Excerpt from “The Political Economy of Microfinance: Financializing Poverty”, Introduction, A Framework for Engaging Microfinance.
Concepts and Euphemisms
There is often confusion about some terms that are commonly used in discussions about microfinance. Before the substantial chapters begin, an explanation of terminological choices which affect the analysis [in this book] is essential.
Microfinance vs. microcredit – There is no consensus definition of microfinance. We may stick to a condensed version of CGAP’s definition , following which microfinance is “financial services for poor and low-income people, offered by different types of service providers, most of which designate themselves as microfinance institutions”.
Yet some readers might be irritated by the usage of the term “microfinance” in a book which pays relatively little attention to services such as microsavings or microinsurance. Though I differentiate clearly between microfinance and microcredit in a historical frame – where “microcredit” was the dominant term during an earlier period, while thereafter “microfinance” fell into favour – the term “microfinance” is used otherwise throughout this book to refer to the entire system, even where my analysis focuses on the credit dimension.
Why? First, even though “microfinance” is a relatively recent term – Seibel (2005) claims to have coined it in 1990 – hardly anyone now speaks of “microcredit”, let alone “microenterprise finance”, which was used mainly in the 1990s. The fact that “microfinance” is the dominant term may already be reason enough to use it. But, second, (a) microinsurance and (b) microsavings are more hype than reality. They are practically nowhere standalone businesses, while microcredit often is. Credit was, and remains, the essential element of microfinance, as the most profitable and prominent element.
On (a), while summary figures are not obtainable, many have noted that the scope of microinsurance is terribly small (Kiviat 2009; Binswanger-Mkhize 2012). A major, if not predominant, part of microinsurance is simply credit insurance (often obligatorily) sold with loans, and not a separate service (cf. Wipf et al. 2012).
On (b), microsavings are not central to microfinance. The sums which poor people save are usually negligible compared with the effort of collecting and administering them, so MFIs borrow most of their capital from larger banks, or seek investors. MFIs can even borrow capital from funders such as Kiva free of charge, or obtain fully free capital through grants from donors such as Oxfam, and therefore they routinely neglect collecting deposits. Among those MFIs in which commercial MIVs invest, the share of savings has decreased over the past years. When MFIs do take savings, these are often tied to credit, and clients are not allowed to save without having a loan – again, credit remains the essential element. Worse yet, these savings are often forced savings in that loans are not fully paid out, and a part is withheld as collateral, which is registered on MFIs’ books as “client savings” (cf. Sinclair 2012: 35–36, 101–102).
All MFIs, even those that are ostensibly focused on savings such as “SafeSave” in Bangladesh and “MicroSave” in India, give loans. For the fiscal year of 2012, out of 1,263 MFIs globally, 579 MFIs reported no client savings at all (another 255 had less than $1 million), while 1,255 reported issuing loans (and 978 had lent more than $1 million). Total microsavings globally came to $86.5 billion (the percentage of voluntary and forced savings was not disclosed), yet lending came to $100.7 billion. However, of these savings, 33.5 per cent were held by Harbin Bank in China and another 14.9 per cent by the majority state-owned bank BRI (Indonesia) – hardly typical microfinance institutions. Only 172 MFIs globally (out of 1,263) report larger amounts of savings than loans. [These figures are based on the 2013 MIX global dataset.]
Credit should be given where credit is due, and this book studies the activities of an industry which calls itself microfinance but which began with credit, grew via credit, still predominantly does credit and earns its almost all of its profits on credit. For most clients the face of microfinance is credit. Therefore, speaking of “microfinance” while focusing on microcredit is wholly justified.
Microfinance institution – Here the word “institution” is not used in the sociological sense. Just as banks are often called “financial institutions”, the entities which offer microloans and (to a lesser extent) other small-volume financial services are commonly referred to as “institutions”, which is a misnomer, since in fact they are organizations. The common use of the shorthand “MFI” will make the term more easily distinguishable here from the sociological sense of “institution”, which I also employ. I adhere to this terminology for simplicity’s sake, particularly because usage of the rarer term “microfinance organization” could create confusion by implying “organizations of MFIs” (which exist as well) while offering no theoretical or empirical gain.
Sustainability – A common euphemism in the microfinance literature is “sustainable microfinance”. The word “sustainable” is used for its positive connotations to stymie criticism, while in fact the sustainability referred to is “financial sustainability”, which means “profitability”. CGAP even reveals the misappropriation of this word in its online FAQ (“What is microfinance?”):
Is the microfinance industry sustainable? Is the microfinance industry financially sustainable – is it profitable after making adjustments for subsidies not likely to continue in the future? Most MFIs are still unprofitable, especially if one includes the many small MFIs that do not report to the international databases. (CGAP 2012) 
Of course, there is nothing at all “unsustainable” per se about subsidies if they come from a dependable source. But it is central to the mainstream microfinance ideology to regard anything that fails to (at least) cover costs – including the market cost of capital, adjusted for risk – as “unsustainable”. In the name of calling a spade a spade, this book rejects the misappropriation of “sustainability” and therefore speaks plainly of “profitability” where microfinance’s capacity to earn financial returns is concerned; in other cases, “sustainability” is used in the sense of being able to uphold.
Poverty and ‘the poor’ – Perhaps the most troubled term here is “poor”. Categorizing people as “poor” brushes over all distinctions. Poverty is not an identity but a multidimensional deprivation. However, to analytically categorize some people as poor and others as rich in itself should not amount to denying their individual identities, patronizing them or otherwise invalidating their agency. Rather, I find that the opposite – to rhetorically beautify the circumstances of structurally disadvantaged people with terms such as “microentrepreneurs” or “bottom of the pyramid”, which microfinance enthusiasts often prefer – is facetious and harmful.
Refusing the category “poor” outright while promoting new euphemisms denies something fundamental: there is such a thing as material poverty today, and it is a problem. The category “poor” and the analysis of “poverty” help to more sharply render the contours of the extreme economic and social inequalities which many people rightly find objectionable. As the theoretical framing of Chapter 3 explains, poverty as understood here is primarily a social relation between people which can be constituted differently and which, this book argues, is being financialized via microfinance.
Mader, Philip: The Political Economy of Microfinance: Financializing Poverty. London: Palgrave-Macmillan, June 2015.
Footnotes for this blog entry:
1. Oddly, CGAP’s definition of microfinance constantly changes. The one cited here was used until mid-2014; the most recent one can be found here.
2. Here, again, CGAP’s views have changed. This question and answer have disappeared from its FAQ page.