The burden of proof that microfinance makes any meaningful contribution to poverty reduction remains squarely with its practitioners. This is a high hurdle: a country achieving fast economic growth is likely to see poverty reduction, but identifying the specific contribution, if any, of microfinance has proved much harder.
The negative effects of excessive microfinance debt, however, are much easier to establish, as in Andhra Pradesh, India, where dozens of heavily indebted farmers killed themselves between 2009 and 2010.
Alleviating poverty by providing financial services to the poorest on a commercial basis has usually been little more than a ‘politically-driven fantasy’, the book argues. There is not even convincing evidence that policy efforts have even led to wider access to financial services. Borrowing from formal financial institutions remains heavily outweighed by borrowing from family, friends or informal lenders in most developing regions.
The roots of failure lie in the colonial era. Colonial officials in the early 20th century identified the lack of access to affordable credit, savings and insurance as obstacles to economic development. However, in West Africa, merchant firms, such as the Compagnie Française de l’Afrique Occidentale (CFAO) and the Société Commerciale de l’Ouest Africain, resisted efforts to reform agricultural finance as they knew that controlling the supply of credit ensured their control over cheap crops.
Modern attempts by the World Bank to use access to credit as a poverty reduction tool have been hampered by insufficient understanding of colonial legacies
In British Kenya, meanwhile, legal land titles and access to finance were largely restricted to white settlers, while race was a good predictor of ability to get loans in South Africa. Modern attempts by the World Bank to use access to credit as a poverty reduction tool have been hampered by insufficient understanding of colonial legacies and the ways they defined credit markets, Bernards argues.
Microfinance sought to make an ‘end run’ around the limits imposed by the colonial financial infrastructures with a predictable lack of success. The idea that markets were a kind of ‘default setting’, which needed only to be shielded from interference confronted the reality that post-colonial financial sectors were “not designed to lend to farmers, especially the poorest smallholders or landless farmers, or for housing in informal settlements”.
Bernards sees fintech largely as the latest attempt to achieve financial inclusion in the light of microfinance failures. He questions the idea that mobile phone data, for example, can give a real picture of ability to repay loans, and argues that is a dangerous disconnect between big data credit scoring and real productive activity.
A gap in the book is the lack of consideration given to local methods of trying to tackle poverty. Fintech need not necessarily be tied to Western poverty finance policy. An example is rotating saving and credit associations (ROSCAs), which date back to at least the 13th century and are known globally by a variety of local names in poor countries.
Savers contribute to a collective pot, with the total then being shared out equally between the members in random order. The advantage comes from an early pay-out, which creates an amount of working capital that would have taken the individual saver much longer to accumulate.
The basic pattern is open to endless variations. The price mechanism can be introduced by allowing participants to bid for an early pay out, with the extra proceeds being used to provide a return for those who get their money later. Fintech can be used to make the process faster and secure. The risk that the person holding cash will abscond is eliminated, and participants can be found much more quickly. Ethiopian start-up eQub is among those putting fintech-based digital ROSCAs into action.
A Critical History of Poverty Finance: Colonial Roots and Neoliberal Failures by Nick Bernards (Pluto Press, 2022)
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