The need for a longer (but not too long) history of microfinance

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.

The more popular usual, underhistoricized account of microfinance as a unique and revolutionary phenomenon purges – perhaps deliberately – the political, social and institutional developments which crafted it, focusing attention instead on the activities of a few “great men” and prominent organizations. At the other extreme, the lesser-known, overhistoricized account adorns modern microfinance with a long and distinguished array of forefathers which it hardly deserves, by vastly overstating the importance of a few distant and tenuous ties.

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I seek a long(er) history of microfinance, neither over- nor underhistoricized … Today’s microfinance, which transfigured from a developmental policy tool into a financial system, is distinctly a product of late 20th-century capitalism – this precise phenomenon could hardly have emerged in other circumstances – albeit one that has deeper historical origins. I therefore present [in this book The Political Economy of Microfinance: Financializing Poverty] an account of microfinance which maps the uncertainties, insecurities, conjunctures and lineages which made today’s microfinance what it is. This institutionalist genealogy implies more than a simple acknowledgement that “institutions matter” and “history matters” – about which the classical theorists, including Weber, Durkheim, Simmel and especially Marx, left no doubt –; it implies that the processes that give birth to powerful ideas and generate political constellations are often long and gradual.

Institutional change is often characterized by “incremental but consequential change”, which only slowly and uncertainly builds and solidifies new institutional arrangements. Djelic and Quack (2003: 309) propose the image of a stalactite growing sedimentarily from small drops. … This “process-oriented analysis that is characteristic of historical institutionalism” (Thelen 1999: 400) helps to challenge the generic microfinance narrative of “how an idea changed the world” – since ideas neither arise randomly nor autoactively change the world – and shows instead how agency and context made today’s microfinance possible.

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An earnest search for the origins of microfinance should begin with local predecessors, not historically and geographically remote antecedents. Already the British had hoped to reduce poverty and bring moral improvement to South Asia with credit. Cooperative credit was brought to India, Bangladesh, Pakistan and Burma as an instrument to pacify unrest and transform rural economic relations. Nearly a century before Yunus, this introduction of credit as an instrument of social policy started the heritage on which Yunus drew, consciously or unconsciously.

In what remains an appropriate statement today, Sir Malcolm Darling, a scholar and administrator in British India, observed that “the bulk of the cultivators of the Punjab are born in debt, live in debt, and die in debt” (Darling 1925: 279). … In Darling’s time, cooperative credit already existed throughout British India on a fairly large scale; the Co-operative Credit Societies Act was passed by the UK Parliament for India as early as 1904. As Turnell (2005) explains, experiments had begun in the late 19th century; and cooperative credit societies, based on a partial adoption of the Raiffeisen model from Germany, were introduced throughout British India and Burma over the first three decades of the 20th century. These were a “transplant of a German idea, with English characteristics, slightly modified to suit conditions in British India” (Turnell 2005: 16).

The cooperative movement was aided significantly by state funding, but simultaneously avowed free-market principles and praised freedom from state interference [much like today’s microfinance sector]. Henry W. Wolff, a prominent cooperatives promoter, specifically applauded the Indian credit societies for their independence and their capitalist ethos: “Whatever else the Indian experience may teach, in the matter of co-operative credit it serves, in the foremost place, as a splendid justification of the avoidance of State aid, as yielding ten times better results than anything that State aid could accomplish” (Wolff 1910: 520).

In what may with hindsight appear to be ironical, Wolff even portrayed British India’s cooperatives as superior to their European counterparts:

Compare the eagerness and the good practice of the non-State aided Indian rayats with the listless indifference and sluggish backwardness of the French and Italian peasantry now being urged by government officers to array themselves in State-fed banks against their will! … And, large as the results of State-assisted agricultural co-operation in Germany and Austria have been – where people are systematically drilled into obeying State orders – they can still not compare in degree with what has been accomplished, in little more than four brief years, in India. (Wolff 1910: 520–521)

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Microfinance’s institutionalization has neither been a pure “revolution from the South” (as proponents often claim) nor a one-way “top-down” imposition by the North. Rather, a complex hybrid of colonial heritage, grassroots self-help idealism, neoliberal doctrines, charitable intent and political market-building shaped today’s microfinance industry.

Cooperative credit introduced by the British to their South Asian colonies in the early 20th century provided a lineage of credit-based social policies which was continued by the new nations of India and Pakistan. The Bangladesh Liberation War and the weak Bangladeshi state gave birth to an active civil society, from which emerged NGOs that gave small loans for entrepreneurship. In the 1970s and 1980s, as import-substituting industrialization and state-driven development fell out of favour, the informal sector was recognized, women’s role in development and basic needs were emphasized, and an influential critique of subsidized credit was mounted. Different actors around the world, including Muhammad Yunus, started non-state, non-cooperative group loan programmes.

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The transformation of microfinance from developmental policy to financial system has been gradual and piecemeal, but nonetheless profound. Some may wish to reduce the recent history of microfinance to it having been a pure civil society project which was suddenly corrupted by business interests. As, for instance, Muhammad Yunus (leader of his own network of profit-earning “social businesses”) lamented in recent times about other MFIs, “When they start looking at profit they become loan-sharks … If you want to commercialise, please choose a different name. Real microfinanciers are not commercially minded” (AFP 2011).

But Yunus’ calls for restoring an ostensibly more innocent, NGO-led microfinance system that is not governed by the rules of financial markets appear quixotic and spurious against the backdrop of the effort, including much of his own, which was invested into developing today’s commercialized and financialized microfinance system. There can be no doubt that, to a large extent, in this emerging market of microfinance, “laissez-faire was planned” (Polanyi 2001: 147). The various junctures at which things could have taken a different turn, and the presence of numerous uncertainties and lost lineages notwithstanding, the essence of microfinance today is to be part of the transnational financial market, and there doesn’t appear to be any realistic way back to its NGO origins. Further, in light of the repeated failures of prior credit-based social policies, seeking to return to some more ostensibly “benign” form of microfinance appears to be naïve.

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While having being shaped by various conflicts and institutional changes in its history and prehistory (including the changes that were wrought by colonialism, decolonization, developmentalism, neoliberalism and the global turn to finance), microfinance itself has increasingly come to resemble an institution, perhaps most importantly in the cultural-cognitive dimension. Microfinance today shapes how developmental and social-policy programmes are conceived and perceived.

By prescribing a certain way to “do good”, microfinance advocates often denounce charity as being inherently demeaning and crippling, while praising profit-earning microloans as empowering – it has affected the cognitive frames of policy-makers, development organizations and philanthropists. Microfinance exerts normative power in favour of certain rule-regimes (e.g. liberalized banking regulations) and against others (e.g. state-run policy lending, or transfer payments to poor people). The effects of these changes in the perception of poverty, thanks to microfinance, are profound.

Mader, Philip: The Political Economy of Microfinance: Financializing Poverty. London: Palgrave-Macmillan, June 2015.

(phil)