An analysis of contemporary microfinance and the impacts of mission drift in the field of international development

Abstract

(In lieu of the Abstract, this is the Introduction) Between the 1970s and the 1990s, the concept of microfinance as a strategic anti-poverty mechanism occupied a vast and dynamic space within the field of international development. Popularized by economist and 2006 Nobel Peace Prize co-recipient Dr. Muhammad Yunus, microfinance is rooted in a local experiment in Bangladesh with the purpose of promoting self-employment and small-scale entrepreneurship, particularly among impoverished and disempowered women. During the first stages of its development, microfinance was arguably a revolutionary concept for poverty alleviation. Its original objective was to reach the most impoverished through the provision of small loans that could be used for entrepreneurial endeavors and revenue generating projects. Microfinance was seen as a way to reduce extreme poverty, empower women, and increase the quality of life for the borrowers. Between 1997 and 2005 the number of microfinance institutions increased from 618 to 3,133, and the number of borrowers rose from 13.5 million to 113.3 million (84 % of them being women) (Hermes and Lensink, 2007). After gaining popularity and support from development scholars, policy circles, and the public as a poverty alleviating tool, microfinance as a concept also became an attractive revenue generating site for profit seeking commercial banks and multi-national corporations. The expansion of microfinance policy opened up a new opportunity for commercial banks to integrate microfinance into their banking portfolios, which was framed as an effort to better serve the impoverished by increasing the value and amount of loans available to them. More in-depth and frequent evaluations of microfinance success rates have brought to light the corrupt and manipulative potential that microfinance has when used in a profit seeking context, leaving the practice as a target of moral criticism and ethical questioning (Hudon, 2011). Notable scholars, such as Karim (2008), suggests how the shift that microfinance has experienced in the late 1990s and early 2000’s, from a bottom up, grassroots approach to poverty reduction, to a top down, profit seeking approach, runs in parallel with the spread of neoliberal economic policy to developing communities, further ingraining dependent relations between the powerful rich and the vulnerable poor. In addition, the culturally insensitive practices of many profit seeking microfinance institutions not only perpetuate the debt cycle and expand the neoliberalglobalization agenda to the South, but they can also trigger conditions such as mass suicides and severe stress related health problems (Ashta, et al., 2011). The following study will engage with the dangers and negative impacts that small microfinance institutions face when they are co-opted by profit seeking commercial banks and other for-profit financial institutions. It will highlight the deliberate and exploitative measures that further develop dependent relationships between borrowers and lenders through pushing the impoverished deeper into poverty traps and debt cycles. It will suggest the necessity of reevaluating modern microfinance practices as a poverty alleviation tool, and present valuable innovations that microfinance institutions have used in their programs in order to create a sustainable and well-rounded poverty alleviation tool. The main focus of the analysis will establish the high risk of mission drift that modern day microfinance institutions encounter, as the scope of microfinance within international development continues to lean more towards neoliberal economic policy, rather than grassroots, not-for-profit development strategies, and how this is a detriment to the borrowers who are involved. Throughout the analysis, this thesis will also highlight the large gap in empirical research within the study of microfinance that further deepens the divide between critics and advocates of microfinance, as the evidence for or against microfinance is typically limited to anecdotal instances or cases. The study concludes by claiming that the commercialization of microfinance organizations is an inefficient, exploitative, and contradictory attempt at the original aim of microfinance and its poverty alleviation vision, and that grassroots microfinance organizations who strive for capacity expansion through commercialization effectively limit their success of poverty alleviation through their risk of mission drift, or complete co-optation by commercial organizations. The following portion of the introduction provides a brief context of microfinance, in addition to the discussing the two key questions of this study: 1) What is the context of the borrowers’ situation, and is microfinance effective in alleviating their impoverished situation? and 2) What are the risks and negative impacts of mission drift, and how has the commercialization of microfinance created a counter intuitive economic concept that actively exploits and deepens the socio-economic disparities within developing communities?