The wonders of microcredit

The idea of microcredit as a ‘magical solution to poverty’ gained momentum after the UN declared 2005 as the year of microfinance and, particularly, when the Nobel Peace Prize was jointly awarded to Dr Muhammad Yunus and the Grameen Bank.

Microfinance institutions innately started with a series of double bottom line objectives: achieving financial sustainability, reaching out to the poorest of the poor and targeting women clients. Later, providing credit to impoverished women proved to be a tool of extreme poverty alleviation and, eventually, the economic empowerment of women.

When viewed as a philosophical underpinning, the notion that access to financial resources ultimately leads to economic empowerment is the genesis of the provision of financial facilities to the poor – particularly poor women – as a development tool. The idea is based on historical evidence from the developing counties. Across the globe, a majority of the poor are women. As a result, the prioritised access of impoverished women to financial services and its control is considered to be an optimal policy agenda for gender mainstreaming.

Moreover, financial inclusion – a recently development phenomenon – as a universal development agenda, further increases the importance of financially marginalised communities to financial resources for equitable and sustainable development.

Does the provision of microcredit help ensure the economic empowerment of poor women? It has remained a question of central importance and a great policy intervention option. However, research studies show that mix results depend on the dimensions and indicators of empowerment and investigation techniques. Nevertheless some of the studies have reported deteriorating economic and social effects on impoverished women.

The conceptualisation of poverty as the ‘lack of access to financial resources’ signifies the importance of microcredit and recommends it as a logical solution of poverty. Nevertheless, the agreement between researchers and development agencies about microcredit as a ‘magical tool’ to curb poverty and ensure women’s empowerment is not universal.

The idea of microcredit as a solution of poverty and economic empowerment seems attractive and imperative. However, cultural resistance, the intrinsic characteristics of the poor and non-favourable neighbourhood effect can reduce the usefulness of microcredit to achieve its goals. As a result, targeting poverty-stricken women in microcredit programmes to allow them to participate in income-generating actions and ultimately uplift their social and economic status appears vague in empirical literature. Moreover, poverty and women’s empowerment are not monetary phenomena but have multiple dimensions. Targeting poverty and women’s empowerment via microcredit and other financial facilities may not be rigorous policy interventions to alleviate poverty effectively and ensure significant gender mainstreaming.

The potential of microcredit with relation to effective poverty alleviation can be questioned in many ways. First, poverty restricts the social, mental, economic and political choices of the poor. Conceptualising poverty as a monetary phenomenon undermines width and breadth of the issue and supplies only restricted and unidimensional solutions, which might not result in noticeable and favourable changes.

Second, the commercial solution for poverty through the provision of credit is astonishing. The idea that a person who is living below a minimum acceptable standard and also deprived of fundamental economic rights is helped through a commercial motive to uplift his socioeconomic conditions seems illogical. Third, poverty is a consequence, not a cause. People may face poverty but its reasons might be quite different. As a result, understanding microcredit as a solution to all forms of poverty might be misleading for obvious reasons.

Fourth, the scarcity of financial resources develops its own mindset. Those who are facing the problem of scarcity become over-conscious about fulfilling existing needs but mostly at the cost of losses to the future. This psychology results in excessive borrowing behaviour and the non-productive use of credit – which seems to be a hurdle to alleviating poverty and ensuring the productive use of credit.

Fifth, the emphasis on the formalisation of microfinance institutions (MFIs) deviate them from their original goal: the socioeconomic empowerment of the poor on a sustainable basis, which is technically known as mission drift. This phenomenon has shifted the attention of MFIs from social goals to financial goals while putting the cost of a full credit supply to the poor. This situation is obviously non-favourable for the poor and considered to be a big hurdle to ensure the productive use of credit for self-employment and income-generating activities. Sixth, higher interest charged from the poor is justified as it is based on the concept of poverty penalty. In fact, the profit motive and expensive financing architecture are the major reasons of the high operating cost of MFIs, not the decision to finance the poor.

A detailed assessment of the arguments and empirical literature reveals that poverty is neither unidirectional nor does it result from a lack of access to financial resources alone. Moreover, women’s empowerment via the provision of microcredit might not be targeted effectively. Furthermore, various technical, social, economic and institutional constraints restrict microcredit as a successful tool to curb poverty and promote women’s empowerment. This situation necessitates the conceptualisation of poverty and women’s empowerment via the wider socioeconomic, political and institutional scale. Moreover, a comprehensive, cohesive and non-commercial package will help to effectively alleviate poverty and promote women’s empowerment.

The writer is an assistant professor of
Economics at the Institute of
Management Sciences, Peshawar.

Email: zahoor.khan@imsciences.edu.pk