Microcredits. An Effective Tool to Empower Women in Developing Countries?

Table of Contents

1. Introduction

2. The Advent of Microfinance Institutions

3. Conceptualization

4. Why are women better clients?

5. Why may effects of microcredits be higher when they are provided to women?

6. Four schools

7. Evidence on women’s empowerment
7.1. Economic empowerment
7.2. Socio-cultural empowerment
7.3. Interpersonal empowerment
7.4. Psychological Empowerment
7.5. Political and Legal Empowerment

8. Empowerment vs. financial sustainability

9. Contra arguments

10. Access= Empowerment? Bringing all together

References

“At first I was afraid of everyone and everything: my husband, the village sarpanch, the police. Today I fear no one. I have my own bank account; I am the leader of my village’s savings group. I tell my sisters about our movement. And we have a 40,000-strong union in the district.”^[1]

1. Introduction

From 1997 when the first Microfinance Summit took place until today, 18 summits brought together microfinance practitioners, educational institutions, donors, financial institutions and non-governmental organizations to facilitate knowledge experience sharing in microfinance. While pushing this topic forward, the Microfinance Summit Campaign works on four issues. Next to “Reaching the Poorest”, “Financial Self-Sustainability” and “A Positive, Measurable Impact” is “Empowering Women” among the top four goals. Thereby microfinance and empowering women just covers two essential objectives of the United Nations Development Goals set in 2015. But the potential to empower the poorest people of the world were already recogniz ed in the 1970’s and 1980’s when the first microfinance intuition, the Garmeen Bank in Bangladesh, was established. In the following decades, microfinance instruments, especially microcredits, underwent a unique success story and became one of the most popular development tools. In 2013, microfinance institutions (MFI) counted 211 million clients, among them 114 poorest borrowers (Abed et al., 2015).

This assignment aims to shed some light into the turbidity of women’s access to microcredits and their corresponding empowerment. Despite there is a range of literature reviewing the success of specific microfinance programs in different communities, here an overall picture of microcredits’ capabilities to empower women will be developed. The subsequent research question is

How can microcredits as a developmental instrument be assessed in terms of their effectiveness to empower poor women in developing countries?

In order to answer this question in a systematic manner, the paper is structured as the following: It begins with an overview on the advent of microfinance institutions and a clear conceptualization of the two terms microfinance and empowerment. The subsequent chapter discusses the question why women are predominantly targeted by microfinance institutions and whether this is effective. Four schools, all of them having a different position towards women’s empowerment and microfinance, are identified thereafter. The centrepiece is a review of evidence for the different dimensions related to women’s empowerment due to their access to microcredits. In the last two chapters the empowerment theory is critically scrutinized and last but not least, the findings will be summarized.

2. The advent of microfinance institutions

Most economies in developing countries are characterised by a high share of small-scale producers and enterprises, often one-person or family businesses with low and irregular income. The constantly uncertainty leaves no room for saving or investment on their own. Productivity remains low and living standards stagnate at a level under the poverty threshold. In the literature it is commonly accepted that the lack of access to capital constitutes the main reason why people in these countries remain poor, see for example Hermes and Lensink (2007). Poor peoples’ access to capital is limited by their difficulties to provide the expected collaterals. Commercial banks need these in order to access the borrowers’ quality. In addition, small loans are more expensive to process (as per dollar rent) compared to normal size loans, they have high administrative costs and commercial banks are more reluctant to provide these (Todaro & Smith, 2009).

A solution provided Muhammad Yunus, professor for economics and winner of the Nobel Price. He founded the Garmeen Bank in 1983, one of the most famous examples on how poor people can use capital as a factor of production. The dilemma between lacking collateral of poor clients and high costs for banks was dissolved through externalizing costs: Microfinance institutions like the Garmeen Bank in Bangladesh transfer the selection, examination and monitoring process of clients from paid bank employees to the poor themselves. Hereby peer pressure is utilized as collateral. Clients are organised into so called credit cooperatives. Each is headed by one person on a rotating basis. All clients select other members who are poised to co-sign the loan and share the responsibility. Once one member of the cooperative makes use of the loan, no other member can receive an additional loan until the first one is repaid. With increasing experience and positive repayment records, clients can take out larger loans. Joint liability group lending facilitates screening, monitoring and enforcing of the loan conditions among the clients. Because of their geographical proximity, internal information is gathered much more effective (Hermes & Lensink, 2007). Additional pressure on client’s payment discipline is exerted through the publication of successes and failures (Todaro & Smith, 2009). The credit cooperatives meet every week to discuss the progress so far and further steps to take. The high transparency and rotating responsibilities are expected to prevent abuse and corruption.

The group lending scheme enables the poor to gain access to loans at reasonable costs and invest in their businesses and abilities. The growing economic activity and productivity is expected to feed into higher living standards and reduced poverty in developing countries (Duvendack, 2011). Yunus (2003) makes a valuable statement here: “(Microcredit) is based on the premise that the poor have skills which remain unutilized or underutilized. It is definitely not the lack of skills which make poor people poor. (...) Unleashing of energy and creativity in each human being is the answer to poverty”.

3. Conceptualization

In order to assess microfinance as a tool to increase women’s empowerment comprehensively it is important to be clear about the two concepts. While the former demonstrates a clear substance, the latter is more abstract and requires further clarification.

Beginning with microfinance, Todaro and Smith (2009, p. 741) define it as financial “products and services supplied to people who might otherwise have no access to them or have access only on very unfavourable terms. It includes micro saving and micro insurance as well as microcredit”. Following this, microfinance institutions (MFIs, as described above) can be determined as financial institutions specialised in providing these products and services to low-income groups. The largest MFIs are ASA in Bangladesh, Bandhan in India and Banco do Nordeste in Brazil. This paper focuses on microcredits, but the term microfinance is used equally.

Turning to the second concept, one find agreement among scholars that empowerment of women is one essential part of each development strategy. But the terminologies and meanings linked to women’s empowerment vary to a great degree and operationalization for measuring the concept is poor developed (Duvendack, 2011). Competing concepts are such as gender equality, female autonomy or women’s status. But as Malhorta (2003) emphasizes, there are two distinguishing elements of women’s empowerment: process and agency. The former describes the process from state of gender inequality to equality, the latter refers to the fact that women need to be the actors of the transition process. This paper relies to the widely acknowledged definition of Kabeer (1999, p. 437), who describe empowerment as “the expansion in people’s ability to make strategic life choices in a context where this ability was previously denied to them”, which goes hand in hand with the terminology used by the Wold Bank’s Empowerment Sourcebook (2002, p. 6) “Empowerment is the expansion of assets and capabilities of poor people to participate in, negotiate with, influence, control, and hold accountable institutions that affect their lives”. Women’s empowerment is an implicit goal of an increasing number of microfinance institutions and demonstrates donor’s claim to link financial services with the possibility to bring about change, choice and power (Cheston & Kuhn, 2002). Nevertheless, there is no “single set of empowerment items” that can be used across all regions and communities. Rather one has to outline several dimensions of women’s empowerment. While Mayoux (2000) for example differentiates the three dimensions economic empowerment, increased well-being, and social and political empowerment, Malortha (2003) outlines a more sophisticated framework consisting of the six dimensions and three levels (see table 1). The dimensions are economic, socio-cultural, familial-interpersonal, political, legal and psychological empowerment and relate to the household and community level as well as to broader areas. In spite of the growing number of research on microfinance and its influence on women’s empowerment, the existing empirical evidence is rather limited to some of the dimensions and levels, and suffers from weak methodologies, see for example Mayoux (2000), Duvendack (2011) or Cheston and Kuhn (2002).

Table 1: Dimensions of women’s empowerment in the household, community and broader areas (according to Malhorta, 2003)

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4. Why are women better clients?

Women have a disproportionally high share among the world’s poorest people and suffer from poverty and its consequences for health, education and empowerment in particular. MFIs worked towards including high numbers of women to enable access to financial services and thereby facilitate higher standards of living. In addition, women make up a great and even increasing part of microfinance target group: women are disproportionally represented among small businesses, self-employed and persons working in the informal sector. According to Armendáriz and Morduch (2010) women make up 70% of the clients of the largest MFIs. But women’s share varies considerable depending on the region they live in. The U.S. Agency for International Development (2000) reports that percentage of female clients ranges from 87% in Asia to 27% in the Near East. With a view on the total numbers of female clients with outstanding credits, one can see an increase in general from 150.0 million in 2012 to 157.7 million in 2013. But a real issue is the fact that the number of the poorest women owning a lean has fallen from 96.4 million in 2012 to 94.4 million in 2013 (Abed et al., 2015). Thus microcredits are more and more open to the group of poor women as such, but those who are at the very bottom of the social pile experience difficulties to benefit.

In addition to the poverty argument, women are the preferred target group of MFIs because of their nature and characteristics. It is common sense that women perform better as clients due to their higher liability in repaying loans as well as their more risk-averse and conservative behaviour in investment (Armendáriz & Morduch, 2010; Pitt & Khandker, 1998; Pitt, Khandker, & Cartwright, 2006). One last argument in favour of preferring women is their low mobility. Women tend to have a limited radius of movement (because of their children, household and lower outside job opportunities), so MFI’s can monitor and contact their female clients at lower costs (Armendáriz & Morduch, 2010).

5. Why may effects of microcredits be higher when they are provided to women?

But women are not merely the preferred group of MFIs; money given to them is invested more effectively compared to men, too. Evidence is provided by Pitt et al. (2006) for example, who has found evidence that the effectiveness of microfinance programs depends to a great degree on the client’s gender. Previous research by Pitt and Khandker (1998) showed that loans supplied to women are much more likely to change behaviours compared to men. The observed transformations include household expenditures on basic needs, non-land assets held by women, male and female labour supply and children’s education. Mayoux (2000) adds one additional point - higher spending on health. On the other hand, some expect men to invest the additional financial resources in cigarettes and alcohol instead (Armendáriz & Morduch, 2010). It’s not just that women are the preferred group of clients to MFI, investing in women means a comprehensive improvement of the whole families’ economic and social situation. It is a leverage effect.

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^[1] Citation from a discussion of poor men and women in India. Quoted from: World Bank (2001). World Development Report 2000/2001: Attacking Poverty. Oxford University Press.