DSA2016: Politics in Development
Microcredit evolved in to microfinance which morphed in to 'financial inclusion'.
What are the substantive differences between these, and is 'financial inclusion' any more likely to succeed in alleviating poverty, or does it share too many of microcredit's fundamental flaws?
Microcredit began with the noble aim of alleviating poverty through the extension of small loans to poor borrowers, predominantly women. A decade on from the 'Year of MicroCredit', the practice has not been proven to have succeeded in either enriching or empowering its borrowers.
The new narrative is that 'financial inclusion' is the key to ending global poverty (Goal 8 of the SDGs, by improving livelihoods). Financial inclusion is indeed a wider concept than simple microcredit, but this panel seeks to explore what are the substantive differences between microcredit and financial inclusion. Is the change in nomenclature merely inspired by perceived political correctness, or does it go deeper? To what extent is the provision of financial inclusion dependent upon the extension of microcredit? If financial inclusion were to build in more ethical safeguards than microfinance did, would this lessen or increase its chances of better delivering on the SDGs? What specific reforms to the practice of microfinance or financial inclusion would improve either the way it functions ethically, and/or its chances of success? Would greater regulation of microfinance or financial inclusion increase or decrease its chances of better delivering on the SDGs?
This panel is closed to new paper proposals.
The shift from microfinance to financial inclusion - what does it mean?
This paper identifies and critically assesses ongoing changes in the assumptions, theories and practices of programmes that target poor people with financial services in the name of developmental outcomes.
Microfinance is a key element in the global push for financial inclusion. While the terms "microfinance" and "financial inclusion" are increasingly used interchangeably, the ongoing shift from microfinance to financial inclusion signifies not only changed rhetoric. This paper examines core assumptions in microfinance programming, and compares them with the assumptions made in financial inclusion programming. It contrasts the different theories of change inscribed into these programmes. And it critically inquires about changes in practices (including the how and why of these changes), such as shifts in relevant actors and technologies. It suggests that neither seeing financial inclusion as just a new label for microfinance ("old wine in new bottles"), nor as a radically new programme that replaces microfinance with something better, is adequate. Instead, studying processes of institutional path dependence, bricolage and agency at work provides a better understanding that emphasises both elements of continuity and change.
Financial Inclusion: A Resolution of the Ethical Shortcomings of Microfinance, or a Reprise?
‘Financial Inclusion’ draws on many levers to achieve its goals, but microfinance is a major one. The microfinance model as previously practised contained elements of exploitation and coercion, and failed to exercise a duty of care. Does Financial Inclusion resolve these ethical flaws, or repeat them?
Microfinance enjoyed a thirty plus year spell as the development tool of choice to raise some of the world's poorest people out of poverty. Its intentions were, largely, noble and honest: to enrich and empower its borrowers, and, as the commercialised model developed, to make a profit as well. But underneath the best of intentions lay practices that required borrowers to face exploitative interest rates and loan conditions; the prospect of coercion through the insistence on the use of group liability; the absence of a recognised duty of care to the vulnerable; and an indifference to the distribution of winners and losers from engagement with credit.
'Financial Inclusion' has replaced microfinance as the preferred tool to achieve a number of the Sustainable Development Goals (SDGs). To what extent, then, is financial inclusion a radically different model to microfinance? To the extent that Financial Inclusion uses microfinance as one of its major levers to deliver on the SDGs, how has it adapted the microfinance model to repair the ethical failures of the past? Has the microfinance of financial inclusion resolved the ethical flaws of old microfinance, or is it the same old wine in new bottles?
Financial Inclusion in the UK: what does ethical finance look like?
Rather than regulating the cost of credit for the financially excluded, policy makers should instead focus on how customers are treated at the point of transaction and how to create better access to mainstream financial services.
For the past decade Fair Finance, a not-for-profit community finance institution, has provided credit and advice to financially excluded individuals in London. Drawing on this experience, the paper considers three issues:
First, that the ethical mission of the company is exemplified by the way in which the staff serve the customer; and not in the way in which prices for products are set. We cannot judge whether microfinance institutions are behaving ethically by looking at prices.
Second, that the new UK regulatory framework for high cost consumer credit is likely to lead to a bifurcation of the sub-prime sector into "near prime" and "doubly excluded". The cap on the cost of credit is, in reality, a denial of (legal) credit to a section of the UK population.
Third, that public policy should aim to eliminate financial exclusion, not to embed it in the financial system. The long-term interests of the financially excluded (and the rest of the population) would be best served by access to mainstream service providers.
These UK issues are likely to be similar to issues facing policy makers and microfinance institutions elsewhere in the world.
This panel is closed to new paper proposals.