Towards a plural history of microfinance

ABSTRACT

This article reviews different ways of telling the history of microfinance. We first contrast a mainstream and mostly positive narrative with a radical critique, illustrating differences with reference to India. We then argue for a more inductive and plural account, drawing on a set of doctoral research studies to illustrate variation in microfinance experience according to social relations among users, organisational culture of suppliers and the political economy of regulation. A global narrative of movement towards total financial inclusion will not do justice to this diversity, nor should the history of microfinance be dominated by one overarching global perspective.

RÉSUMÉ

Cet article analyse différentes façons de raconter l'histoire de la microfinance. Le récit dominant et généralement positif est d’abord comparé à celui de la critique radicale, leurs différences étant illustrées par le cas de l’Inde. Puis, en nous fondant sur un ensemble de thèses de doctorat pour illustrer l’hétérogénéité des expériences selon les rapports sociaux entre les usagers, la culture organisationnelle des fournisseurs et l’économie politique de la régulation, nous proposons une narration à la fois plus inductive et plurielle. Un discours unique et universel sur l’inclusion financière ne peut rendre justice à la diversité des expériences pas plus que l’histoire de la microfinance ne devrait être dominée par une seule perspective.

KEYWORDS:

• Microfinance
• financial inclusion
• pluralism
• social embeddedness
• India

Acknowledgements

Thanks to Geof Wood, Emeritus Professor of Development Studies at the University of Bath, a pioneering contributor to research into microfinance. Thanks also for comments from Supriya Garikapati, Althea Rivas, Berndt Balkenhol and two anonymous referees.

All the authors have at some time conducted research into microfinance as members of the Centre for Development Studies at the University of Bath. This writing of this paper coincides with its 40th Anniversary, including more than 25 years of research into microfinance and financial inclusion.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

James Copestake is Professor of International Development at the University of Bath. His interests include development finance and its evaluation, rural livelihoods and agrarian change, and the political economy of international development thinking, policy and practice.

Susan Johnson is Associate Professor in International Development and Director of the Centre for Development Studies at the University of Bath. Her research interests include microfinance and the embeddedness of the economy and markets in social relations.

Mateo Cabello is an independent consultant affiliated to Oxford Policy Management in Oxford, UK. He has extensive experience with financial sector policy development and political economy analysis, particularly in Latin America and across Africa.

Ruth Goodwin-Groen is Managing Director of the Better than Cash Alliance, a programme under the United Nations’ Capital Development Fund that facilitates digital payment systems.

Robin Gravesteijn works for the United Nations Capital Development Fund and is currently based in Thailand. He has extensive experience in social performance assessment and management, much of it with Oikocredit Microcredit Finance Fund in the Netherlands.

Julie Humberstone is an independent researcher based in Salt Lake City, Utah, USA.

Max Nino-Zarazua is an independent consultant specialising in financial inclusion and based in Bath, UK. He has extensive experience in the design and management of microfinance programmes, particularly in Mexico.

Matthew Titus is a microfinance specialist based in New Delhi, where he helped to establish and to manage the umbrella microfinance organisation Sa-Dhan.

Notes

1. K-Rep was established as a NGO in 1987.

2. See also recent World Bank policy prescriptions (2015a, 2015b) and Rhyne (2014).

3. This typology can itself be viewed as a “meta” mental model based on the inductive claim that it is useful to classify our collective understanding of microfinance into three coherent mental models. While we cite various authors for having elucidated particular points that are important to one or other of these models, we are not thereby implying that these authors’ views are fully congruent with a particular model or have remained unaltered over time. The mainstream model in the typology incorporates both “consensus” and “minimalist” views on credit subsidy policy, and the plural model encompasses the “alternative” view set out in Copestake (1996). In contrast, Gravesteijn (2014) gives more weight to differing normative positions by distinguishing between “business first”, “development first” and “social enterprise” models of microfinance.

4. The data on the sector mentioned above are from Sa-Dhan (2014, xvii). Note that 1 crore = 10 million. For broader historical reviews, see Mahajan, Gupta-Ramola, and Titus (2000) and Copestake (2013).

5. All banks are required to lend 40 per cent of their total assets to priority sectors, as defined by the RBI. In 2004 refinancing microfinance was classified as priority-sector lending, and this was retained when the list was significantly narrowed down a few years later. As economic growth in India accelerated, so bank balance sheets expanded and microfinance became a convenient channel for enabling banks to meet their priority-sector targets.

6. The then governor of the RBI sought to downplay this by emphasising India’s more paternalistic and cautious approach to bank regulation (Reddy 2009); a view somewhat undermined by the subsequent Andhra crisis. The current governor is more cautious in his assessment of microcredit, observing that “although it has promise on a small scale, history suggests that when scaled up, and especially when used as an instrument of government policy it will likely create significant problems” (Rajan 2010, 45).

7. ASA = Association for Social Advancement. BRAC currently does not represent an acronym but was known formerly as the Bangladesh Rehabilitation Assistance Committee and then as the Bangladesh Rural Advancement Committee. For a contrasting mainstream assessment of the Bangladesh experience see Khandker and Samad (2014).

8. The term “adverse incorporation” is explored in detail by Wood (2003). It serves as a reminder that inclusion (whether into hierarchies, markets or communities) does not necessarily have benign effects because it exposes those being integrated to various forms of coercion and exploitation. It is one thing to prefix “socially responsible” to “financial inclusion” as a goal (Malmberg 2014) but not so easy to ensure that doing so is meaningful.

9. This particular view (or mental model) of microfinance allows for aid and “smart” subsidies as long as they can be justified on “infant industry” grounds – that is, they are a transitional means to building financially self-sustaining financial services. It is also broad enough to accommodate minority interests in alternative models of microfinance – Washington being home to the World Council of Cooperative Credit Unions as well as CGAP.

10. This is not to deny that neoclassical economics can also assist in powerfully illustrating how institutions evolve to reinforce and sustain inequality. For example, credit bundling or inter-linkage with other markets both lowers screening, monitoring and enforcement costs and entrenches monopoly. Group lending with dynamic incentives in the form of escalating loan sizes operates as an “efficient” (that is, cheap to the lender) mechanism for screening out borrowers with insufficient debt-capacity by passing on the costs of such screening to the group (Conlin 1999).

11. Compartamos Banco is a Mexican bank and the largest microfinance bank in Latin America.

12. Organisational culture refers to the shared motivations, perceptions, norms and values of people in an organisation, and how they are institutionalised in its core operating practices (see also Cameron 2008, 431).

13. In both cases the impact assessment relied on a panel comprising three surveys with combined “treatment” and control-group samples of 900 clients for IMON and 1,500 for Bai Tushum. Qualitative data included 61 semi-structured interviews with MFI staff, reports, informal conversations and field notes. These examine how the MFI staff experienced the piloting process, including their prior assumptions about who their clients were, what they learned from doing the evaluation and how this learning translated into organisational actions.

14. They modified the product by reducing loan documentation requirements and involving family and local municipalities in the product delivery. Significant investments were made in human resources to start a business development services department offering various non-financial services.

15. This corroborates an extensive literature that emphasises the importance of intrinsic motivation (Osterloh and Frey 2000), internal commitment (Senge 2006) and endogenous drivers (Boettke and Coyne 2008) in bringing about institutional change. They all argue that performance management driven by internal factors will create more commitment to invest resources, to learn, to build capacity and to take ownership of performance (see also Denzau and North 1994, 8–10).

16. The Social Performance Taskforce Standards set up through CGAP has agreed 98 indicators for SPM (Social Performance Management), but these largely ignore implicit internal organisational culture on the grounds that they are too difficult to assess (SPTF 2012). As a result the standards appear to have become a technocratic “tick box exercise” conducted to comply with externally imposed standards, but lacking internal support.

17. ASSEFA stands for Association for Sarva Seva Farms and Crusade stands for Centre for Rural Systems and Development. Both are based in Chennai.

18. Fundación Covelo, http://fundacioncovelo.hn/.

19. Reddy (2009, 183) provides a relevant overview that emphasises India’s plural position: aiming “to ensure the inclusion of all segments in mainstream institutions while taking advantage of the flexibility of multiple models in delivering a wide range of financial services”.

20. See Copestake (2013) for a discussion of the different kinds of evidence available for India, and Duvendack et al. (2011) for a broader and more systematic review.

21. Big data and the benefits of hindsight may enable some empirical issues to be resolved with more confidence. To give a historical example, Burgess and Pande (2005) arguably did more to justify state activism in promoting rural bank branch expansion across India during the 1970s and 1980s than more detailed empirical studies were able to do at the time.