Escolar Documentos
Profissional Documentos
Cultura Documentos
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There are also various loan products designed for different needs and characteristics of clients, such as group (peer) loans (business or consumer), individual
loans (business or consumer), agricultural loans (peer or individual). However,
between the individual and group lending, the latter product is considered by
many to be a milestone in microfinance history. In this form of lending, selfselected groups of 310 people join together and apply for a loan. In addition to
fulfilling individual credit liabilities, each member also shares some degree of
responsibility for other members repayments, varying from legal guarantees to
the loss of future access to credit.
Microfinance Clients
It is important to note that microfinance operates at the intersection of three
sets of actors. At the micro level, is the poor who need these financial services.
Typical microfinance clients are self-employed entrepreneurs. In rural areas they
are small farmers and others engaged in small income-generating activities, such
as food processing and trade. In urban areas they are street vendors, shopkeepers, service providers, artisans etc. (Helms 2006).
Many microfinance programs have been specifically targeting women as their
clients since the beginning of 1990s. There are several reasons for that. First,
many believe women are among the poorest and most vulnerable in society and
therefore the segment of the population that would benefit the most from microfinance. Others believe that investing in women contributes to greater economic growth and development in society. This is based on the evidence in the
literature that an increase in womens resources result in higher wellbeing for
the household, especially the children. Another motivation for targeting women
is their generally good record on repayment. It is generally reported that women
have some of the best repayment rates among microfinance clients and are the
most reliable borrowers, contributing significantly to the financial viability of microfinance institutions. Finally, many NGOs use microfinance as an opportunity
to mobilize women around gender issues. They consider microfinance as an
entry point in the context of wider strategy for womens economic and social
empowerment (Mayoux 2005). As a result, reaching and empowering women has
become one of the official goals of the Microcredit Summit Campaign since
1997. It is, however, important to understand that not all microfinance institutions target women. Especially in the new developing areas like Central Asia,
there is an attempt to widen the clientele for microcredit and create equal
opportunities for women and men alike.
Microfinance Institutions
At the meso level is the microfinance institutions that provide financial services
to the poor. These institutions range from highly formalized institutions to the
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FIG. 1. The Spectrum of Microfinance providers. Note: ROSCAs = rotating savings and credit associations; ASCAs = accumulating savings and credit associations; CVECAs = Caisses Villageoises dEpargne
et de Credit Autogerees; FSAs = financial service associations; SHGs = self-help groups; NGOs = nongovernmental organizations; NBFI = nonbank financial institution. Source: Helms 2006.
informal sector. Institutions that belong to the formal sector, such as international development banks, commercial banks, state banks, rural banks, microfinance banks, fall under banking regulations and oversight. Semi-informal sector
institutions include credit unions, specialized NGOs, village banks and cooperatives. Informal MFIs include saving and credit associations, non-registered
self-help groups, individual moneylenders etc. (see Figure 1). NGOs, non-bank
financial institutions, commercial banks that specialize in microfinance, and
microfinance programs in commercial banks account for about 18% of the
roughly US$750 million total combined savings and loans accounts. Financial
cooperatives make up 5% and government-owned financial institutions dominate
the scene with about three-quarters of the accounts (Helms 2006). Aside from
the differences in their legal status, organizational structure and mission, these
institutions also vary in terms of the sources of funding for their operations.
Sources can be internal (retained earnings, shareholder capital, deposits) or
external (grants, donations, soft loans and or commercial loans) or both (UNDP
2005:19).
Microfinance has over the years evolved significantly from informal to formal
providers. Traditional moneylenders, deposit collectors, pawnbrokers, and rotating savings and credit associations (ROSCAs) have been convenient and fast for
the poor with low-cost operations and easy access but some of these informal
institutions have proved to be insecure, expensive (as in the case of moneylenders) or rigid and limited in operations. For instance, ROSCAs require regular
deposits of identical amounts from its clients and each individuals money is tied
up until it is their turn to access the funds. They can also be highly risky since
there are no formal mechanisms of preventing and compensating for others failure to contribute. Similarly, self-help groups (SHGs) as in India provide financial
services to very remote areas and very poor rural women. Usually consisting of
1020 people, they start by collecting members savings and then use these savings to gain access to bank loans. Just like ROSCAs, however, they are inflexible.
Their loan terms do not correspond to clients cash flows or product demands
(Helms 2006:40).
Credit unions and credit cooperatives are more formal as they are often
grouped into federations at the regional and national level. These member-based
organizations typically rely on their members savings as the main sources of
funds but some also receive funding from NGOs and commercial banks. These
530
financial cooperatives are owned and controlled by their members and are usually nonprofit. Members often share some common bond in terms of where they
live, work etc. Despite being widely used, these types of member-based microfinance institutions face many governance and financial challenges. Oftentimes
their management is not sufficiently monitored, leading to high risks of fraud
and corruption. Moreover, their operations are limited to members and especially the smaller ones offer very limited products (Helms 2006:42).
Out of all the microfinance institutions, the non-governmental organizations
have been the true pioneers of microfinance since the mid 1980s. Some are
formed with the sole purpose of providing microfinance, others offer it in addition to other services. Some NGOs are locally created and sustained; others are
founded and supported by funds from international donors. The best-known
microfinance NGOs include the Bangladesh Rural Advancement Committee
(BRAC), Grameen Bank in Bangladesh, Foundation for International Community Assistance (FINCA), and CARE International. While some of these organizations are increasingly behaving commercial to achieve sustainability and
independence from donors, others are continuing to be socially driven and are
pushing to reach poorer and more vulnerable clients in remote areas. Even
though NGOs have led the way in the development of microfinance, they face a
number of constraints, the two most important being the high-cost operations
and the limited range of services that they can offer. For instance, legally NGOs
cannot mobilize savings as banks and other intermediaries that are supervised by
banking authorities can (Helms 2006:45).
Finally, the formal financial institutions are relative newcomers to the world of
microfinance but ironically hold the most potential in terms of making financial
systems all inclusive. They often have widespread branch networks, and they
already possess the infrastructure to offer a range of financial services. Some government-owned banks were specifically founded with the clear mission of bringing development to rural areas. For example, Bank Rakayat Indonesia (BRI)s
microbanking division is the largest and one of the best performing microfinance institutions in the world. Similarly, the postal networks in the Middle East
and North Africa serve a large number of clients and play an important role in
the financial system (Helms 2006:50). However, the challenge with many government owned financial institutions is that they are not very reliable financial institutions. They are usually politically motivated; they depend on large subsidies;
they have weak loan collection mechanisms; and they do not adequately respond
to the demands of poor clients. The private commercial banks and nonbank
financial institutions (NBFIs) that specialize in microfinance, on the other hand,
typically provide more sound financial services. For instance, Compartamos is
the largest dedicated MFI in Latin America, Share is one of the more prominent
MFIs in India, and BancoSol in Bolivia is the first private commercial bank in
the world dedicated exclusively to microfinance (Helms 2006:51, 52). These institutions generate their own resources and invest in technology and innovation
that can bring financial services closer to poor people. For instance, they extend
access to financial services through cell phones or working through agents like
the town general store or telephone kiosk (Helms 2006:54).
Governments
Finally, it is important to note that at the macro level, the government plays an
important role in terms of defining and setting up the legislative and policy
framework (macroeconomic stability, liberalized interest rates, and appropriate
banking regulations and supervisory practices) to sustain the financial services
targeted to the poor. A good policy environment encourages a range of financial
service providers to coexist and compete to offer higher-quality and lower-cost
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services to large numbers of poor clients. Governments can also deliver financial
services directly and indirectly by disbursing credit to preferred groups or channeling resources to financial institutions through wholesale arrangements
(Helms 2006:76). They can also proactively promote inclusion by offering fiscal
incentives or requiring financial institutions to serve the poor. The interesting
and unique aspect of microfinance, then, is its ability to bring together the public, private and external actors for the provision of economic and social development and the realization of an economic right of the poor: that is the right to
access to credit. It offers a new mechanism for linking rights obligations to nonstate actors as well as to a rethinking of the role of the state in terms of safeguarding these rights.
Effects of Microfinance on Development
Economic and Social Impact
The economic and social effects of micro-financing are extensively studied. In a
wide range of policy analyses and scholarly works, micro-financing has been
shown to be positively correlated with economic development by reducing poverty, improving welfare and allowing poor people to protect, diversify, and
increase their sources of income and assets (Pitt and Khandker 1996; Hulme
and Mosley 1996; Sebstad and Cohen 1999; Zaman 2000; Remenyi and Quinones
2000; Morduch and Haley 2001; Barnes 2001).4 By creating jobs through selfemployment and new businesses, micro-financing promotes a more productive
use of capital and has a direct and positive impact on local economies.
Micro-financing is also shown to impact social development and quality of life
by promoting environmental sustainability, improving family expenditures on education, thereby contributing to improving the human capacity of poor families,
and reducing family expenditures on health care through improvements in housing, water, and sanitation and ensuring food security (Khandker 1998; Barnes
2001; Chen and Snodgrass 2001; Chowdhury and Bhuiya 2001; Simanowitz 2002;
Littlefield et al. 2003). Through income creation opportunities, microfinance can
help fight social exclusion by integrating traditionally marginalized groups into
the economic system. Social empowerment, increased self-esteem and dignity are
considered among the most beneficial outcomes of microfinance activities.
Along this line, there is also substantial literature on the relationship between
micro-financing and gender equality (Goetz and Sengupta 1996; Hashemi, Schuler, and Riley 1996; Cheston and Kuhn 2002; Pitt, Khandker, and Cartwright
2003). Despite some disagreements as to the actual effects of micro-financing
programs in various social contexts5, it is generally believed that sustainable microfinance services can lead to womens individual economic empowerment by
stimulating womens micro-enterprise development and leading to increased
income under womens control. It is assumed that womens control over these
resources will then lead to increased well-being (health, nutrition, literacy, housing) and reduced mortality rates for women and their children (Schuler and
Hashemi 1994; MkNelly and Dunford 1998; Pitt and Khandker 1998; Chowdhury
and Bhuiya 2001; Pitt et al. 2003).
4
Almost all the studies focusing on the poverty reducing effects of microfinance argue that microfinance is not
the sole solution to reducing poverty. Financial servicesespecially credit which can turn into a debt easilyare
not usually appropriate for everyone. Many note that microfinance should not be seen as a substitute for investment
in basic education, health and infrastructure.
5
More rigorous research methods and wider regional comparative observations have shown that microfinance
does not always automatically benefit women. Many studies draw attention to the dynamics of gender relations in
which microfinance programs are embedded (Goetz and Sengupta 1996; Rogaly 1996; Buckley 1996; Mayoux 1998,
2001; Rahman 1999; Johnson 2005).
532
Despite this extensive literature on the economic and social affects of microfinance, very little attention has been given to its political implications. To the
extent that political empowerment by microfinance has been analyzed at all, the
focus has been almost exclusively from the perspective of gender (Hashemi et al.
1996; Mayaoux 1999; Sebstad and Cohen 2000; Cheston and Kuhn 2002; Simanowitz 2002; Pitt et al. 2003; Johnson 2005) and mostly within the context of family
planning and in terms of self-esteem, status and gender activism in community.6
Political Impact
I argue in this paper that microcredit can have the effect of increasing the political empowerment of individuals in a society. The World Bank defines empowerment as the process of increasing the assets and capabilities of individuals or
groups to make purposive choices and to transform those choices into desired
actions and outcomes (Alsop and Heinsohn 2005). Empowerment, then, is
about change, choice, and power. Political empowerment entails the ability to
make political choices and the freedom to act on it. The politically empowered
can better influence the course of their lives and the public decisions which
affect them and their communities. Individually empowered citizens can have a
significant impact on the development of their societies.
Political empowerment can be measured in terms of two indicators: political
awareness and political participation. Political awareness measures the level of
information on the publicly provided goods and services available to citizens, on
the performance of the elected officials in providing for these goods and services, and on the rights and tools available to citizens to hold their officials
accountable and to request goods and services from them. Essentially, political
awareness depends on access to information.
The second indicator of political empowerment is participation. Poor people
and other traditionally excluded groups are empowered not only when they are
aware of issues, problems and remedies, but also when they are included in
agenda setting and decision making regarding the state of their communities
and their well being. Voting usually comes to mind first, but voting turnouts may
understate the extent to which the poor can truly participate in public decision
making. Other indicators such as participation in community organizations, campaigning, contacting, petitioning, protesting, litigating, unionizing etc. also assess
how actively citizens engage with the processes of public decision making.
I hypothesize that microcredit can primarily strengthen political empowerment
through two mechanisms. First, if microcredit improves the economic and social
conditions of the poor, the poors political empowerment will consequently rise
due to an increase in their self-efficacy. Second, in addition to increased self efficacy, microcredit can also increase the social capital in a society, which then
improves individuals access to political information and capacity to participate
in politics. In the next section, I lay out the theoretical framework in understanding the connections between microfinance, self-efficacy, social capital, and
political empowerment (see Figure 2).
From Microfinance to Political Empowerment
Self Efficacy
Socioeconomic status plays a key role in the development of perceived self-efficacy.
Self-efficacy is typically defined as the belief in ones own efforts to control desired
6
For instance Hashemi et al. (1996) used eight indicators to test empowerment: womens economic contribution to the household; mobility; ability to make small purchases; ability to make large purchases; ownership of productive assets; involvement in major decisions; freedom from family domination; and political awareness.
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533
Social Capital
Microcredit can also increase political empowerment by creating social capital in
society. I argue that this is especially a function of group lending in microcredit.
While microcredit can be loaned to individuals, group lending is also very common in developing countries. In this form of lending, self-selected groups of
310 people join together and apply for a loan. In areas of the world where
bowling leagues are far less common, such associations may be one of the few
ways of generating social capital which can then provide the basis for political
empowerment.
Despite a clear lack of consensus on its meaning, the most common definition
of social capital focuses on the features of social organization, such as trust,
norms, and networks that can improve the efficiency of society by facilitating
coordinated actions (Putnam 1993:167). Social capital is explicitly communal in
that it resides not in individuals but in the relations between individuals (Coleman 1988). Citizens are able to trust others in their community, according to
Putnam, because of the horizontal networks of generalized reciprocity within
which their actions are embedded. Repeated interaction through participation in
these associations enables personal trust to form and then to develop into social
trust and allows individual norms to transition into shared norms. Networks
534
formed through regular interaction give each participant a vision and identity of
being a member of a larger community. Once these central components of social
capital are formed, they are transferable from one setting in a community to
another setting in the same community. The key feature of social capital in
this definition is that it facilitates coordination and cooperation for the mutual
benefit of the members of the association as well as for the society as a whole
(Putnam 1993).
There is a burgeoning literature that focuses on the positive role social capital
plays in generating economic development. Social capital for instance has been
shown to be valuable for reducing the cost of imperfect information and solving
collective action problems for community development: such as forest management, distribution of irrigation water and reduction of crime etc.7 It is considered
an especially powerful asset because it is a public good which benefits all members of a communitythose who contribute to it and those who do not (Coleman
1990). Given this positive relationship, scholars and policymakers are increasingly
trying to understand how social capital can be generated in the first place. In this
context, the potential role of microfinance institutions and the process of microfinance itself in generating social capital become especially pertinent.
Group Lending and Social Capital
What mechanisms of microfinance, then, can generate trust, norms, and networks that form the social capital? In the literature there seems to be an increasing interest in the ability of micro loans to create social capital that can aid
community building (Larance 1998; Van Bastelaer 1999; Seibel 2000). The focus
of most of these studies has been almost exclusively on the experience of group
lending initiated by the Grameen Bank in Bangladesh. The structure and nature
of group lending is what makes social capital stock accumulate over time. Group
lending operates by using peer pressurepressure exerted by fellow-borrowers
or by members of the borrowers communityto repay. In the absence of physical collateral, the main motive behind this peer pressure, or social collateral, is
to guarantee repayment since all members are jointly liable for the loan (Mosley,
Olejarova, and Alexeeva 2004). It is a cost-effective way of allocating credit
because it transfers the cost and burden of information gathering from the lender to the group as the group screens the individuals who want to join, engages
in peer monitoring and exerts peer pressure (Berger 1989; Montgomery 1996;
Van Bastelaer 1999). According to Yunus, group membership smoothes out the
erratic patterns of individual members, making each member more reliable in
the process (Yunus 2003:62).
In addition, the group becomes a support mechanism for members in need.
Social collateral created by microfinance links individuals, enterprises and households to each other through two related channels: information and reputation
(Mayaoux 1999). The transfer of information helps to establish a common belief
and a code of behavior upon which individual and institutional reputations are
built. Reputations then become the basis of further interaction (Sebstad, Barnes,
and Chen 1995). Hence, peer selection, peer monitoring, peer enforcement,
and peer support all help build trust among borrowers within groups and even
between different groups as they are required to interact with each other
through regular center meetings.8 Membership in the Bank enhances the
7
For various publications and reports on how social capital contributes to development see World Bank (social
capital website): www.worldbank.org/poverty/scapital
8
Groups in Bangladesh form a center, a federation of up to 8 groups in a village that meets weekly with a bank
worker. The chairperson of the center, who is elected by all members to manage the centers affairs, helps resolve
any problems that a group is unable to handle on its own.
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radius of trust and allows people, who are not related to one another, to cooperate to achieve a common goal- access to credit (Dowla 2006:34).
Trust has been shown to emerge also vertically in the case of the Grameen
Bank experiment. In the context of the severe disconnect between the poor and
the traditional financial institutions, the Grameen bank believed and propagated
that the poor are credit worthy and that they can be trusted (Dowla 2006). In its
early years, the banks founder, Muhammad Yunus, and his staff worked hard to
convince both the commercial and state bankers to provide loans for the poor
and the poor to take the loans to set up their individual businesses. Building the
poors trust was a long and arduous process. But over time they were successful
in earning the trust of both sides. According to Asif Dowla (2006), the Grameen
Banks trust in its borrowers created a realization that the borrowers have to
reciprocate by repaying the loans on time. This reciprocity created a reputation
for trustworthiness of the poor and had a positive spillover effect whereby other
institutions were able to benefit from this generalized trust. In a way, this particular microfinance institution was able not only to connect borrowers to one
another through credit allocation, but also to serve as a bridge between the commercial and state institutions on one side and the poor on the other (Dowla
2006).
According to some studies, in terms of norm creation that provided social
cohesion, the Grameen Bank has also been successful. The Grameen-type norms,
routines and rituals such as regular attendance in meetings, insistence on timely
repayment, and transparency in financial transactions have all helped in changing credit norms and culture in countries like Bangladesh (Seibel 2000). Yunus
argues that a norm like credit discipline is meant to boost the borrowers sense
of self-reliance, pride, and confidence (Yunus 2003:137). Lisa Young Larance
(1998) further argues that the Grameen Bank center-meeting norms have helped
build individual recognition, shared identity, produce feelings of empowerment
among members, increase exchange among people, and even reduce conflict
among village members now that they know each other and their extended families. In performing the rituals of membership, individuals also developed a
strong identity with the Grameen Bank. The norms of Grameen Bank membership seem(ed) to provide members with structure to their lives that enables this
type of cooperation (Larance 1998:3).
As for the norm of transparency, Dowla (2006) notes that by holding public
meetings, the Bank provides a corruption-free environment.
In these meetings a group chairperson, a position that regularly rotates to prevent distrust, collects repayment from members and hands them over to the
bank worker who makes the entry in the ledger book. The bank worker disburses
credit in center meeting. This precludes the possibility of misappropriation of
funds by the staff and bestows a sense of ownership to the members. (Dowla
2006:20)
During annual workshops of center leaders of the Grameen Bank, the borrowers have also established their own set of norms known as the Sixteen Decisions,
among which are the pledges to advance unity, courage, hard work, to educate
children, not to commit any injustice, to collectively undertake larger investments for higher incomes, to always be ready to help each other, and to take
536
part in all social activities collectively (Yunus 2003:136). These norms have not
only created a sense of identity and cohesion among borrowers but also reflected
their mutual awareness and aspirations to improve the quality of life in their
communities. As with all public goods, the greater community also benefited
from the development of these norms.
Microfinance, as particularly depicted in the Grameen Bank experience, has
been shown to also contribute to social capital by forming productive horizontal
networks beyond immediate family and kinship groups in a community. According
to Putnam, in order for the shared identity to transform into social capital, members must have the regular opportunity to gather and interact (Putnam 1993).
Along that line, H. Todd (1996) and Larance (1998) show how regularly held center meetings expand the social and information networks of the members to facilitate economic and non-economic transactions. One of Larances respondents, for
instance, indicates that because of these networks, she learned of and enrolled in
the governments mass education program(Larance 1998:13). During center
meetings, the members share marketing information as well a range of topics such
as the best practices on cow fattening, livestock rearing, poultry farming, fish farming etc. The members also use the networks to exchange scarce resources (clothes,
jewelry, tools etc.), swap labor and childcare services, and to meet social obligations
in the village (Larance 1998). Moreover, the networks have eased mobility for
women who were secluded within their neighborhoods where they often interact
only with their husbands kin (Dowla 2006:30).
Social Capital and Political Empowerment
How can the social capital created by microfinance translate into political
empowerment? Despite the obvious and well-studied link in political science
between social capital and democratic development, very little attention has
been given within the microfinance community and among development
studies to the potential role micro-financing may play in fostering political
empowerment by way of creating social capital in poor societies.9 There exists
plenty of aspiration rhetoric to create social capital and thus a more open
society by means of microfinance, but little systematic analysis of what kind of
political empowerment microfinance institutions have in practice been able to
create.
Even though social capital was first introduced by Coleman (1998) and Bourdieu (1983), Putnam was the first to link the concept to the study of democracy.
Putnam argues that an abundant stock of social capital produces a dense civil
society, which in turn has been widely argued to be a key to making democracy
work.10 Social capital can help with democratic development in several ways.
First of all, it provides a space for the creation and dissemination of discourse
critical of the present government (Paxton 2002:257). Group ties create a protective environment to voice discontent without any sanctions. Some studies show
that individuals are more likely to challenge authority in the presence of friends,
colleagues etc. (Paxton 2002). Secondly, high levels of social capital provide
resources for the organization and mobilization of oppositional movements.
9
To my knowledge, Mosley et al. (2004) is the only study to date that has looked at this relationship in some
detail.
10
In Making Democracy Work, Robert Putnam (1993) conducts an in-depth analysis of civic community, institutional performance, and democracy in Italy. By analyzing the development of identical new regional institutions in
Italy, this longitudinal study was able to determine the extent to which such institutions were shaped by the social
context within which they operate (Putnam 1993:8). He argues that in the more civic northern and central
regions, horizontal social relationships were more prevalent. In sharp contrast to this, vertical social relationships
characterize Italys southern regions, where politics is organized hierarchically, leading to patronclient relationships.
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537
Established networks act as sites for bloc recruitment to social movements that
oppose a regime (Paxton 2002). They can better monitor and motivate their
members and facilitate collective action, which can produce real advantages for
their members. Moreover, norms and routines produced within and across these
networks can create feelings of duty, increase a sense of interdependence with
others, and produce a habit of participation. Finally, social trust helps increase
tolerance, open-mindedness, and respect for others and allows individual citizens
to willingly relinquish political power to those with opposing views. Hence,
through participation in trusting associations, individuals may experience
changes in their values, preferences, and capacity to act (Paxton 2002:259),
Higher levels of social capital and a robust civil society may reduce the ability of
the state to directly oppress citizens and provide space for the growth of organized opposition to a nondemocratic regime.
The connections that Putnam makes between social capital and democratic
development can arguably be extended to the relationship between social capital
and political empowerment (see Figure 2). While not the same thing, there certainly is close affinity between the concept of political empowerment and democracy. In societies where citizens are empowered, governments can be more
effectively held to account, constitutionally guaranteed rights can be enforced,
and individuals demands can be better represented within the policy process.
Consequently these make the chances of democratic change or consolidation
more likely. In a democracy compared to a non-democracy, individuals are typically considered to have more power and capacity to make choices and to transform those choices into desired actions.
In the microfinance literature, one can find some anectodal and narrative evidence of this link between social capital created by microfinance and political
empowerment. For instance, Yunus (2003) argues that the trust and social networks created by microfinance have become vehicles for political action as group
members became increasingly linked economically and socially and began to
identify their interests with that of their communal groups. He writes, for
instance, that Grameen borrowers enthusiastically embraced the idea of exercising their democratic rights in the national election of 1991 in Bangladesh. He
reports that
the members of many centers paraded to the voting booths with banners
reminding everyone that they were from a Grameen Bank center and were voting
as a block. In some cases, local politicians asked if they could address Grameen
center meetings In 1992, some four hundred Grameen borrowers were elected
to union councils, and in 1996, Grameen borrowers led the way to an almost
unthinkable feat- more women voted in the national election than men, which
helped to nearly wipe a political party that had taken positions against womens
rights out of parliament. In addition over 1,750 Grameen members (1,485
female and 268 male) and 1,570 members of Grameen borrowers families were
elected to local offices in 1997. Two Grameen male borrowers and fifty-seven
male family members were voted in as chiefs of local bodies. These successful
candidates constituted 6 percent of the total elected representatives in all the
local bodies in the country. These astonishing results proved to us that once
Grameen borrowers grew in self-esteem they would readily express their opinions. (Yunus 2003: 196)
Similarly, Cheston and Kuhn (2002) discuss how female clients of Fund
Opportunity Russia (FORA) organized to campaign for democracy during Russian elections; how female clients of Opportunity Microfinance Bank in the Phillippines have gained leadership experience and confidence in their banks and
have gone on to be elected as leaders of their local governments; and how 89%
of Working Womens Forum in India had taken up civic action for pressing
538
problems in their neighborhoods. Hashemi et al. (1996) also found that participation in microfinance programs like the Bangladesh Rural Advancement Committee (BRAC) had strong effect on womens participation in political
campaigns and public protests in Bangladesh.
While few microfinance organizations explicitly seek political mobilization or
structure their programs in such a way as to deliberately nurture collective
action,11 participation in lending groups may have the effect of increasing their
access to information and awareness of political issues, actors, processes and
channels of influence. By contributing to clients knowledge and self-confidence,
increasing their level of trust in each other as well as in society, widening their
social networks, and increasing their ability for collective action microfinance
programs may give their clients the tools and skills they need to participate more
effectively in the decisions and policies that affect their lives. Informed citizens
are better equipped to take advantage of opportunities, access services, exercise
their rights, negotiate effectively, and hold state and non-state actors accountable. As some of these Grameen experiences demonstrate, microfinance can
have the potential to go far beyond credit delivery. It has the potential to change
the quality of its members lives and that of the community by creating and cultivating a form of social capital.
Some Caveats
The theoretical links that I draw above between microcredit, self efficacy, social
capital, and political empowerment are based on assumptions that are widely
contested and debated in the literature. For example, there are a number of
scholars who argue that a womans access to microcredit does not necessarily
lead to an improvement in her socioeconomic wellbeing and then to an increase
in her self efficacy because in many contexts men take the loans from women or
women choose to invest the loans in mens activities.12 To the extent that the
loans are used by women, some studies have found that income increases for
women as a result of these loans have been very marginal, and in some cases
negative (Hulme and Montgomery 1994; Montgomery, Bhattacharya, and Hulme
1996). In some urban areas, the rapid expansion of microfinance programs has
contributed to market saturation in female activities and hence declining profits
(Mayoux 2005). And, to the extent that women do initiate income generating
activity, they are often encouraged to take up enterprises, such as sweater knitting, that do not disrupt practices of isolation and seclusion within their households (Mayaoux 1995; Goetz and Sengupta 1996). A few studies have also shown
that small increases in womens income come at the cost of heavier work load
and increased stress and health consequences for women. There is some evidence that microcredit and income-earning take women away from other social
and political activities (Mayoux 2005). Furthermore, some have found that without alternative care for children and the elderly, womens commitment to outside work has had adverse effects on the household. For instance, Mayoux and
Johnson (1997) find that in numerous cases daughters are withdrawn from
school to assist their mothers, thereby continuing and entrenching the gender
inequalities in society for years to come.
11
Some MFIs actually consider themselves socially responsible and divert some of their revenues to community
building efforts. For instance, according to Zhanna Zhakupova, her organizationthe Asian Credit Fund in Kazakhstanhas various community projects to help improve the lives of their clients and their families. Authors interview
in Almaty, June 19, 2006.
12
Studies have found that on average women borrowers surrender nearly 40% of their control over the investment decisions they make to their male partners (Armendariz and Roome 2008) and that over 90% of the returns
women realize from their investments are handled by their husbands (Goetz and Sengupta 1996).
Oksan Bayulgen
539
Microfinance has also been found to increase tensions between men and
women, leading to more hardship on women in society. The fact that some microfinance programs exclude men prove to be counterproductive as men feel
increasingly threatened in their role as primary breadwinners within the family
(Mayaoux 1999; Rahman 2001; Armendariz and Roome 2008). Some anectodal
evidence has suggested that divorce rates and possibilities for divorce and violence in the family have increased for women since they started receiving the
loans (Mayoux 2005).
There are also a number of scholars who question the positive role of microfinance in creating social capital. Kabeer (1998), for instance, argues that people
who are in entrepreneurial competition with each other do not have a natural
affinity to form into groups together. Credit is considered finite, making cooperation among competitors especially difficult.13 Rankin (2002) points out how
richer members of microfinance groups may, in time of economic stress, expel
poorer members who they fear may not be able to repay loans. Her examples of
microcredit experience from Nepal and other ethnographic research in South
Asia demonstrate that groups also tend to exclude members based on caste and
ethnic identities. Similarly, Montgomery (1996) demonstrates in detail some of
the exclusionary pressures BRACs Rural Development Program in Bangladesh
exerts on the poorer and more vulnerable members. Montgomery (1996) and
Todd (1996) further point out that norms like mutual support, trust, reciprocity
may not form over time because credit is viewed as a privilege that each member
fiercely protects as an individual right. Monitoring one anothers consumption
and repayment patterns can generate an environment of hostility and coercion
that atomizes rather than unites the clients. Because credit also means debt, microcredit groups may put severe strains on existing networks if repayment
becomes a problem.
Finally, one needs to be cautious about assuming that social capital would
automatically lead to political empowerment. Optimism in the positive effects of
social capital ignores recent debates in the literature about its potential drawbacks. Critics argue that social networks that provide people with access to markets through reputation and repeated transactions can exclude new entrants
(Collier 1998). In addition, community pressure may be harmful to individuals
as traditions can stifle individual growth and creativity and members who do not
comply with norms and their families can be ridiculed or ousted from the community. Furthermore, communities with dense social capital, particularly if organized along ethnic or religious lines, can be harmful to each other and to
society as a whole.14 What this means is that in microcredit programs, if the
social capital that is created is exclusionary and coercive, then group loans could
in fact entrench rather than challenge some already existing modes of inequality
and subordination in society. Instead of increasing political empowerment, this
type of social capital that is created by microcredit may perpetuate the powerlessness of the poor and especially the marginalization of poor women.
Future Research on Microfinance
I have outlined some of the potential theoretical contributions and drawbacks of
microfinance for political empowerment. More research has to be conducted in
the future to empirically test and verify the hypothetical links discussed in this
analysis. Future research could benefit substantially from large impact surveys
that compare microcredit clients to non-clients in societies where microcredit
13
Authors interview with Olga Tomilova (CGAP) Almaty, June 20, 2006.
For further overview and critique of original uses of the concept by Coleman and Putnam, see Evans (1996);
Foley and Edwards (1999); Harris and de Renzio (1997); Fukuyama (2002); and Paxton (2002).
14
540
programs are employed. In such surveys, the sample could further be divided
among group and individual clients to test the different effects group and individual loans may possibly have on political empowerment.
A typical survey on microcredit clients should generally consist of four parts.
In the first part, the researcher should ask questions that reveal whether or not
the socioeconomic conditions and the self efficacy of clients have improved since
they gained access to micro-loans. The second part of the questionnaire should
be designed to find out whether or not social capital (trust, norms, and networks) is actually being produced by group loans. Some scholars assert that
whether or not microfinance creates social capital depends on the existence of
social capital prior to the initiation of lending programs. Studying group lending
in various parts of the world, Berenbach and Guzman (1992), Fuglesang and
Chandler (1993), Mosley et al. (2004) conclude that group lending is generally
successful because of the positive preexisting relationships among borrowers.
They assert that mutual support is inherent in lending group self-selection and
that only in places where social capital already is strong can group-lending programs be successful and have a substantial effect on community building. For
instance, according to Pitt and Khandker (1996) these programs have been successful in Bangladesh, Cameroon, Malawi, South Korea, and Malaysia but have
shown mixed success in India, Egypt, Venezuela, Kenya, and Lesotho. The survey
questions should be designed in a way to elucidate the social links and level of
trust that existed in these societies before microcredit groups were formed.
A third set of questions needs to address the type of social capital that is generated from microcredit. To distinguish between negative and positive externalities of social capital (that are addressed above), some scholars are now
emphasizing the differences between bonding and bridging social capital.
According to Putnam (2000), bonding social capital results from ties to people who are similar in terms of their demographic characteristics, such as family
members, close friends, work colleagues etc. Bridging social capital on the
other hand refers to bonds among people who do not share many of these characteristics (Putnam 2000). As such societies that have more bridging social capital than bonding social capital are considered more inclusive and civic minded.
In recent years scholars have added a third conceptual classification of social
capitallinking social capitalto the mix. This type of social capital refers to
ones ties to people in positions of authority, such as representatives of public
(such as the police, political parties) and private institutions (Grootaert et al.
2004). In societies where there is abundant linking social capital, trust and cooperation is enhanced vertically between individuals and institutions. These classifications help clarify and refine the possible affects of social capital in different
contexts. Hence, in drawing the links between microfinance, social capital, and
political empowerment, one needs to design questions that distinguish among
different types of social capital and be aware of their varying effects.
Finally, the last part of the survey should have a battery of questions regarding
whether or not the clients feel more politically empowered since they started
receiving microloans. Here questions measuring the improvements in the degree
of political awareness and political participation of clients would provide strong
indicators for political empowerment. The analysis once again needs to be sensitive to the context in which these programs operate. Does microcredit have positive effects on political empowerment only in contexts where there are already
opportunities and incentives to participate in politics? Many scholars in the literature question the direction of causality between social capital and democratic
development and insist that the direction may actually need to be reversed (Fox
1996; Levi 1996; Offe 1999; Paxton 2002). In other words, they argue that social
capital can only be generated if democratic institutions permit the formation of
voluntary organizations and networks and if individuals are allowed to participate
Oksan Bayulgen
541
542
Caucasus
Central Asia
No. of active
borrowers
Borrower Pop.
1565 years old
99
376
203,747,957
438,841,627
186,356
371,924
1.70%
1.10%
new businesses.17 Moreover, most small businesses in the region had neither the
track record of borrowing nor the collateral required by commercial banks. In
this way, microfinance filled an important void in these transitioning economies.
MFIs have been able to fulfill the financing needs of many of the self-employed
as well as the micro and small enterprises because they focus[ed] their loan
analysis on clients character, cash flow and commitment to repay the proposed
loan, rather than on collateral or business experience (Forster et al. 2003:11).
Despite the fact that micro-financing arrived in Central Asia and the Caucasus
only during the mid 1990s and that it has limited current outreach- reaching
1.7% of all borrowers between the ages of 1565 in the Caucasus and 1.1% in
Central Asia (see Table 1)it is a fast growing market. In Central Asia, for
instance, microfinance institutions have an annual portfolio growth rate of about
40% and a client growth rate of about 2030% (World Bank, Agriculture and
Rural Development Department 2004). CAC lacks much of the supporting institutional architecture of higher income regions but still has some of the most
profitable institutions and deepest outreach among the post-communist states.
MFIs in this region have low average loan balance per borrowerUS$345 and
$447 in Caucasus and Central Asia respectivelywhich suggests that they are
serving the poorest segments of the population (MIX [Microfinance Information
Exchange] 2004).
There is a significant potential for microfinance to grow in this region. The
demand for microfinance far outstrips the supply. In Kazakhstan, for instance,
the demand has been estimated to include between 140,000 and 220,000 clients
with a total value of the microfinance market exceeding US$ 800 million. By
2004, reports indicate that around only 50,000 people received credits (UNDP
2005). Similarly, as of June 2004, USAID estimated that Georgian microfinance
institutions have also reached less than one third of the potential clients and
serve less than 10% of the effective loan demand (Pytkowska and Gelednidze
2005).
In addition to the economic and social costs associated with the transition
from communism, the resilience of authoritarianism is another reason why this
region is appropriate for studying the nexus between microfinance and political
empowerment. Despite the transition to democracy in the beginning of 1990s,
these states are still captive to strong authoritarian or pseudo democratic leaders
with few incentives to introduce real democratic reform. After more than a decade of stable authoritarianism, many students of this region acknowledge that
the impetus for democratic change needs to come from below and perhaps as a
result of changing economic interests and balance of power in society (Bayulgen
2005). Colton (1995) for instance, argues that political interests will emerge as
economic transformation spawns property rights and a civil society, in which
members have pecuniary and psychic stakes in what the government does
17
When the transition started in 1990, mainstream banks had almost no experience using key elements of financial intermediation. The transition economies had to create a functioning financial system from scratch. Almost all
these countries were confronted with financial crises during the 1990s when bad lending practices led to the insolvency of many banks.
Oksan Bayulgen
543
(Colton 1995:749). In this context, microfinance may be one of the most viable
and effective long-term tools to generate much-needed social capital that then
may empower individuals to take part in the important decisions regarding their
future and that of their country.
Some Limitations and Expectations
A study that analyzes the effects of microfinance on the political empowerment
of CAC region needs to take into account several limitations. First, microfinance
sector in this part of the world is only a decade old and still has limited outreach
in these societies. Hence, one will most likely find only nascent political effects
of microfinance at this point. The time lag, however, does not make this exercise
futile. An assessment of the trends that have emerged in the last decade can give
us an idea as to where the region is headed, and whether or not alternative
sources of power are being created in these weak societies. At a time when students of this region are trying to understand why authoritarianism has persisted
for so long in this part of the world, a study like this can help us understand the
conditions necessary for these societies to break away from authoritarian regimes
and build democratic norms of trust and participation from scratch.
Second, in analyzing the effects of microfinance, one needs to refrain from
assuming that microfinance can by itself solve the democratic deficit facing these
societies today. Thus, instead of claiming sole causality, it needs to be stressed
that microfinance acts as a catalyst for building and strengthening the social capital which is one of the conditions necessary for political empowerment.18 Moreover, it would be wrong to assume that microfinance automatically has positive
political effects. As the literature also clearly shows the level of social trust and
network opportunities that existed prior to the microfinance programs as well as
the policy environment created by governments to encourage or discourage the
expansion of these services to various segments of the population all matter in
understanding the contribution of microfinance to this region. For this reason,
one should not assume microfinance experiences to be uniform across the CAC
region.
Finally, such a study needs to emphasize the role governments play in the
microfinance sector of these countries. Traditionally, the allocation of credit
has been a powerful tool for governments to spread patronage. In this way,
credit oftentimes serves political rather than developmental purposes, especially in countries where state ownership and control of the financial system
is strong. In the CAC region, initially governments reactions to microfinance
have been mixed. At first, given its proven track-record of alleviating poverty,
governments in the region gave it the status of a magic wand to solve various social problems.19 They established micro-credit programs and even
owned some MFIs themselves. Over time, however, due to inexperience and
political interference, most of these institutions proved to be inefficient and
ineffective.20 As a result some of these governments came to the realization
that external funds, expertise, and private initiative are needed to get the microfinance industry up to its feet. At the same time, however, these governments have been reluctant to grant some of the MFIs, i.e., the non-bank
NGOs and non-financial institutions, the status and legality that the conventional banks enjoyed in the financial system. One reason for this has been
the resistance and lobbying efforts of commercial banks to prevent too much
18
Authors interviews with Zhanna Zhakupova (Asian Credit Fund) June 19, 2006; Olga Tomilova (CGAP) June
20, 2006.
19
Authors interview with Olga Tomilova (CGAP).
20
Authors interview with Andrey Rudetskih (UNDP) Almaty June 23, 2006.
544
competition in the financial sector. In fact, some argue that this resistance
partly explains, especially in Kazakhstan, the current restrictions on the microfinance legislation.21 Another reason is most likely the general distrust of
NGOs. Considering the latest colored and flower revolutions in this region
and the role some NGOs played in these movements, it is no surprise that
such institutionsespecially those that have financial powerare viewed with
great suspicion and apprehension.
Conversely, non-state MFIs are also concerned about state intervention in the
sector. As one analyst put it, the fear is that the governments might embrace microfinance too much, causing distortions in the way the market works through
government subsidies, low interest rates, loan forgiveness etc.22 The irony and
the reality, however, is that for the microfinance industry to prosper and to have
a positive effect on political empowerment, the cooperation of all these actors is
crucial. A strong microfinance industry can neither exist with sole government
ownership nor can it exist without any government involvement. Microfinance
cannot develop in a vacuum. It needs a stable macro environment to develop
and prosper.23
Conclusion
In this paper I surveyed the literature to demonstrate the theoretical connections
that can be drawn between microfinance, self-efficacy, social capital, and political
empowerment. It is obviously a first cut into a fruitful area of research. I have
also delineated the general contours of future research and tried to make the
case that the CAC region would provide an appropriate venue to analyze the
political effects of microfinance.
Despite the vast literature on the economic and social affects of micro-financing in poor countries, little attention has been given to the political implications
of micro-financing. At a time when the broader development implications of
micro-financing are being recognizedthanks, in part, to the Nobel Prize Award
to Yunus and the Grameen Bankpolitical scientists have an opportunity to contribute to and learn from this financial instrument. Research in this area will not
only fill an obvious gap in the literature, but it will also help microfinance institutions, donor communities and governments to better understand the wider
political implications of microfinance and the methods by which to measure
them. The reason why Yunus and the Grameen Bank received the Nobel Peace
Prize has everything to do with the economic, social as well as political transformative power of microfinance. Political science can contribute to the literature
on microfinance by drawing attention to the political implications of this powerful development tool.
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