Credit for Poor Women: Debt or Empowerment?

By Smitha Radhakrishnan

You have heard the story. A poor woman in a rural village is trying to support her four kids with the meager income that her drunkard husband deigns to give her. She is then offered a group loan, without collateral, for a small amount of money that allows her to buy a cow. She tends to the cow and sells the milk, and eventually, starts to earn a bit more money. She pays back her loan and then takes another. Before long, she owns a herd of cows, her children are educated, and her husband has given up drinking to become her business partner. This is the motivating story of the $115 billion global microfinance industry, popularized for years by everyone from the Nike Foundation to the Harvard Business Review.

Now, this story may well have been possible in some places in the world at some point in recent history. But today, microfinance has become a profitable industry that provides financial products to the poor that are too expensive for the rich. At interest rates typically ranging from 22%-90% per year, profitable microfinance companies around the world now consider themselves providers of “financial inclusion,” and not women’s empowerment, poverty alleviation, or even enterprise development. This “mission shift” comes as a result of significant criticism from academics, social activists, and even microfinance practitioners around the world, and a significant crisis in India. Critics have noted that microfinance can push vulnerable families into debt spirals, that microfinance has been associated with suicides due to overly aggressive collection practices, and that for-profit microfinance especially caters to the better off working classes rather than the poorest. In contrast, however, recent research in West Bengal, India supports the idea that some forms of microfinance may provide women with the potential for collective social action.

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Borrowers engage in entrepreneurial training activity, Coimbatore.

My own research on microfinance companies in India since 2012 suggests that the reality of microfinance is far more complex and context-specific than either the fans or the critics suggest. I studied two microfinance companies and interviewed clients, trainers, loan officers, managers, and directors. I observed training sessions for clients and staff, home visits to verify loans, and center meetings, where clients repay.

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Borrowers gather for financial literacy training, Chennai.

I discovered that microfinance—at least, in its profitable form in India—might be more like a credit card than either a magic bullet for women’s empowerment or a downward spiral into perpetual indebtedness. Like credit cards, clients use them in many ways that are useful to them, including providing private education for kids, improving their homes, paying off more expensive debts, and in some cases, investing in a new or existing business. Like credit cards, microfinance carries a high interest rate. But there is a twist: when you take a group loan as a microfinance borrower, it’s not just your credit score that’s on the line. You put at risk relationships with your closest friends, who might be your entire support system.

Here’s a story you probably haven’t heard. Imagine yourself in it. You get together with a few close friends and take a loan from a financial institution based purely on trust in one another. Weeks later, your child becomes ill. You put the money set aside for loan repayment towards her mounting medical expenses.

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A failed microenterprise, Bangalore.

Week after week, you show up at the collection meeting empty-handed. As your child’s illness continues, you stop going to the meetings. Your friends reluctantly pony up the repayment money from their meager earnings in order to avoid default themselves. You feel badly about not being able to pay your share, and start avoiding them. Before long, they stop talking to you altogether. In just a month or two, your most precious economic and social relationships, built over years—not to mention your future access to loans—has evaporated.

How can an incredible woman-and-cow story completely eclipse a troubling woman-with-sick-child story? To answer that question, we must recognize that the lives of women we regard as poor are more diverse and complex than anything we can imagine. Like us, they fit into the expectations of dominant institutions one minute, and buck those expectations the next. To understand microfinance—why it targets primarily women, why the interest rates are so high, and why the terms are so rigid—we must re-examine our fundamental understanding of who benefits from this widespread development intervention, and how. Microfinance yields empowerment for poor women about as much as credit cards yield financial stability for cardholders. But investors, microfinance companies, and donors take the profits and good feelings derived from microfinance all the way to the bank.

Smitha Radhakrishnan is Associate Professor of Sociology at Wellesley College, specializing in the study of gender, globalization, and development. She is author of Appropriately Indian: Gender and Culture in a New Transnational Class(Duke University Press, 2011), a multi-sited ethnography of Indian information technology professionals. Radhakrishnan’s work has appeared in Gender and Society, Theory and Society, World Development, among others, and she serves on the Gender and Society Editorial Board. 

 

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