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«UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION economy environment employment SME TECHNICAL WORKING PAPERS SERIES Working Paper No. 14 Combining ...»

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By enabling them to make important economic contributions to their households, microfinance often improves women’s status within the household. This in turn strengthens their decision-making power. Evidence from various countries shows that participation in microfinance programmes frequently has a positive effect on women’s influence in the areas of family planning, children’s marriage, sending daughters to school and buying and selling of property. Most female microfinance clients also report improved relationships with their husbands and families as well as a decrease in domestic violence (Cheston & Kuhn, 2002). The fact that even illiterate women can receive and handle banking services can provide an important boost to self-confidence and can prove to the wider community that women are capable of managing their own businesses.

Although the economic improvements associated with microfinance are probably the most important factor contributing to women’s empowerment, other aspects of microfinance programmes, such as group membership and training, also play a role. For example, leadership and public speaking skills learned in groups often help women be more confident and increase their ability to interact with others in their households and communities. Several accounts exist where people in villages turned to self-help groups rather than to traditional leaders to help them solve problems. Finally, the respect that microfinance clients receive from bank staff can in itself be empowering.

Women in Sindhudurg, feel that enterprises started jointly with other members of their self-help group have enhanced their control over their lives. Activities such as selling vegetables or the preparation and marketing of snacks have increased their disposable income. This has been used not only to take care of their personal needs, but also to help each other with small amounts of credit in times of crisis (see section 2). Access to credit and savings can thus have significant non-pecuniary benefits.

Despite the arguments suggesting a positive impact of microfinance on women’s empowerment, there is reason for caution. Access to financial services for women will not automatically lead to increased welfare or gender equality. Although many women worldwide are already contributing to household income, their status within the household continues to be low. In Chanderi, for example, women reported that despite earning a The term ‘empowerment’ is seldom precisely defined, but typically refers to women’s increased ability to take decisions within the household and the wider community and their ability to have access and control over resources. This process is accompanied by changes in social attitudes towards women.

© United Nations Industrial Development Organization

16 SME TECHNICAL WORKING PAPERS SERIES

living for the family, they have little control over the household’s finances or even over their own earnings. The men in the family continue to decide on expenditures. As long as women continue to lack social resources such as access to education, they will only be able to make limited use of the financial resources they have obtained. As Cheston and Kuhn (2002, p.178) observe: “The ability of a woman to transform her life through access to financial services depends on many factors – some of them linked to her individual situation and abilities, and others dependent upon her environment and the status of women as a group”.

There is some empirical evidence which questions the positive effects of microfinance on women. In a study of microcredit provision to women in Bangladesh, Goetz and Sen Gupta (1996) find that only in 37% of cases, women retained full or significant control over loans, while 63% of cases fell into the categories of partial, very limited and no control over loans11. Particularly when women are not generating cash income themselves and have to ask their husbands for funds to meet their regular loan repayments, dependency can be reinforced and new sources of tension may arise. However, control over loans is by itself not a good indicator of empowerment. 37% of loan retention may already be a significant achievement in a gendered society such as Bangladesh. In societies in which women are precluded from access to markets, male relatives remain important mediators. Indeed, cooperation between men and women may already be a form of empowerment. It can also be considered an improvement if women and men take joint decisions on business investments since husbands would previously have taken the decisions by themselves (Cheston & Kuhn, 2002). Finally, handing over loans to male relatives may increase women’s bargaining power or may be a survival strategy (e.g. to preserve a marriage or to guarantee food supply). For example, Rahman (1986, quoted in Goetz & Sen Gupta, 1996) found that female Grameen Bank borrowers who had transferred their entire loan to a male relative had a higher nutritional status and more money spent on clothing and medical needs than wives of male borrowers. Nevertheless, as long as women borrowers bear the liability for loans invested by their male relatives, loan retention remains an important variable.

F. Benefits of Microfinance The preceding discussion has shown that microfinance can lead to increased income, consumption and human capital accumulation. It can reduce vulnerability and may





improve women’s economic and social status. As Ledgerwood (1999, p.1) notes:

“[m]icrofinance is not simply banking, it is a development tool”. Box 1.6 summarises the benefits of microfinance for the economically active poor.

It was found that women were more likely to retain full control when they were widowed, separated or divorced, when loans were invested in traditional women’s work such as livestock rearing, when loans were small and when resources were provided in kind.

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Microfinance can:

• Promote microenterprise development by facilitating access to working and investment capital as well as enabling bulk purchases of inputs, which entail cost reductions

• Improve household income and reduce poverty by promoting microenterprise development and facilitating income diversification

• Promote economic independence of the poor and marginalised and decrease exploitation by local elites.

• Stimulate employment creation for household members and others.

• Enable consumption smoothing by reducing seasonal fluctuations in income.

• Help avoid recourse to moneylenders as well as the dependence and high interest rates associated with informal credit.

• Act as a social safety net and reduce vulnerability by helping to protect against risk ahead of time and to manage losses following an adverse shock. Microfinance clients may also be more able and likely to seek outside support and demand the services they may be entitled to.

• Increase physical asset accumulation (both for business and household purposes) either through direct loan use or through profits re-investment. Existing assets can also be improved and protected, e.g. by having funds to repair equipment or avoiding the sale of productive assets in the event of a crisis.

• Improve women’s economic and social status and thus have an empowering effect on women.

• Increase clients’ self-confidence.

• Alleviate the need for child labour. However, child labour may initially rise as children are relied upon to ease women’s increased work burden.

• Increase human capital, by improving nutrition as well as access to health care and education.

• Allow provisions for old age, which could in the long-term affect fertility rates.

• Allow improvements in housing.

Source: Robinson (2001); Simanowitz & Walter (2002).

G. Limits of Microfinance Despite the significant benefits of microfinance, it is not a panacea for the elimination of poverty. It has its limits, including that (a) by itself microfinance is often insufficient to alleviate poverty, (b) microfinance typically does not reach the ‘poorest of the poor’, (c) not all economically active poor want to become microentrepreneurs and thus can benefit from microcredit, (d) microfinance may lead to the displacement of entrepreneurs without access of microfinance, (e) there might be cultural or religious reasons against accessing microfinance products and (f) many microfinance programmes have simply failed.

Access to microfinance is by itself insufficient to reduce poverty. The economically active poor need skills, adequate technology, profitable investment opportunities and access to markets to make their business ventures profitable. Frequently, limited demand, low quality products, unavailability of inputs, scarce public infrastructure and lack of education and health care facilities is an even greater obstacle to enterprise growth and poverty reduction than lack of capital. The fact that credit on its own fails to address many of the constraints faced by the economically active poor is supported by evidence suggesting that - although microfinance can play an important role in enabling enterprises

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to survive in times of crisis - there appears to be a ceiling on the growth that is stimulated by improved access to credit (Dawson & Jeans, 1997).

There has been considerable debate over whether microfinance can and should reach the ‘poorest of the poor’. Microcredit in particular, seems to help mostly those on the upper edge of poverty. People near the poverty line are typically more likely to have business opportunities and thus more able to make productive use of microcredit than the ‘poorest of the poor’12. The poorest, by contrast, will channel any available money into meeting basic needs. Although the poorest may have a need for credit, their debt capacity, i.e. their ability of taking on debt without running the risk of inadequate cash flow and subsequent loan default, is likely to be insufficient. Encouraging these people to take on debt will

serve neither the borrower nor the lender. As Robinson (2001, p.73) emphasises:

“commercial microfinance is a complement to, not a substitute for, government and donor poverty alleviation and employment generation programs for the extremely poor”. Some microfinance institutions, such as BRAC in Bangladesh, have therefore developed special programmes for the poorest, in which they provide grants or food for a fixed period of time. This is intended to stabilize clients’ income so that, over time, they will be able to graduate into the institution’s mainstream credit programme. Despite the limited usefulness of microcredit for the poorest, other microfinance products such as savings facilities and insurance are likely to assist them in managing their livelihoods.

Not all poor want to invest and be entrepreneurs. Entrepreneurship requires a certain degree of skills and owning and managing a business carries a risk that not everyone is able and willing to assume. Self-employment is therefore often a last resort and many poor people would prefer stable wage employment. Nevertheless, whereas poor wage labourers may not benefit directly from microcredit, they typically do gain from access to reliable savings and insurance services and may benefit indirectly if they find employment in an enterprise that was created or expanded with microcredit. There is evidence that daily wage labour rates of the poorest increased in Bangladesh as a result of microfinance interventions (Wright & Dondo, 2001).

A loom in Chanderi costs between Rs 5,000 and Rs 8,000 (US$ 110–176). This represents over one third of an unskilled weaver’s annual salary. Only very skilled weavers can accumulate enough capital to become independent weavers. For poor weavers, it is less risky to work as labourers than to be independent. In these cases, the provision of microcredit to buy a loom could be counterproductive and result in a debt trap - unless it is accompanied by skills training, which provides weavers the opportunity to increase their incomes.

Microfinance may displace some economically active poor without access to credit through competition with microfinance clients. Particularly in saturated markets characterised by low entry barriers, low skill levels and lack of innovation, the growth of Some authors (e.g. Simowitz & Walters, 2002) challenge the belief that very poor people cannot productively use credit by arguing that inadequate financial products are typically the problem. There are some microfinance institutions that attempt to serve only the very poor. These institutions are, however, mostly dependent on subsidies.

© United Nations Industrial Development Organization

SYNERGIES BETWEEN CLUSTER DEVELOPMENT AND MICROFINANCE 19

enterprises with access to microfinance may take place at the cost of displacing those unable to obtain credit. Thus, microfinance targeted only at a subgroup of the population can entail significant displacement rather than the creation of employment (Dawson & Jeans, 1997).

For cultural or religious reasons, some people may be reluctant to take out microcredit or to deposit their savings in financial institutions. Most devout Muslims accept the interpretation of the Koran that all "riba," i.e. a fixed rate of interest on loans or deposits, is forbidden. Islamic banks may therefore neither charge or pay interest, nor can they require specific provisions for inflation. Instead, they earn their money by charging fees and by sharing the risk and profits with entrepreneurs. For Muslims it is forbidden to give money to financial institutions and to collect interest at the end of a certain period. They may therefore not have regular savings accounts and any interest which accrues must be given to charity.

Finally, not all microfinance programmes have done well. The success of microfinance programmes crucially depends on an enabling macroeconomic, political, legal and regulatory environment. There is some evidence (e.g. Yaqub, 1995) suggesting that the low default rates of many microfinance institutions may not be sustainable in the long run.

Through larger repeat loans and the resulting increase in income and assets, clients obtain access to alternative sources of finance and are less dependent on microfinance providers.

They may therefore be more likely to default.

© United Nations Industrial Development Organization



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