The Democratization of Capital? Microfinance and Its Discontents
By Ananya Roy
Microfinance is once again in the global headlines. In the last few months this “magic bullet” of poverty alleviation has been on the front pages of newspapers. But these headline stories of microfinance are deeply contradictory. Here for example are three recent snapshots of microfinance.
One. Microfinance, the provision of financial services to the poor, is the most cost-effective tool of poverty alleviation and gender empowerment around. Recently, Nicholas Kristof has argued that microfinance may be much more effective in combating “terror” than “bullets and drones.” In Pakistan, Kristof credits microfinance NGOs with having created jobs and educational opportunities” and thereby “draining the swamps that breed terrorists” (Kristof 2010).
Two. Microfinance is a new frontier of global capital yielding millions of dollars in profit for venture capitalists and other investors. Earlier this year, India’s largest microfinance organization, SKS Microfinance, completed its first initial public offering. Since then it has become a “stock market darling.” Vinod Khosla, the Silicon Valley billionaire venture capitalist who is one of its investors lauded profit-making microfinance as a sustainable enterprise, noting that he is “relatively negative on most NGOs and their effectiveness” (Bajaj 2010).
Three. Microfinance is a system of exploitative and predatory lending that traps the poor in cycles of indebtedness. A recent New York Times headline story reports that in India the microfinance industry faces high rates of default and is on the brink of collapse. As with all microfinance stories, this one too comes with photographs of poor women, except that this time they are not proudly displaying the fruits of their entrepreneurialism or nurturing their children; this time they are fleeing debt and lamenting the loss of assets, dignity, and even life. “Indian officials fear that microfinance could become India’s version of the subprime mortgage debacle … a reckless, grow-at-any-cost strategy” (Polgreen and Bajaj 2010).
Let me put forward the provocation that all three snapshots, although at odds with one another, are true depictions of microfinance. The contradictory character of microfinance is captured in its key logic: the democratization of capital.
The Two Faces of Democratized Capital
As a development technology, microfinance first emerged as an antidote to financial exclusion. Experimenting with the social management of financial risk, microfinance NGOs were able to include the poor in financial systems, thereby ending decades of redlining. In this sense, microfinance marks the democratization of capital. It would be a mistake to underestimate the revolutionary capacity of such forms of financial inclusion. Microfinance, in many contexts, operates as the only viable alternative to the elite capture of political and economic institutions, as the thorn in the side of predatory moneylenders, and as an opportunity for the landless poor to build assets.
“But today microfinance is much more than an anti-poverty tool.”
But today microfinance is much more than an anti-poverty tool. It is also a global industry and indeed an “asset class” for global finance capital. Under the watchful eye of the World Bank based Consultative Group to Assist the Poor (CGAP), the microfinance industry has increasingly turned to the rules and norms of global finance to formulate standards of scale and sustainability. Concerned with portfolio quality rather than poverty, with return on equity rather than social equity, microfinance now bears the promise of commercial expansion. In a piece titled “Profit and Poverty: Why it Matters,” Michael Chu (2007), a well-known interlocutor in the world of microfinance, makes the case for this approach: “No longer funds-constrained, the number of poor people reached and the volume of capital disbursed has exploded.” Chu’s vision is an instance of “bottom billion capitalism,” the emergent efforts to mine what C.K. Prahalad (2004) famously labeled the “fortune at the bottom of the pyramid.” This too is the democratization of capital, for now the poor are treated as financial consumers, now the walls between formal finance and finance for the poor are broken down.
“Like microfinance, subprime markets serve as a remedy to the redlining of the poor. But the poor are included on terms that differ substantially than those enjoyed by “prime” borrowers.”
To better understand the inherent contradictions of the democratization of capital it is necessary to return to the case of subprime markets. As Elvin Wyly and colleagues (2008) pithily state: “Exclusionary denial and inclusionary segmentation into subprime credit are two sides of the same coin.” The analogy between microfinance and subprime lending is no coincidence. Like microfinance, subprime markets serve as a remedy to the redlining of the poor. But the poor are included on terms that differ substantially than those enjoyed by “prime” borrowers. In the case of microfinance, these subprime terms range from the high interest rates charged by commercialized microfinance providers to the elaborate social conditionalities imposed by microfinance NGOs. Put simply, the democratization of capital carries within it the inherent risk of subprime discrimination.
But in the wake of the global financial crisis, a new set of questions has arisen about the subprime character of microfinance. Although recent reports on microfinance defaults in India have sounded a note of alarm, other microfinance narratives have been highly optimistic. Muhammad Yunus, a legendary force in microfinance, has insisted that microfinance as a “sub sub sub prime” sector can finally restore trust to forms of lending (Parker 2008). His claim seems to suggest that microfinance may contain the key to the mystery of subprime markets. Indeed, during the financial crisis, as traditional commercial banking suffered, so microfinance was repeatedly lauded for its resilience. CGAP reports show that the assets of the top 10 microfinance global investment funds grew by 32% in 2008, making “microfinance one of the few asset classes with a positive return” that year (Reille and Glisovic-Mezieres 2009). The argument about microfinance’s resilience is not new. In 2003, Stanley Fischer, then vice-president of Citigroup, reminisced about the East Asian financial crisis of the previous decade: “A large Indonesian bank, suffered nearly 100% default rates in its corporate portfolio, but only 2% in its microfinance portfolio” (New York Times 2003).
What accounts for the “resilience” of microfinance? It is the microfinance cliché that “the poor always pay back,” the title of a recent book on the Grameen Bank (Dowla and Barua 2006). In other words, as a development technology, microfinance has perfected the management of risk. The calculative capacity of microfinance is less a valuation of the labor of the poor or of the assets of the poor and more an assessment of the capacity to enact repayment. This is the speculative arbitrage that underlies microfinance, a calculation about the habits of the poor and the guarantees of financial discipline provided by microfinance institutions. Such forms of financial discipline are of course deeply gendered Microfinance, as one microfinance economist put it, works through the “mystical and transcendental practice” of “monetizing the promise of a poor woman who has never before touched a coin.” And it can do so, as yet another microfinance observer put it, “in places where Americans are scared to drink the water.”
Microfinance then is not the primitive past of modern finance capital; rather it is the face of the future. In their prescient book, Financial Derivatives and the Globalization of Risk, LiPuma and Lee (2004) chart a new economy that is characterized by circulation rather than production and that derives value from risk. Of course it is the management of risk that lies at the heart of microfinance and its habits of resilience. In such an economy, finance capital – what is known as high finance – will itself have to turn to the tricks and techniques of microfinance. After all it is microfinance that promises to renew what anthropologist Janet Roitman (2005) has called the “productivity of debt.” In my work, I characterize such transformations and transactions as “poverty capital,” the conversion of poverty into global circuits of capital.
“But there is also a version of microfinance that is concerned with the large-scale, nonprofit delivery of financial services to the poor. The most successful versions of such programs seem to exist in Bangladesh.”
But there is another side to microfinance, an untold story that must be told in times of persistent and extreme poverty. The global headlines continue to be about two oversimplified stories: one of a profit-making microfinance industry that is haunted by the specter of financial predation and the other of dispersed, do-good microfinance that is haunted by the specter of failed poverty panaceas. But there is also a version of microfinance that is concerned with the large-scale, nonprofit delivery of financial services to the poor. The most successful versions of such programs seem to exist in Bangladesh and it is important to take a closer look at them. For this it is necessary to give some thought to what is being called the “Bangladesh paradox.”
In the last decade, Bangladesh, often dismissed as a “basket case,” and plagued by both natural disasters and political instability, has seen significant improvements in human development and drops in income poverty. Hailed as the “Bangladesh paradox,” such successes have been partly attributed to an ensemble of microfinance NGOs, the largest of which are the Grameen Bank, BRAC, and ASA. Taken together these massive organizations overshadow the Bangladeshi state and also render irrelevant the work of traditional foreign donors such as the World Bank.
There is a history waiting to be written about the emergence of such institutional forms. We know, for example, that each of these homegrown organizations emerged in the 1970s, during a unique historical conjuncture of postcolonial nation-building. Some like BRAC started out as relief and rehabilitation organizations; others like ASA were committed to direct, radical action. All three were eventually transformed into what is best conceptualized as pro-poor service delivery organizations. It would be a mistake to interpret such institutional forms as examples of grassroots development or as community-based organizations. Although homegrown, these are top-down, hierarchical bureaucracies committed to building scale and size. It is thus that Fazle Abed, the founder of BRAC notes: “If you want to do significant work, you have to be large. Otherwise we’d be tinkering around on the periphery” (Armstrong 2008). Together they serve hundreds of millions of Bangladesh’s rural poor. The traditional vocabulary – of NGOs, civil society, nonprofits, community development – fails us here. What seems to be at hand is a novel institutional form of pro-poor service delivery that is taking place outside the gambit of both the state and donor-led development. Well known for their microfinance programs, these organizations also deserve recognition for their innovations in building pro-poor services and infrastructure.
Bangladesh’s microfinance organizations explicitly reject the commercial impulses of the global microfinance industry. But there is much more to them than microfinance. From Grameen’s emphasis on “credit as a human right” to ASA’s pride in its hyper-efficient delivery of microfinance products, microfinance is the “public transcript” of development in Bangladesh. However, I argue that a “hidden transcript” is at work and that the explanation for the Bangladesh paradox may not lie in microfinance but rather in a set of social protection programs that build assets for the poor and build infrastructure for the rural economy. One of these is compulsory savings.
“While much of the hype in microfinance has been focused on microloans, it turns out that one of the most vital financial services for the poor is savings.”
While much of the hype in microfinance has been focused on microloans, it turns out that one of the most vital financial services for the poor is savings. In Bangladesh, the Grameen Bank and other microfinance organizations not only give out microloans but also attach such loans to obligatory savings. Anthropologist Arjun Appadurai (2001) has described poverty as the “tyranny of emergency.” If this is the case, then the crucial role of savings in helping the poor cushion risk and vulnerability and manage lean seasons of hunger and deprivation is obvious. Savings also help microfinance organizations manage risk. Indeed, compulsory savings rather than joint liability may explain the forms of financial engineering that lie behind the Grameen Bank mantra, “the poor always pay back.”
However, Bangladesh’s pro-poor service delivery organizations do much more than simply provide financial services. In most cases their microfinance programs, be it loans or savings, are embedded in the creation of human development infrastructure. For example, BRAC actively initiates and manages “value chain projects.” These include pro-poor infrastructure such as health clinics and schools at the village level. The numbers are staggering, with BRAC covering an estimated “110 million people with services in microfinance, health, education, social development, human rights and legal services, and microenterprise support” (Microfinance Gateway 2008). In addition, BRAC runs value chain projects related to economic development. From poultry hatcheries to dairy plants, these projects link the microenterprises of the poor to national and global markets. They seek to transform subsistence economies into those that can generate economic value. Such an approach is worth highlighting for it flies in the face of the much-touted microfinance doctrines of self-help. BRAC’s value chain interventions pose the question: what good can it do to enable the poor to launch microenterprises if the entire economy is decidedly anti-poor?
“Persistent and extreme poverty is a structural condition, shaped by long histories of disenfranchisement, dispossession, and disempowerment. It is rooted in hierarchies of class, gender, race, and ethnicity.”
There is much talk in the world of microfinance of the entrepreneurial poor. It is a magical idea: of the world’s “bottom billion” populated by micro-entrepreneurs who are able to, with just the touch of a microloan, miraculously launch a billion enterprises. But is this really the world of poverty? After all, persistent and extreme poverty is a structural condition, shaped by long histories of disenfranchisement, dispossession, and disempowerment. It is rooted in hierarchies of class, gender, race, and ethnicity. In the parts of South Asia where I do research, it is marked by back-breaking labor undertaken under conditions that approximate feudalism. No magical capitalism of bottom billion entrepreneurs is available here. Amidst this sobering reality, in Bangladesh, the microfinance organizations have once again stepped far beyond the “public transcript” of microfinance to take up the task of “asset-ing the poor.” I borrow that phrase from the important work of Imran Matin, director of BRAC’s Research and Evaluation Division, who draws attention to strategies of poverty alleviation that ensure social protection rather than those that promote economic entrepreneurship (Matin and Begum 2002). The latter may be possible, but in contexts of dire poverty it is the former that requires urgent attention. Innovative asset-building programs abound in Bangladesh, such as the Grameen Bank’s housing loans, notable for the fact that through such loans women borrowers come to hold rights to homestead land. Assets are of course not only economic but also political. Fazle Abed and Imran Matin (2007) thus argue that the “greatest power of microfinance lies in the process through which it is provided, in “new forms of engagements, relations, and capacities” that they call “process capital.” One radical interpretation of microfinance in Bangladesh then is that it is a process of the political organization of the landless poor to build power and mitigate structures of feudal inequality. Such an approach is a far cry from the aspirations of the global microfinance industry and its conceptualization of the bottom billion as a lucrative, emergent market of financial consumers.
In conclusion let me make two general points about microfinance. The first is to state that no generalizations are possible about microfinance, about its capacity to yield profit, about its capacity to fight poverty, or to fight terrorism. Paradoxes abound. As a counterpoint to the contrast that Nicholas Kristof is eager to draw between militancy and microfinance, it is worth noting that in the Middle East, Hezbollah is the region’s largest provider of microloans. It is necessary to study diverse models of microfinance and to look beyond the public transcripts to understand actual practices.
Second, the subprime crisis serves as a cautionary note for the aspirations of the global microfinance industry. Will the efforts to transform microfinance into an asset class fuel a whirl of financial speculation, predatory lending, and ever-expanding debt? But even more troubling is the myopia of this industry. By relying on the rules and norms of commercial banking, it threatens to strip microfinance of its pro-poor innovations. The lesson to be learned from Bangladesh is that finance for the poor cannot be conflated with high finance.
One crucial piece of pro-poor models of finance is subsidies. In the world of development, the term “subsidies” has come to be a dirty word. This, I believe, is a mistake. Against the Grameen Bank’s protestations, various scholars have shown that its microfinance programs rely on soft money procured at concessional rates. Jonathan Morduch (1999) estimates that without such subsidies the Grameen Bank would charge much higher interest rates. According to his calculations, in the late 1990s, such subsidies worked out to $15 per member per year. Similarly, BRAC’s asset-building and value chain projects also rely on subsidies. One of its most widely celebrated programs, “opportunity ladders,” which serves the ultra poor and combines government food aid with skills training and compulsory savings, require subsidies of about $135 per beneficiary per year (Hashemi and Rosenberg 2006). Such is the nature of pro-poor finance.
I end on this note of subsidies because it points to the deep misconceptions that shape current debates about microfinance. CGAP, for example, has written off the “early pioneer organizations” of microfinance – “the nonprofit socially motivated nongovernmental organizations” – as outmoded and outflanked by “financially sound, professional organizations” that are a “fully integrated part” of “mainstream financial systems” (Littlefield and Rosenberg 2004). Similarly, Pierre Omidyar, founder of eBay and now microfinance enthusiast, insists that “there is a difference between undemanding capital – contributed by donors who expect nothing in return – and demanding capital, which requires transparency of financial reporting and an appropriate reward for risk” (Bruck 2006). “Demanding capital,” it is implied will ultimately serve the poor well. But will such forms of demanding capital demand services and infrastructure for the poor? Not necessarily. And of course, high finance, lauded as a model for sustainable microfinance, is itself highly dependent on subsidies. This too is a lesson from the recent financial crisis. Robert Reich (2008) has rightly called the Wall Street bailouts “socialized capitalism” – “socialism for Wall Street, free markets for the rest of us.”
I leave readers then with a question: why are we so willing to extend generous forms of state help to the richest segments of our global society while leaving the poorest to fend with miserly extensions of self help? The story of the Bangladesh paradox reminds us of the urgent need to build robust systems of pro-poor services and infrastructure for the world’s poor. Whether or not we call this microfinance may matter little.
About the author
Ananya Roy is Professor of City and Regional Planning at the University of California, Berkeley. She also serves as the Education Director of the Blum Center for Developing Economies and in that capacity is the founding chair of the undergraduate program in Global Poverty and Practice. Her most recent book is Poverty Capital: Microfinance and the Making of Development (Routledge, 2010).
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