Rethinking Microfinance: just who is being served?

Madiha khan

Email: mk226 @le.ac.uk

School of Management

University of Leicester

Abstract

Commercialization of microfinance institutions has raised concerns regarding the mission of poverty reduction. The issue of mission drift has been well documented across theoretical and empirical studies but the commercialization paradigm dominates the industry. This paper is an attempt to illuminate this issue of mission drift through the discourse analysis of micro-borrowers’ accounts. This study shows how poor people are discouraged by commercial microfinance institutions and hence mission drift is taking place.

Introduction

Microfinance refers to a range of financial services extended to the poor people – forexample micro-credit, micro-saving, micro-insurance. Initially there were only microloans offered by microfinance organizations and therefore micro-credit and microfinance were and are often used interchangeably. The idea behind microloans was poor people will invest the loan into income generating activities and it will thus help them increase their household income and lift themselves out of poverty. This idea of poverty reduction through lending small loans has been embraced around the world and microfinance is considered as perhaps the best strategy to fight with poverty (see for example, UNCDF, 2005[1]; UN, 2008[2]). Since its invention by Mohammad Yunus in 1970s, microfinance has become so popular that year 2005 was declared the international year of microcredit. United Nations Factsheet 2008 proclaimed that:

Microfinance has helped many of the world’s poor to increase their incomes through self-employment and empowerment. With access to small loans and other financial services such as savings and micro-insurance, microfinance clients, mostly women, have formed micro-enterprises that generate income. Through microfinance, the poor are able to establish support networks for improving health and education in their communities. Microfinance also helps them meet unexpected needs arising from medical emergencies or a death in the family.

Another report says that

Access to financial services underpins the ability of the poor to achieve the MDGs on their own terms in a sustainable way. Financial services enable the poor to increase and diversify incomes, build human, social and economic assets, and improve their lives in ways that reflect the multidimensional aspects of poverty. Evidence shows that poor people choose to invest in a wide range of assets: better nutrition, improved health, access to schooling, a better roof on their homes, and expansion of their small businesses.

(Donor Brief, 2002)

Such quotations by microfinance stakeholders show that microfinance is believed to have the potential for seemingly miraculous change and to play a key part in achieving the millennium development goal of poverty reduction (UNCDF, 2005; Littlefield, Morduch and Hashemi, 2003). There have been continuous developments in lending strategy and loan contracts in microfinance over the last decade and the industry, in terms of size, has expanded substantially in this time period. According to the World Economic and Social Survey (WESS2008), microfinance institutions have reported success all over the world: “There are more than 7,000 microcredit institutions in 2006 serving about 80 million people in about 65 countries, including some developed ones” (cited in UN-Desa policy brief No.10[3]). A report stated that “As of December 31, 2004, 3,164 microcredit institutions have reported reaching 92,270,289 clients, 66,614,871 of whom were among the poorest when they took their first loan. Of these poorest clients, 83.5 percent, or 55,622,406 million, are women” (Harris, 2006). These reported statistics, although indicate the rapid growth of microfinance, do not provide information on ‘who is being served’.

The question of ‘who is being served’ seems to be crucial in determining the success of microfinance if we want to continue with the original mission of poverty reduction. The existing literature in microfinance reveals that most of the work done on ‘who is being served’ is muddled with associated topics such as financial sustainability, outreach and commercialization, thereby providing a mixed and confusing message. There are a few studies that have reported that there was no significant mission drift in the process of transformation (see Hishigsuren, 2007) but previous studies suggest substantial mission drift is taking place when criteria such as average loan size are examined. However, crude statistical comparisons suffer from several limitations and do not tell the whole story. This study provides new insights into the question of ‘who is being served’ through analysis of the discourse used by micro-borrowers’. The way in which micro-borrowers represent themselves in relation to microfinance will help our understanding of how the target market becomes composed. This paper discusses discourse analysis in more detail in the methodology section of this paper.

The structure of this paper is as follows. It first discussesthe exiting literature on commercialization and mission drift in which the opposing arguments provided by two camps (welfarists and institutionalists) are discussed, together with findings of empirical studies regarding mission drift. After this, the methodology is further explained, along with data collection and analysis methods. Following the methodology section, the analysis will be examined in relation to existing literature. The paper concludes with recommendations for microfinance practices.

Literature Review

Initially, microfinance was offered by NGOs that were either donor or subsidy funded. Later, there was pressure for microfinance institutions to change and a central argument was that the uncertainty of donor funding may result in financially unsustainable microfinance programs. Additionally, it was suggested that the large demand for credit could be met through finance markets and therefore microfinance should be more ‘commercial’.

Commercialization has raised many questions (see for discussion, Morduch, 2000) such as whether charging market clearing rates would diminish demand for microfinance and whether commercialized and profit-driven microfinance would result in the crowding out of poor people. Effectively there are two schools of thoughts: welfarists and Institutionalists. Institutionalists argue against subsidy funded programs as they believe the money often ended up in the hands of non-deserving recipients and an oft-cited example would be the credit programs of 1950 and 1970. Additionally, they argue that the market-based approach, if adopted by microfinance providers, would help in raising more funds that will in turn enable them to reach out to more clients. Institutionalists further argue that poor people need continuous access to credit, not ‘cheap credit’ (Morduch, 2000) and thus merely charging competitive interest rates will not diminish demand. However, there are a number of studies that found that there was a trade-off between institutions’ profitability and their serving the poorest (Olivares-Polanco, 2005; Paxton, Graham and Thraen, 2000) raising concerns about whether the poverty alleviation mission of microfinance was being adhered to.

Proponents of commercialization typically justify the market-based approach by claiming that institutions achieve both greater outreach and profitability. Institutional profitability is often used as a proxy to ‘prove’ that poor people can pay higher interest rates and simultaneously creates the illusion that poor borrowers’ business is profitable. The term ‘outreach’, as it is used by some commercialization advocates is a bit duplicitous, as it informs only about number of borrowers (breadth of outreach) served by MFIs and remains silent regarding who is being served. For example, in the following quotation “increased commercialization is likely to have a positive impact on outreach in the future, resulting in more clients served and increased competition among MFIs” Charitonenko (2003:49) mentions only number of borrowers as measure of outreach to justify commercialization. Measuring depth of outreach remains problematic – the quantitative solutions of simply measuring average loan size has many limitations. It assumes that relatively rich people will not be interested in smaller loans, therefore smaller loan sizes means the poor are being served but the supposed correlation between loan sizes and poverty level has not yet been clearly demonstrated.

Methods

This study employs discourse analysis to provide a new way of understanding mission drift in microfinance. Bringing the discursive perspective is important since the use of language constructs the social world as we perceive and understand it, and is real in its consequences (Burr, 2005). Language is used to do things such as forming order, blaming or defending, refusing or accepting (Potters and Wetherell, 1987). People can present themselves in a desirable way through the language; imagine a micro-borrower, who comes to microfinance bank for microcredit. How will he present himself? Will he talk about his vulnerability, poverty and misery, or will he talk about his entrepreneurial skills? Which is likely to be seen as appropriate by lenders?Traditionally, prospective lenders approached normal banks with tales of their wealth and income, rather that of their poverty and vulnerability, and one of the earlier constructions of microfinance was recognition that this would automatically exclude those in a condition of poverty.Thus alternative criteria were sought for alternative finance – but are that still true in our current commercialised environment?

The analysis of the interviews of micro-borrowers uses a version of the discourse analysis (DA) employed by Potter and Wetherell (1987). Potter and Wetherell (1987), in their book Discourse and Social Psychology,applied DA to social psychology, drawing inspiration from both the wider social sciences and Conversation Analysis and ethnomethodology. Traditionally, interviews were treated as a source of information on the interview topic and what interviewees think and feel about the topic. DA treats interviews as constructing and performing functions and not just mere representation of social world. In traditional interviews, consistency in the interview responses is important while inconsistent and variable versions/accounts are treated as noise to be avoided.In DA, variability in responses is as important as consistency, and in fact it finds a different kind of order in inconsistent interview responses when interpreted in local and wider social contexts.

This paper is based on a qualitative study of Microfinance and ROSCAs in Pakistan that explores how local businesses use finance made available to them. The data used in this paper was collected in 2009 in the Dera Ghazi Khan, located in the southern Punjab of Pakistan. The research respondents were accessed through banks, who also provided bank records. During the six months of fieldwork, data was collected through participant observation and qualitative interviews. The interviews were on the topic of how entrepreneurial loans worked for and through them. All interviews are tape recorded to ensure accuracy and lasted on average 45 minutes. Interviews were transcribed first in the native language and then translated into English. Preliminary analyses were carried out in the native language before translation into English and further analysis.

Analysing Discourse of Richness and wealth in the context of Microfinance

Before embarking on the findings, it is perhaps helpful to present a picture of the local context of the interviews so that readers can reinterpret the interpretations in that light. Interviews discussed in this paper were conducted on the premises of bank and interviewees were approached through the bank. I introduced myself in the start of every interview but I was believed to be a bank officer by some interviewees and others may have suspected that I would share my findings with bank officials. In some analyses, that might be considered a considerable problem but, as will become clear, in this particular study, it is a real benefit.

During the analysis of micro-borrowers’ interviews, a persistent discourse of richness and wealth captured my attention and I started to work through it. Take the example of the following interview excerpt:

  1. Interviewer: What work you do
  2. Interviewee: cultivate land and I have livestock too. My livestock
  3. consists of almost 40 to 50 she-buffaloes.
  4. Interviewer: It means you have very big business
  5. Interviewee: Yes certainly. I have very big business. (MM6)

This excerpt shows the interviewee representing himself as financially sound and a wealthy man. This excerpt is part of an interview that was conducted with the interviewee when he came to the bank to clear his previous debt and to make a new application. The whole discourse was put together by the interviewee in a way that constructed him as a financially sound applicant. For example, by introducing the number of she-buffaloes that he owns, though I did not ask about this, does considerable work in strengthening his statement about his financial strength. Potter, Wetherell and Chitty (1991) studied quantification rhetorics and use of numerical/non numerical information and found it is used to propose or undermine arguments. In the above excerpt, the number of she-buffaloes puts the proposition that interviewee is a rich man. In rural Pakistan, a man who has but five to ten she-buffaloes would be considered a rich man. The interviewee, inputting forward the statement that he owns 40 to 50 she-buffaloes, represent himself as financially extremely healthy.

This was by no means unique. In the following excerpt, the interviewee has used a discourse of wealth in the context of his eligibility for a microloan and his ability to repay.

  1. We are all businessmen. There is no one who got nothing.
  2. Everybody has got 15-20 livestock and also owns land. We know,
  3. this man is not like this. He at least has livestock, 15 to 20 she-
  4. buffaloes. Loan is of Rs. 15000 and one she-buffalo is of Rs. 60,000.

(MM4)

This interviewee is using a similar discourse as the previous interviewee to establish his credibility. Similarly, he mentions the number of she-buffaloes owned by each of the group members. The interviewee uses ‘we’ and ‘everybody’ to produce an idea of homogeneity, a homogeneity that is based around wealth, productivity and understanding of how to use money. Thus he presents all of his group members as being rich in the claim, ‘everybody has got 15-20 livestock’, and as productive and financially aware in the claim, ‘we are all businessmen’. Towards the end, the interviewee does some calculations that strengthen his statement of eligibility in the context of repayment capacity. For example, ‘He at least has livestock, 15 to 20 she-buffaloes. Loan is of Rs. 15,000 and one she-buffalo is of Rs. 60,000’. The unstated implication is that if one she-buffalo is of Rs. 60,000 then 20 she-buffaloes means Rs. 1,200,000 (approximately $ 20000) – making the loan just a few per cent of his wealth.

This then is often repeated, as in the example below:

  1. Interviewer: So what do you think would you be able to pay loan
  2. of other.
  3. Interviewee: God Willing
  4. Interviewer: Do you have that much income to pay for others.
  5. Interviewee: God be praised. I do. Rs. 20,000 to Rs. 25,000 is not a
  6. big matter. God willing will be able to pay this.
  7. Interviewer: How will you manage?
  8. Interviewee: I have cultivated lands, have business.

(MM11)

This is interesting in the context of microfinance. The interviewee puts forward the claim that he can not only pay back his own loan but of his any group members, should that be necessary. The sum involved, for him ‘Rs. 20,000 to 25,000 is not big matter.’ This is obviously far from the life-changing possibilities that microfinance was once seen to offer. But more insidious than the suggestion that microfinance is now directed to different consumers is the continuing self-presentation as being wealthy enough to be eligible for a microloan. Other interviewees follow the same line – “I have several acres of land, large livestock (MM3)” “We are landlords...... I have livestock, 12 she-buffaloes and 8 cows...... I have 4 acres land (MM10)”.These interviewees consistently constructed their discourse in such ways to present themselves as rich and wealthy, able to pay.

The methodology section of this paper detailed that the concern is not whether interviewee accounts are true representations, Rather, the interest is in rather what function it is performing and how it can be interpreted in the specific context. The accounts of interviewees show them constructing themselves as rich and wealthy people and this leads to the question as to why a micro-borrower would be using discourses of richness and wealth. How would this help to get microfinance loans that are specifically designed for poor people? Would one not be excluded by presenting himself as rich man?

It is perhaps understandable if people present themselves as poor to get the microloans but presenting themselves as rich to claim eligibility for microloans suggests something may be awry here.If we accept that people are active users of discourses (Wood and Kroger, 2000) and select appropriate discourses for the situation, it suggests that rhetoric of wealth is considered appropriate when applying for a microloan. This is reinforced by the suggestion, outlined above, that many interviewees saw me as a representative of the bank. The corollary, of course, is that povertyis seen as inappropriate for application for a loan from a commercial MFI.

In Pakistan, most of the previously subsidized banks and NGO’s are transforming to commercialization[4] and the one, in which I conducted interview with this interviewee, is in the process of scaling up. If this quotation is interpreted in the context of welfarist argument ‘on exclusion of poor people with the commercialization’ then it can be said that commercialization will cause mission drift and poor people will be crowded out by relatively rich and well-off borrowers.

I do not wish to claim that the discourse of wealth dominated the Microfinance discourse but it was consistently present in the talk of micro-borrowers. However, the presence of such discourses in this, the transitional period, suggests that such discourse will be increasingly prevalent with increased commercialization.

Conclusion

This paper proposes a different way of assessing mission drift. Discourse analysis of the interviewee’s accounts when interpreted in the context of microfinance suggests micro-borrowers are representing themselves as rich and wealthy. As such discourse is likely to instrumental, reflecting what people believe they need to say, this suggests not only that commercial microfinance is seeking out rich borrowers but that the poor are both being excluded by commercial organisations and that potential borrowers realise that poverty is now a problem when applying for a microloan.