NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, June 17, 2011

The commercialization of microfinance has been blamed for a lot of troubling trends, from prompting the clampdown in Andhra Pradesh to muddying the industry’s benign image as a development tool to help the poor. But one impact that has been largely overlooked is its impact on women.

One of the hallowed truths about microlending has been that it works best when loans are made to women, as the keepers of household finances, and particularly to groups of them, so they feel a joint responsibility to repay. The payoff, as it were, was the empowerment of poor women, who could use the cash flow to help climb out of poverty. This was at the heart of the drive among socially-oriented non-profits to spread small-loan programs across much of the developing world.

More recently, the great – and unresolved – debate within the industry has been whether profit-oriented financial firms have a valid place in that scenario. Supporters say profit-driven companies bring discipline and much-needed capital that is driving the industry’s expansion. Detractors say the drive for profits undermines the industry’s social development goals and attracts barbs about financiers making money off the backs of the poor. The debate is part of a general re-examination of the entire microfinance model, as highlighted by a recent British parliamentary group’s report.

One surprising result of the drive to commercialization is that the traditional preference for lending to women diminishes, says Mary Ellen Iskenderian, president of Women’s World Banking, a New York-based network that binds together about 40 microfinance institutions (both nonprofit and commercial) in 27 countries with the goal of promoting women’s empowerment. She cites a 2008 study of 27 microfinance institutions across Africa, South America and South Asia that found that, on average, two years before a lender transformed from a nonprofit to a commercial venture, 88% of borrowers were women. By four years after commercialization, that percentage had dropped to 60%.

Why? The answer, she told India Real Time, is that small loans are very expensive to service. So as commercial entities, lenders become more interested in giving larger loans and to bigger businesses. Those are typically run by men, who also tend to be more willing than women to take on business risk and often invest more into their businesses while women have more demands on their time and finances such as looking after kids and pushing their education.