This article discusses microfinance in developing nations and its sociological impacts. It discusses the variances in the development of microfinance in different parts of the world and the major models through which microfinance is administered. Emphasizing that microfinance goals are often as social as they are economic, the article explores the connections between microfinance activity and other social change–oriented action. As microfinance initiatives are frequently associated with women's empowerment movements, the gendered aspect of microfinance is discussed in detail, as well as the increasing popular conception of microfinance. Several common critiques of microfinance and various ways in which the microfinance movement must adjust in the changing global economic climate are also explored.
Keywords: Developing World; Economic Development; Formal Economy; Gender; Informal Economy; Microcredit; Microfinance; Microfinance Institution (MFI); Person to Person Lending; Poverty
The distribution of the world's wealth and resources has been a topic of interest to sociologists since the field was first imagined. Indeed, for many sociologists, access to resources is a fundamental aspect of how society functions. As the world has become more economically intertwined, sociologists now examine issues of global economic interaction between the developed and developing world as well as the relationship between local economic conditions and sociological changes. The subject of microfinance has particularly illustrated both the connections between developed and developing nations and the impact of economic policy and action on social orders and structures within a community.
What is Microfinance?
Microfinance generally refers to a variety of banking and lending activities geared toward very low-income clients, typically in developing nations. Rajdeep Sengupta and Craig P. Aubuchon (2008) have explained:
Although the terms microcredit and microfinance are often used interchangeably, it is important to recognize the distinction between the two … microcredit refers to the act of providing the loan. Microfinance, on the other hand, is the act of providing these same borrowers with financial services, such as savings institutions and insurance policies. In short, microfinance encompasses the field of microcredit. (p. 9)
Thus, microfinance can consist of micro-credit, micro-loans, micro-insurance, and micro-savings accounts, among other applications.
Ideologically, microfinance advocates often identify themselves as part of a sociological process, as well as an economic scheme, describing microfinance as
a movement that envisions a world in which low-income households have permanent access to a range of high quality financial services to finance their income-producing activities, build assets, stabilize consumption, and protect against risks. ("What is Microfinance?" 2009)
Microfinance rests on the idea that stratified societies have excluded certain portions of society from economic access, which has also led to greater social marginalization. Microfinance Institutions (MFIs), which refers to any organization (nonprofit or commercially oriented) that provides financial services for the poor, administer microfinance through various projects that often incorporate specific social goals with the economic goals, for example, women's empowerment is a common aspect of microfinance projects (Consultative Group to Assist the Poor, 2009). According to Sengupta and Aubuchon, in 2008, "it is estimated that anywhere from 1,000 to 2,500 microfinance institutions (MFIs) serve some 67.6 million clients in over 100 different countries" (2008, p. 9).
The Emergence of Microfinance
Microfinance has developed differently in various parts of the world. Almost everywhere, however, it emerged from a similar social problem: lack of financial access by the poor to traditional financial services. The traditional, commercial banking sector is built on a system of credit and collateral, neither of which the poorest sections of society can provide. Low-income communities were viewed as too high-risk for banks to offer loans, and the savings and investment products at commercial banks charged fees that were prohibitive to the poor with only a small amount of money to begin with. Many of the poorest clients operated within budgets that were far lower than any traditional banking system was designed to handle; poor clients that lived on a few dollars a day needed loans of amounts smaller than the banks offered. Leading further to this exclusion was a physical lack of bank branches in the poorest, most rural communities of the world. The net result of the system was that a large portion of the world's poor were virtually excluded from the commercial banking sectors (Sengupta & Aubuchon, 2008; Yunus, 1999). This exclusion is further compounded when comparing developed and developing nations. Access, or lack of access, to traditional financial products can be seen when comparing loan availability in the developed vs. developing world. The Consultative Group to Assist the Poor has reported that in developed nations 82% of adult individuals have received some sort of loan, while in developing nations only 22% of adult individuals have received loans (Consultative Group to Assist the Poor, 2009).
The Informal Economy
Prior to the intervention of microfinance, low-income communities operated largely within the informal economy. The 'informal economy' refers to unofficial economic activity; it is unregulated, unofficial, and un-taxed. It can operate as a discrete entity from the formal economy, although frequently the two overlap and exist side by side. While some government lending schemes have been successful in providing small-scale financial services to farmers and rural poor, more frequently, low-income communities developed systems of finance based on kinship, neighbors, or cooperative agreements. The most informal of the scenarios was to borrow money from family or neighbors when needed. This led to social strains when loans were not repaid and in very poor communities or times of economic downturn, there was often no option for borrowing from family as everyone was struggling. Since the loans were unregulated and often given under quite desperate situations, the lender held a high degree of power in the relationship, and the loan recipient was often forced to accept exorbitant interest or conditions on the loan.
Cooperative Credit Societies
Cooperative credit societies are the most structured of these options, and may be seen as precursors to microfinance. In a cooperative credit society, several members of a village or town would contribute a small amount of money to a mutual savings account, and when needed, would have the right to borrow from the account. While cooperative credit societies were successful in many regards, there were also problems with local power dynamics affecting the ability of some members to access the funds when needed. In addition, in cases of severe famine or crop failure, the collective pot was not big enough to cover the needs of all members at once. Even more problematic was the scenario in which the money was not repaid — not only was the entire community unable to replace the fund, the loan defaulters would be socially excluded, even physically banished or harmed, leaving their situation more desperate than prior to the loan (Collins, Murdoch, Rutherford & Ruthven, 2009; World Bank, 2006).
In Latin America, microfinance developed in the latter 20th century with the vision that it would serve as a bridge to the traditional banking sector. Much like previous "targeted lending" schematics, clients were sought from the "economically active poor," meaning poor people that already held a small amount of assets (usually an existing business) that just needed a small loan to help transition to an economic position compatible with traditional banking. From its very beginning in Latin America, microfinance was seen more as a business than a social movement (World Bank, 2006). In Asia, Africa, and more recently Europe, microfinance has instead developed around the rhetoric of poverty alleviation, rather than business. Muhammad Yunus, founder of one of the first MFIs in South Asia, Grameen Bank of Bangladesh, describes microfinance as a social revolution, and has argued that,
Poverty is not created by the poor. It is created by the structures of society and the policies pursued by society. Change the structure as we are doing in Bangladesh, and you will see that the poor change their own lives. Grameen's experience demonstrates that, given the support of financial capital, however small, the poor are fully capable of improving their lives. (Yunus, 1999, p. 205)
Thus, while two major styles of microfinance continue to function (social and business), in most of the developing world microfinance has become more popularly associated with the social project of poverty alleviation. Microfinance can be seen as a tool toward social change through the method of economic change.
While the goals of microfinance are broadly the same from institution to institution and location to location, the methods by which microfinance is accomplished vary greatly. Different MFIs have widely variant modes of...
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