Rethinking

Microfinance & Poverty

SOC 402
Sociology of Poverty
 A Presentation by Group 02

Submitted to: Submitted by:

Dr. Khairul Chowdhury Afifa Islam Heme (142)

Associate Professor Istiaq Nur Muhit (171)
Department of Sociology Asif Karim Chowdhury (182)
University of Dhaka
Introduction
From the cradle of civilization, rulers and thinkers alike tried to address
the deprivation of one group of people in relation to another. Taking all
dimensions in consideration, what we identify as poverty today, is
therefore, not a new concept though many other definitions has been
coined in the past few years.

With the hard works of scholars, here comes the new approaches. Some
of these new methods obliterate over time yet some stand, marking its
usefulness on the face of human advancement. In this presentation, we
(group 02) are going to discuss some revised approaches and views
towards poverty and we will try to examine the popular notion of
microfinance in new lights.
Poverty
According to Marshall (2012), Poverty is “a state in which resources,
usually material, but sometimes cultural, are lacking”. Poverty can be
discussed in both absolute and relative terms. Where absolute poverty
indicates a state where an individual lacks basic subsistence to survive,
relative poverty does not entail such predetermined parameters in
explaining poverty. Rather, relative poverty wants to measure poverty by
comparing groups within a society.

There exist handfuls of scales and lines to grasp absolute poverty and
many indexes to grip the magnitude of relative poverty.

Charles Booth & Seebohm Rowntree’s study of poverty in London can be

regarded as the seminal work of poverty.
Rethinking Poverty
For all developmental agenda, Poverty is regarded as evil and everyone
agrees to end poverty for good. But none can prescribe a ‘one size fits all’
solution to this downtrodden problem.
As Banerjee & Duflo(2011) suggested, two channel of thoughts are
prominent. One believes in ‘poverty trap’ which is the process of
reinforcing poverty as both cause and effect. Therefore, it is believed
that external push such as foreign aid or government incentive can kick-
start a poor man’s life, liberating him from the trap.
Other groups are against direct foreign aid as they deny poverty trap and
believe that giving away money to poor destroys their spirit and control
over their life. Thinkers like William Easterly of New York University and
Dambisa Moyo of World Bank advocate that foreign aid creates an
endless spiral of aids over aids.
Rethinking Poverty (Continued)
Abhijit V. Banerjee & Esther Duflo are two big economists of our times.
They founded Abdul Latif Jameel Poverty Action Lab (J-PAL) and used
Randomized Control Trials (RCTs) to examine outcomes of a certain
poverty alleviation strategy.
RCTs can be understood as a process
where a certain strategy is compared
with a randomized group, known as
comparison group. This comparison
group is not exposed to that strategy.
Each subject has equal probability to
be exposed to that certain strategy.
Therefore, with careful examination,
the outcome can easily be perceived .
A New Look at Poverty
Banerjee & Duflo have provided us with some invaluable insights by their
pioneering book “Poor Economics: Rethinking poverty & the ways to end
it (2011)”. These insights are briefly given below:

-Poverty is not a singular anomaly. Rather, it consists of some small

problems. Therefore, we need to focus on ‘one step at a time’ rather that
working out absurdly giant problem.

-Being poor no longer means being hungry. Rather, the problem of

malnutrition must be addressed to battle poverty. Besides, increased
purchasing power doesn’t mean more calorie intake; poor people often
spend money on costly food.
A New Look at Poverty (Continued)
-Lack of proper health maintenance is a potential evil of poverty and
poor people often fall in the trap of bad health, resulting in more severe
poverty.

-Poverty’s effect on education should not be simply measured with the

rate of attainment. The lack of proper schooling as well as drop out rate
can be taken as better indicators of poverty.

-The notion that large family is poorer than small family is not
statistically sound. Rather, the size of family or population control in
general has little effect on poverty situation.

-Regional economic disruption has little effect on poor as they already

live on margin.
A New Look at Poverty (Continued)
-Microfinance helps the poor in general but most of the promises it
makes are futile and non-existent.

-The poor not having any savings is a problem on the part of formal
financial institutions. It is not a habitual demerit of poor because they are
already in deprivation of many necessaries. Besides, for banks and other
formal institution, poor are not welcomed easily.

-For insecurity and lack of investment, poor people see jobs as more
secure ladder to climb on rather that a business. Investors and lending
institutions are not interested in financing small party and that motivates
the poor psychologically to avoid entrepreneurial endeavor.

-Focus must be given on policies, not on the form of government.

Microfinance
Microfinance is regarded as one of the most promising solutions to the
existing poverty problem. The money lending entity that lends money to
a group of poor people who are not given loan by mainstream financial
institutions and who are repressed by informal moneylenders with high
interest rates can be called microfinance institution.
Microfinance institutions (MFIs) simply lend the money to a group. These
groups usually consist of people with same economic condition and
these money are collected generally at weekly basis. This way, the poor
are saved from the grip of usurers at one hand, the high interest rate of
microcredit helps MFIs to become a sustainable institution without
foreign aid on the other.

Therefore, MFIs are showered with praises and accolades worldwide.

Rethinking Microfinance
Microfinance provides a bucket full of promises. The Nobel Peace Prize
for Grameen Bank made the MFIs established in the battle against
poverty. But does it worth such appreciation? This question is very
relevant because most of the MFIs operate with little help of donors.
Therefore, the need for a rigorous monitoring and evaluation for these
MFIs are non-existent. Besides, success stories of these MFIs prevail all
kind of doubt.

But, Banerjee & Duflo examined the MFIs using their RCTs. For this
purpose, they randomly selected some cases of Indian MFIs to
understand the apparatus of microfinance and the effects it casts upon
the overall poverty scenario. It is interesting to see their findings about
MFIs and the impacts they actually have.
Rethinking Microfinance(Continued)
To begin with, Banerjee & Duflo puts the poverty scenario forward as:
• The poor don’t get loans from the banks as the collateral money can’t
be provided by the poor.
• Even if some banks start public lending, it was a failure as the
defaulter rates were high and often this lending is used in political
purpose.
• Informal money lender as Mahajons are primarily involved in giving
loan to the poor.
• The interest rate of these informal lending is so high, often ten times
higher than the formal lending mechanism.
• The informal lending system works on trust and vigilance of the
money lender.
• No formal sector can establish the monitoring system over loan
holders like informal lenders.
Re-evaluating Microfinance
Microfinance operates with some local loan officers who are responsible
for collecting loans and disbursing. Usually, the loans are provided to a
group of people and these groups have to attend regular group
meetings. Every member of the group is responsible for other defaulters,
therefore, everyone looks out for others.
Usually, the interest rates are higher than formal banks but several times
lower than informal money lenders.

With Banerjee & Duflo’s careful account, they find some interesting
finding about MFIs as:
• MFIs are not so different from informal lenders except a low rate.
Otherwise, both of these focus on regular return and maximizing
profit generations.
Re-evaluating Microfinance(Continued)
• MFIs lending procedure is too rigid. Poor people can hardly afford
time for such procedures.
• A little chaos can hamper MFIs function. The group suicide of farmers
in India made the MFIs’ activity at a standstill.
• As the loans are given to a group, if some member become
defaulters, the whole group try not to give money back.
• The MFIs provide just loans and incentives and the people use it to
buy more product. But it has little impact on overall poverty scenario.
If the MFIs are such a big deal, the disbursement will skyrocket. But
even for the case of Grameen Foundation, the figure is still small.
• Loan officers have a reputation to push people to the edge. This has a
profound impact on overall operation as it makes the people anxious.
Re-evaluating Microfinance(Continued)
• MFIs lend money for small enterprises and the per capita
disbursement is low. Therefore, to establish a medium business, MFIs
can not be used.
• MFIs has little relation with overall household environment
improvement.
• The claim that MFIs empower rural women has little empirical
evidence.

It is to be duly noted that, Banerjee and Duflo do not mean to discredit

MFIs in any regard and in their findings, MFIs are very important in
achieving financial backing. However, their findings burst the bubble of
overestimation about MFIs .
Microfinance & Capitalism
If we look back on the Marxist theory on the origin of capital, Marx
stated that the genesis of capitalism lies in the residues of the
ancestors, which is primitive accumulation. The main argument is
that, capitalism requires the actors to accumulate capital and enter
inside the formal economy or, to be more precise, capitalist economy.

With the help of microfinance, the poor people achieve accumulated

capital in the form of loans and enter inside capitalism.

In the paradigm of microfinance, the development is translated as the

poor man’s access to credits and as Yunus said, a man’s access to
credit is one of the human rights (Yunus 2003:15).
Microfinance & Capitalism(Continued)
According to Roy (2010), microfinance is a tool by which capital
undergoes the process of democratization. To put this implication, she
meant that with the activities of microcredit, all of the poor become the
active participants in capitalism.
Then, she arises the main question, does the poor really want to be a
part of this or they are getting played by capitalism’s apparatus to get
involved?

It is no surprise that, poor people are not useful to capitalism due to two
reasons. Firstly, poor’s economy is informal economy; informal money
lending is a bypass to traditional capitalist system and by MFIs, the poor
are included in the formal capitalist process and with more purchase
power, they strengthen the capitalism to function properly.
Conclusion
Promoting small enterprises and alleviating poverty are two different
processes (Hulme & Mosely 1996:132) and one must not confuse
between these two. Microfinance undoubtedly fuels the small initiative
but it is no miracle, rather, for many critics, it is just another formal
usurer. Just like some other poverty alleviation tool, microfinance is not
universally beneficial.

Exploring policy after policy and action after action, it is reflected that
fighting poverty requires close observation and situation specific
strategy. As Banerjee & Duflo shows in their J-PAL, the outcomes of any
strategy must be put under examination before abruptly regarding its
victory. Ideology induced and macro-focused solution has, therefore,
little chance of winning in the war against poverty.
Reference
1. Hulme, D., & Mosely, P. (1996). Finance against Poverty, Analysis and Recommendations.

2. Marshall, G., & Scott, J. (Eds.). (1998). A dictionary of sociology.

3. Yunus, M. (2003). Halving poverty by 2015-we can actually make it happen. The Round Table,
92(370), 363-375.

4. Roy, A. (2010). Poverty capital: Microfinance and the making of development. Routledge.

5. Banerjee, A. V., Banerjee, A., & Duflo, E. (2011). Poor economics: A radical rethinking of the
way to fight global poverty. Public Affairs

6. Mader, P. (2013). Explaining and quantifiying the extractive success of financial systems:
Microfinance and the financialisation of poverty. Economic research-Ekonomska istraživanja,
26(sup1), 13-28.