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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?

4. Empowerment and microfinance: an analysis of theoretical concepts and practices – Reflections from a microfinance project in Indonesia

Wayan Suadnya, Shankariah Chamala, Muktasam Abdurahman et Rosiady Sayuti

Texte intégral

1One of the specific characteristics of rural life, and especially for the rural poor, is lack of capital. Inter alia, rural productivity has been relatively low due to the lack of capital. The financial liberalisation measures introduced in Indonesia in 1983 have brought a number of new rural banks into operation in the Indonesian rural financial system. However, these institutions are mainly concerned with non-agriculturalists.

2On the basis of this assumption, attempts were made to provide capital/credit through various government programmes with top-down approaches to achieve specific targets for dispersing the credit, such as poverty alleviation programmes (IDT) by the Department of Internal Affairs, Small Farmer Income Generating Project (P4K) by the Agriculture Department, Social Safety Net (JPS) by the Social Department, Farm Credit (KUT) by the Department of Agriculture, and others. All these programmes offer credit with low interest rates to rural communities. Sometimes it is channelled through cooperatives and other banks. When the banks act as a channelling agent, funds and risks are fully undertaken by the government. When the banks act in an executing role, they provide the funds and the government takes the risks of non-payment by providing a guarantee (Suwardi 2003). This has resulted in high levels of non-performance and nonpayment of credit, and many programmes failed. Most of the studies regarding programme failure in Indonesia have not discussed empowerment as one of the possible causes of failure. As the concept of empowerment has recently been introduced in Indonesian development programmes, it is a challenge for researchers to understand the reasons for failure as seen by the stakeholders, and the analysis of several theoretical factors and concepts can be used to explain the link between empowerment and microfinance programmes.

3The University of Queensland, in collaboration with the Research Centre for Rural Development (P3P) at the University of Mataram (Unram), conducted a two-year research project to formulate a sustainable and innovative model of credit delivery systems in rural areas. The Australian Centre for International Agricultural Research (ACIAR) has funded this project, which used a three-phase participatory action research methodology.

4In the first phase, a study was undertaken to identify issues and opportunities of existing credit systems, possible reasons for failure, and methods for developing a sustainable microfinance institution (MFI). Following this, in the second phase the aim is to develop a sustainable microfinance model based on stakeholders’ ideas and experiences. Ten credit programmes were examined to identify the issues and opportunities for developing sustainable MFIs to act as an intermediary system for one of the commercial banks in Lombok, West Nusa Tenggara province, Indonesia. Some of the findings are examined within the perspective of an empowerment paradigm. Hence, it is important to understand the empowerment process as it is known and practiced in developing countries and especially in the Indonesian context. It is believed that these differences may help us to understand why empowerment concepts and processes would not achieve similar results in Indonesia, at least in the initial stages of implementing empowerment processes. However, this paper focuses mainly on the conceptualisation of empowerment and microcredit failures. An attempt is also made to link empowerment and other concepts such as Social Capital (SC) and Community Driven Development (CDD), which are used to explain programme failures or successes.

1. Understanding the meaning of the empowerment process

5The meaning of the term empowerment is explained by Vogt and Murrell (1990: 8):

“In simple definitional terms, the verb to empower means to enable, to allow, or to permit and can be conceived as either self-initiated or initiated by others. For social agents, empowering is the acts of building, developing and increasing power through cooperation, sharing and working together. It is an interactive process based on a synergistic, not a zerosum, assumption of power; that is, the process of empowerment changes the power in the situation as opposed to merely redistributing it”.

6Itzhaky and York (2000) note that empowerment as a concept has been recognised in a number of ways for many years. Some authors have seen empowerment as a process (Perkins and Zimmerman 1995; Titi and Singh 1995); another defines it as a product or outcomes (Friedmann 1992), while others perceive it as an approach to social work practice and an aim of social work research (Hess 1984; Rapp, Shera and Kisthardt 1993; Hegar and Hunzeker 1988).

Figure 1. The powering process: creating power through relationship. Adapted from: C. L. Brown, (2002)

Figure 1. The powering process: creating power through relationship. Adapted from: C. L. Brown, (2002)

7Brown (2002) – based on her research in the nursing sector – developed a theory of the process of creating power in relationships. Her model consists of two mirror images of dialectical processes: empowering and overpowering. Each side of the mirror consists of four steps: communicating, relating, fitting and being. The inner cycle of this process is the intra-personal process composed of three steps: imaging, defining and allowing. The empowering and overpowering processes that affect the internal perception as conceptualised by the author are shown in Figure 1.

8This model started with the reflection of the relationship between people in an organisation. From this reflection, people form an image of what happens in the relationship. Based on this image, people define the situation and make a judgement, thus defining what they will allow to happen in future interactions. According to Brown (2002), this stage is set for either empowering or overpowering. The process will then go through the four steps mentioned previously. In the microfinance situation, particularly in subsidised government credit programmes (findings from the first phase of the study), the conditions put forth by the community leaders, government and credit agencies (even though it is unfair) are accepted by the farmers even though they know very well that they are overpowering and feel powerless. However, they will still try to fit into the conditions to obtain the credit because of the potential benefits to be gained from the cheap credit. It is an exchange process between the power holders and powerless clients. People accept the situation or “play the game” to obtain personal benefits, knowing it is unhealthy, dominated and controlled. Moreover, in the context of the patron-client relationship, the client feels that being and fitting in the relationship with the people who have power is safe and beneficial. This is not just about simple personal ethics and the moral values one holds, but is also about the power structure that pervades society at every level. It is a trade-off situation with economic/survival rationality.

9In Indonesia, the word “Pemberdayaan” (empowerment) has existed in the Indonesian Dictionary for a long time, but it was not used for 52 years from 1945 to 1997. Its use started at the beginning of the reformation era in the mid-1990s and became popular in 1997. During this stage (1997-1999) the word empowerment was widely used but only as rhetoric or in a token way and action was not carried out by the development departments. The President, Abdurrahman Wahid, introduced empowerment programmes in 1999. During his presidential period (1999 to 2001) the laws for decentralisation, autonomy and fiscal decentralisation were implemented (Suadnya 2003).

10However, like many developing countries, the development programmes have a long history of using the paradigm of a centrally planned technocratic approach. They were implemented from the top down and, inter alia, created dependence at the grassroots level. The poor became dependent on government projects for their survival. They became hopeless and powerless (Suadnya ibid). The old paradigm used by the development agencies is slowly being replaced by the new paradigm of empowerment and participation.

11It created a new perception, where the development agencies and the community perceived empowerment as “support-money” to improve their economic capability and capacity to achieve a better life. Therefore, in order to empower the poor, the government should provide them with financial support. It is not inappropriate in relation to this development initiative, as long as it is combined with good governance.

12Good governance is the essential part of the development of empowerment, which leads to genuine community participation. Governance and professional management are important aspects of the empowerment process. Rock, et al. (1998) clearly document the principles and practice of microfinance governance, and provide good guidelines for the effective development of microfinance programs.

13Davis and Mills (1999) distinguish pseudo-empowerment from genuine empowerment. They identify two perspectives that lead to pseudo-empowerment. The first, which they term the pragmatic approach, considers empowerment to be just another tool for enhancing competitive advantage. It is introduced in response to market and organisational requirements and employees can be disempowered as readily as they are empowered if conditions were seen to demand it. They argue a second perspective, which is rooted in labour process theory. This regards empowerment, in line with other management strategies, as a means of enhancing the control of capitalists–represented by their agents (managers) – over the workers. In communist countries such as China, they rarely use the word empowerment but since the beginning of reforms in 1997, Deng Xiaoping, a paramount leader, introduced the “household responsibility system” replacing “collective responsibility”. Economic reform was liberalised, but without much political freedom. It is interesting to note that the emphasis is on “responsibility” for their livelihoods, which rests on the family instead of the state. Decentralisation also places emphasis on the responsibility aspect of the empowerment process, to reduce dependency and to make creative choices that will help them to develop (hopefully they will not be blamed for their lack of development).

14Even though this paper focuses on microfinance and empowerment, it is important to understand some related concepts such as Social Capital (SC) and Community Driven Development (CDD). There is much literature on empowerment, SC and CDD but not discussed together. In an effort to better understand these concepts, the World Bank commissioned five consultants (Krishna, Grootaert, Agrawal, Esman and Poteete) to write “think pieces” that examined the meanings of these and their interrelationships. Their findings were presented at a round table discussion moderated by S. Jorgensen, Director of the World Bank’s Social Development; the event also featured comments from World Bank task managers working in these fields: Ruth Alsop (empowerment), Robert Chase (SC) and Dan Owen (CDD). The Summary of Think Pieces (World Bank 2003) provides conceptual definitions, linkages and major points of agreement and divergence. We have selected from this Summary the definitions of these three concepts.

Box 1. Conceptual definitions

Empowerment: Increasing the capacity of individuals or groups to make effect development and life choices and to transform these choices into desired actions and outcomes. It is by nature a process and/or outcome (Krishna).

Social Capital: features of social organisation such as networks, norms and social trust that facilitate coordination and cooperation for mutual benefit. It is by nature a stock (Krishna).

Community Driven Development: A methodology of undertaking development enterprises that gives control of decisions and resources to community groups. It is by nature an activity (Krishna).

15Conceptual linkages between these three concepts are given in this summary and we have selected the following: “These three are interconnected concepts and activities. Building social capital facilitates empowerment. Viewing social capital and empowerment as multi-level concepts facilitates the link to poverty reduction. CDD is a manifestation of social capital and empowerment” (Grootaert, World Bank 2003).

16Krishna (World Bank 2003) summarised four key operational points:

  1. The three concepts need to be pursued separately as objectives.
  2. For SC, the emphasis should be on building stronger cognitive and structural links among community members.
  3. For CDD, the emphasis is on making complementary resources and formal authority available to communities–helping form community organisations, delegating authority to them and providing resources to them.
  4. For empowerment, emphasis is on improving governance and making individuals and communities better agents of their own development.

2. Results and discussion

  • 96 Details of the project findings are published in the Komunitas a Journal of Rural Studies, vol. 5, (...)

17Three out of ten projects were found to be successful. Among other factors that contributed to the success, the empowerment concept was also implemented properly. Failures of the microfinance programmes in Indonesia were linked with 19 factors96. These factors were retrospectively classified into three categories:

  1. Empowerment factors (lack of commitment and responsibility, lack of knowledge and top down approach, lack of good governance (ineffective use of credit, low repayment rate, mis-targetting, ineffective partners, complex credit procedures, corruption, manipulation/fictitious data, credit disbursement not on time);
  2. CDD factors (project and target approach to development, negative perception of government credit/credit perceived as a grant, low production and low prices); and
  3. Social capital factors (ineffective groups, use of wrong reference groups as reason for not returning credit, and lack of supervision).

18Historically, technocrats, the policies and programmes implemented from the top down, with each department providing parallel services, dominated the centralised planning process. This development culture existed within the stable hierarchical organisational structure in the Indonesian government. The introduction of the empowerment process into this organisational culture has been encountering many issues and problems and the empowerment attempt – at least in the initial stages – produced negative results. We believe that the interpersonal relationships between departmental personnel and the community more closely resembles “overpowering” than empowering, as explained by Brown in her theory of the empowerment process. As the project and financial flow goes through a hierarchical bureaucratic channel, interpretation and distortion of the concept could take place at each level of government, as they attempt to fit empowerment into their old paradigm. Consequently, good governance is not practiced and the system is corrupted. Changing the organisational and community culture to introduce the new paradigm of empowerment with an emphasis of ethics and good governance, participation and social capital into the society is an immense task. It requires time for all the concerned actors to learn about the empowerment process, and then to implement the programmes. Thus, the concept of empowerment sounds good theoretically, but is hard to implement and takes a long time to become the practice in many developing countries, including Indonesia.


19The Indonesian government’s attempts to provide microfinance to improve agricultural productivity and reduce poverty in the centralised planning system met with limited success. After the reformation, the government’s introduction of empowerment as a new paradigm in microfinance programmes was theoretically sound. However in practice, different agencies and people did not uniformly practice the concept of empowerment in microfinance development programs. The theoretical concepts and empowerment policies – when communicated from the national government to the village level (as well as from the agencies to the group and individual) – could be distorted and modified to fit into the old model of development. Manipulation of the concept may occur in every layer to suit old habits and culture. If we reflect on Brown’s theory of the relationships among people, or government agencies, it seems that more of the overpowering process has taken place in the early stages of implementation. As a result, theoretical disposition is different from the practical realities. The findings also demonstrate that when empowerment is practiced with an emphasis on ethics and good governance, it produces good results. In addition to the lack empowerment, other factors such as lack of social capital and problems in community-driven development also contribute to the failure of the programmes.

20However, the recent Indonesian government’s approach to implementing a genuine empowerment process, financial liberalisation and the prosecution of corruption cases promises to create a better climate for promoting effective microfinance programs. Changing the pseudo-empowering culture into a proper empowerment process requires a fundamental paradigm shift in values and ethos to bring about a culture of social responsibility among all the actors. In addition, microfinance institutions need to change other related policies such as legal framework guidelines for credit dispersal at the provincial – and regional – level. A provincial-level government has already funded the project team to develop legislative frameworks, and the project team is helping provincial banks to develop guidelines to work with MFI intermediaries to increase the outreach to rural areas.


96 Details of the project findings are published in the Komunitas a Journal of Rural Studies, vol. 5, no 1-2 June, 2003. A Special Issue on Micro Finance Programmes in Indonesia.

Table des illustrations

Titre Figure 1. The powering process: creating power through relationship. Adapted from: C. L. Brown, (2002)
Fichier image/jpeg, 118k


Research Centre for Rural Development, University of Mataram, Lombok (Indonesia)

Associate Professor, School of Natural and Rural Systems Management, University of Queensland, Brisbane (Australia)

Research Centre for Rural Development, University of Mataram, Lombok (Indonesia)

Research Centre for Rural Development, University of Mataram, Lombok (Indonesia)

© Institut Français de Pondichéry, 2005

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