By Tasnim Anwar
Microfinance is a social finance system designed for bottom of the pyramid customers. Financial services, such as credit and insurance, are offered to customers in small monetary quantities with lenient collateral requirements.
A common form of microfinance collateral is social capital. Social capital collateral refers to the assurance of consistent payments through peer pressure and group solidarity in the customer's network.
For example, in microcredit, social capital collateral is usually created through the group lending approach. Under group lending, each individual borrower is responsible for their own loan repayments and also other group members' loan repayments.
Inclusion of Women
The advent of microfinance has diminished the level of women's exclusion from the financial services market. Through access to microfinance services, women are believed to have greater income levels and resource control in their households.
Additionally, microfinance institutions (MFIs) find women to be better borrowers as they are less likely to default on their loans and more likely to invest proceeds towards household improvement than male borrowers.
Criticism
Microfinance was initially established to empower borrowers - mainly women - and eradicate poverty. Several studies have, however, shown conflicting results.
A 2010 article, published in the Development and Change journal, states that implementing social capital collateral with female microfinance customers has not been completely effective in Bolivian villages.
Social capital collateral was found to be effective in investments related to agriculture and land ownership as the asset being funded represented a sense of community and cooperation. However, in the case of women-led commercial activities, the power of social capital collateral did not succeed. Instead, the collateral strained the female customers' network due to the sole profit generating objective of commercial activities.
Furthermore, a 2012 Development and Change journal article, explains that the number of loans disbursed to women does not clearly indicate women empowerment. The article suggests the usage of the loan as a better indicator.
Through a study conducted in rural India, it was found that men with wives enrolled in a credit program report less wage-earned hours and more self-employed hours. This implies that the funds disbursed to women are most likely used to improve productive assets owned by men.
In such situations, where women are not the consumers but conduits of microfinance service, women's access to microfinance is not actually improving their own economic status and bargaining position in households.
A 2012 Asian Social Work and Policy Review article also chimes in by criticising the improper measure of women empowerment through microfinance.
Based on studies in Bangladesh, the article encourages MFIs to use metrics other than loan repayment rate to assess the empowerment of its clients. MFIs are asked to regularly measure changes in empowerment factors such as gender disparity and women's self-worth.
The article also urges MFIs and other organizations to provide capacity-building programs to ensure good profitability and credit rating of women-led enterprises. The capacity building programs are especially crucial in countries like Bangladesh, where the governments do not have many well-developed support programs.
Prospects of Improvement
The cases presented above are not an alarm for crisis, but a reminder for persistent evolution of the microfinance system. Certain organizations have already started reacting to these market calls. In the next article of this two-part series, we will examine the recently developed tools and initiatives that aim to improve microfinance programs.
Tasnim Anwar
Tasnim is a contributing writer for Social Enterprise Buzz. She graduated with High Distinction from the University of Toronto with a Bachelor of Business Administration in Management & Finance. In the past, Tasnim has worked with multinational organizations such as Ernst & Young, Rotaract, and Scotiabank. Her interests include strategy, economics, and community development.
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