Poverty Alleviation or Poverty Aggravation?

The Neoliberal and Capitalist Capture of Microfinance Institutions

John Simone C. Yrastorza

Edited by Christian Arvie G. Doria

Microfinance: History, Context, and Objectives

The Poverty Situation and Goals to Eradicate It

As of 2019, 648 million people across the world are living below the extreme poverty threshold of $2.15 (World Bank, 2022b). In the 2021 Family Income and Expenditure Survey (FIES) of the Philippine Statistics Authority (2022), the Philippines posted an 18.1% poverty rate. In recent decades, poverty has been the focus of various non-governmental organizations, as well as multilateral organizations. Particularly, the World Bank (2022a) has committed to reduce global poverty to below 3% by the year 2030. In the Sustainable Development Goals (SDGs) of the United Nations (UN), the first out of the 17 goals is poverty eradication (UN SDG, n.d.).

The World Bank, as a multilateral development financial institution, has funded various development projects, specifically in the Third World. For instance, in the Philippines, it has greatly funded various infrastructure projects, rural development, livelihood, and conditional cash transfers (World Bank, 2021). In recent decades, the bank added in its focus what was viewed as the silver bullet for the poverty issue — microfinancing. Since then, the International Finance Corporation (IFC), one of the five nomenclatures under the World Bank Group, has invested over $3.5 billion in over 300 microfinance from 91 countries (Holtmann & Aijazuddin, 2015). Eventually, other multilateral and regional development institutions also jumped onto the microfinance bandwagon (IMF Monetary and Financial Systems Department, 2005). In this paper, it will be argued that poverty, a structural and political problem, would also need structural and political solutions, and not its conversion into a personal private problem in the form of microfinancing.

The Grameen Bank of Nobel Peace Prize Winner Muhammad Yunus

In 2006, Muhammad Yunus was awarded the Nobel Peace Prize for his contribution to pursuing development through a bottom-up approach in both social and economic dimensions (The Nobel Prize, n.d.). It has been common for large and commercial financial institutions to exclude the poorest of the poor from their target market as they are deemed risky and not creditworthy. In the risk-return trade-off concept, the return that your money will gain should be higher or should at least be commensurate with the risk of an investment. Since the poor usually have unstable incomes and livelihoods, they are deemed incapable of paying loans, thus leading to non-repayment or delinquencies. However, is it not the lack of financial capital that causes the impoverishment and unpredictability of the poor’s cash flow? This was the turning point of Muhammad Yunus in innovating a new financing scheme that would work towards the provision of opportunities for indigent Bangladeshis — by being a “Banker to the Poor.” In his book of the same title, he discussed his story and the Grameen Bank (Yunus, 2007).

It was when Yunus, then a newly-minted Ph.D. graduate from the United States, returned to Bangladesh to teach economics two years before the 1974 famine of Bangladesh. Not so distant from his university is an impoverished community, Jobra, which made him rethink the economic theories that he was teaching. Hence, a hopeful search for a better understanding of economic issues and social realities led him to immerse in poor communities, alongside his university students. Frustrated with the need for people to borrow money from loan sharks who earn more than half of their income from making bamboo stools, he instead lent them $27 from his own pocket to pay the loans of 42 people from the usurious middlemen. With the hopes of helping the community have more sustainable and just credit provisions, he tried convincing his university’s banking arm to lend them. To no avail, they were viewed, again, as not creditworthy. But for Yunus, “It’s not people who are not credit-worthy. It’s banks that are not people-worthy” (Yunus & Jolis, 2007).

In his eureka moment, he instead provided personal loans to the poor community from the money that he loaned from the bank. Eventually, through their government’s support in 1983, it was turned into the Grameen Bank. Grameen, in their vernacular, literally means “village” or “rural.” Their lending model included grouping people into five with each being responsible for each other’s loans, thus social collateral, as a basis of their loan amount limits in the succeeding cycles. Contrary to the usual assumption that they would be unable to repay the loans because of poverty, it even exceeded the repayment rates of commercial financial institutions by posting 98% repayment (Cull et al., 2008). From being a $27 loan to 42 people in 1974, it has expanded presently into a $2.8 billion financial institution serving 45 million people (Grameen Bank, n.d.-a; Grameen Bank, n.d.-b). Since then, it has been adopted by various countries in the Third World, including the Philippines as a weapon against poverty, and as a tool to empower women.

Poverty Aggravation and Philippine (Under)Development Strategies

Structural Adjustment Programs (SAPs) and the Philippine Economy

In the 1950s, the Philippines was second to Japan, Malaysia, Hong Kong, and Singapore in terms of economic growth (Balisacan & Hill, 2003). Since the term of former President Macapagal in the early 1960s, the national government has sought the help of the World Bank and the International Monetary Fund (IMF) in the form of loans alongside conditionalities due to its balance of payment issues (Official Gazette of the Republic of the Philippines, 1962). His successor, Ferdinand Marcos, Sr., in the hopes of fulfilling the dream of the Bagong Lipunan (New Society), also sought the Bretton Woods twins for funding, alongside subsequent stabilization programs for the country (Ofreneo, 2023). Despite the corruption controversies surrounding the administration, it is as if the twins turned a blind eye as long as they are able to pursue their neoliberal agenda. This was heavily seen in the 1981 and 1983 structural adjustment programs — liberalization, privatization, and deregulation — that were implemented (Ofreneo, 2023; Toussaint, 2020). In line with these structural adjustments are austerity measures — the reduction of budget deficits, specifically by reducing expenditures (Committee for Abolition of Illegitimate Debt, n.d.). In our case, expenditure reductions focused on basic social services — education, healthcare, and other welfare programs, which are integral to human development.

Although structural reforms in the economy were framed by multilateral institutions as factors to a country’s development, data and experience suggest otherwise. These hampered the human development of Filipinos. For instance, Simbulan (2001) argued that due to the privatization of health services, healthcare is becoming more of a privilege, instead of a human right. Besides, the government’s health budget also increased the inability of Filipinos to receive the right and adequate medical services. In line with the findings of Abocejo’s (2014) analysis, despite tightening the country’s budget after the policies’ implementation, it failed to impact the level of Filipinos’ impoverishment. Perhaps, this was the reason why multilateral institutions showed much excitement for what microfinance may bring in terms of acting as a safety net for those severely affected by these structural adjustments (Bello, 2008).

The Rise of Microfinance Institutions in the Philippines

While the concept of microfinance — the provision of loans to low-income people — is not new to the Philippines, the group lending scheme introduced by the Grameen Bank was relatively new. Since the 1980s, the same time as the SAPs were implemented, the establishment of microfinance institutions employing the Grameen framework has increased in the Third World. The rise of this methodology in the country emerged in 1989 and is currently led by Ahon Sa Hirap, Inc. (ASHI), Negros Women for Tomorrow Foundation, Inc. (NWTF), Tulay Sa Pag-unlad, Inc. (TSPI), and Center for Agricultural Research and Development (CARD) (Yunus, 2007). In the 1990s and 2000s, it even expanded into the provision of micro-savings and micro-insurance (Vince Rapisura, 2021). At present, hybrid schemes and modified schemes combining group liability and individual liability methods are prevalent.

In 2015, Republic Act №10693, also referred to as An Act Strengthening Non-Government Organizations (NGOs) Engaged in Microfinance Operations for the Poor was enacted. The law emphasized the role of microfinance NGOs in the provision of financial capital to the poor for entrepreneurial activities as a tool for poverty eradication (Department of Finance, 2016). As of 2020, the loan portfolio of local microfinance institutions increased to Php404.1 billion from Php201.7 in the span of four years (Social Enterprise Development Partnerships, Inc., 2023). However, despite the support of the government in such undertakings, there is still limited evidence of the efficacy and success of microfinance in poverty reduction.

In a study conducted by Rich (2018), microfinance institutions in Palawan have been instrumental in the consumption smoothing of the clients, but have done little to help improve their enterprises. A separate study conducted in the cities of Caloocan and Navotas revealed the same results that the loans are used either for consumption smoothing or reinvestment in their businesses (Oguejiofor & Unachukwu, 2014). The same study also revealed that while microfinance loans may help in poverty reduction, it is contextual and should be combined with other strategies to realize better results. Furthermore, it was also mentioned that there is still insufficient evidence of whether microfinance was able to reduce worldwide poverty.

Finally, in an Asian Development Bank study, it was found that the majority of the microfinance clients in one of their programs are not poor, contrary to the original objective of the program (Kondo, 2007). Additionally, while it was proven to increase the incomes and expenditures of the clients, the significance was negative for poorer households, and only those who were relatively richer benefited significantly. Following the principles of the Grameen Bank, it smoothened consumption, since they pay lower rates than loans from other sources. However, it did not find impacts on their spending in improving human capital — education levels, and health outcomes. Finally, the author pointed out the importance of correct targeting of intended clients if it is to be used as a poverty eradication strategy.

The Lost Success of Poverty Reduction Through Microfinance Institutions

A Political Problem Turned Personal Private Problem

The World Bank and the IMF have massively promoted, supported, and even funded microfinance institutions across the globe. For instance, former World Bank President Paul Wolfowitz has viewed microfinance as “a powerful tool for reducing poverty” (UN News, 2005). Although a lot of scholars and economists, as well as the Bretton Woods twins, believed and argued that microfinance is a great tool to lift people from the bottom of the pyramid, some scholars have argued otherwise. Only a few are brave enough to break the delusional view of some on microfinance as the silver bullet to poverty due to anecdotal evidence.

As Hickel (2017) puts it, “It turns out that microfinance usually ends up making poverty worse.” In addition, he also criticized the view of microfinance as a solution to poverty, since it “turned the political problem into a personal private problem” (TRT World, 2017). Finally, Bello (2008) pointed out that microfinancing earned the enthusiastic view of the twin institutions because it is seen as a safety net for people who were adversely affected by the structural adjustments among the countries in the Third World.

A Tool for Women (Dis)Empowerment

Microfinance institutions have been focused on providing microcredit to women, as Yunus mentioned, prior to the Grameen Bank’s establishment, only a meager 1% of all the bank loans in Bangladesh were borrowed by women (Harvard Business Review, 2012). It became his goal to empower women by balancing things out between women and men, aside from the view that women focus more on the welfare of their families. While the intention of empowering women was good, the interventions were made on the wrong foot.

Over the decades, anti-poverty programs have focused their provision largely on women, thus the “feminization of poverty.” Even so, it is contestable whether the results have really led to gender equality or women empowerment. The World Bank (1995) argued that women should be the focus of investments if we are to focus on poverty alleviation as they are more productive and efficient. Hence, it can be pointed out that these organizations may have been on the lookout for the possible economic gains rather than the social gains that women would earn; Viewing women empowerment and gender equality as a means to something else, rather than as an end in itself.

As Chant (2016) pointed out, the neoliberal restructuring of economies in the 1980s led to the idea of women working for development, instead of development working to forward the interests of the former who are already vulnerable and disadvantaged. Besides, as Federici (2016) mentioned, although most microfinance institutions post significantly higher numbers of women clients than men, it is the latter that uses the money (i.e. husbands, brothers, etc.). These are similar to Hickel’s view of poverty being turned into a personal private problem. It seems like our society is now implicitly telling women that they should prove themselves to people to receive the same respect and opportunities that men get, even if these are fundamental rights of all human beings.

Business of Poverty: The Commercialization of Microfinance Institutions

For instance, Haldar & Stiglitz (2015) argued that the mission drift of India’s SKS Microfinance, the ‘second microfinance of importance after the original,’ from providing capital to those who are financially excluded to a profit-seeking one — via usurious interest rates and Initial Public Offerings — has caused the dilemma that the industry is currently experiencing. Thus, the shift from philanthropy to conventional financing practices. It was also pointed out that microfinance cannot be easily duplicated in ways similar to those employed by companies manufacturing goods. The increased political intervention by governments may have also taken part in these unprecedented issues, as the foundation of microfinancing is based on the social capital and trust of debtors and creditors among themselves and not through legal institutions.

In Mexico, Banco Compartamos was recently viewed as the most important financial institution despite not being the biggest (The Economist, 2008). It was established in 1990 by a religious group inspired by Mother Teresa known as the Gente Nueva before it became a for-profit organization, which then charged 90% interest rates compared to the 25% to 45% average in the entire world (Malkin, 2008). When it entered the capital markets and was offered to the public, the shares of Accion International, a non-government organization (NGO) that previously invested money in the Compartamos in 2000, was able to sell a part of its stake at $135 million which is 135-fold its original investment (Malkin, 2008; Rosenberg, 2007). Hence, it seems like the tables have turned for microfinance institutions that have undergone such commercialization and shifted to profit-making schemes. From the original goal of the abled helping the poor, it is now the poor that give profits to the rich. Even Yunus condemned the Compartamos, and argued that they shouldn’t frame themselves as microcredit because as he puts it, “Microcredit was created to fight the money lender, not to become the money lender” (Bloomberg, 2007).

Microfinance as a New Poverty Trap

While it may be true that the Grameen Bank, which is still thriving after more than three decades of establishment, has been helpful in improving the financial inclusion of the poor — specifically, Bangladeshi women, its reinvention and shift to profit-making objectives of those who commercialized it made the paradox of microfinance and its goal of women empowerment. Microcredit clients who have previously viewed microfinance as an escape from poverty are now in a more aggravated poverty trap. For some, the new escape from this imprisonment has become suicide. For instance, in Sri Lanka alone, it is estimated that 200 cases of recorded suicides were committed in the span of three years, and in India in 2010 alone (Finch et al., 2022). According to the National Crime Records Bureau of India, 87,000 cases of suicides were recorded due to indebtedness and harvest failures (Akhuwat, n.d.).

Rethinking Poverty Alleviation

It is inconclusive whether microfinance institutions at present are really able to reach the poorest of the poor who are in need of financial capital or it is the relatively able part of the society that receives their support. Thus, a need to ensure that the real target beneficiaries of microfinance institutions are reached is necessary. Additionally, through monitoring and capacity-building activities, they may also help borrowers by increasing their human capital. Moreover, it is also important for lenders to ensure that the loans are allocated to projects that are profitable. This is in line with the findings of Kondo (2007) that households usually allocate loans in business activities that do not generate sufficient revenues to increase their income.

Nonetheless, if we want poverty alleviation to be successful, the focus should shift from improving economic institutions including microfinance to improving the political institutions that shape the former. As Acemoglu & Robinson (2012) argued in their book Why Nations Fail, “Poor countries are poor because those who have power make choices that create poverty.” Thus, the creation and reform of political institutions that are of, for, and by the people is of utmost importance if we want to solve economic problems. Besides, it is every government’s responsibility to ensure that none of their population is poor. After all, why should we work for development that does not translate to our own development? While microfinance can serve as a tool to improve our lives through inclusion in financial services, it must not be framed as a poverty alleviation instrument, especially now that it has shifted focus from philanthropy to profiteering.

John Simone C. Yrastorza is an undergraduate student majoring in Public Administration at the University of the Philippines National College of Public Administration and Governance (UP NCPAG). In 2023, he was part of the Summer School Program of the London School of Economics and Political Science (LSE), where he completed a course on International Development. His academic and research interests encompass the political economy of development, development in historical perspective, East Asian developmental states, Philippine economic history, fiscal administration, and the intersections among poverty, gender, labor, and development.

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