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Microfinance challenges: empowerment or disempowerment of the poor?

Isabelle Guérin
Jane Palier

Part I - Questions as to definition: what is understood by empowerment?

3. Structural issues in empowerment under microfinance

Sreejata Banerjee et S.J.S. Swamidoss

Texte intégral

1The primary objective of microfinance is the provision of financial aid on a small scale to those who are on the fringes of society, too overwhelmed by the formal restrictions and procedures of the organised sector, too vulnerable to help themselves, and left out of the mainstream. Microfinance provided to vulnerable section of society has to be synonymous with the empowerment of the beneficiary groups in order to sustain their income flow and make them economically independent. The affirmed objective of microfinance, therefore, is empowerment, which enables a beneficiary to live an acceptable quality of life, with dignity.

2The proponents of the financial systems approach hope that microfinance will provide sustainable financial services to low-income groups. On the other hand, proponents of the alternative poverty lending approach hope that microfinance will lead to poverty reduction and empowerment (Guilli 2002). In this paper, we focus on the second approach, to understand the barriers to empowerment, and to analyse structural issues of empowerment within the framework of new institution economics pioneered by North, Olson and others.

3The microfinance movement, introduced in India in 1992 and adopted in Pondicherry in the late 1990s, is perceived as being successful from the point of view of high loan recovery. The contribution of voluntary organisations in promoting self-help groups (SHGs) has also been widely recognised. If members in SHGs are able to lead a life of dignity and quality, then the rural poor are truly empowered.

4The objective of this study is to first understand how far the beneficiaries of SHGs have been empowered. Second, we examine structural issues that are impediments to empowerment. Finally, we try to identify steps that can be adopted to enable the vulnerable people to be economically strengthened in the road map to empowerment. We had informal discussions with SHGs in Villianoor (Pondicherry) to explore the possibility of collecting anecdotal evidence.

1. Empowerment: what it implies

5We define an empowered individual as one who would be self-motivated to explore and earn future streams of income so that he or she does not take a loan to repay another. Therefore, empowerment goes beyond giving loans and creating assets, or forming thrift or credit societies. Our research becomes unambiguous if empowerment is defined in terms of welfare. Although we know that empowerment has been described in terms of power to, power over, power with and power within, the nature of empowerment can be diverse, depending upon the parameters that define the lack of power within the institutional framework in operation. Institutions are humanly devised constraints that shape human behaviour; they structure incentives in human exchange, whether political, social or economic (North 1990). A range of informal constraints, of “codes of conduct”, “norms of behaviour” and “convictions” exists, which have evolved from “socially transmitted information and are a part of the heritage that we call culture” (Ibid). Boyd and Richardson (1985) define culture as “transmission from one generation to the next via teaching and imitation of knowledge values and other factors that influence behaviour”. The social or cultural environment establishes the degree of empowerment possessed by different members of the society, which are broadly determined by formal constraints, such as rules of law, and informal constraints, such as the codes of conduct. The rights over private property and the public domain in any society have evolved over a long period of time, and whether in a feudal or democratic system, certain sections remain outside the mainstream, deprived and neglected. The objective of any microfinance programme should be to ensure that such people are uplifted and empowered to lead a life of dignity.

6The rural poor are victims of debt traps, embedded in the social structure of economic institutions. Economic theory is replete with theories of choice and decision-making, but for the poor there is no choice, and their inability to access credit makes them vulnerable. Rural banks provide loans for land purchase, but reject loan applications for marriages. The banking system, which is one of the formal constraints, deprives the poor, and the informal constraints of inadequate property rights and social systems render them weak and marginalised.

7Empowerment is generally linked to gender bias and poverty, but in India it has been further specified in terms of caste-based poverty. Beteille (1999) points out: “empowerment is invoked in the context of economic weakness and insecurity, particularly of marginalised, unorganised and other disadvantaged groups”. There are various structural characteristics such as caste, regional and economic development, geographical features, social customs, religious beliefs and so on that have a significant impact on efforts made by various agencies, including the government. Therefore, any microfinance scheme should take them into consideration for its consistency and success.

2. Structural issues in empowerment

8The success of a microfinance programme should be measured not only from the standpoint of high repayment ratio but also from the perspective of how far self-sufficiency has been achieved. We have identified four basic factors that influence the consumption behviour of marginalised people, which impinge on the success of microfinance. They are awareness, self-esteem, dependence and sustainability. We analyse each of these factors in relation to their impact on the ability of the SHG member to be self-sufficient and lead a better quality of life.

2.1. Awareness

9Lack of awareness about empowerment is the first structural hurdle. Awareness has to be created among beneficiaries so that they become motivated and cognizant of the outcome of empowerment. SHGs are promoted to disburse funds at a micro-scale in the rural areas, and they are not an integral part of rural society. However, the SHG movement has gained momentum and is forging ahead despite being superimposed for providing credit to the rural poor. Observing SHGs from the angle of institutional economics, we find North’s (1990) arguments illuminating. He says internally “enforced codes of conduct have a meaning in terms of informal constraints”. These “informal constraints, which are self-enforced, make norms of cooperative behaviour effective” and this is perhaps the source of the success of the SHGs. This also may be observed from the perspective of low dropout rates, since in times of adversity such as death or chronic illness, other members come forward to ease the burden.

10The social and cultural heritage that imposes stringent behavioural customs, such as conducting a daughter’s marriage, and a range of other social practices, imposes a severe economic burden on members of society. Real empowerment will enable them to provide for their social obligations from their own income. Beneficiaries need to be aware of opportunities through empowerment and understand the incentives that allow them to lead a better quality of life. Transmission of knowledge and active and passive persuasion has to be a key component of the programme for the first-level success of empowerment. The argument here builds on the line of reasoning that an institutional transformation is imperative for greater awareness.

11Our interaction with SHG members of Villianoor (Pondicherry) revealed that banks advance loans at an interest rate of 12%, but members borrowing from the SHGs corpus are charged 24%. A lower interest rate would substantially reduce the interest burden of members. They are not aware of their power to bargain for a lower interest rate from the banks, which have low default rates, unlike blue-chip corporate bodies that have high credibility and which borrow from banks at only 6 or 7% per annum.

2.2. Self-esteem

12Traditionally, the trade carried out by individuals in rural areas is hereditary, and this imposes informal constraints on their lives. All those who carry on certain trades are ineligible for some privileges such as property rights, or have no access to public spaces or common areas, for example to graze cattle or use a common water source. The rulers or politicians are instrumental in creating the structure of property rights. Because politicians make and enforce economic rules, it is not surprising that property rights are seldom efficient (North 1990).

13Having been continuously neglected by society, these people are likely to have low self-worth. Inculcating a feeling of self-esteem in them will generate a much greater success of the programme. Nongovernmental organisations (NGOs) that played the role of self-help promotion institutions (SHPIs) have been found to be more successful than the government or banks as they have greater flexibility built into their operations (Satish 2000). From the empowerment point of view, the success is limited when dropout rates and group disbanding are high.

14Generations of being subjected to restrictions of this kind, has caused a deep-rooted wound in the psyche, which has resulted in low self-esteem. It is these people who are more likely to drop out. Conveying the message to them that being a member of a backward community would not prevent their family from attaining a higher quality of life would lead to empowerment.

15In our discussions with SHG members, we found that they had had a sense of well-being and confidence after joining the SHG movement, with the freedom to avail of loans without harassment by moneylenders. Despite this positive outcome it must be noted that several members took loans for consumption instead of investing in micro-enterprise.

2.3. Dependence

16Third, it is observed that social beliefs and customs are too strong for individuals to appreciate the benefits of self-reliance. For instance, it is believed that sons must support their parents in their old age; this is a deeprooted phenomenon in Asia, where family ties are strong. Unfortunately, the son himself may be below the poverty line, and in need of help. Indian society is ‘notoriously’ hierarchical (Beteille 1999) and this dependence on familial ties for succour is a deterrent to independence. There are innumerable cases where the members fail to be self-sufficient after withdrawal of the donor agency, so microfinance does not always lead to empowerment.

17In our discussions with SHG members, we observed that they believed they were independent. But in reality, they are not, since they cannot make consumption or investment decisions without the SHG’s help. They later acknowledged their dependence on SHGs. Simanowitz’s (2001) experience of South Africa finds that group members continue to depend upon loans having taken their fourth loan in two years after repaying the earlier loans. We found that dropouts suffered from family problems of alcoholism and chronic illness, requiring continuous expenditure of medication, making them more vulnerable. Hence, their inability to repay the loan amount forced them to quit the group.

2.4. Sustainability

18Sustainability is the fourth issue; here we need to distinguish between thrift and savings. While thrift refers to the amount generated from deferred consumption, savings are generated from surplus. However, those who are marginalised neither have access to credit nor possess personal savings, therefore, they are vulnerable in times of unexpected calamity such as sickness or morbidity. In times of critical financial adversity they are forced into bonded labour. Sustainability will be possible only when the microfinance provider ensures that the source of income is self-generating. An experiment conducted by one of the authors is narrated here to illustrate the problem. A fruit vendor in Chennai was provided with a loan from a moneylender of Rs. 2,000 at 0% interest when he was in dire need and unable to manage his business. Soon afterwards, he was in distress again, having to pay for an illness in the family; another loan of Rs. 1,000 was given to him by the author, but this did not give him any sort of long-term solution. The inability to sustain income flow is a major impediment to empowerment.

19Dropouts from SHGs are an indication of the failure of the microfinance programme. Dropouts are likely to be a direct or indirect result of the inability of microfinance programmes to work in such a way that the client comes out of poverty (Simanowitz 2001). The exit of the client can be due to business collapse and difficulty in maintaining repayments. It is imperative to understand these dynamics and address it before we can claim that microfinance has been successful. Despite the difficulty in gathering information, studies on dropouts indicate that the exit of clients are due to “family problems” and “failure of business” within the group in terms of relationship equations. The structural issue here is the unsustainability of existing microfinance programmes.

Conclusion: a road map

20Structural factors identified, that impede the empowerment of beneficiaries under microfinance, point towards the need to address these issues by the government, financial institutions and NGOs. Farsighted policy measures need to be adopted in a holistic manner to overcome the hurdles of empowerment for the poor who become members of SHGs and aspire to break free from the stranglehold of poverty. A road map for empowerment is given in the chart below.

Diagram 1. A Road Map

Diagram 1. A Road Map

21Voluntary organisations and NGOs have done exemplary work in creating awareness about SHGs and being instrumental in forming the groups. Groups or associations are very difficult to form and maintain a) because there is a cost involved in forming organisations in the logic of collective action, and b) once a group is created there are opportunities for free-riders (Olson 1982). Despite such hurdles, SHGs have grown and are here to stay.

22Creating awareness about the need to understand the implications of empowerment is the job in hand for the SHPIs. Members must understand that simply knowing how to handle a cheque book or opening a bank account does not empower them. They have to understand that:

  • Their power stems from the way they manage the resources provided through the group.
  • They need to be involved in those micro-enterprises that assure them a stable income.

23Second, to increase their self-esteem, the members of the SHGs must be conscious of their power as a group and power as individuals. We perceived that some members were reluctant to speak against the president or secretary of the group even if they had genuine grievances. This shortcoming can be overcome by changing the byelaws of SHGs so that an individual is not penalised for expressing dissent. Checks and balances within the system have to be re-enforced.

24Third, dependence on families can be changed only through persistent efforts, using, for instance, the electronic media and street plays. We found that even when people do become members of the group they are not able to visualise independence from family ties, for they become a source of emotional and economic support. Inculcating independence as a mindset involves a long-term policy measure from the government and voluntary organisations.

25Finally, the crucial component for empowerment is sustainability, both from the point of view of SHGs and individual members. An assured source of funds by donor agencies will help considerably in sustaining the programme. But members are vulnerable to shocks such as illness or failure of crops or death of a milch cow, inclement weather, and so on. During such adversities, NGOs that promote the SHGs need to be with them and nurture them. Moreover, the role of the government in coming forward to provide health insurance to the needy would substantially enhance the quality of life. The road ahead is uphill and arduous. Sincere and committed effort from all participating agents only can eventually lead to true empowerment.

Table des illustrations

Titre Diagram 1. A Road Map
Fichier image/jpeg, 85k


Professor, Great Lakes Institute of Management, Chennai (India)

Director, Dept. of Economic Analysis and Policy, Reserve Bank of India (RBI), Chennai (India)

© Institut Français de Pondichéry, 2005

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