The Political Economy of Microfinance

Financializing Poverty

Philip Mader

• Publisher: Palgrave Macmillan
• Year: 2016
• ISBN:
  9781137364210
• Topic: Politics & International Relations
• Subtopic: Trade & Tariffs
• Index: Politics & International Relations

According to the author, rather than alleviating poverty, microfinance financialises poverty. By indebting poor people in the Global South, it drives financial expansion and opens new lands of opportunity for the crisis-ridden global capital markets. This book raises fundamental concerns about this widely-celebrated tool for social development.

1

A Framework for Engaging Microfinance

The gospel of harmony between labor and capital has been preached now for almost fifty years, and bourgeois philanthropy has expended large sums of money to prove this harmony of interests by building model institutions, and, as we shall see later, we are today exactly where we were fifty years ago.

Friedrich Engels, The Housing Question (1935)

Towards a transnational political economy of microfinance

Contemporary capitalism is a financialized capitalism, and microfinance is its response to poverty. Microfinance taps into the capital markets and uses philanthropic support to build banks because – its proponents argue and its supporters believe – these banks help to build a better world. Far from being unimportant or eccentric elements of global finance, the multitudes of tiny transactions that are organized in the microfinance system stand paradigmatically for the hopes and contradictions of the present, finance-based economic order. That a financial subindustry could come to stand for such lofty aims as ending poverty and empowering women is a phenomenon to be explained and questioned. But microfinance is more than mere lofty aims. It also engenders concrete practices which shape people’s lives in different ways, generating new narratives, roles, risks and capital flows at local and global scales. Microfinance today is increasingly a financial system in its own right, which uses an array of different methods to channel return-seeking capital into Asian slums, African villages and Latin American favelas, bringing them closer to the core of contemporary capitalist activity. To explain how this could arise, and what it means, is the challenge of this book.

The microfinance system takes financial markets to the extreme, using finance to build economic relationships which stretch from the very richest investors to the poorest borrowers – from billionaires such as George Soros and Pierre Omidyar to African, Asian and Latin American seamstresses, peasants and rickshaw drivers. These model institutions of “bourgeois philanthropy” have been invested with the greatest expectations: microfinance institutions are supposed to help to grow stunted “bonsai people”,¹ empower oppressed women, “financially include” the disenfranchised, help policy-makers achieve variously defined “development” goals and replace the ineffectual developmental state with more efficient self-help through credit. As a leading global microfinance network explains in The Business of Fighting Poverty, “we use your philanthropic support to build banks for the poor in some of the world’s most remote and difficult places … Our goal is to help break down the walls of financial exclusion, in order to build a world in which no one is shut out of all that society has to offer” (ACCION International 2009: 3).

According to the father figure of the sector, Muhammad Yunus, microfinance should confine poverty to “poverty museums” within two generations (Yunus 1997). Only time will tell. But meanwhile, a significant and growing body of literature has controversially engaged with how microfinance activities impact the target populations – including, among others, Armendáriz and Morduch (2005), Dichter and Harper (2007), Collins et al. (2009), Bateman (2010; 2011a), Duvendack et al. (2011b), Karim (2011), Roodman (2012a), Klas and Mader (2014) and Bateman and Maclean (forthcoming) – and reached vastly divergent conclusions. For some, microfinance sanguinely “presents a series of exciting possibilities for extending markets, reducing poverty, and fostering social change” (Armendáriz and Morduch 2005: 3); for others, because of the innate incompatibility of these goals, “[p]ut simply, microfinance does not work” (Bateman 2010: 1).

In the light of this profusion and confusion, this book’s goal is to move forward the debate which has very often revolved around the question “Does microfinance work?” by asking: “What does microfinance work at – and how?” In doing so, this book examines contemporary microfinance through the lens of financialization, and it also seeks to understand financialization through microfinance. By proposing to analyse the transnational political economy of microfinance as financializing poverty, this work connects with and builds upon foregoing critical analyses, particularly Weber’s (2006b; 2010) explication of microcredit as a political tool for neoliberal reform, Elyachar’s (2005) analysis of “markets of dispossession” and A. Roy’s (2010) conceptualization of “poverty capital”. As these authors have established, microfinance has been part of a profound transformation of the logics of development since the 1980s, both materially and ideologically intertwining with the expansionary logics of financial markets.

Heloise Weber explains microfinance as a “disciplinary” governance tool to entrench market-based development even in the face of resistance and dissent: “a neoliberal approach to poverty” which justifies and demands conducive macrolevel policy adjustments such as financial sector liberalization (Weber 2006a: 51). Microcredit, Weber argues, was a logical policy choice for international financial institutions, development organizations and other policy-makers pursuing neoliberal reform, thanks to its “dual function” of supporting structural adjustment economically and politically stymieing resistance:

Firstly, as a financially steered targeted poverty reduction strategy, microcredit, via its implications for policy, facilitates financial sector liberalisation as well as extending the policy of trade in financial services to the local level. Secondly, [it] has a disciplinary potential that renders it particularly conducive to functioning as a political safety-net. In the latter case, it offsets “income-insecurity” and attempts to absorb surplus labour in growing informal sectors.

(Weber 2002: 541)

But microfinance as “empowerment debt”, Julia Elyachar (2005: 192) argues, goes beyond such political-economic transformation, thanks to an insidious capacity to transform developmental subjects’ attitudes and values by implanting “new subjectivities that are more conducive to neoliberal market rule”. Microcredit supplied through non-governmental organizations (NGOs) helps to build the software, so to speak, to match the hardware of the neoliberal market by teaching the “generation of structural adjustment”, Elyachar (2005: 27) argues, “to fend for itself”. To be “empowered” via microdebt requires the subjects of market “rule” to bring their cultural habits and social networks into the marketplace and, in acting as entrepreneurs who have been dispossessed of their prior identities and established ways, learn or “come to accept one version of the market as the only possible market” (Elyachar 2005: 6): the “free” market reigned by the “invisible hand”.²

Lamia Karim’s (2011: xvi/f.) ethnography in Bangladesh, however, highlights the disjuncture between the theoretical free-market relations presupposed by the microfinance model and the real, messy social relations which microborrowers live in. Instead of broadly empowering women, Karim explains microfinance as in fact empowering the NGOs which provide it, positioning them as a “shadow state” that is endowed with a proprietary “power/knowledge”, allowing them to define how poverty is to be understood and alleviated (Karim 2011: 33, 163ff.). Ananya Roy (2010: 30), consequently, conceptualizes microfinance as “poverty capital”: “a subprime frontier where development capital and finance capital merge and collaborate such that new subjects of development are identified and new territories of investment are opened up and consolidated”. In what she terms “millennial development” – the currently dominant vision of the combined agency of empowered poor and non-poor individuals apolitically creating development in a mutual effort – “poverty capital” brings together the idea of “microfinance as a resource”, which actors such as NGOs and the World Bank employ to produce truths and knowledge about poverty, and of “poverty as a resource” to be made amenable to capital.

In my analysis I borrow from Roy the image of the financial “frontier”, which for the present purpose illustrates better than “fringe” or “sub-subprime” how lands of opportunity are opening up for finance, thanks to microfinance – only seemingly financially deserted, yet fertile (and distinctly gendered) spaces ready for financial settlement and enclosure. With Elyachar I note the contradictory and multiplicitous relationship between debt as a means of empowerment and as a means of dispossession – a duality which is perhaps most especially marked in the developmental context. I employ Weber’s foundational insight into microfinance’s disciplinary potential to entrench the (financial) market via its “dual function” of facilitating neoliberal rule both at the policy level and in everyday life. In comparison with the ethnographic richness and crucial detail that is offered by Elyachar (2005) and Karim (2011), and the intricate insights into the dynamics at the centres of developmental power which A. Roy (2010) offers, the aim of this book can only be relatively more modest while still aiming for a substantive contribution. This contribution is to apply the financialization approach to microfinance, seeking to understand the global microfinance phenomenon from a political economy perspective which emphasizes the central role of finance in contemporary capitalism and to show how the financialization of poverty works in practice. The book also investigates the boundaries of this financialization by studying the ongoing expansion of (micro)finance beyond entrepreneurship and consumption and into the socially sensitive realm of public goods – where these goods, too, are made amenable for market expansion and effectively financialized – and investigating the crisis events which have occurred where the microfinance sector reaches its limits.

The argument made in this book builds upon the aforementioned analyses which identify microfinance as a tool for building markets and exerting power, capable of bestowing new forms of legitimacy upon the ongoing transnational project of building the market in the name of development and of dispossessing people of their identities and networks. As Morgan Brigg (2001: 252) underscores, the effects are profound:

In reinscribing the neoliberal and developmentalist approach at the micro level through innovative disciplinary techniques, microcredit programs have the effect of promoting entrepreneurial subjective modalities over other ways of being and of integrating Third World subjects into financial and economic networks and the development dispositif. In this process, poverty is depoliticized through an individualistic rather than redistributive approach to its alleviation.

While the critical literature has thus recognized an increasing centrality of microfinance in market-building and the overall neoliberal reprogramming of developmental subjects, noting this as an ongoing “financialization of development” (Roy 2010: 47), the operations of microfinance as a financial system, rather than as a dependent component of the broader neoliberal politics of development, remain underexplored. The original political-economic function of microfinance may well have primarily been to promote the entrepreneurially individualistic rationalities embedded in Washington and Post-Washington Consensus approaches to poverty alleviation and development, in both an operational and an ideological sense. But microfinance increasingly also possesses a meaning and functionality of its own, beyond its generically market-building function and beyond financializing the project of development, in turning poverty into a problem of finance and potentially making it the basis for new capital–labour relations that are built through finance. The microfinance we are dealing with today is more than just a market for small loans and savings; it is a potent force at the frontier of transnational finance.

This political economy analysis therefore emphasizes the expansion of financial markets into new terrains of accumulation through microfinance – that being what microfinance works at, in this analysis. Of course, microfinance remains an intervention that is materially and ideologically wedded to the neoliberal politics of development, which still benefits from massive political support from key players such as the World Bank and major national donor agencies. But, to drastically simplify what the following chapters will explain, it also increasingly represents an autonomous financial subsystem that builds credit relations with poor people, for the price of surplus extraction – how it works. Having arisen from the contested developmental politics of the late 20th century, drawing on older colonial and postcolonial lineages of credit as a social policy, the microfinance sector today serves as a nexus for new market-based interactions of capital with the poor, centred on the economic activities that the poor perform in poverty.

My argument that contemporary microfinance is in this way financializing poverty represents a counterpart to David Roodman’s (2012a: 266) conclusion that “the greatest strength of microfinance has been in building industries that enrich the fabric of nations” – Roodman means financial industries.³ Indeed, the strength of microfinance in building a financial industry which plays “Banker to the Poor” (Yunus 2003), unlike many other strengths that are claimed for it, is undeniable, albeit all too rarely recognized for what it is. But the portrayal of this financial industry-building as an indubitable gain for the poor – or the “fabric” of their “nations” – can only rest on a belief “that sustainably extending the financial system to poor people is development, appropriately defined” (Roodman 2012a: 266).⁴ The result of this “sustainable” extension of the financial system, I show, is that through such processes as the successive commercialization and deepening union with mainstream financial markets, and the expansion of microfinance into new fields such as credit for public goods, the system of microfinance has expanded the frontier of finance and opened up new terrains for capital in its restless and unrelenting search for opportunities to generate and extract surplus. Does this constitute development? Perhaps, but a thoroughly financialized capitalist variant of development.

This functionality has grown all the more acute with the ongoing financial calamities after 2008 revealing the insecurities of core financial markets and sparking a quest among capital-holders for alternative sites of financial accumulation. An “impact investing” partner at PricewaterhouseCoopers answered the question “What is the main problem with microfinance?” with: “there is a lot of money but very few organisations capable of absorbing it … microfinance companies need to restructure to be capable of absorbing new funds” (iD4D 2012). Capital is in restless migration in search of fertile new lands, and the still-growing economies of the global South – where business guru C.K. Prahalad (2004) prophesied a “fortune at the bottom of the pyramid” – in particular have been sighted as attractive new frontiers. Brazen financial frontiersmen (and some women) are rushing in to seek the fortunes which reportedly lie in the social economies of the global poor. With the expanding microfinance sector not only are the poor increasingly included in the financial market, but also the institutions of financial capital which supply the capital for microfinance are increasingly willing and able to include the poor as their subjects. At the same time, microcredit still appears to many to be a feminist, pro-poor, ostensibly social aspect of the economy, “defusing”, as Nancy Fraser (2009) argues, radical feminist resistance to neoliberalism while actively fuelling what Milford Bateman (2010) terms the “destructive rise of local neoliberalism”. Microfinance promises a “win-win potion for development and capital” (Fernando 2006b: 194) built on an imagery of indigenous solidarity, individual agency and entrepreneurial (feminine) creative potency, while inseparably expanding the pool of investable assets. Its utopianism extends to proposing a resolution of multiple dichotomies: seemingly unproblematically uniting philanthropy with business, charity with self-reliance, financialization with democratization, even bringing NGOs and banks into symbiosis, and apolitically resolving the differences between capital and labour through credit. The consequence, as Christa Wichterich (2012: 407) says, given the majority-female borrowers, is nothing less than “a feminization of financialization of village life”, and “a feminization of indebtedness”. With this, microfinance is not only a small part of financialization, but a leading edge where capital confronts potentially vast opportunities for accumulation by mobilizing and harnessing the labour power of the poor together with the developmental imaginaries of the rich into the financial system.

Clearly, microfinance is neither financialized capitalism’s only response to poverty nor the only element of the ongoing financialization of poverty. A broader definition should include (among others) processes of land-grabbing, food commodity speculation, “social business” expansion and perhaps even certain new modes of welfare provision (cf. Lavinas 2013). Neither does microfinance generate the same uniform, sweeping transformations everywhere it goes, simply turning poverty into just a financial relation and nothing more (chapters 4 and 5 discuss the limitations and vulnerabilities of the financialization of poverty at length). But microfinance does currently present itself as the crucial salient in a broader drive of financial markets deeper into the communities and livelihoods of poor people in the global South, as private capital is increasingly partaking in the expansion of microfinance. Indeed, for this reason alone arguably the ambivalence – and maybe even the potential for counterhegemonic agency – which Fernando (2006a: 7ff.) still made out in earlier microcredit programming is absent (or rapidly receding) from today’s microfinance, which instead is trailblazing on the frontiers of a new hegemonic project: the financialization of all aspects of life.

The state of microfinance: A primer

Microfinance is not a stable monolith, having as a concept and a sector undergone significant transformations over time, and remaining a contested terrain between competing forces that are pursuing different ideals and technological approaches (Khan 2011). Yet for all practical purposes there is such a thing as a recognizable microfinance, which is the sale of standardized financial services in small quantities at high volumes. The basic product is credit, running on cycles that are...