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«Microfinance and development finance in India: research implications J. Copestake This paper appraises options for research relating to microfinance ...»

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Microfinance and development finance in

India: research implications

J. Copestake

This paper appraises options for research relating to microfinance in India, doing so in

the broad context of rival macro pressures to accelerate economic growth, maintain

political order, reduce poverty and adapt to climate change. This paper first set out a

general well-being regime framework that can be used for this analysis and sketch the

role microfinance plays within it. Section 2 uses it to inform a brief historical discussion of the evolution of microfinance in India. Section 3 develops the analysis further by considering possible effects of three external drivers of change: rising political aspirations; climate change and food insecurity; and new information and communication technology (ICT). Section 4 uses these examples to discuss methodological options for policy-relevant empirical research. It also suggests that microfinance is an important arena for exploring empirically the tension inherent in the idea of development management.

The term microfinance is widely used to refer to institutions governing savings, credit, insurance and monetary payments by relatively poor people, including those regulated by both official laws and informal norms. Analysis of microfinance is widely framed as a purely micro issue, centered on the motivation and behavior of specific users and providers. However, such analysis is almost invariably located - whether explicitly or implicitly - in a wider view of how the state, markets and society institute poverty. In India as elsewhere, for example, private microfinance organizations is viewed positively as a force for promoting financial inclusion by “making markets work for the poor”; and at the same time viewed negatively as a smokescreen behind which the state can retreat from a ‘social banking’ strategy of mobilizing much larger resources to challenge pervasive and chronic indebtedness. Following Brett (2009) this paper regards such seemingly polarized views as jointly contributing also to an intermediate “pluralist liberal orthodoxy” struggling to identify the least worst combination of state, market and civic mechanisms for addressing poverty and oppression in countries where their potential to do so is deeply compromised by capacity constraints and vested interests. Microfinance – along with all potential instruments of development – needs to be appraised against country-specific historical realities. Evaluating it instead in relation to a universal view of its role in some idealized market or state-led view of development can be viewed either as a naïve and idle distraction, or as irresponsible and self-serving.

CEB Working Paper N° 10/028 February 2010 Université Libre de Bruxelles - Solvay Brussels School of Economics and Management Centre Emile Bernheim ULB CP145/01 50, avenue F.D. Roosevelt 1050 Brussels BELGIUM e-mail: ceb@admin.ulb.ac.be Tel. : +32 (0)2/650.48.64 Fax : +32 (0)2/650.41.88 Microfinance and development finance in India: research implications.

James Copestake, University of Bath, UK.1 February 2010.

1. Introduction Summary This paper appraises options for research relating to microfinance in India, doing so in the broad context of rival macro pressures to accelerate economic growth, maintain political order, reduce poverty and adapt to climate change. This paper first set out a general well-being regime framework that can be used for this analysis and sketch the role microfinance plays within it. Section 2 uses it to inform a brief historical discussion of the evolution of microfinance in India.

Section 3 develops the analysis further by considering possible effects of three external drivers of change: rising political aspirations; climate change and food insecurity; and new information and communication technology (ICT). Section 4 uses these examples to discuss methodological options for policy-relevant empirical research. It also suggests that microfinance is an important arena for exploring empirically the tension inherent in the idea of development management.

The term microfinance is widely used to refer to institutions governing savings, credit, insurance and monetary payments by relatively poor people, including those regulated by both official laws and informal norms.2 Analysis of microfinance is widely framed as a purely micro issue, centered on the motivation and behavior of specific users and providers. However, such analysis is almost invariably located - whether explicitly or implicitly - in a wider view of how the state, markets and society institute poverty. In India as elsewhere, for example, private microfinance organizations is viewed positively as a force for promoting financial inclusion by “making markets work for the poor”; and at the same time viewed negatively as a smokescreen behind which the state can retreat from a ‘social banking’ strategy of mobilizing much larger resources to challenge pervasive and chronic indebtedness. Following Brett (2009) this paper regards such seemingly polarized views as jointly contributing also to an intermediate “pluralist liberal orthodoxy” struggling to identify the least worst combination of state, market and civic mechanisms for addressing poverty and oppression in countries where their potential to do so is deeply compromised by capacity constraints and vested interests. Microfinance – along with all potential instruments of development – needs to be appraised against country-specific 1 J.g.copestake@bath.ac.uk. This paper was first presented at a workshop organized by the Centre for Research into Microfinance in Brussels on the microfinance and development studies.





I am grateful to Ariane Szafarz and other participants for comments, as well as to Julie Humberstone, on whose work I have drawn heavily in footnote 14.

2 Monetary payment here refers to the service of facilitating transfers of purchasing power, rather than the wider transaction underpinning the transfer. For example, it refers to the means by which a cash transfer is made by government to a poor person rather than the full terms of such a transfer.

1 historical realities. Evaluating it instead in relation to a universal view of its role in some idealized market or state-led view of development can be viewed either as a naïve and idle distraction, or as irresponsible and self-serving.

A well-being regime framework As an antidote to naïve or ideologically biased micro analysis of microfinance this paper advocates developing a wider understanding of its role as part of an evolving well-being regime. The idea of well-being regimes can be traced back to classical political economy, refashioned – particularly under the influence lly of Karl Polanyi - into contemporary comparative social policy. The main emphasis (followed here also) is on a well-being regime as an open and evolving national level system, but such analysis can be applied at global and local levels too.3 It is captured in its simplest form by Diagram 1. This depicts a feedback loop whereby from any given starting point (captured by an endowment of conditioning factors) an institutional matrix of state, market, civil society (or community) and household mechanisms distribute resources in such a way as to determine well-being outcomes for a population.4 Well-being is defined broadly to include human capabilities, opportunities and emotional states including life, liberty and happiness.5 A given well-being outcome (along with popular perceptions of the institutional matrix that delivers it) triggers a set of reproduction consequences.

These include changes in the distribution of power and wealth that alter the institutional matrix and hence future well-being outcomes in processes of cumulative causation. They also affect the regime more profoundly by altering the conditioning factors that underpin the institutional matrix. However, implicit in the idea of a regime is the assumption that there is substantial overall system stability and that radical regime change or breakdown is an exception to the norm. In contrast the framework is designed explicitly to encourage analysis of social dynamics. These can range from those that have limited structural effects, such as business and electoral cycles, to those that entail more complex institutional change including cycles of increasing state power over society, both triggered by and leading to episodes of state weakness.

The term well-being is deliberately chose over welfare to distance itself from analysis based on the assumption that individuals operate solely on the basis of material self-interest and that institutions persist solely as a consequence of their functional contribution to individual and collective material interests. This is not to deny the power of such political economy perspectives, but simply to avoid downplaying the importance of other social processes, including those with cultural origins. Use of the term, in other words, signals an 3 See Gough and Wood (2004), Copestake (2008). It echoes North, as well as Polanyi, in its emphasis on national path-dependence in the ongoing tension between forces of commodification and de-commodification.

4 The term institution is taken to refer to rules and norms governing resource allocation that are protected by culture in the sense that non-compliance is widely enough viewed as an affront to cherished values that it provokes a political reaction sufficient to uphold order.

5 More specifically, this echoes the definition of well-being at “a state of being in society where people’s basic needs are met, where they can act effectively and meaningfully in pursuit of their goals and where they feel satisfied with their life.” (Copestake, 2008:3) 2 attempt to combine an understanding of the politics of resources and redistribution with the politics of identity and recognition. One further clarification is that notwithstanding use of the term well-being, the framework aims primarily to inform positive rather than normative analysis; thus particular well-being regimes may more appropriately be referred to as an insecurity regime or an inequality regime, for example.6 Figure 1: A simple framework for well-being regime analysis

–  –  –

Microfinance and well-being regimes How is this framework to be used? One purpose is to aid analysis of how a specific component of a regime, such as microfinance, is likely to be affected by wider system dynamics. This requires a critical analysis of the system-wide role the component performs. If particular institutions (such as chronic informal rural indebtedness) are resilient over time, then this suggests they contribute to overall regime stability in some way and warns against naïve assumptions about how easily they can be changed. It is necessary to understand these roles, and also the forms of resistance likely to arise from any attempt to change them.7 More generally, the framework can also be used to explore how a particular component is likely to be affected by largely independent forces of change (conditioning factors) in a particular historical context. This is the approach adopted here by viewing microfinance in India as an endogenous component of the institutional matrix, subject not so much to autonomous change but to being moulded by more powerful forces such as global climate change, the ICT revolution and the deeper cultural and political revolution taking place in India.

6 For case studies see Bevan on in/security regimes in Africa in Gough and Wood (2004) and Copestake and Wood on Peru as an unequal security regime in Copestake (2009).

7 The approach can hereby be seen as part of a wider literature exploring the relevance of “an institutionally grounded complexity analysis” (e.g. Room, 2008).

3 Potential well-being outcomes to clients from access to a full range of microfinance services (savings, credit, insurance, payment) include capacity to save, to spread risks, to smooth consumption, to meet lumpy expenditure needs and investment opportunities, to make and receive transfers easily, and so on.8 These services are an important part of the institutional matrix. Financial exclusion deprives people of these potential benefits, while adverse incorporation entails having to trade them against high costs, loss of autonomy and restricted aspirations. It is implicit in the definition of microfinance that access to them is indeed segmented by income, whether because technology is not scale-neutral, because there are socio-political barriers to access, or more likely a combination of both. Hence microfinance not only delivers important well-being outcomes but also play a critical role in the reproduction. On the supply side, the effect of unequal control over who controls microfinance services, and thereby derives income and wealth from it, is also important.

To be sure, technical change that lowers the transactions costs of providing microfinance offer opportunities for improvement in material well-being.



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