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Excerpt from “The Political Economy of Microfinance: Financializing Poverty”, Chapter 6, At the Crossroads of Development and Finance. (see other excerpts here)

Re-evaluating microfinance

Although definitive policy prescriptions go beyond the scope and intent of this book – as a political economy of microfinance, not a policy appraisal – I hope that it may contribute to a reconsideration of microfinance… Putting the current state of impact evidence together with my analysis of microfinance as financializing poverty begs the question: If we have no proof that microfinance reduces poverty, but we do know that it extracts labour power from the poor, why should we continue with microfinance? And since the research presented here draws into question the hopes placed in, and the policy attention devoted to, microfinance as a developmental tool, what practical lessons can be drawn?

Enthusiasts believe that, in the case of the microfinancial industry, the interests of capital owners, financial intermediaries and the global poor can be aligned. That the poor see a share of their labour power extracted by a new financial industry might well be justifiable (in terms of social policy), if measurable, demonstrable benefits to the poor were to systematically arise.[1] But the fact that, on the one hand, systematic benefits for the poor are difficult if not impossible to demonstrate after more than three decades (in studies whose designs aimed to find these benefits, and whose frame of comparison was that of doing nothing at all), while on the other hand, microfinance does demonstrably impose systematic costs on the poor, makes the arguments put forward in its defence look increasingly questionable.

Furthermore, instead of purging them, the microfinancial industry has come with many of the trappings of “normal” finance: excesses, crises, bailouts, overindebtedness, fraud, sale on false premises, collusion, predatory lending, abusive practices, irrationality, speculation and greed. These aspects of the credit relation constructed by microfinance should also be considered in any overall appraisal.

One perfectly logical option for policy-makers would be to discontinue their direct and indirect support (including financial support, logistical support and conducive policy changes) for microfinance systems, until the day their beneficence can be proven. Another logical possibility would be to regulate the sector in such a way as to ensure that the interests of investors and MFIs cannot supersede those of their clients. Yet the sector remains deeply averse to such regulation with teeth – such as interest rate caps or loan usage restrictions – and will likely strongly resist it by employing arguments that emphasize poor people’s right to choose between different credit sources and modalities which would be curtailed by regulation.

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Yesterday, the papal encyclical “Laudato Sii” was finally released. Environmentally engaged members of the Roman Catholic Church have awaited this day with cautious excitement since January 2014, when it was first announced that Pope Francis prepares such a document on “the ecology of mankind”. Over the last months, the event has also received remarkable attention in the wider public all over the globe.

The release of the encyclical exemplifies how religious actors can influence regulatory processes. Short-term, it may affect current political events with judgments about concrete political choices, influencing their (il)legitimacy. For instance, the papal encyclical calls the final document of the Conference of the United Nations on Sustainable Development in Rio de Janeiro in 2012, “ineffective”. Further,

the strategy of buying and selling “carbon credits” can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. […] it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors (Laudato Sii).

The release may also create a new momentum of debate and hope in the year of the 21st Conference of the Parties (COP21) to the United Nations Framework Convention on Climate Change (UNFCCC) and the 11th session of the Meeting of the Parties (CMP11) to the 1997 Kyoto Protocol in Paris during which parties aim for a new, legally binding agreement.

Long-term, it is a significant theological document meant to give direction to contemporary Catholicism and 1.2 billion Catholics around the world. Even if we cannot know how it will be interpreted in thirty years from now, its effect is likely to last longer than the next international climate agreement. But despite or especially because of its character, it enfolds its dynamic only with its reception by an audience willing and eager to engage with it. At least three factors have helped to turn the publication of the encyclical into a widely received event which is likely to deserve all the hope that is attached to it.

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Excerpt from “The Political Economy of Microfinance: Financializing Poverty”, Chapter 2, A Genealogy of Microfinance.

Two basic types of story are commonly told about the origins of modern microfinance. One is the underhistoricized version, whereby Dr Muhammad Yunus (and/or a handful of other pioneers) “invented” or “discovered” it: “The modern microfinance movement began in Bangladesh in 1977, as an experiment by economics professor Muhammad Yunus … Over the next three decades, the model he established became widely accepted and replicated in other countries as a way to fight poverty. Microfinance spread around the world and earned Yunus a Nobel Prize in 2006” (Wharton Business School 2011). In this and similar tales, before the 1970s, microfinance has no meaningful history.

The overhistoricized version meanwhile draws parallels and connections with various prior credit systems and financial interventions, portraying microfinance as part of a long lineage of poverty-alleviation programmes through credit. For instance, “modern microfinance did not arise de novo thirty-five years ago. The ideas within it are ancient, and their modern embodiments descend directly from older successes” (Roodman 2012a: 38). Here, today’s microfinance sector is all history, and merely the temporary pinnacle of a long, quasinatural evolution.

Both stories are unsatisfactory, not least because they downplay (or ignore) the political-economic context of microfinance; they overlook the “visible hand” of the state in its emergence; they fail to show how microfinance arose out of particular historical circumstances (neither as sudden discovery nor as revival of ancient ideas); above all they are blind to the insecurities, uncertainties and contingencies which shaped today’s microfinance sector. Microfinance was neither a sudden and miraculous discovery nor a historical necessity.

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Excerpt from “The Political Economy of Microfinance: Financializing Poverty”, Chapter 3, The Financialization of Poverty. (see other excerpts here)

Microfinance … performs both financial intermediation and financial innovation … it intermediates across time and space by creating entitlement relationships that reach from now into the future and from capital providers to borrowers. It innovates in generating new financial technologies which bring fresh borrowers into connection with capital-providing actors who can pursue not only financial goals, such as rapid turnover and growth of capital via above-market interest rates, but even quasi-charitable ideals.

The microfinance industry has developed (and continues to develop) technical means for channelling substantial quanta of capital directly to people living without collateral or assets at the bottom of the global income scale, technologies including group lending, social collateral, standardization and computerization, ratings of MFIs, and securitization of loan portfolios. The growth and stability of global microlending, at between 17 and 78 per cent annually during 2002–2009, and 10 per cent on average since then, both demonstrates the resulting system’s efficacy and indicates that capital-owners expect it to be durable.

The Cost of Microfinance

Surplus extraction through microfinance, 1995–2012

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The Book

Governance across borders: transnational fields and transversal themes. Leonhard Dobusch, Philip Mader and Sigrid Quack (eds.), 2013, epubli publishers.
June 2015
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