Microfinance as Neo-Colonialism: The Consequences of Framing Debt as Development

Aracelis SanchezINT 401

Final Paper11/23/2015

Sanchez

I was initially introduced to the idea of microfinance during a trip to China in

May of 2014 with a few professors and students from Dominican University. I was

speaking with the psychology professor that had co-founded the program and he

brought up that he engages in microfinance loan services on a popular site known as

Kiva. He explained that he had helped over 20 people in the past year with small

loans to expand their entrepreneurial interests. I didn’t think anything further

about microfinancing after that conversation until I heard about it again on another

study abroad trip. During my stay in South Africa that following summer, we spoke

about microfinance loans in one of my development classes specifically called,

Economic and Development Problems in South Africa. We touched lightly on the

subject, just being taught what it was and that it was a new development strategy

that had helped many Black South African women living in the townships. We only

spoke about a few success stories, but did not go into any further analysis on the

topic. I have been reintroduced to the concept, for the third time, in graduate school.

After reading Lamia Karim’s book Microfinance and its Discontents, along

with other research, I have found that the narratives of microfinance practices are

limited, disjointed, and often fabricated. The use of microfinance as a tool for

development has been adopted by numerous non-governmental organizations and

banks starting in the 1990s – with the numbers soaring in the early 2000s.

Traditional forms of development have been replaced with the microcredit model; a

model based off of the central idea that giving the poor access to capital will enable

them to scrape themselves out of poverty. Essentially, putting people in debt will

enable them to succeed. Karim’s ethnographical approach to studying the

2

Sanchez

intersections of neoliberalism, microfinance, NGO’s and gender in Bangladesh has

produced a counter-narrative that forces us to rethink the microfinance model

(Karim 2011, xiii). The success narratives released by institutions that offer

microfinance services should be taken with caution because behind those numbers

lie complex issues that are not considered.

There are a number of assumptions behind the microfinance model that are

out of touch with the reality of their targets and the power relations they are bound

to. In class, we are exploring how the market has become the primary organizing

pillar of social life – to the point where integration into the capitalist market is being

framed as a necessity to escape poverty. Conceptualizing debt as development

impacts targets of development – mainly poor, rural women – in adverse ways by

functioning as a modern manifestation of neo-colonialism. In this paper, I aim to use

Lamia’s Karim’s findings, along with additional research, to illustrate the negative

consequences of such a conceptualization of development and how new forms of

domination are emerging.

First, I will lay the foundation for discussing the term development by

defining it and briefly explaining dimensions of development. I will then explain

microfinance practices, analyze the underlying assumptions, and lay out the master

narratives surrounding the success of this model. Following that, I will discuss the

consequences of conceptualizing debt as development using Lamia’s Karim’s

research, shed much needed light on the counter narratives and expose the neo-

coloniality of the microfinance industry.

3

Sanchez

Development: A Brief What, Who, and How

When classifying countries in the world, there are a number of terms to

differentiate between nations that are seen as industrialized verse those who are

not: global north vs. global south, 1st world vs. 3rd world, even civilized and

uncivilized. The most common terms in almost any academic discourse is developed

countries vs. developing countries. The key to understanding the difference between

them lays in our understanding of the term development. Development essentially

equates to improvement (Bellu 2011, 2). Developed countries have improved to a

standard in which grants them that status, while developing countries need to

improve themselves to reach that particular standard. What is this standard and

what indicators are used to decide if its been reached?

Some of the most common indicators of development are economic and

social parameters. These parameters include Gross Domestic Product (GDP), GDP

growth, inflation, unemployment rate, inequality of wealth, life expectancy, birth

rate, maternal and infant mortality rates, literacy rates, and poverty rates. There is

not a rigid number that must be reached for any of these parameters in order for a

nation to be deemed developed. Relative to their population, countries that are

labeled developed should have long life expectancies, low mortality rates, high

literacy rates, large GDP and GDP growth, low unemployment rates, low inflation

and low poverty rates (Bellu 2011). To try to explain exactly what would constitute

the correct numbers would require a whole other paper in itself. The point is that

there are different dimensions of a country that require improvement in order to be

recognized as a developed nation.

4

Sanchez

Economic development has traditionally been seen as the first, and most

important, form of development (Bellu 2011, 3). Without economic development,

improvement in the human condition cannot exist. The overall goal of economic

development is economic growth, which can be measured by a number of above-

mentioned parameters. The experts who construct these paradigms of development

are, unsurprisingly, of western influence – the World Bank, International Monetary

Fund, USAID, The United Nations and strong global actors. These types of paradigms

are constructed in spaces such as the G8 Summit, the Annual Bank Conference on

Development Economics, and the United Nations Sustainable Development Summit.

These spaces are not necessarily negative in nature – yet the domination of a

particular perspective at the expense of others is what makes it troubling. While the

inception of microfinance services did not occur in these spaces, its domination as a

development strategy did – in the first Microfinance Summit in 1997. Understanding

how development has been defined and how paradigms have been constructed

allow us to dive into the microfinance model with a critical lens that focuses on the

construction of the model, and the construction of its master narratives.

The Microfinance Model and its Assumptions

Microfinance, formerly termed as microcredit, refers to a broad range of

financial services for people who lack access to typical banking services. The

microfinance model started out with a small personal loan from Muhammed Yunus

of Bangladesh to 43 people and has developed into one of the leading strategies for

development and poverty alleviation. Gaining traction in the late 90s and early

2000s, the microfinance model for development has replaced traditional forms of

5

Sanchez

development, such as investing in the public sector, and aims at promoting

entrepreneurship and personal responsibility (Karim 2011). In this model, loans are

given out to targets of development –mainly poor, rural women – so that they can

jumpstart their businesses within their communities. The microfinance model

depicts poor, rural women as worthy investments that can contribute to the local

markets and make their way out of poverty. The model seems promising with

elements of entrepreneurship, gender empowerment, and market literacy present.

However, the underlying assumptions of the model are problematic, and the model

fails to take into consideration the complexities of social life within those targeted

communities.

There are a number of assumptions present in the model that are

problematic for its success. First, it is assumed that the lack of access to capital is

why poor people are poor. Poor people aren’t characterized as poor due to any

other factor beside a lack of access to money and the market. It completely leaves

out complex power relations and structural problems that attribute to the high

poverty rates in the country. Second, recipients of the loans are thought to have

autonomy over their money. There exists no theorization that takes into

consideration cultural differences that may impact market integration. And lastly,

recipients are expected to pay back their loans and interest, whilst making a profit

that will aid them in escaping poverty. The consequences of these assumptions

impact targets of development in adverse ways that do not allow them to improve

their quality of life. The consequences of the model will be discussed in the next

section.

6

Sanchez

Despite the problematic assumptions of the model, the master narratives

about subjects of microfinance depict the strategy as successful due to the high

number of loan repayments and lowering of poverty rates. The Grameen Bank,

which was established by Mohammed Yunus, has been hailed as the pioneer of

microfinance services with a repayment rate of 98 percent along with helping 4

million families out of poverty (Karim 2011, xxvii). However, the conclusions on the

effectiveness of microfinance are not the same across the board. There has been

much research that pointed out to the ineffectiveness of such programs, and no

evidence of improvements in standards of living. This counter research does not

receive much attention and the microfinance services continue to shape the

development strategies of NGO’s around the world.

We have seen that microfinance services rest on problematic assumptions

about their subjects and have been established in a framework that conceptualizes it

as an effective development strategy. It’s conceptualization guides the results.

Instead of conceptualizing microfinance services as development, Karim

conceptualizes it as, “a structure of debt, that is, a relationship of power and

inequality (Karim 2011, 36).” This new conceptualization will guide my analysis of

the consequences of microfinance services on women in Bangladesh and opens a

new path for a more critical analysis of the concept.

Debt as Development?

Karim uncovers a number of adverse consequences that microfinance

services had in numerous villages in Bangladesh. The lack of analysis regarding

power relations in the theorization of microfinance services presents a number of

7

Sanchez

problems in its application. Without taking into consideration local power

structures, kinships, cultural codes, and political motivations of different groups –

microfinance services resulted in deeper problems within communities. Karim’s

ethnographical approach to microfinance services in Bangladesh gives important

insights into the local people’s experiences.

The erasure of power relations in the microfinance model is at the core of

every single adverse consequence related to microfinance. Karim argues, “Access to

microfinance loans has created new forms of subordination and oppression for poor

women both at the household and community level (Karim 2011, 197).” This

subordination occurs based on one of the essential assumptions of the microfinance

model – the assumption that the recipients have autonomy over their loans. Women

in Bangladesh are operating in patriarchal structures that culturally require them to

transfer their loans to her husband, kin, or social superiors. Her access to capital

presents the women as a means of access for the kin in her group –therefore

subjugating her to another dimension of control by the men around her.

Microfinance services also claim to require no collateral in order for women

to receive loans. However, these services rely on intangible collateral, such as social

obligations, to collect their repayments. Women collected loans in groups – they are

responsible for ensuring that the group pays the loans back in its entirety. If one

woman in the group could not pay her installment, the other women would be

affected as well. This type of social collateral for the loans creates a monetization of

social relations. As David Graber discuses in his book, Debt: The First 5,000 Years, the

concept of debt had been around for thousands of years – but only recently has it

8

Sanchez

been so rigidly quantified. Relationships between these women have become

monetized – their relationship is based on their joint financial relationship with

their creditor. Graber argues that this monetization of social relations is an act of

violence – and Karim finds that this to be true as relationships crumble and new

forms of domination take place (Graber 2012).

One of the most detrimental consequences of microfinance services is the

loss of social solidarity within the community and the disruption of the fabric of

rural life. There are a number of cultural codes and ways of living that have been

manipulated by microfinance institutions. As stated before, the use of social

obligations as collateral creates tension between groups of women and pressure

between families. Microfinance institutions also use housebreaking – the act of

going into peoples houses to confiscate items when a loan repayment has not been

made – as a way of showing their authority over their recipients. Cultural norms

such as dowries are also affected. With women’s access to loans, dowries have

increased since women have access to outside capital. However, without

reinvestment, the women have no way to repay the loans after paying the dowry.

Even the overall sense of civic sensibility has diminished since NGO’s play such an

influential role in emergencies and other community matters (Karim 2011). The

role of the NGO has transformed in ways that allow it to act as shadow state next to

the government.

Karim has termed the hyper involvement of NGO’s as NGO governmentality.

Based off of the work of Michel Foucalt, Karim conceptualizes the NGO as an agent

that replaces the state in providing services and connecting with the people. She

9

Sanchez

states, “According to Foucault, the role of modern governments is the management

of populations. Governmentality is the creation of a set of rules, conducts, and

procedures that aim to achieve selected goals through the supervision of targeted

populations (Karim 2011, xvii) .” NGO’s act as a regulator of social behavior – with

the regulation stemming from the microfinance services it provides. NGO’s have

become key in providing essential services and infrastructures to rural

communities. NGO executives sit with government officials and help make nation-

building decisions due to their constant contact with rural citizens.

Experts on the subject – researchers, academics, and others affiliated with

development agencies, have constructed development discourse to the point where

these master narratives dominate the discourse and marginalize counter narratives.

Karim dedicates an entire chapter to the production of development knowledge and

the dangers of conceptualizing microfinance as an effective and worthwhile

development strategy. Development discourse produces a social archive of

knowledge about the poor, and the best strategies to combat poverty. Author

Timothy Mitchell highlight the role of experts in producing knowledge in his book,

“Rule of Experts: Egypt, Techno-politics and Modernity,” and argues experts aid in

constructing their discipline (Mitchell 2002). As previously discussed, the experts

on international development come from organizations such as USAID, World Bank,

International Monetary Fund, and the United Nations. There are also more local

actors such as the Grameen Bank, and the number of NGO’s that work in those

communities. These experts, through their scholarship, research and ideas, shape

the sphere of development in ways that render it linear and void of other voices.

10

Sanchez

They have a specific framework that their expertise operates in, and this has

consequences for the information they produce and the consumption of that

information.

The primary microfinance service that NGO’s provided is the small loans that

have been discussed throughout this paper. Yet, NGOs have expanded their financial

services to include pension plans, education plans, and health schemes. NGO’s

presence in these communities facilitated the creation of markets where

multinational corporations can sell their commodities (Karim 2011, 202). Women

in rural communities can use their loans to buy from multinational corporations –

whether it be patented seeds for agricultural purposes or a cellphone to become the

cell-phone lady in the village and charge for its usage. The construction of the poor

as consumers by giving them access to capital seems like a great idea, yet they are

buying from the market on debt. They are using money that they need to eventually

give back to NGO’s. Karim has found that these women who are take out loans spend

more time trying to figure out how to pay them back, rather than investing the

money in their business and providing for their families.

Those few women who are paraded as the successes of microfinance have

multiple characteristics in common; these characteristics embodied “all the

competitive aspects of the neoliberal subject (Karim 2011, 199).” These women

found success in acting as traditional moneylenders and provided their services to

other women who couldn’t repay their loan installments. These women were head

of their households and their husbands allowed them to handle the financials. They

usually married within their own village, which enabled them to be more visible in

11

Sanchez

the public and navigate the public sphere with more autonomy. They also lived free

from their in-laws and other kinships that would otherwise obligate them to be

adhere to certain cultural codes. The microfinance model worked for these women

because they were not affected by some of the strong cultural codes, kinship bonds

and other social agents present in their society. However, they still somewhat

circumvented the goals of the microfinance model because their success relied on

the failures of the model. The microfinance model produces a vicious cycle in which

the women it aims to serve incur debt at alarming rates with no sustainable way to

pay them back. Through this relationship, the NGOs maintain control over the

actions of its subjects while fabricating it as a tool of development.

Manifestation of Neocolonialism: Debt as Social Control

I have presented a number of adverse ways in which the microfinance model

affects poor rural women in Bangladesh, based off of the findings of Laria Karim in

her ethnographic research. These consequences are not a generalization of the

effectiveness of microfinance on a global level, but they do illuminate the

importance of power relations and cultural differences when constructing

development discourse and employing development models. Constructing debt as

development produces a number of power relations that do not serve the purpose

of improving its subjects, but, rather, controlling them. Karim eloquently framed the

problem in the following paragraph:

Credit and debt are two sides of the same financial instrument. While credit is theorized as a positive attribute, to be in debt is a social embarrassment. Debt is a regulator of social behavior. In theoretical terms, debt ties the present and the future together: once in debt, the debtor's present behavior determines future payoffs. Debt creates a state of domination and

12

Sanchez

subordination between creditor and debtor, and it has both a financial and social component (Karim 2011, 37).

The funneling of resources from western donors to NGOs in developing countries

has created a new form of neo-colonialism – one where the domination of the

capitalist market permeates rural life; one where the rural poor are essentially in

debt to the western world and to the capitalist market.

There is no general definition of neo-colonialism, but most refer to it as new

ways of domination over colonized states after the colonial period. For the purpose

of my argument, I will be using the specific definition of neo-colonialism developed

by Vasili Vajrushev who defined it as, “a colonial policy performed by the imperialist

powers with new hidden mechanisms in order to reinforce capitalism, maximize

profit and maintain the economic, political, ideological and military influence of

colonial times (Haag 2011, 9).” Western donors funnel their resources through

NGO’s rather than in aid to the government, which creates a new relationship

between the rural poor and the western world. Access to capital originally in the

hands of western donors is now able to make its way to marginalized groups around

the world as long as those recipients act according to neoliberal order. The

microfinance model operates as a new mechanism of neoliberal influence and

capitalist control.

The concept of neo-colonialism isn’t limited to a dichotomy of western world

verse the non-western world. In fact, as Karim has illustrated, the workers of the

NGO’s provided microfinance services are usually citizens of those countries who

have intimate ties to the problems plaguing the community. The new forms of

13

Sanchez

domination employ agents ranging from field workers and local elites to NGO

executives and government officials. Major proponents of the capitalist system are,

however, western nations that require such a system in place in order to keep

accumulating capital. The domination of the capitalist market is a recent

phenomena, and economist Karl Polanyi traces the origins of economic origins of

our time in his book The Great Transformation. The emergence of the nation-state

went hand in hand with the emergence of the market economy. Polanyi argues that

these two changes in society were intimately linked; yet they were constructed and

not natural (Polanyi 1994). In modern times, the market economy sustains

dominance by being framed as free and natural. It helps that the market economy

has also yielded insane amounts of capital, but the majority of that capital is in very

few hands. The market economy is framed as autonomous and naturally sustainable,

but in reality, it can only be sustained by expansion.

Polanyi speaks of the idea of enclosures in 18th century England, which was

the legal process of enclosing small pieces of land into one large parcel that was

restricted to one owner. The owner closely monitored the productivity and

economic processes of that enclosure, and the social order was completely re-

organized due to the hierarchal relations present. The enclosure movement was key

in the great transformation to a market economy (Polanyi 2011). The microfinance

movement shares considerable characteristics with the inner workings of the

enclosure phenomena. The NGO’s play important roles in their targeted

communities by providing access to capital, collecting loan repayments, providing

essential social services, opening new markets, and facilitating nation-building

14

Sanchez

decisions on the national level. They effectively create a sphere of influence over

their targets –where they control capital flow, disrupt social relations, and create

new forms of domination. The NGOs operate on western capital effectively

functioning as a neo-colonial mechanism to reinforce capitalist dominance and

sustain western dependence. Using integration into the market economy as the only

means of development fails the subordinated population on a global scale, and

prevents other frameworks of development from entering the realm of expertise. As

the great Audre Lorde once said, “The master’s tools with never dismantle the

master’s house.”

15

Sanchez

References

Bellu, Lorenzo G. 2011. “Development and Development Paradigms: A (Reasoned) Review of Prevailing Visions.” Food and Agriculture Organization of the United Nations.

Graeber, David. 2012. Debt: The First 5,000 Years. New York: Melville House Publishing

Haag, Diana. 2011. “Mechanisms of Neo-Colonialism: Current French and British Influence in Cameroon and Ghana.” Institut Catala Internacional Per La Pau Working Papers.

Karim, Lamia. 2011. Microfinance and It’s Discontents: Women in Debt in Bangladesh. Minnesota: University of Minnesota Press.

Ledgerwood, Joanna, ed. 2013. The New Microfinance Handbook: A Financial Market System Perspective. Washingtion D.C: World Bank.

Mitchell, Timothy. 2002. Rule of Experts: Egypt, Techno-Politics, Modernity. California: University of California Press

Nkrumah, Kwame. 1966. Neo-Colonialism: The Last Stage of Imperialism. New York: International Publishers

Pieterse, Jan Nederveen. 1996. “The Development of Development Theory: Towards Critical Globalism.” Review of International Political Economy 3(4):541-564

Polanyi, Karl. 1944. The Great Transformation: The Political and Economic Origins of Our Time. Boston: Beacon Press Books

16