NB Financial Health
When Failure is Hard to Recognize: Facing Hard Truths about Microfinance
For much of its history, beliefs about microfinance’s effectiveness as a development tool were more based on faith, intuition or ideology than rigorous evaluation. But in the past decade or so we’ve seen attempts to address this gap. Quantitative researchers have begun applying randomized control trials to the study of microfinance and, after decades of faith in the ability of tiny loans to transform people’s lives, they are finding that in most cases, microfinance does not live up to the hype. For example, authors using randomized control trials, in the 2015 special issue of the American Economic Journal, found a “lack of evidence of transformative effects on the average borrower” (Banerjee et al. 2015, 3) across a wide variety of contexts. David Roodman similarly states that according to “the limited high-quality evidence so far available, the average impact of microcredit on poverty is about zero” (Roodman 2012, 150). Important qualitative studies of microfinance have also raised serious questions about the on-the-ground practices and impacts of MFIs. Lamia Karim uncovered questionable practices on the part of Bangladeshi MFIs – including shaming and house-breaking in order to ensure repayment. Maryann Bylander and David Stoll, working in Cambodia and Guatemala respectively, found that microcredit was fueling migration rather than stimulating the local economy. These disappointing qualitative and quantitative findings lead to an obvious question: in the face of their lackluster results, how have microfinance projects persisted?
There are powerful factors at the global level that have contributed to microfinance’s reproduction. These types of projects, after all, are more feasible and less controversial than tax reform, land redistribution, establishing social safety nets or properly regulating large transnational corporations. As Jason Hickel explains, microfinance is appealing because it “promises an elegant, win-win solution to the problem of poverty. It assures us that we – the rich world – can eradicate poverty in the global South without any cost to us, and without any threat to existing arrangements of political and economic power.” Hickel, an anthropologist at the London School of Economics, bases his conclusions on his experience tracing global changes in the development industry and studying development projects in sub-Saharan Africa. My personal experience studying microfinance in Guatemala revealed additional, bottom-up reasons why these types of projects tend to persist – namely, that multiple actors leverage these projects for their own ends and have a stake in their continuation.
Between 2007 and 2014, as part of my research for my dissertation and later my book project, I interviewed and surveyed Guatemalan women about their experiences with microfinance, interviewed and observed MFIs’ funders, policymakers (managers) and employees, and immersed myself in the day-to-day operations of two small MFIs providing small loans and classes to poor women for more than six months each. I shared my honest impressions with the MFIs and tried to make myself useful whenever possible but was very clear with the organizational leaders that I was acting as an independent researcher, not a volunteer. Gaining unfettered access to the on-the-ground and behind-the-scenes workings of these organizations on such terms was only possible because I conducted research over such a long period of time (seven years), which allowed me to build meaningful relationships with the organizations and their leaders – something that required a patience that is often in short supply in the field of development and research funding today. The first organization I studied, Namaste, applied business mentalities to non-profit work, specialized in business and financial services, and used quantitative evaluation of women’s business profits to measure success. Namaste offered women small loans, group classes on business and financial literacy and one-on-one meetings with business advisers who were to provide customized business advice. The second, Fraternidad de Presbiteriales Mayas (the Fraternity), saw loan groups as new avenues for indigenous women’s participation and leadership, and thus paired loans with classes on a variety of topics, including Bible study, lessons about self-esteem, caring for the environment, and recapturing Mayan culture, and drew on qualitative evaluations.
Starting at the “top” my research revealed that policymakers who design development projects for the global South are not simply looking for the most efficient solutions to obvious problems. Instead, like the adage, “if all you have is a hammer, everything looks like a nail,” development policymakers tend to construct or prioritize problems for which their expertise offers a solution. For example, Namaste’s founder, a successful businessman for whom credit and business training were empowering, set about to design a program that provided these to poor women in the global South – never mind that they were operating in very different environments, often already had a certain level of business acumen, and held very little desire to grow their businesses. Similarly, the Fraternity’s founders had fought for indigenous women’s leadership and participation in their communities and thus designed a project that attracted indigenous women to the organization with loans, and then engaged them in a host of participatory activities – never mind that some women were already participating in other spheres (churches, local level development councils, school committees, etc.) and that many were so overwhelmed with their responsibilities that the organization’s group activities felt like a burden rather than a benefit.
Namaste’s and the Fraternity’s policymakers aren’t particularly unique. Development policymakers the world over design programs by drawing on their past experiences, personal perspectives, and simplistic assumptions about beneficiaries, which rarely line up perfectly with the messy reality on the ground. This not only introduces obstacles to fulfilling policymakers’ goals, it also introduces obstacles to them fully processing lackluster feedback. After all, these projects are intertwined with their identities and worldviews in ways that make it difficult for them to question the projects’ worth. People whose life experience and contexts have taught them that entrepreneurship is possible and empowering, and who has worked tirelessly for many years to design and fund microloans for the poor, would have to wrestle with incredibly high levels of cognitive dissonance in order to accept that microfinance doesn’t help the poor all that much. As a result, lackluster results are read as evidence that the project needs to be tweaked rather than ended; disappointing feedback actually spawns new waves of similar projects.
Other actors unintentionally reinforce this tendency. I observed that workers were not mere transmission belts for policy, but diverse individuals acting with their own goals in mind, many of which had little to do with the MFIs’ goals. Employees, attempting to juggle the sometimes-contrasting demands of higher-ups, and hoping to keep their jobs in a context in which good jobs were hard to come by, often shifted pre-set plans mid-course or highlighted feedback that made them look or feel good. For example, some of Namaste’s workers struggled to fulfill all of the requirements that higher-ups set for them and thus focused more on the activities that were more easily monitored, like filling out paperwork, than those activities that were less easily monitored, like providing customized business advice to each woman. These entirely rational decisions impeded Namaste’s attempts to distinguish itself from other MFIs by prioritizing business education and mentorship while simultaneously presenting superiors with a view that all was proceeding according to plan. Similar patterns emerged even in the more grassroots organization. The Fraternity’s employees – in attempts to please their bosses and funders—reported anecdotal stories demonstrating that women’s self-esteem was being raised and highlighted women’s attendance in MFI activities as evidence of their increased participatory zeal, even though attendance was required in order to access loans. The workers were understandably juggling multiple drives including keeping their jobs and wanting to see their work as worthwhile. But the result was that the Fraternity’s policymakers and funders were left with an overly rosy picture of the reality on the ground.
Beneficiaries also played a role. Namaste’s policymakers – often-successful businesspeople themselves – assumed that Guatemalan women wanted to grow their businesses, would value education and had limited access to loans. In reality, most women were content to keep their businesses small so they could fulfill their household responsibilities and avoid hiring non-kin employees or paying taxes (see how women’s diverse goals affected outcomes here). They often saw attending educational sessions as a cost rather than a benefit, and often had ready access to loans through other MFIs. But many of Namaste’s borrowers went through the motions and played the role of grateful, entrepreneurial women during the recruitment process and later educational sessions in order to maintain access to low-interest loans and to more powerful MFI employees. Although they rarely had the same goals as the MFIs’ policymakers or employees, many judged their participation in Namaste as useful because it allowed them to access cash in the short term, even though it did not lead to significant transformations in their lives. The fact that beneficiaries would ask for a second or third loan from Namaste could be read by policymakers as a sign of success – but it did not necessarily mean that policymakers’ long-term goals were actually being met.
A similar pattern emerged in the Fraternity, where policymakers used loans to attract indigenous women into the organization in order to inspire deeper transformations related to women’s self-esteem, cultural practices and community participation. Yet only a small minority of women participating in the Fraternity internalized the Fraternity’s lessons. Others followed along with the Fraternity’s empowerment scripts in order to access low-interest loans without significantly changing their beliefs or practices. Employees and policymakers often generalized from the few exceptional women who had undergone significant transformations and failed to recognize that many other women were going through the motions. They were thus blinded to the true diversity of women’s experiences and outcomes.
In sum, my observations of both organizations revealed that borrowers are savvy individuals who leverage projects for their own ends, engage with and pick apart projects, all while recognizing that such projects rarely transform their lives and communities in any dramatic way. They may see their participation as successful for their own reasons and play along with policymakers’ scripts, even when policymakers’ goals are not being met – thus unintentionally contributing to projects’ persistence.
What lessons can we learn from the history, and my observations, of microfinance for the current push for business solutions to poverty? First, the history of microfinance suggests we should be skeptical of those with an unquestioned faith in the poor’s ability to overcome structural inequalities through their own entrepreneurial grit as well as those promoting “win-win” projects that sound too good to be true, because they probably are. Second, my findings about the bottom-up mechanisms of reproduction suggest that we need to focus on ways to encourage those involved in development work not just to think about how their projects can be improved but also to question their fundamental assumptions and the very worth of their projects. This would require considerably more flexibility and humility than is common; it might mean, for example, incorporating diverse categories of evaluation, derived from the multiple perspectives inevitably involved in any project, rewarding workers and beneficiaries for “talking back to” higher-ups, and responding to beneficiaries’ diverse goals as they emerge rather than prioritizing policymakers’ or funders’ goals. Perhaps most difficult, it would mean taking to heart the argument of the widely read anthropologist of development politics, James Ferguson, that “[t]here is no guarantee that our knowledge and skills will be relevant,” (Ferguson 1994, 287) as uncomfortable as that might make us.
Erin Beck is an assistant professor of political science at the University of Oregon.
Photos by Erin Beck.
Above: A loan officer verifies the monthly repayments of loan group members.