This paper attempts to analyse the various aspects of the relationship between ethics and microfinance, as ethical considerations were the primary justifications of the microfinance emergence. Since, the concept developed, organisations are considering ethics in their actions. However, the sector is subject to fierce critiques following some failures and scandals.
Before engaging in discussing the relationship between the two notions, it is essential to define the concepts. On one hand, Microfinance could be defined as the provision of services such as credits, savings, money transfer, insurance and other financial services for people excluded from traditional banking systems. It includes all approaches aimed at improving access or quality of financial services to the poor population. On the other hand, ethics could be characterised by the criteria to judge if an action is considered good or bad. Similarly, such a concept may be questionable as good and bad is an interpretation of each.
By looking at the definition of microfinance, it seems clear that the objective of helping poor people was at the centre of the creation of such a concept. The ambition of microfinance was from the beginning to help poor people to leave poverty or to improve conditions of life through financial services they were usually excluded from. Consequently, it could be provocative to question the consideration of ethics within microfinance. However, the changing socio-political, economical and financial environments among others have been adding pressure to the role and functions of microfinance. Indeed, new stakes and new protagonists have been appearing. Moreover, economic sustainability seemed to emerge as a key factor of success and often shifted the debate from the initial microfinance sector mission.
From then on, the objectives may be diverse and may not be in accordance with the early principles. Altogether, it seems relevant to put into question the two concepts in regards to the evolution of microfinance and to better understand their relationship.
First, the discussion will look at the overall history of microfinance in order to understand the base of such a field. Secondly, it will take into consideration the ethical aspects of microfinance as to focus on the extent to which the microfinance is ethical. Finally, it will attempt to introduce the limits and mission drifts of microfinance.
CONCEPT OF MICROFINANCE
From the Traditional to the Modern Perspective of Microfinance
The history of microfinance is so diverse among continents that it is difficult to outline precisely the various stages defining clearly the evolution of the concept. Nevertheless, this paper identifies three major phases that are accepted as common consensus.
Traditional Microfinance Stage
The first stage of this three-step evolution is the predominantly accepted definition of microfinance and could be characterised as non-institutional.
In some parts of the world, the microcredit has been an ancestral measure such as the "chit" funds in India, "tandas" in Mexico, "cheetu" in Sri Lanka, "pasakanu" in Bolivia or "arisan" in Indonesia among others.
In Europe, the system of microfinance started around the 15th century with the creation of "mounts of piety" by Franciscan monks. The idea was born in 1462 when an Italian monk named Barnaby di Terni decided to fight against wear and abusive interest rates as a part of the population was struggling to cope. The concept was to provide pawn broking loans with low or no interest rates. Thereafter, the process developed and spread through Europe; for example, there was the creation of loan funds in Ireland in 1720. In 1849, microfinance took a huge step forward when Friedrich Wilhem Raiffeisen opened the first saving and credit union providing financial services to the poor working class excluded from traditional banks.
In Africa, the saving and credit experiences were in line with the western models of the end of the 19th century. The oldest forms of microfinance listed in Africa were those of Ghana, Kenya, Nigeria and Uganda around the mid-fifties. However, it was more the methods of credit union developing in these countries. As in other parts of the world, microcredit has been an ancient practice in specific ethic groups such as the "susus" in Ghana, "merry-go-round" in Kenya or "tontines" in Western African countries.
The second stage of the evolution of microfinance remains in the institutionalisation of microfinance. Microfinance had existed for centuries but the 1970's are the years of experimentation which led gradually to the creation of specialised institutional structures: the emergence of Micro Finance Institutions (MFI). The Grameen Bank and its extraordinary success allowed microfinance to experience real expansion. This was decisive for the sustainability of microfinance in Bangladesh as well as for countries where Microfinance was developing. The model of Grameen Bank developed by Muhammad Yunus contributed to the spread of microcredit mechanism based on group solidarity and on absence of physical guarantees.
Modernisation of Microfinance Stage
The third stage is considered as the modernisation of microfinance starting in the 1980's where microfinance was no longer based solely on microcredit but rather became multiform. Indeed, on top of microcredit, MFIs provided developed saving services, money transfers, and micro insurance among others. The concept of Grameen Bank started to spread worldwide with the creation of structures like Accion International in Brazil, Bancosol in Bolivia but also to all the similar structures in the last three decades. Moreover, MFIs started to grow in different forms with various legal statuses. The objective of this paper is not to enumerate all the MFI diversity within Microfinance and to explain them in depth. However, it appears necessary to point out that this extraordinary multiplicity reflects the significant range of financial missions; they do need to tackle all over the world.
The Theoretical Justifications of Microfinance
There are many attempts to theoretically justify microfinance and these lean on various aspects. As it would be a large and complex exercise to enumerate each of those, the discussion will focus only on some of the most critical major theories.
According to the United Nations Capital Development Fund (UNCDF), the objective of microfinance is to increase revenues and to create employment in poor populations, through the development of local micro-companies and at the same time maximise the financial welfare of the recipients, their families and their community as a whole. In referring to this definition, it is vital to understand that the justification of microfinance remains founded on impact and consequences. Therefore, this will be accepted as a common background to explain the concept: microfinance is to be promoted in the consequences that are generated on recipients and refers directly to the social welfare it should provide.
Critical to an informed understanding of microfinance is the fact that the notion of ethics differs from the cause and effect reasoning. Indeed, individuals have fundamental rights and moral obligations. These are independent from their consequences on social welfare. Therefore, MFIs could justify their presence in the ground of "justice". First, regarding credits, the access should be a fundamental right. The article 25 of the universal declaration of Human Rights states that "Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family..." It is tempting to think that credit is one of the necessary means to achieve this standard of living. Similarly, the Nobel Prize winner, Professor Yunus put forward the opinion that "...access to credit is a human right."
Finally, the capability approach developed by Amartya Sen is one of the major ethical theories of microfinance. This professor defined capability as the positive freedom to choose its own life. This would suggest that individuals are in a position to be free to take this decision and that the choice would be doable. Indeed, according to Sen, taking a decision because others are impossible is not a real choice. When an individual is not able to get this freedom, it is said to be in a shortage of capabilities. In allowing the people excluded from traditional finance and without the capability to take decisions (shortage) to have access to finance for their lives and projects, microfinance contributes to extend the range of possibilities by increasing their capabilities.
In summary, according to theoretical backgrounds microfinance benefits from diverse and important ethical justifications. However, it appears essential to understand the extent to which these ethical justifications are taken into account in activity operations of MFIs.
ETHICAL ASPECTS OF MICROFINANCE
The ethical issue in microfinance is a delicate and debateable subject, as much in the definition of ethic as in the activities of MFIs. Indeed, the notion of ethics would mean focusing on the extent to which the activities abide with some values and principles. In aiming at appreciating the relationship between ethics and microfinance, it is necessary to look at the internal and external aspects. Firstly, in regards to the internal aspect, it is crucial to understand how the activity of microfinance is organised to be compatible with ethics. In addition, an appreciation of the positive impacts of microfinance activities on recipients is also fundamental.
The objective here is to understand if MFIs have the specific tools allowing them to lead their activities ethically. It would prove too expansive to enumerate each of these tools so the discussion will focus on one. With the intention to structure, harmonise and follow-up the sector of microfinance, various networks of practitioners have emerged for a couple of years. These networks aim at encouraging MFIs to use good professional practices and based on these intentions emerged diverse levels of codes of ethics. These codes differ from one country to another but follow the same general content with a few notable exceptions. These codes require some basic conditions:
- Towards the customers: to adopt a respectful behaviour towards the target population; to deliver services to the active economically poor without any sort of discrimination such as race, religion, gender, political orientations and to maintain strict confidentiality among others
- Towards the occupation: to operate activities in accordance with the legal regulations, the secure works conditions, the skilful staff required, the production of financial reports and frequent audit missions among others.
These codes could lead MFIs to undergo sanction if they are not respectful. These sanctions are diverse and go from the simple warning to the revocation of the microfinance practice permit. All these arrangements put in place by the microfinance sector show the good intention and the interest of MFIs to use ethic in their internal activities.
The External Aspects
An awareness of the sector of microfinance engenders a critical appreciation of the impact on customers and the extent in which MFIs succeed to reach their objectives. Apart from the economic objective included in sustainability, there is also a social objective and this is the closest in relation to ethics. These objectives lean on a major aspect: the impact of microfinance in reducing poverty.
The debates surrounding the link between microfinance and reduction of poverty are becoming fierce and particularly since the integration of microfinance as a tool of choice to fight poverty in the Millennium Development Goals (MDG).
Various studies have approached the subject of the impact of microfinance on the poverty reduction and one of the principal issues is on the targeting operations. Before focusing on poverty reduction, the idea is that economically poor people could benefit from microfinance services.
The results are unequivocal; as MFIs are facing the financial sustainability, they are more focused on targeting economically active poor, leaving on side the very poor population. As Wright stated: MFIs "fail to reach the poorest... and fail to provide additional services desperately needed by the poor"
If many studies agree on the fact that MFIs do not target the poorest population, some institutions have developed filter systems to specifically target the poorest. Lift Above Poverty Organisation (LAPO) in Nigeria is a pertinent example as, before granting any loan, they check the state and size of accommodation, the type of food and the frequency of familial revenues. Despite the criticism that could be raised against such practices, LAPO does reach its objective of starting with the poorest people.
A recent study on the social impact of microfinance in Bangladesh showed that the increase of self-employment among the customers and an improvement of children's welfare (better feeding and better school attending). Thus, the impact of microfinance is not only economic but also social.
The same results have been highlighted by the World Bank, which underlined that in most cases, the use of micro credit has positive effects on opportunities, revenues and social empowerment among others.
Through these studies on the impact of microfinance on poverty reduction, microfinance appears to be a way to maintain or to improve conditions of life. However, despite the minimum of ethics efforts within microfinance not to be ignored, it is important to note that there is existence of limits and drifts around the debates of ethic and microfinance.
THE LIMITS AND MISSION DRIFTS OF MICROFINANCE
The objective of microfinance is to create a virtuous circle between microcredit, professional activity and self-employment as ways to have a positive influence on the life conditions of customers.
In view of this social mission, there is a legitimacy to question the efficiency of MFIs in terms of impact on living standards of the poor population. Indeed, the primary ambition of microfinance is social but it is not without financial interests as economic sustainability is a key factor: looking for more autonomy and financial performances are at the centre of MFIs concerns. Seeking social and financial performances are creating a debate because it leans on the premise that both of them are complementary. Many studies put into question the efficiency of MFIs to fight against poverty and the mission drifts due to the greater importance of financial performance.
The Impact of Microfinance on Poverty
The microfinance programs aim at providing financial services to the population excluded from traditional banks. However, it appears that the MFIs leading a policy of targeting the poorest are rare. Most of them consider that the characteristics of their services do not interest the upper class who would exclude themselves from these types of services. For all that, it still questions if microfinance would reach the poor.
For example, the study carried out by Navajas and al in Bolivia was aimed at comparing the poverty level of clients from five different MFIs. All of these institutions had a policy of targeting the poorest. This research resulted to the fact that on one hand, the proportion of poor in belonging to MFI compared to the proportion of poor in the non-MFI population did not differ. On the other hand, one of the results was that such programs were not reaching the poorest but people who were close to the poverty line. Indeed, separating people according to socio-economic criteria while in the same situation of banking exclusion could be considered as a violation of the elementary principles of justice and anti-discrimination but above all would challenge the real impact of microfinance on reducing poverty.
The research conducted by Coleman on north-eastern villages of Thailand, assess the impact of two microfinance programs. The results show that despite the fact that there is an objective to target the poor, it was the richest villagers that were more likely to be involved in these programs and to be selected for the microcredit. Once members of these programs, they were using their social situation to borrow more than others were. Similarly, none of the villagers considered that these programs and services were aiming at the poor. This is an example of the criticism microfinance is facing; not managing to reach the poor and not succeeding to move the less vulnerable away from these services.
Excessive Interest Costs
Microfinance has long been considered as a niche in the development sector, and detached from the financial markets. Many were created with the help of government grants. In addition, the stake was to prove that it was possible to offer financial services to poor populations while ensuring sustainability and profitability. Conversely, the last twenty years, following the success of some MFIs, the sector has turned into a commercial product: in order to reach the biggest volume of people, many MFIs turn towards banking logics to obtain sources of finance and to avoid government grants. Many private investment funds are emerging, some MFIs have been entering the stock market, and this shows that profitability has taken over the social aspect. The inherent risks associated with these processes are various, the most crucial of which is arguably the excessive interest rates it implies.
One of the biggest financial scandals in the sector was the excessive interest rates of "Compartamos". When "Compartamos" was considered as a NGO, the high interest rates seemed to be tenable. In fact, a high price was required to current customers in order to help the future clients and all the profits of the NGO would be allocated to the poor. "Compartamos" decided to change its legal status, becoming a bank in 2006 and entering the stock market in 2007. The amount required for the transaction was colossal and raised critical questions, including:
- Were the public funds provided for the creation of Compartamos used by the shareholders to maximise their own profits?
- Are the exceptional profits and high interest rates legitimate in view of the social mission of "Compartamos"?
- Is the choice between satisfying the shareholders or the customers negative to the ability of "Compartamos" to maintain a balance between financial and social performance?
The discussion has demonstrated that the emergence of Microfinance was the result of ethical justifications. Moreover, MFIs were driven in an effort to keep these ethical aspects of microfinance. There is a clear body of evidence that demonstrates a drift in microfinance, crucially due to limitations on practice and the role of ethical considerations in planning strategic movements in the sector.
The expansion of the microfinance sector, these last years and the recognition made by the international community underline the importance of this field in the fight against poverty. However, it would be an illusion to consider microfinance as the one and only relevant tool to fight poverty. The limits and drifts raised in this document threaten to undermine the ethical foundations of microfinance. From these new challenges, the microfinance protagonists are learning how to implement new tools aimed at preventing the possible drifts of the sector. The reflection on microfinance and ethics could probably lead protagonists to focus on how to access the financial services for the poorest parts of the population, how to implement new tools to measure ethics and how to create a common legal background for microfinance in terms of norms and codes of conducts. Indeed, without calling into question the good will and the necessity of microfinance, it is vital to conclude from this discussion that the field is facing major ethic challenges.
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