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Microfinance: As a Component of Popular Culture, Potential

Development Strategy, and Rising Internet Industry

Sarah Keller

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The broad term microfinance refers to financial services for the poor, encompassing a

variety of services such as loans, savings, money transfers, micro-insurance, and micro-credit

(Carlman, 42). The microfinance revolution is best connected to Mohammed Yunus, the Nobel

Prize winner. He hypothesized that if you provide small business loans to poor people they

would repay these loans and help lift themselves out of poverty. Dr. Yunus found that “just a tiny

loan not only helped the poor survive, but also created the spark of personal initiative and

enterprise necessary to help pull themselves out of poverty” (Roy, 11). Since Yunus’ initial work

to formalize and popularize the concept, the simple understanding of microfinance as a way to

help the poor lift themselves out of poverty has permeated popular culture. American donors

who once directed their donations to local institutions are now directing more of their money to

causes in developing countries. In a world where business and economics are becoming ever

more closely connected, it is perhaps no surprise that philanthropy too is undergoing a process of

globalization. In light of historically failed top-down development strategies and foreign aid

assistance, microfinance is being considered as a way to stimulate development from the bottom- up. More recently the Internet, as a consequence of increased communication associated with

globalization, is beginning to be considered a main player in potentially transforming

microfinance into an industry. In this paper I will seek to explore the reasons behind the modern

rise of both interest and participation in microfinance through loans, analyze it as a way to

stimulate development from the bottom-up, and evaluate the roles disintermediation and the

Internet play in changing it.

Microfinancing began at the local scale, a necessary and logical starting point to fully

understand the needs and potential of a local population. Unfortunately, the poor are rarely able

to access services through the formal financial sector for reasons such as the high cost of small

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transactions, lack of traditional collateral, geographical isolation, and simple social prejudices

(Mehta, 155). Therefore, the capital and financial services offered by large commercial banks are

out of reach for most of the poor population. The microfinance model is able to overcome the

issue of collateral by recognizing the value of what Hernando De Soto calls “dead capital,”

capital not officially titled and thus lacks “representational” value as collateral. For example,

jewelry, textile, livestock, and equipment are recognized by many microfinance institutions,

MFIs, as informal capital i.e. a form of informal collateral and thus eliminating a major

borrowing constraint for many of the poor (Roy, 15). At an even simpler scale, some MFIs even

allow small household items, from a TV to a kitchen table and chairs, to back their microloan.

However, when backing loans with these small household items, borrowers are subject to

repossession of them if they default since they won’t be able to pay. The idea behind

repossessing these kinds of assets is that “the shame of repossession and the cost of replacing an

asset serve as powerful incentives for the borrower to repay” (Schreiner 639). At the risk of a

potential public display of embarrassment, it is enough motivation for borrowers to do

everything in their will to pay the expected sum of money back.

However, microfinance also utilizes a second form of collateral called social collateral.

Microfinance’s heavy reliance on this social collateral is what distinguishes it from formal

finance. Social collateral takes the form of joint-liability groups of around five or so borrowers

where “all members are liable for each other’s debts” (Schreiner, 638). Moyo says, “while many

villages have no obvious visible asset, they all share one thing – a community of interdependence

and trust” and gives it as the reason for the rise of social collateral (Moyo 126). She compares

the idea behind joint-liability groups to credit cards in rich countries, in the sense that borrowers

repay their loans because if they don’t they won’t be able to borrow more tomorrow and his or

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her group will not be extended any further loans. The concept is effective and reaps high

repayment rates because people do not want to be responsible for hindering the loans of their

peers. This informal and social collateral gives poor individuals the option to borrow and thus be

the resourceful, enterprising, and ambitious people they are capable of being and aspire to be.

Ultimately, the rise of microfinance as a component of popular culture can be attributed

to its underlying ethical mission as well as its disassociation from the government. Therefore, the

understanding of microfinance as a newly popularized idea of the poor working as entrepreneurs

to pay back the loan has permeated popular culture in a way that resonates well with the current

group of philanthropists, the generation that has recently struck it rich. The definition and

corresponding idea of individual global philanthropy to the third world has evolved over time

from a definition of a handout to a more mature one of loans involving monitoring schemes to

maximize the ethical impact of their donation. The shift in which Americans are choosing to

donate their money can strongly be attributed to way in which they made their money. “Fifteen

years ago, three-quarters of the Sunday Times Rich List had inherited their wealth and a quarter

were self-made, and today that ratio is completely reversed” (Murray, 2). Microfinance therefore

appeals to the self-made wealthy due to its underlying concept of holding the poor accountable

by having them work to pay back the loan. This translates to the ideas of the “productive

peasant” and the “lazy peasant” suggested by Light Carruyo. The “lazy peasant” is a person who

possesses no desire to work due to both lack of interest and benefits attained from doing so, and

is often cited as the source of many failed development projects. Microfinance on the other hand

can be seen as a way to transform the lazy peasant or “make the peasant productive” by showing

an interest in improving individuals’ quality of life through fostering loans (Carruyo, 80).

Microfinance is acknowledging local and more specifically individually determined needs by

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distributing loans to the poor to fund entrepreneurship so they can ultimately repay the loan. This

idea resonates with European and American values of working and thus matches the donor’s

notions of what they want and are willing to give their money to, establishing the microfinance

loan recipients as worthy objects of aid.

Therefore, the emergence of this new generation of wealthy individuals means that the

funds available for philanthropic projects abroad are greater than ever.

A lot of wealth that’s fueling the new philanthropy comes out of global

businesses. They’re often relatively young people that have created significant

amounts of wealth very rapidly in global companies. So they’re taking the same

boundary-crossing drive into their philanthropy. (Murray, 1)

Taking it a step further, these socially conscious investors can clearly be seen as challenging the

stigma associated with money and are attempting to do something about it by choosing to donate

money to a cause they feel strongly about, rather than just talking about it. They are drawn to

microfinance in the sense that they realize its role in allowing them to promote human triumph in

the third world through the monetary gain they achieved in the first. While it should not be

ignored that these investors are largely still using their wealth to indulge in material luxuries, it is

important to note that they are restructuring their ideals and values to support what’s important

and can actually achieve results.

After there has been such a general dissatisfaction with government foreign aid by

individuals, organizations and the like, microfinance is seen as central to the kind of policies that

should be adopted in the sense it is actually doing something. As reasonable human beings, we

have seen such failure with developmental policies, ultimately creating our need for wanting to

see the results. “Today’s philanthropists want to do more than simply hand over their money to a

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microfinance collateral discussion above, can be seen as an example of the way in which social

capital has brought about positive development outcomes in microfinance. “They work because

members have better information on each other than banks do” (Ito, 324). However, with the

rising popularity and prevalence of internet-based microfinance firms the importance of social

capital has began to diminish (Ito, 326).

Considering the importance of business to the world, as a driver of the global economy,

“successes in microcredit and microfinance have caused experts in development studies and

economics to rethink assumptions about how the poor can manage their assets and about how

institutions can overcome perceived market failures” (Carlman, 43). As a result, microfinance

has specifically become the subject of a potential bottom-up development strategy analysis. A

bottom-up development strategy is a model in which the beginning is small with a focus on detail

and proactive involvement by the people at the bottom. However, at its core it is a way of

implementing a large social development agenda achieved marginally over time.

The consideration of microfinance as such is a result of its roots in the idea of local

knowledge. Local knowledge can be thought of as the ways in which men and women make

sense of their world and their own circumstances, and is the basis of how they make decisions

regarding their personal well-being and that of their community. That being said, microfinance

can ultimately be seen as both a development strategy that is more attune to what communities

need by way of actually helping them. Through this focus on local knowledge, microfinance

projects fit with the local cultural and social livelihoods, which is largely correlated with overall

development effectiveness. Through microfinance institutions, the development discourse has

been actively shifted from one of rescue by asking and expecting the poor to work in a system

that has repeatedly failed them, to one of empowerment that is asking, not telling, what they, as

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individuals, need. However, critics argue that microfinance is not derived from the demand of

the poor for appropriate financial services, but instead is donor-driven and thus more of a top- down scheme (Schreiner, 637). This apparent change in the course of action chosen by

individuals from domestic donations to international microloans, though not governmental

action, clearly shows how the West is finally reforming their off par views on what can actually

help the poor.

In comparison to aid, not only can microfinance be seen as more attune to what

communities need, it can also be considered more sustainable. The sustainability aspect of

microfinance stems from the fact that microfinance institutions can develop sustainable

commercial services on a permanent basis and expand or contract their scope of operations and

outreach based on the changing stability of their financial infrastructures. However, the future of

MFI’s sustainability relies in the future. If they increase and focus their reach on the urban poor,

a concentrated demographic that is easy to serve, then sustainability will be achieved easily.

However, if more focus is placed on reaching the remote and rural poor, achieving sustainability

will be more of a challenge. By presenting it this way, there are clearly tradeoffs with

sustainability and granting loans to those truly at the bottom of the income ladder that may

involve high costs to reach. Therefore, microfinance should not be considered a one size fits all

strategy (Otero, 7). In cases of spatially dispersed and remote populations it may be more

appropriate to rely on other forms of investment.

When discussing microfinance as a development strategy, critics incessantly highlight the

fact that its processes are not reaching all of the poor. “In spite of the ‘microfinance revolution,’

however, in 2006 around 2.5 billion people were still living under the poverty line of two dollars

per day and 80% of the global population did not have access to credit” (Hagiu, 4). Similarly,

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ethical and socially conscious base it rose from to one that is instead more generic and

meaningless. However, the rapid and dramatic change that the philanthropy sector, microfinance

specifically, is undergoing resonates with the West because their participation is personally

rewarding and fulfills their desire to see where their money is going (Murray, 1). “Internet-based

microfinance firms’ recognized this and as a result developed the appearance of a direct link

between funders and recipients of microloans” (Bruett, 46). Following this model, lenders are

pleased with the face being put on the destination of their money.

The website Kiva.org specializes in loans to entrepreneurs in developing countries

specifically by “disintermediating the lending relationship between socially motivated lenders

and microentrepreneurs in the developing world” (Bruett, 47). The website showcases individual

borrowers through extensive and detailed profiles with a biography, loan request, loan term,

purpose, and picture. Lenders are then able to sort these profiles by a variety of options such as

country, gender, business, etc. Purposes for loans range from agriculture to crafts, while the firm

promotes a strong charity component through its zero percent interest rate. “During the course of

the loan lenders even receive occasional e-mail updates from their borrowers” (Murray, 1).

Thirty million dollars was lent to people in the form of 45,000 loans in forty-two different

countries between its startup in 2005 through 2009 (Moyo, 30). It is possible that this extensive

number of loans granted can be directly correlated to Kiva’s personalization aspect with detailed

profiles, biographies, picture, personal anecdotes and updates sent to the lenders.

Though online microfinance institutions have been commonly described as, “an internet

phenomenon through which individual citizens and institutions can engage with citizen-led

organizations and micro-entrepreneurs all over the world to invest their money, time or expertise

to improve human and environmental well-being” unfortunately not all are (Carlman, 46). The