spate of suicides amongst heavily indebted people aggressively pursued by microfinance institutions, allegations of corruption and the high-profile removal of Muhammad Yunus from the microfinance bank he founded.
In light of this Bateman's book is timely. His book seeks to assess and reformulate conceptions of why microfinance does not work. Importantly, Bateman takes a systematic approach to debunking the myths and misconceptions of microfinance. For example, high rates of repayment are often cited as proof that microfinance works and is financially self-sustainable, as is the belief that microfinance supports income-generating activities. However, as Bateman shows, Finscope studies of sub-Saharan African nations shows that in Uganda only 15% of microfinance money is used for expansion purposes, with the rest being used for food and other non-microenterprise related transactions.
Salwa Ismail, Professor of Politics at the School or Oriental and African Studies, University of London told Think Africa Press, that a central problem with microfinance is the lack of social insurance for recipients:
"As is the case for all informal employment, the burden of creating a safety net is shifted wholly to the recipients of micro-finance," she said. "In other words, the recipients provide the labour and the interest but are not provided with any social insurance."
High repayment rates do not decisively illustrate the success of microfinance. The poor (a relative term, that Bateman uses problematically), have 'fall-back strategies' should a micro-enterprise go bust. Such strategies include borrowing from friends and family - using up 'important stock of social capital along the way - or getting another, larger loan from another institution. Using a new loan to pay the previous one compounds the problem and increases the overall level of indebtedness.
Many studies claim to show the efficacy of such policies through 'impact assessments' and Bateman does a good job in highlighting the flaws in such reports. These reports are not compiled by independent researchers, "but by committed microfinance insiders". A growing number of commercial MFIs, which need good appraisals to legitimise their work, reinforce the problem.
The reality is that a political ideology of neoliberalism is being pursued; and Bateman notes in later chapters, that this local form of neoliberalism is the politically-acceptable face of development, where the responsibility of 'development' and the escape from poverty is predicated on the individual, as opposed to state-led actions.
The microfinance industry began to pursue non-formal economic practices in the 1970s. And Julia Elyachar highlights how this expansion sits well with neoliberal ideology. It operates in social space, the realm of economic activity is beyond the control of state apparatus. The devolution of development co-exists readily with this neoliberalism, as they both usurp the role of the state and stress the role of the individual.
Bateman only lightly touches on the interplay between social capital and microfinance. The suggestion is that social capital, despite vast empirical evidence of heavy use (especially through the Grameen bank), has faded with the 'new wave' microfinance model.
Although he notes that microfinance leads to greater informalisation and is 'unequivocally associated with the delegitimisation of legal process, ... the tax system and sanctioned a casual approach to health and safety", he does not explore the implications. This critique could have gone a little further to highlight the problem of such implicit support of an informal economy.
Rather, his assertions should be conceptualised within a "need economy", integral to the postcolonial capitalist development, where the "economic activities [are] undertaken for the purpose of meeting needs, as distinct from activities driven by an impersonal force of systemic accumulation" .
Ben Fine argues that social capital is 'the missing link in development' that is less about community or empowerment, and more about how to make the economic sphere more productive by using the non-economic or non-market actors. Social capital has itself become a tool for the development industry to co-opt non-formalised economic actors in to a wider economic system.
Professor Ismail explains that microfinance "co-opts so called traditional forms of organisation. Informal credit, and informal chains of supply and circulation which are often based on kin and regional ties, are well integrated into the 'free' market economy and globalised commercial networks".
Milford Bateman's book is a well-written account and is an important step in correcting the misconceptions of microfinance. The industry has been accepted with little rigorous analysis of the impact or the way it continues to justify its mission. Bateman does posit the industry eloquently as a tool of neoliberalism - where microfinance is used to 'bring capitalism to the masses' without fundamentally questioning the structural issues which create and perpetuate poverty. He uses historical and contemporary examples in Wall Street and the global South that make the book accessible, whilst also showing how the economics of microfinance does not work. At times though, he was not detailed enough in criticising the relationship between microfinance and the informal economy.
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