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1 Introduction Setting the Scene Milford Bateman and Kate Maclean This book examines from a multidisciplinary perspective the functioning, outcomes , and often-­ hidden rationale that lie behind the most important, and certainly the most popular, international development policy of recent years: microfinance.1 Unusually for a technical financial development technique, a large number of high-­ profile celebrity campaigns have ensured that the general public has a broad awareness of microfinance and how it works.2 The microfinance model involves the disbursement of tiny loans (microloans) to the poor in order that they might establish a range of very simple, informal income-­ generating activities. Although approaches to and ways of delivering microfinance vary, the mainstream development community assumes that microfinance, by developing formal sources of credit, will render the poor less exploitable by informal sources—usurers or loan sharks. Proponents of microfinance further assert that a formal source of credit will virtually always lead to a successful microenterprise, which will improve livelihoods, reduce vulnerability , and, particularly if the borrowers are women, provide a source of income that will be invested in health and community. The microfinance model’s simplicity, apparent effectiveness, and resonance with dominant neoliberal theories of development very much helped sell it to the international development community and keyWestern governments, most prominently that of the United States. Because the microfinance model put (micro)entrepreneurship and markets center stage in the fight against global poverty at a time, the 1980s, when the neoliberal model was gaining ground, its popularity in the international development community was assured. Peruvian economist Hernando de Soto (1986) was just the most prominent figure predicting that poverty would be abolished (in his native Latin America) thanks both to more microcredit and the slashing of large numbers of regulations and 2 Milford Bateman and Kate Maclean laws. A little later on, as the microfinance model was what we might call “neoliberalized ” and turned into a for-­ profit business model, leading microfinance advocates Maria Otero and Elizabeth Rhyne (1994) announced that a “new world” of massive poverty reduction was just around the corner.Commercializing microfinance would result in “healthy” microfinance institutions that could pump out massive volumes of microcredit without the need for any outside subsidy or support, meaning that all poverty reduction through microfinance would be a no-­cost intervention. The formation of sustainable financial institutions would themselves constitute development.The international development community’s collective view was usefully summed up by the former head of the International Labour Office’s social finance unit, Bernd Balkenhol (2006, 2), who described microfinance as “the strategy for poverty reduction par excellence ” (emphasis in the original). Accordingly, from the 1980s onward, poverty reduction and local developmentpoliciesandprogramsindevelopingcountrieswereconsideredincomplete without a major microfinance component abutted by a thorough deregulation and desupervision of the local financial space. In principle—through self-­ help, individual entrepreneurship, and very easy access to microloans—the global poor could thenceforth be safely left to escape poverty through their own individual efforts. This discourse—usually summarized by the phrase “to pull oneself up by one’s bootstraps”—resonates with the coping strategies employed by the entrepreneurial poor in the developing world, which often take the form of informal microscale enterprises and tiny self-­ employment ventures. In these situations, a lack of access to formal sources of credit is said to curtail income generation. Yet the poor are, by definition, credit risks and hence vulnerable to exploitation by informal lenders, who, unrestricted by market and formal mechanisms, may charge unacceptably high interest rates. Although this type has been largely phased out in recent years, most microfinance interventions initially accepted a group guarantee as “social collateral” against the loan and so avoided the paradox inherent to formal banking systems in which it is “expensive” to be poor. Not only did the group prove to be an effective form of collateral—and microfinance was soon being celebrated for high repayment rates—but the responsibilities of gathering information to establish credit worthiness and collecting repayments were transferred to the group, thus reducing administrative costs for the loan provider. However, such an individualized, entrepreneurial approach to development ignores the structural underpinnings of poverty, which include processes Introduction 3 of colonization, rapid urbanization, and dynamics of gender, class, age, and rurality, which attenuate life chances. It can also function to delegitimize political resistance, blame the poor for their own situation, and dismantle poor people’s “collective capabilities” (such as forming trade unions supporting and voting for a pro-­poor “developmental state” and mobilizing around single-­issue...


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