Why I'm Afraid to Fund Group Microcredit

Because of circumstances beyond their control (sickness, flood, drought, theft and so on), lack of skills and knowledge or taking bad decisions, a proportion of poor borrowers encounter great difficulties in repaying loans. While MFIs [microfinance institutions] suggest that such problems are overcome through ‘social support’ in some painless way this is often not the case---talk to the dropouts of MFIs! Many (though presently we have little understanding of exactly what proportion) report being threatened by group members and MFI staff or having their possessions (pots and pans, roofing iron) seized. In Bangladesh, MFI debtors have been arrested by the police (this came to light in 1997 when a police vehicle carrying such debtors crashed and the individuals concerned were killed), are threatened with physical violence (Montgomery, 1996), and the press regularly report female suicides resulting from problems of repaying loans. Many poor people are very frightened about getting into debt: this is a rational response to the dangers that arise from indebtedness to MFIs and not a ‘misunderstanding’.

That's from David Hulme's "Is microdebt good for poor people? A note on the dark side of microfinance," which appeared in the Small Enterprise Development and What's Wrong with Microfinance? I quote it for the exhortation to talk to all microcredit clients, including dropouts, in order to understand the full implications of microfinance for women.I've been reading studies of this subject in the last few weeks. Two headlines: 1) If one defines "talking to" not as running through survey questions to feed into quantitative analysis but as in-depth "ethnographic study" interviews, then it is the true that researchers rarely talk to dropouts. 2) The information we do have about microcredit's losers worries me.To show what is shaping my thinking, I offer that most scintillating of Internet content types, the literature review. I encourage you to persevere because I reach a big conclusion that even I am surprised by. You are watching me make some key judgments, live. And you can participate in the deliberations.One question I've confronted as I've read is how much to weight various bits of evidence. My tentative choices at this point depend on the type of evidence---especially given the subtlety of the "empowerment" concept, I trust qualitative more than quantitative, and non-experimental quantitative least of all---and on how much capacity for critical thinking authors demonstrate.Quick takes on things I've read:Hashemi, Schuler, and Riley 1996; Schuler, Hashemi, and Riley 1997The authors valiantly quantify female empowerment (try Ctrl-+ in your browser to zoom in on this document). As an index-maker I am in awe of their achievement. For an appreciation of the complexity of "empowerment," consider their major headers:

• mobility [within and between villages]
• economic security
• ability to make small purchases
• ability to make large purchases
• involvement in major decisions [in the home]
• relative freedom from domination by the family
• political and legal awareness
• participation in public protests and political campaigning.

The authors apply their index to survey data, then perform econometric analysis that suggests that BRAC lending empowered women and Grameen lending even more so. The authors take some steps to rule out reverse- and third-variable causation and are humble about the limitations thereof. Equally commendable, they bring richness to their findings through ethnographic interviews. On balance, though, this is non-experimental quantitative work, and I must discount the conclusions even as I applaud the quality of the effort. The hypothesis that Grameen empowers more through the discipline of chanting the 16 decisions feels more like a just-so story.Helen Todd, Women at the Center, 1996Helen Todd says it is no more than a myth that women in classic Grameen microcredit groups build solidarity that leads them to look after each other and fight patriarchy with joined fists. However, she tells powerful stories of women clawing their way up economically, mainly by using their loans to buy and rent land. Surely that is empowerment. The caveat, as I've written before, is that she chose not to study dropouts. She only tracked borrowers who had been with Grameen at least 10 years.Kabeer 2001Naila Kabeer, like Todd, brilliantly details the effects of microcredit on the lives of women of a few villages in Bangladesh. She also questions feminist authors who equate empowering women with challenging cultural and legal norms. Some women used loans to comply more with purdah, the traditional confinement of women to the private sphere. They stopped working in the fields for day wages and instead bought and raised cows near home, thus elevating themselves in the eyes of their neighbors. They exercised their loan-bestowed freedom in order to confine themselves. More generally, Kabeer's verdict tends toward the positive. But here too a caveat: she studies a program that made subsidized individual loans to women with at least half an acre of land, in contrast to the classic, unsubsidized group-based loans meant for those with less than half an acre. Kabeer's subjects started with better prospects and lived free of the peer pressure of group credit.Sanae Ito's 1999 doctoral thesis, University of Sussex, "Grameen Bank: Rhetoric and Reality"Based on a year of fieldwork in southern Bangladesh, Ito does not investigate empowerment effects as systematically as Kabeer, the scope of the thesis being broader. Most passages relevant to empowerment are worrying, such as: "In extreme cases, this pressure that the centre members exert on bad members takes the form of threats to take away their assets, such as their livestock or household utensils. At the Kajla centre there were two recent cases in which several centre members raided the houses of the members in arrears, under pressure from the branch manager" (p. 159). (Ito is married to Stuart Rutherford.)Karim 2005This paper focuses on dropouts from group microcredit in Bangladesh and turns up some disturbing stories, as one might expect from someone looking for the worst. A husband, for example, spends his wife's loans on drugs and gambling. The pressure on her to repay exacerbates tensions in the marriage while the MFI ultimately expels her.Burra, Deshmukh-Ranadive, and Murthy, Micro-Credit, Poverty and Empowerment: Linking the Triad, 2005A set of studies initiated by India's ICICI Bank and the U.N. Development Programme that mostly serve to illustrate how easy it is to do bad qualitative research. The contributions are studded with anodyne generalizations such as that women "view themselves with greater confidence than ever before" and "women report the enormous value of regular access to credit...to themselves and their families"---with little systematic demonstration. Unclear is whether subjects tilted what they said because they viewed the researchers as agents of the lenders. The researchers investigated for days or weeks, not the months or years of the best studies. An exception that popped out on a skim is Shashi Rajagopalan's chapter about a self-help group (SHG) program called Lokadrusti. She concludes: "As a result of Lokadrusti's work in the field of micro-credit, at the individual level, the women appeared to have gained very significantly in terms of mobility, self-confidence, widening of interests, access to financial services, building of own savings, competence in public affairs, and status at home and in the community." But her critical eye also picked up the SHGs' lax financial management. Defaults were rife, apparently with little sanction. One can see how that would be empowering. Nor is it clear that Rajagopalan talked to dropouts. So don't look to this book for clear, wide-angle insight into the impacts of classic, self-financing group credit.Frances Sinha and team, Self Help Groups in India: A Study of the Lights and ShadesAn excellent study of India's SHGs. It devotes a whole section to drop-outs, counting them and their reasons for leaving, and telling their stories. Some of the stories are worrisome (a woman loses her savings in an SHG because of fraud), some less so (a woman falls ill and leaves her SHG, taking her savings). Separately, the report tabulates collective interventions of SHG members into domestic disputes, such as by brow-beating a wife-beating husband, or into community issues, by pressuring local leaders to shut down alcohol shops. Involvement in domestic matters was fairly rare, especially in groups of very poor or scheduled casts ("untouchables"). But involvement in community issues was found in 40 of the 108 villages studied. Notably, the non-governmental organizations (NGOs) who set up the SHGs also played a critical role in exposing the women to feminist ideas and organizing joint actions. The actions did not in general arise spontaneously. And, as with Lokadrusti, financial management seemed too lax: "In relation to financial transactions, books and records need to be well maintained with systems in place to verify the records and as a basis for transparency with group members. This is largely not happening." Fernando, ed., Microfinance: Perils and ProspectsA $180(!) academic book dominated by abstract theorizing about "disciplining the development subject" and "blurring the boundary between development and capitalism" that I don't have time for. Chapters 5--8 insert some evidence from Guatemala, Mali, Peru, and the Philippines, most of it negative, but none with the rich perceptiveness of Todd and Kabeer.Tentative conclusions from this survey:

• Some of India's self-help groups really do seem to be giving women more agency in their families and communities, thanks to the educational and organizing efforts of sponsoring NGOs (paid for how?). Perhaps this is what Linda Mayoux has in mind when she writes that finance programs must be designed to empower women if they are to do so---in which case, I must eat my critical remark about her work. Credit and savings might be the lures that bring the women together rather than major sources of empowerment in themselves.
• Individual loans, by not binding people to each other's debts, are more freeing than group loans.
• I know nothing about the empowerment effects of (group-based) village banking as it is practiced outside of India. (Mexico's controversial Compartamos has more than a million village banking clients.)
• The most famous form of microcredit seems least empowering, indeed most likely to reduce power over one's circumstances. Solidarity group credit, popularized by Grameen Bank and Accion International, is generally more regimented and purely financial than SHGs and village banks. Certainly it opens doors to entrepreneurship and helps poor people make big purchases, like schooling. But especially because of the peer pressure it harnesses, it also puts the squeeze on many poor women. In general, clients who are better off to begin with make better use of credit, while the poorest are most likely to get caught in its gears. In this light, the rapid, profit-fueled growth of this form of credit in India is a bit worrying.

It should be said that the Grameen Bank has moved on from the model it developed and made famous, through a package of reforms called Grameen II. (Vikram Akula, founder of the world's fastest-growing Grameen replicator, says it's too soon for SKS to copy Grameen II.) Among the reforms are a shift in emphasis from credit to savings and formal banishment of joint liability. Yet Rutherford writes (p. 17; also see this) that group pressure persists, perhaps for business reasons. Keeping the lending machine efficient may still require aggressive collective pressure on those struggling to repay. For example, a Grameen loan officer can still withhold new loans from all of a group's members until all repayments are current.Having read many stories now about the poorest of poor women being burned by solidarity group credit, and having found no high-quality qualitative research on how village banking (the other major variety of group credit outside India) affects women's lives, the thought of financing such programs myself, such as through Kiva, troubles me. I say that understanding that horror stories may constitute 10% or less of cases. Why? I worry about what I know, that the danger of entrapment is real, and about what I don't know, about the extent of that danger in any particular context.I welcome your thoughts. Have I missed good studies? Are my generalizations lopsided? To help me, challenge me.