CGAP Consultative Group to Assist the Poor

LIST OF ACRONYMS

CGAP Consultative Group to Assist the Poor

FOSIS Solidarity and Social Investment Fund (Chile)

MFIs Microfinance Institutions

OECD Organization for Economic Co-operation and Development

ROSCA Rotating Savings and Credit Association

USD United States Dollar

“The man who moves a mountain begins by carrying away small stones.”

- Confucius, The Analects

1. INTRODUCTION

1.1 GENERAL INTRODUCTION

In one of the vulnerable poblaciones[1]of Santiago De Chile, Yenny, a 40-year-old head of household, was working as domestic servant. During her free time, apart from spending time with her three children, she used to dedicate herself to her dream: handicrafts. She made looms, tapestries, dream-catchers and pictures with recycled materials that she found on the ground or that people gave her. At the beginning it was just a hobby, but then she decided to transform this passion into her work. She received $100,000 CLP[2] from a microfinance institution and bought some materials. It was the first time she could spend money for her hobby and receive trust from somebody she did not even know. She kept on working as a domestic servant but she dreams to live off her art. She now thinks to be on her way of getting what she wants.

In Chile, the crisis in the 1980s created high levels of unemployment and, consequently, economic and social exclusion. To face this situation, people decided to set up new economic initiatives in order to find a source of household income. Although risky, small economic units were set up by vulnerable people, with a necessity of small loans not worthwhile for the traditional bank (Martinez et al. 2011: 143-144). In these years, various microcredit institutions such as NGOs, banks, cooperatives and foundations, emerged in order to support microenterprises. The difference between them is constituted by the target demand, ways of function, aims and impacts. Nowadays, in Chile there are more than 1,700,000 entrepreneurs – formal and informal- and 75% of them still do not have access to adequate financial services (Martinez et al. 2011: 193-194). Moreover, almost 3 million out of 17 people live below the poverty line: among them, some survive thanks to public subsidies, others manage economic activities and are excluded from the traditional banking systems (Ibid.).

The microcredit experience in Chile took inspiration from the microcredit promoter and winner of the Nobel Peace Prize Muhammad Yunus who opened a financial institution, the Grameen Bank, in order to deliver microloans to poor and “unbanked” people. Starting in the 1970s, microcredit rapidly became the bottom-up approach for “economic development and purposive social change as evidenced by its continuing growth terms of volume, geographical coverage, and influence over social, economic and political processes” (Fernando 2005: 3).

The purpose of microcredit is to reach the bottom of the pyramid, the so-called fourth wagon. Luis Razeto, an Ital-Chilean socio-economist, compares the world economy to a train where the first class is occupied by developed economies, big corporations and affluent people; in the second wagon there are developing countries, medium enterprises, professionals and executives; in the third, there are workers and countries that run the risk to be kicked out of the train; finally, outside this train, there are all the people that are marginalized and excluded by the system (Razeto 2006). Outside the train there are some poor people that survive thanks to public subsidies, while others are creative and talented individuals who need help and support. These people which struggle to get in the train compose the fourth wagon.

During my fieldwork in Chile, I had the opportunity to have direct experiences, then deepened my knowledge and understanding through books and articles. Thanks to my job, I had the possibility to interview clients of microfinance institutions and people that work in the microcredit field such as directors and managers of institutions. Hence, it was possible to enrich my panorama of knowledge about the microfinance world in Chile. From one side, the clients, who have been participating to a microcredit program for more than one year, were witnesses to the impact of microcredit on their lives. On the other hand, people who work for microcredit institution shared their remarkable knowledge about their professional experience. The latter are all part of the Network of Microfinance Institutions[3] that groups all the microfinance institutions whose aim is to eradicate poverty and generate social development. The results obtained through my field work experience, the interviews and the study of theories are condensed in this work of analysis about issues related to the economic and social impact of microcredit on beneficiaries' lives.

1.2 PROBLEM FORMULATION

In the last decades, the level of poverty and inequality decreased slightly, however Chile still suffers from disparities between rich and poor people (OECD). As a development tool and bottom-up approach, the purpose of microcredit is to alleviate poverty and improve living conditions.

The aim of this social research is to investigate:

how microcredit economically and socially impacts poor people's living conditions in terms of income, family well-being, empowerment and social network.

The research questions that help to answer the main question are:

• Considering the distinction between different types of microcredit institutions, how does microcredit impact poor people's living conditions in terms of income, family well-being, empowerment and social networks?
• How does the neoliberal and solidarity economy approaches explain these impacts on poor people's lives?
• Considering the Solidarity Economy approach, how can microcredit improve the impacts on poor people's living conditions?

1.3 CLARIFICATION OF TERMS

In this section, some definitions of terms used in this paper will be provided in accordance with the Chilean context:

• Microcredit: “programs [which] extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families” (Grameen Bank website).

• Microfinance: I refer to financial services offered to low-income clients by institutions (Niccoli & Presbiterio 2010: 25). In this paper, there is a distinction between microfinance institutions with a minimalist approach and an integrated approach. The first ones, which consist basically in banks and cooperatives, offer individual credit to clients that have businesses already consolidated. The amount of their loans exceed one million CLP[4].Apart from credit, they deliver also other financial services such as credit cards for consumer credit, bank accounts, savings account and so on. Microfinance institutions with an integrated approach offer credit to group of vulnerable people that not necessarily have already a business. These institutions, mainly NGOs and foundations, offer credit and social intermediation services such as business training. The amount of the loans is lower than one million CLP. These groups consist in 10-20 low-income individuals responsible for each other credits ( Ledgerwood 1998: 65-66).
• Microentrepreneurs: Individuals who have self-employment projects, sell less than 57,743,856[5] Chilean Pesos and are close to or below the poverty line (Mendoza 2012: 3).
• Empowerment: “it refers to the expansion in people’s ability to make strategic life choices in a context where this ability was previously denied to them” (Kabeer 2001: 19). In this project, it is used in terms of self-esteem, autonomy in making decisions, vision of the future, participation and leadership.
• Social capital: social relations of individuals considered as a set of resources which they can utilize, together with other resources, in order to better pursue their aims (Pizzorno 1999: 374).
• Well-being: “a state of health, happiness, comfort, and prosperity” (WordReference). In this social research, because of the vagueness of the concept, it will be used in terms of consumption, health, education and savings.

2. METHODOLOGY

This section provides the methodological considerations that characterize this paper. This includes “theories of how, and how far, a research design enables researchers to draw sound inferences to conclusions that offer answers to the research questions and to determine how far hypotheses are supported or undermined” (Perri & Bellamy 2012: 305). In other words, methodology is basically how to acquire knowledge; hence, in this section, after a brief section about the structure of the paper, I will examine in depth the research strategy, research design and the limitations of this research.

2.1.FIELDWORK EXPERIENCE

Firstly, I will shed some light and importance on my experience in Chile. This research project is based on my internship and, consequently, job that I developed in Santiago De Chile. For nine months I worked in the field monitoring lending groups in the vulnerable areas of Santiago. My participant observation during my work-hours represents an important hallmark since visiting and talking with people incited me to develop curiosity about the popular economy and to write this social research. Indeed, during the job, the possibility to realize social and economic evaluation of clients has led to my involvement in people's business and develop an interest about other aspects of credit, including the social sphere. Moreover, the opportunity to participate in formal meetings with experts in microfinance institutions raised my interest about topics such as the problem of sustainability of microfinance institutions (MFI) and the importance of government recognition of MFIs.

2.2.RESEARCH STRATEGY

Research strategy, as Bryman (2012: 35) defines, is “a general orientation to the conduct of social research”. According to Bryman, the characteristic distinction between qualitative and quantitative research leads to distinguish “differences in terms of the role of theory, epistemological issues, and ontological concerns” (Ibid.: 37).

2.2.1.QUALITATIVE AND QUANTITATIVE APPROACH

The qualitative approach consists mainly in “descriptions, accounts, opinions, feelings” and “is common whenever people are the focus of the study, particularly small groups or individuals, but can also concentrate on more general beliefs or customs” (Walliman 2006: 129). The research methods associated with qualitative research that I employed are (Bryman 2012: 383):

• ethnography and participant observation: for nine months I had been immersed into the social setting of vulnerable poblaciones of Santiago “in order to observe, question, listen and experience the situation in order to gain an understanding of processes and meanings”(Ibid.);
• qualitative interviewing and focus group were conducted in order to gain information about the microfinance world and its impacts on their clients' living conditions.
• Analysis of text and documents, e.g. formal studies on the same case, news and articles, books.

On the other hand, quantitative data are also employed to conduct this social research. This includes, for example, economic growth, trends and indicators of concepts such as poverty and inequality as they “tap concepts that are less directly quantifiable” (Ibid.: 164). Moreover, measures such as personal income, investment in goods and equipment are employed as economic indicators of people's businesses and personal well-being. Nevertheless, all these numbers and figures do not express qualitative information about a phenomenon, hence it is the social researcher's duty to “make them speak” (Kura & Sulaiman 2012: 12).

Therefore, in this paper, a combined method of quantitative and qualitative research– the so-called 'mixed methods research' – is used in order to be “mutually illuminating” (Bryman 2008: 628). In fact, many impact studies on microfinance collect quantitative indicators e.g. coverage and repayment rates, which do not express fully the qualitative improvement of human lives but aggregate data that have to be taken into consideration. Obviously they are not separate, they work jointly to “provide a better understanding of a phenomenon” (Ibid.: 649). Indeed, qualitative and quantitative approaches in social science can be combined in order to understand and to analyze complex subjects such as poverty (Kura & Sulaiman 2012: 13). “The major issue in combining is to note that the quantitative approach is about breadth while the qualitative approach is about depth”. (Ibid.: 15). In my case study, the interviewees combined quantitative data to express the income of their business and qualitative data which to express clients' assessment of improvement. This social research is therefore more heavily based on qualitative data, that is people's assessments, perceptions and feelings.

2.2.2.EPISTEMOLOGY AND ONTOLOGY

“Every research tool or procedure is inextricably embedded in commitments to particular versions of the world and to knowing the world” so the inclination to qualitative or quantitative methods should bring about certain epistemological and ontological considerations (Hughes 1990: 10). With regards to epistemology, or “what is (or should be) regarded as acceptable knowledge”, an interpretative approach rather a positivist one should succeed the inclination for qualitative methods (Bryman 2012: 31). In the same way, qualitative research should be related with a constructive ontology, that is “the belief that social phenomena are in constant state of change because they are totally reliant on social interactions as they take place” (Walliman 2006: 15). In regards to positivism, Hughes (1990: 149) asserts, that it is essentially based on observation and taking knowledge of an objective reality that is independent of the social researcher but, on the other hand, “the social world, its topic of inquiry(...) is constructed through meanings and the practices predicated on them” (Hughes 1990: 149). Therefore, in this research, the point of departure is how people view their social situation and how they assess their living standards. In other words, it is based on my interpretation of other people's interpretations. Moreover, the social researcher is not a “passive reporter” but an “active agent in the construction of accounts of the world through the ideas and themes incorporated in forms of knowledge” (Ibid.). Indeed, the researcher brings his/her own unique interpretations of the world because she/he is “inextricably bound into the human situation which she/he is studying and it is necessary to remain open to the attitudes and values of the participants (Walliman 2006: 15-20). In this way, the main preoccupation of the social researcher is trying to see the social world with the eyes of people being studied in order to see the “social reality as a constantly shifting product of perception” (Bryman 2012: 399-400; Walliman 2006: 37). This research is focused on the understanding of human action, how people perceive their social status and its improvements: the perception of how microcredit impacts on their lives is interpreted by them and, at a later stage, interpreted by the social researcher. Categories such as poverty, living standards, family well-being can be treated as social constructions, as the result of interactions between people in constant state of change varying “by both time and place” (Bryman 2012: 34). Nevertheless, people are constrained in an organization characterized by rules and regulations, cultures and subcultures, “that acts and inhibits its members” (Ibid.: 32).

In conclusion, positivism has limitations that an interpretativist methodology could fill and vice versa: “the nature of social research is just as complex as conducting research in the real world. You may discover general tendencies, but they are precisely that – tendencies” (Bryman 2012: 36; Kura & Sulsaiman 2012: 5).

2.2.3.DEDUCTIVE – INDUCTIVE

Regarding the process of research, two approaches can be employed: deductive and inductive. According to Bryman's (2012: 70) categorizations, an deductive approach reflects a rationalist approach, while the inductive is related to the empiricist approach. On the one side, inductive research implies the observation of reality and the development of “a statement from a position in which we have no real idea of what might turn out to be plausible, relevant or helpful about the subject of interest” (Perri & Bellamy 2012: 76). On the other side, a deductive way of reasoning consists of a general statement and a series of logical steps in order to verify the theory (Ibid.). In this paper, deductive and inductive ways of reasoning are both employed in order to answer the problem formulation. Indeed, the scientific method

combines inductive and deductive reasoning, resulting in the to-and-from process of developing hypothesis (testable theories) inductively from observations, charting their implications by deduction, and testing them to refine or reject them in the light of the results (Walliman 2006: 18).

Within the inductive and deductive approaches, general and particular, the hypothesis and theories are in a continuous dialogue. In fact, it is difficult and impractical to say which way of reasoning is predominant in this specific case.

In regards to this particular project on microcredit, the observation of reality, general assumptions and critical views on microcredit stimulated the hypothesis. Perri and Bellamy (2012: 76) highlight that “a precise statement of what we expect to find in our observation, given what we think we know, or suspect we know, in advance of doing our research”. The general statement in this research was followed by stages of testing theories through empirical materials and back to theories in a back and forth process.

In conclusion, the categorization of quantitative and qualitative research, to which correspond deductive and inductive way of reasoning, positivist and interpretative epistemology, objective and constructed ontology, is a polarization. In fact “quantitative methods have been used in some qualitative research, and analyses of quantitative and qualitative studies can be carried out using the opposite approaches” (Walliman 2006: 37).

2.3.RESEARCH DESIGN

The “research design” is “the specification of the way in which data will be created, collected, constructed, analyzed and interpreted to enable the researcher to draw warranted (…) inferences” (Perri & Bellamy 2012: 308). In this paper the research design employed is the case study, which consists of the analysis of the “complexity” and “particular nature” of the case used to answer the problem formulation (Bryman 2012: 66). As case studies are associated with a “location” and call for an “intensive examination of the setting”, this social research is based on field work that lasted for several months in the población of Santiago de Chile (Ibid.: 67). The main critiques to the case study as an empirical inquiry are related to the lack of rigor of the research process and the lack of generalizations from single cases (Yin 2009: 14-15). According to Yin (2009: 16-20), case studies can offer an explanation to experiments, answer “how” and “why” and can be used to “enlighten those situations in which the intervention being evaluated has no clear, single set of outcomes”.