A Critique of Microcredit
Microfinance and Women's Poverty
In this article, originally published in the November/December 2006 issue of Dollars & Sense magazine, feminist economists Susan F. Feiner and Drucilla K. Barker look at how the 2006 Nobel Peace Prize awarded to microcredit guru Muhammad Yunus affirms neoliberalism. Feiner is professor of economics and women's studies at the University of Southern Maine. Barker is professor of economics and women's studies at Hollins University. They are co-authors of Liberating Economics: Feminist Perspectives on Families, Work, and Globalization.
The key to understanding why Grameen Bank founder and CEO Muhammad Yunus won the Nobel Peace Prize lies in the current fascination with individualistic myths of wealth and poverty. Many policy-makers believe that poverty is "simply" a problem of individual behavior. By rejecting the notion that poverty has structural causes, they deny the need for collective responses. In fact, according to this tough-love view, broad-based civic commitments to increase employment or provide income supports only make matters worse: helping the poor is pernicious because such aid undermines the incentive for hard work. This ideology is part and parcel of neoliberalism.
For neoliberals the solution to poverty is getting the poor to work harder, get educated, have fewer children, and act more responsibly. Markets reward those who help themselves, and women, who comprise the vast majority of microcredit borrowers, are no exception. Neoliberals champion the Grameen Bank and similar efforts precisely because microcredit programs do not change the structural conditions of globalization--such as loss of land rights, privatization of essential public services, or cutbacks in health and education spending--that reproduce poverty among women in developing nations.
What exactly is microcredit? Yunus, a Bangladeshi banker and economist, pioneered the idea of setting up a bank to make loans to the "poorest of the poor." The term "microcredit" reflects the very small size of the loans, often less than $100. Recognizing that the lack of collateral was often a barrier to borrowing by the poor, Yunus founded the Grameen Bank in the 1970s to make loans in areas of severe rural poverty where there were often no alternatives to what we would call loan sharks.
His solution to these problems was twofold. First, Grameen Bank would hire agents to travel the countryside on a regular schedule, making loans and collecting loan repayments. Second, only women belonging to Grameen's "loan circles" would be eligible for loans. If one woman in a loan circle did not meet her obligations, the others in the circle would either be ineligible for future loans or be held responsible for repayment of her loan. In this way the collective liability of the group served as collateral.
The Grameen Bank toasts its successes: not only do loan repayment rates approach 95%, the poor, empowered by their investments, are not dependent on "handouts." Microcredit advocates see these programs as a solution to poverty because poor women can generate income by using the borrowed funds to start small-scale enterprises, often homebased handicraft production. But these enterprises are almost all in the informal sector, which is fiercely competitive and typically unregulated, in other words, outside the range of any laws that protect workers or ensure their rights. Not surprisingly, women comprise the majority of workers in the informal economy and are heavily represented at the bottom of its already-low income scale.
Women and men have different experiences with work and entrepreneurship because a gender division of labor in most cultures assigns men to paid work outside the home and women to unpaid labor in the home. Consequently, women's paid work is constrained by domestic responsibilities. They either work part time, or they combine paid and unpaid work by working at home. Microcredit encourages women to work at home doing piecework: sewing garments, weaving rugs, assembling toys and electronic components. Home workers--mostly women and children--often work long hours for very poor pay in hazardous conditions, with no legal protections. As progressive journalist Gina Neff has noted, encouraging the growth of the informal sector sounds like advice from one of Dickens' more objectionable characters.
Why then do national governments and international organizations promote microcredit, thereby encouraging women's work in the informal sector? As an antipoverty program, microcredit fits nicely with the prevailing ideology that defines poverty as an individual problem and that shifts responsibility for addressing it away from government policy-makers and multilateral bank managers onto the backs of poor women.
Microcredit programs do nothing to change the structural conditions that create poverty. But microcredit has been a success for the many banks that have adopted it. Of course, lending to the poor has long been a lucrative enterprise. Pawnshops, finance companies, payday loan operations, and loan sharks charge high interest rates precisely because poor people are often desperate for cash and lack access to formal credit networks. According to Sheryl Nance-Nash, a correspondent for Women's eNews, "the interest rates on microfinance vary between 25% to 50%." She notes that these rates "are much lower than informal money lenders, where rates may exceed 10% per month." It is important for the poor to have access to credit on relatively reasonable terms. Still, microcredit lenders are reaping the rewards of extraordinarily high repayment rates on loans that are still at somewhat above-market interest rates.
Anecdotal accounts can easily overstate the concrete gains to borrowers from microcredit. For example, widely cited research by the Canadian International Development Agency (CIDA) reports that "Women in particular face significant barriers to achieving sustained increases in income and improving their status, and require complementary support in other areas, such as training, marketing, literacy, social mobilization, and other financial services (e.g., consumption loans, savings)." The report goes on to conclude that most borrowers realize only very small gains, and that the poorest borrowers benefit the least. CIDA also found little relationship between loan repayment and business success.
However large or small their income gains, poor women are widely believed to find empowerment in access to microcredit loans. According to the World Bank, for instance, microcredit empowers women by giving them more control over household assets and resources, more autonomy and decision-making power, and greater access to participation in public life. This defense of microcredit stands or falls with individual success stories featuring women using their loans to start some sort of small-scale enterprise, perhaps renting a stall in the local market or buying a sewing machine to assemble piece goods. There is no doubt that when they succeed, women and their families are better off than they were before they became micro-debtors.
But the evidence on microcredit and women's empowerment is ambiguous. Access to credit is not the sole determinant of women's power and autonomy. Credit may, for example, increase women's dual burden of market and household labor. It may also increase conflict within the household if men, rather than women, control how loan moneys are used. Moreover, the group pressure over repayment in Grameen's loan circles can just as easily create conflict among women as build solidarity.
Grameen Bank founder Muhammad Yunus won the Nobel Peace Prize because his approach to banking reinforces the neoliberal view that individual behavior is the source of poverty and the neoliberal agenda of restricting state aid to the most vulnerable when and where the need for government assistance is most acute. Progressives working in poor communities around the world disagree. They argue that poverty is structural, so the solutions to poverty must focus not on adjusting the conditions of individuals but on building structures of inclusion. Expanding the state sector to provide the rudiments of a working social infrastructure is, therefore, a far more effective way to help women escape or avoid poverty. Do the activities of the Grameen Bank and other micro-lenders romanticize individual struggles to escape poverty? Yes. Do these programs help some women "pull themselves up by the bootstraps"? Yes. Will micro-enterprises in the informal sector contribute to ending world poverty? Not a chance.
"Informal Economy: Formalizing the Hidden Potential and Raising Standards," ILO Global Employment Forum (Nov. 2001).
Jean L. Pyle, "Sex, Maids, and Export Processing," World Bank, Engendering Development; Engendering Development Through Gender Equality in Rights, Resources, and Voice (Oxford University Press, 2001).
Naila Kabeer, "Conflicts Over Credit: Re-Evaluating the Empowerment Potential of Loans to Women in Rural Bangladesh," World Development 29 (2001).
Norman MacIsaac, "The Role of Microcredit in Poverty Reduction and Promoting Gender Equity," South Asia Partnership Canada, Strategic Policy and Planning Division, Asia Branch Canada International Development Agency (June, 1997).