ngos in microfinance: learning from the past, accepting limitations, and moving forward

NGOs in Microfinance: Learning from the Past,Accepting Limitations, and Moving Forward

Bipasha Baruah*International Studies Program, California State University, Long Beach

Abstract

Over the past three decades, microfinance has become an extremely popular and populist develop-ment intervention. The Grameen Bank and its founder, Dr. Muhammad Yunus, were awardedthe 2006 Nobel Peace Prize and the Global Microcredit Summit in Halifax, Nova Scotia set itselfthe goal of lending to 175 million people around the world by 2015. Despite such global enthusi-asm, the limitations of microfinance are gradually being acknowledged even by its most vociferousproponents. The vast majority of NGOs in microfinance not only face tremendous challenges inbalancing outreach and financial sustainability, but there is also growing evidence of their failureto make an aggregate impact on poverty reduction. At the same time, there is evidence thatNGOs can – even without offering credit or savings programs – play extremely important roles inareas such as poverty relief, marketing, enterprise development, innovation, and social intermedia-tion. This article looks at strategies NGOs in microfinance can use to meet their social justicegoals without becoming completely seduced by commercial values or being lured away from theirmajor objective of serving the poor. As a development methodology, microfinance is firmlyembedded within a neo-liberal framework that seeks to increase poor people’s access to financialresources without really challenging the entrenched status quo of unequal power relations betweendifferent groups of people. The continued popularity of microfinance should not foreclose thepossibility of more creative and complex engagement with inequality as well as for more boldlyoriginal visions and innovative solutions to promote human dignity and social justice.

Introduction

In the 1970s, the state was indisputably the key institutional player in the design andimplementation of programs in market-led economic growth, poverty alleviation andeducation. By the early 1990s, decades of neo-liberal critique of the state, compoundedby the failure of centrally planned economies around the world, led to a shift in interna-tional development ideology. The new understanding that poverty did not respond togrowth-oriented ‘trickle down’ development efforts coincided with increased awarenessof the dimensions, scale and stubborn persistence of the informal sector economy (Sanyal1991; Woller and Woodworth 2001). Microcredit was one of the tools designed to bene-fit large numbers of people, sometimes accounting for up to 90% of employment in acountry, involved in the sector variously termed as ‘unorganized’, ‘unprotected’, ‘unregis-tered’, or ‘informal’ (Jhabvala and Subrahmanya 2000; de Soto 1989). Organizations likethe Grameen Bank in Bangladesh led the way in experiments involving small amounts ofcredit aimed at very poor people and demonstrated that poor people, especially poorwomen, were highly reliable borrowers. An alternative route of ‘bottom up’ economicempowerment began to emerge and while it included the market-oriented private sectorand the public sector, it also envisaged an expanded role for civil society organizations

Geography Compass 4/8 (2010): 979–992, 10.1111/j.1749-8198.2010.00362.x

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and their most visible representatives, the nongovernmental organizations (NGOs). Thishappened partly because of the characteristics attributed to these organizations. NGOswere thought to be – although not universally – less bureaucratic, less conservative, closerto their constituencies and, therefore, more in touch with their needs and constraints.The face-to-face interactions between NGOs and their constituencies seemed to givethem a greater advantage in promoting innovative participatory strategies and less scopefor trivializing or avoiding the issue of women’s subordination (Narayan 2000).

Based on institutional research conducted by development agencies, reviews of academicliterature, and my own observations and conversations with microcredit practitioners inSouth Asia, I wish to focus on two major areas in this article. First, while recognizingNGOs for their laudable work in microcredit, I draw attention to some of the major weak-nesses that most organizations in this sector appear to share and suggest ways to compensatefor these shortcomings. Second, I elaborate upon other important activities that NGOs canpursue in support of microfinance without necessarily becoming credit programs them-selves. While identifying ways to make microfinance more accessible and affordable tolow-income populations, it is difficult to ignore that the use of microfinance carries implicitneo-liberal assumptions about how development should occur. Therefore, I end the articlewith a call for more creative and complex engagement with the deep-rooted structuralinequalities that permeate human societies around the world today as well as for more pro-methean visions and innovative solutions to promote human dignity and social justice.

NGOs, Credit and Poverty Alleviation: A Retrospective

Thirty years ago NGOs were not part of the mainstream discussion on microfinance. Itwas only in the mid-1980s that a role was conceived for NGOs in credit services. Mean-while, the term ‘microenterprise’ gained popularity due to the pioneering efforts of orga-nizations like Grameen Bank, which began as an NGO in Bangladesh in 1976, and cameto be associated with the informal sector and poorer people. The success of organizationslike Grameen with group solidarity lending, high repayment rates, and the growing notion– although not without detractors – that credit alone could make a difference in people’slives led to an understanding that credit could be offered not just to enterprises but also toindividuals for small-scale economic activities. One of the areas in which NGOs stood outfrom other institutions that provided credit, namely savings banks (including national andpostal savings schemes), credit unions and commercial banks, was their ability to reachpoor women. Research conducted by the World Bank in 1995 under the SustainableBanking with the Poor (SBP) project revealed that more than 80% of the NGO microfi-nance programs in South Asia, for example, were female based. As grassroots practitionerswho were ideologically motivated and appropriately positioned, NGOs created a niche formicrocredit aimed at very poor people, a majority of them women, whose activities werenot so much businesses of the kind commercial banks and credit unions served but ‘liveli-hood’ or ‘subsistence’ activities. Reliable and equitable access to credit was perceived tofulfill the social goals of providing a safety net, smoothing consumption, enabling smallimprovements in family welfare and asset creation, and empowering women to exercisesome control over resources within the family and society. In seeking to meet theseimportant goals and to secure donor funding for what appeared to be very fertile groundfor them, hundreds of NGOs joined the microcredit bandwagon in the 1990s.

Because so many microcredit projects have mushroomed around the world, a substantialbody of research has been generated that points to the limits of what it has been ableto accomplish. While some of these limitations may just reaffirm the complex nature of

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development work, NGOs in microcredit have found themselves especially vulnerable tosome glaring weaknesses. They have also left themselves open to the criticism that by focus-ing credit on the immediacies of poverty, they have arrogantly believed that what they haveto offer is what people need and can use effectively. Many examples of poor practice havebeen reported in South Asia, Africa, and Latin America, and some of them have threatenedto reverse the positive accomplishments of the sector. Microcredit as a major, or lone, inter-vention for ‘development’ also echoes the dominant post-Second World War moderniza-tion philosophy, when capital scarcity was singled out as the ‘missing component’ for thedevelopment of post-colonial countries. That justification was, of course, used to rationalizeexport of capital and foreign ‘aid’ from capitalist countries. While it cannot be argued withany degree of confidence that NGOs should not practice microcredit or that the poorshould not have access to credit, there are widespread limitations and weaknesses that thesector must address to ensure its effectiveness and survival. A few of the major issues thatappear to be common threads in the literature on microcredit NGOs are outlined below.

SUSTAINABILITY

The measurement of success in microcredit has thus far been almost entirely confined toinstitutional financial sustainability and outreach or access to credit by the poor. Whenjudged simultaneously by both criteria, the results for NGOs are not encouraging (Nair2001). From the beginning, most NGOs have been dependent on donor funds from largemultilateral and bilateral organizations such as the World Bank and United States Agency forInternational Development (USAID), and sometimes even from larger NGOs. Most NGOsdo boast impressive repayment rates of higher than 90% but because they are not registeredas banks, the law does not allow them to collect deposits from their borrowers. They are alsolegally not permitted to provide borrowers with other savings instruments such as mutualfunds or guaranteed investment certificates. This renders NGOs ineffective at weaningthemselves off of donor funding, especially since the cost of lending very small amounts(US$100 per loan on average in South Asia) is extremely high and intense monitoring isrequired (World Bank 2007). In this respect, NGOs lack the inherently conservativegrounding that comes from basing growth on deposits, which is at the heart of capitalistbanking practices. There is the danger that they will run into financial problems (indeedmany smaller NGOs already have) and the certainty that they will remain highly dependenton donor funds and subsidies. While describing this weakness, it is important to rememberthat NGOs are (or at least they are supposed to be) driven by an ideological bias in favor ofthe poor. Many of them are pioneers in the sense that they had the courage to lend to peoplewho were not considered creditworthy by conventional banks. In addition to credit, NGOsare also more likely to offer other social services like rights awareness and literacy classes thanother financial institutions. The NGOs surveyed by the World Bank had an average ratio of1.3 social staff to 1 financial staff (World Bank 1995). Ahmad (2003) writes about the twotypes of fieldworkers – economic development workers (EDW) and development educationworkers (DEW) that work for Proshika, a Bangladeshi NGO (although he does indicate thatEDWs receive more frequent promotions and bigger pay raises than DEWs!). To someextent this commitment to social justice in itself legitimizes NGOs’ entitlement to donorfunding and asserts their ‘right to operate.’ At the same time, it creates a certain amount ofconfusion over their roles and responsibilities and leads to the question of whether theseNGOs are primarily social or financial organizations.

There are, of course, ways to address the issue of financial sustainability. It is possible thatwell-established NGOs will effectively lobby governments to change the regulatory regime

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to allow them to take deposits, or alternately, as has happened in a few well-known cases,become banks themselves. While this is perhaps feasible, there is also the chance that theNGO community may resist adopting banking practices driven only by efficiency as thismay be perceived to render the sector more commercial and less responsive to the needs ofits constituency. The high correlation between commercialization and ‘mission drift’ hasbeen written about most frequently in the context of Latin America, where commercialbanks today provide 29% of the funds that go to microenterprise and NGOs that have trans-formed themselves into licensed financial institutions provide another 45% (Christen 2000).

NGOs that are not motivated by financial sustainability alone may also choose toremain NGOs while ‘graduating’ their clients to banks after allowing them initial accessto credit and the opportunity to establish sound credit ratings. Based on an assessment ofthe microfinance industry in India, Padhi (2003) recommends the development of a sym-biotic relationship between NGOs and banks, with the former efficiently utilizing theirstrengths in social engineering and the latter focusing on pure financial intermediation.Such a strategic partnership that replaces the usual mutual skepticism and antagonismbetween NGOs and banks would help achieve the otherwise elusive targets of outreachto the poor and financial sustainability. Organizations like the Nari Nidhi, a credit fundfor poor women in the Indian state of Bihar, have developed explicit long-term objec-tives of facilitating direct linkages between groups of poor women and formal bankinginstitutions (Remenyi and Quinones 2000).

CREDIT VERSUS SAVINGS

This last alternative may serve the poor especially well since it would also facilitate theiraccess to savings accounts that NGOs cannot legally provide. The SBP inventory revealedthat far more people are being served by savings services than by credit and that thedemand for safe, liquid, interest-bearing savings instruments is higher than for any otherfinancial service. Similarly, the World Bank’s Consultative Group to Assist the Poorest(CGAP) has concluded that most microfinance clients want to save all the time, whilemost want to borrow only some of the time. To address this need, NGOs can begin todevelop policy dialogue with governments in favor of allowing them to take deposits, butthis may be challenging and risky. Mobilizing savings and providing microcredit are twovery different activities. Lending money to poor clients without taking collateral puts therisk of default on the side of the NGO. On the other hand, taking deposits may actuallymean transferring the risk of poor banking practices or bankruptcy on to clients. This sce-nario would be extremely detrimental, if not disastrous, both for the clients and theNGO, unless it can obtain technical assistance from governments or donor agencies inthe development of deposit insurance programs. Padhi (2003) corroborates that the tenu-ousness of the NGO position is dangerous to the saver. Besides propriety and prudence,which we can certainly not take for granted given the Ponzi schemes and Bernie Madoffscandals of our times, savings custodianship necessitates statutory provisioning and creationof reserves to cover liquidity and other risks. Despite such limitations, it is difficult toignore that to be responsive to the needs of the poor, savings must move into a moreprominent position. Ahmed (2002) emphasizes that shattering the myth that poor house-holds cannot and do not save, and demonstrating that savings can indeed be successfullymobilized from poor households would constitute a more significant achievement of mi-crofinance than the expansion of credit outreach.

Some NGOs have figured out innovative ways to meet this need. The CooperativeDevelopment Fund (CDF) in Andhra Pradesh, India, reaches 79,200 women and 43,700



men through the cooperatives that it assists. The cooperatives focus on organizing andempowering women through ‘thrift,’ in the form of savings, and credit groups (CDF2006). Since cooperatives can be run by the state, they are not always NGOs. Coopera-tive advocacy organizations – like CDF – may, on the other hand, be NGOs. The ulti-mate goal of CDF’s work is the self-sufficiency of the cooperatives, and the organizationcurrently takes almost no donor money. CDF is also involved in cooperative advocacyboth within and beyond its home state. It was recently engaged in a major effort tochange cooperative law both at state and central government levels. The primary purposewas to free the cooperative sector from excessive government interference and to makethe laws relating to cooperatives enabling, rather than controlling, instruments. An act tothis effect was created in response to CDF’s advocacy and it has restored member controlof cooperatives and allowed informal organizations, such as CDF’s thrift and credit groupsto register as formal cooperatives. The NGO hopes that other groups outside the CDFumbrella will follow their example to ultimately register a state-level federation ofwomen’s thrift cooperatives.

Such successes aside, most NGOs continue to operate with the ‘grant and subsidy’mentality that is prevalent in the sector (Dichter 1999). This culture of dependencemakes it nearly impossible for NGOs to be major promoters of financial independence.Assisting the poor to protect their savings and watch them grow is a sustainable solutionto poverty alleviation and therefore highly justifiable. By emphasizing credit to the exclu-sion of savings, in the interest of convenience or self-perpetuation, many NGOs may notbe serving their constituencies optimally.

IMPACTS ON POVERTY

In addition to the concern over the financial sustainability of NGOs, there is debateabout how much impact microcredit has on long-term poverty alleviation. Many suggestthat there is little evidence of any aggregate impact on poverty reduction as a result ofNGO intervention in microfinance (Hulme 2000; Muhammad 2009). Skeptics stress thatbecause microcredit focuses on the immediacies of poverty, poor people are able to meettheir basic needs through their economic activities but unable to rise above the subsis-tence level in the long term. They also argue that because most NGOs in microcreditoperate in a minimalist way by providing loans and assuming that poor people know bestwhat to do with money, borrowers are left to figure out the backward and forward sup-ply and demand linkages of their chosen activities. This limitation will be dealt with inmore detail in the second section of this article.

Loan use is another area that has generated vigorous debate. NGOs are generally awarethat loans to poor people are used for a variety of production as well as consumption-related purposes. Because of their urgent mandate to alleviate poverty, most NGOs arecomfortable with this fungibility especially since studies of credit use show that theirclientele (largely poor women) are not only better repayers than men, but also tend tochannel their credit benefits to their families rather than themselves. Several longitudinalstudies have shown that microcredit alleviates the immediate effects of poverty by facili-tating consumption and cash flow smoothing, and also leads to significant gains inwomen’s access to and control over resources within the household (Ahmed 2002;Kabeer 1996, 1998; Todd 1996). However, the same studies also indicate that long-termeconomic impacts like asset creation and ability to withstand future economic and health-related adversities without falling back into poverty have not yet been seen. This is truenot just of NGOs but of all financial institutions that lend to the poorest borrowers. In



light of this limitation, the credibility of NGOs may be enhanced by acknowledging thelimited long-term economic impacts of microcredit while documenting other crucialgains, such as redirection of income towards family welfare, which this sector seems to beuniquely positioned to effect.

There are some NGOs that claim that their loans do go almost entirely to business-related uses although the poorer the borrower, the more difficult it is to establish this.Additionally, the concern remains that even if the loans can be more or less reliably con-nected to investment in productive assets, it cannot be concluded that this will lead tosustained increased output. One of the SBP’s studies involved a survey of financial servicesto microcredit clients in India. It concluded that the underlying assumption that any poorhousehold can be raised above the poverty line by providing a loan for an income gener-ating asset has not been found sustainable in practice (Dichter 1999).

ACCESS AND OUTREACH ISSUES

Outreach is another major concern for NGOs. Some observers and practitioners ofmicrocredit assert that despite their grassroots membership, the ability of NGOs to reachthe ‘poorest of the poor’ is somewhat overrated. They suggest that while the reach ofNGOs is deeper than other financial institutions, it is also fairly narrow. In other words,NGOs reach some extremely poor people but not enough to be thought of as particularlysignificant for poverty alleviation. This may be a result of NGOs’ accountability – Baruah(2007) argues that ‘accountancy’ is a better descriptor – to donors, which in operationtranslates into a need to constantly balance the numbers reflected by measuring sustainabil-ity and outreach. Balancing outreach and sustainability is understandably quite challengingbut it is more so for NGOs because unlike other financial institutions, they cannot gener-ate resources by mobilizing savings and deposits from their borrowers. In order to facili-tate outreach, many NGOs have started to concentrate growth in highly populated urbanareas where it is easier to contact people but where they may not need credit as urgentlyas in rural areas. In a study on rural poverty alleviation in India, Robinson (1991) notedthat NGOs were successful in including primarily poor people in their programs andexcluding nontarget group members. However, he also observed that they had problemsestablishing sustainable economic activities in remote coastal villages where communica-tions were low, infrastructure was poor, and markets were relatively underdeveloped. Aseries of old and new studies concur that the distribution of NGOs across South Asia doesnot necessarily correspond to the distribution of poverty. More than two decades ago,Gupta (1987) stressed that NGOs tend to follow the logic of the market and are concen-trated in areas where the market is well developed and people have started to articulatetheir need for credit. In India, NGOs are found in larger numbers in the relatively afflu-ent southern and western states and less in the poorer northern and eastern states such asUttar Pradesh, Bihar, Orissa, and Assam. Similarly, in Bangladesh Ebdon (1995) foundNGOs competing for the same clients in well-serviced areas in order to facilitate rapidexpansion of programs. Such competitive behavior contradicts NGO claims to coopera-tion and coordination with the common interest of empowering the poor. Instead, itcreates and perpetuates factions and conflicts at all levels (Ebdon 1995). While competi-tion is deemed a good thing in the private sector, NGOs in microfinance (while theymay adopt some private sector values), are not private sector institutions. Their (and theirdonors’) premise when they go into an area is that there is an unfulfilled need for credit.This is different from Pepsi and Coke lowering prices and (presumably) offering morevalue to the customer in order to stimulate demand and deal with competition. NGOs



are not in microfinance to make money, but to alleviate poverty. By concentrating onhigh volume areas in order to increase cost coverage, their outreach to less dense, but justas needy, areas is curtailed (Padhi 2003). Microcredit cannot rely on competitive commer-cialized operations alone; they will miss far too many people (Harford 2008).

Some NGOs have also shown a trend of moving up the poverty scale away from thevery poorest in order to maintain loan demand and repayment rates. Seventy-five percentof the organizations in the SBP study show this ‘upward creep.’ While evaluating themerits of the Diviseema Social Service Society, a nonprofit microcredit organization inGujarat, Rao (1989) concludes that the society’s greatest success in credit delivery was tosmall and tenant farmers while landless laborers who were the poorest sections of theirtarget population were least likely to have benefited. Compromises like this may helpNGOs establish their viability and outreach in terms of sheer numbers but they are indirect conflict with the larger goal of alleviating poverty, and particularly of addressingthe needs of those termed ‘the poorest of the poor.’ By concentrating on high volumeareas where banking institutions already exist, NGOs may fail to reach areas that are risk-prone and economically underdeveloped, where paradoxically, the need for such creditamong the poorest is the highest (Padhi 2003).

Part of the bigger conundrum in tailoring microcredit to meet the needs of the poorarises because the complex causes and consequences of poverty are not well understood.From what we do know, it appears abundantly clear that poverty cannot be solved bycredit schemes alone. Chronic poverty cannot be attributed entirely to market failures ofcredit or any other kind. Because the array of nonlabor and nonmaterial factors that causepoverty have not even been fully documented, it can perhaps be expected that even aflawless credit market will leave a considerable amount of lingering poverty in its wake.Thus, after 10 years of evaluating microcredit operations in 15 villages in Bangladesh,Muhammad (2006) writes that expanding the credit net without addressing the causes ofpoverty may satisfy zero-sum-game Pareto optimality, but it will not permanently allevi-ate poverty. He goes on to emphasize that if countries like Bangladesh rely solely on mi-crocredit to alleviate poverty, poverty will certainly stick around to keep the programsalive!

Other Roles for NGOs in Microfinance: Exploring the Possibilities

The Norwegian Agency for Development (NORAD) comments thus upon the recentproliferation of credit-granting NGOs in Bangladesh and the need to explore otherimportant agendas:

An NGO should be able to work with a village organization in strengthening their knowledgeabout health and sanitation, and then refer them to a government health clinic. Similarly anNGO should be able to facilitate access to credit from a bank without necessarily becoming acredit organization itself. This last point is particularly important, since the success of microcred-it programs in Bangladesh has led to a belief among most NGOs that they all have to run theirown credit program. (Dichter 1999, p. 44)

So far this article has described some of the difficulties that NGOs in microcredit face inbalancing outreach and sustainability, and outlined the increasing evidence of the sector’sfailure to make a sustainable difference in poverty reduction. The next part of the articledescribes roles that NGOs can play in support of microfinance without offering credit ortaking deposits. These options are being explored by funding agencies and NGOs alikeand may shape the future of the sector in a significant way.



NGOS IN POVERTY RELIEF

Several studies of microfinance institutions have suggested that they have played a biggerrole in temporary poverty relief than in long-term poverty alleviation (Remenyi and Qui-nones 2000; Robinson 1991; World Bank. 1995). NGOs committed to microfinance willhave to decide for themselves whether it is more important for them to reach the poorestwith financial services or to be financially sustainable lenders. Even those NGOs that arepartial to the first option may have to accept that while they may be able to make veryrapid changes in poor people’s lives by relieving the most immediate aspects of poverty,credit by itself may be ineffective at pulling people permanently out of poverty. Instead ofviewing credit as a panacea for poverty alleviation, NGOs could set modest utilitariangoals of helping poor people manage their day-to-day lives better than before.

While production-related expenditures that include working capital needs and purchaseof productive assets are considered a legitimate basis for borrowing by most formal creditinstitutions, the poorest borrowers experience poverty at a level deep enough to warrantspending on other more fundamental needs. These may include expenditures connectedwith food, health needs, clothing, education, and house repairs to name a few. Anothercategory that also generally falls outside the remit of formal credit institutions is reflectiveof the social isolation and vulnerability of the poor and includes resources needed for therelease from bonded labor and repayment of previous debts with moneylenders. As far asthe need for credit is concerned, the distinction maintained by formal institutionsbetween acceptable use of credit for production and its unacceptable use for consumptionis an artificial one in the context of poverty. It is a distinction that becomes increasinglyblurred the more socially and economically powerless the borrower is. Because otherfinancial institutions may still be very wary about lending to this vulnerable group, it isappropriate for NGOs to do so. Given the diversity of the poor and the higher vulnera-bility of certain sections such as the elderly, the chronically ill and the disabled, credit asa safety-net measure will probably always be necessary and NGOs are well positioned toprovide it (Harford 2008). As well, NGOs can adopt advocacy goals and practices andattempt to convince mainstream financial institutions to lend money to the poorest forpurposes other than production or enterprise development. While many researchers ques-tion the effectives of microfinance NGOs in enabling long-term poverty alleviation, theygenerally acknowledge their success if facilitatory and social intermediation criteria areapplied (Ahmed 2002; Nair 2001).

INFORMATION AND MARKETING

While many surveys on microenterprise reveal inadequate access to financial services as ahigh priority constraint, others report that the major constraint is not financing butmarketing. They identify constraints such as saturation, competition, inability to differen-tiate one’s product from those sold by competitors, lack of information, and pricinguncertainties. I observed a situation that exemplifies many of these limitations on a visitto Lucknow, the capital of the Indian state of Uttar Pradesh. The months of June andJuly comprise the peak mango season in northern India and many fruit vendors sell localvarieties of the fruit during the summer. On a visit to a local market, I was astounded tosee about 40–50 women lined up along the sidewalk selling the same variety of mangoout of their vending baskets. Conversations with a few of them revealed that the womenhad received small loans from a local credit society to help them cash in on the seasonalmango market. When I questioned the women about the logic of being at the same place



at the same time with the same product, one of them informed that the weekend marketswere usually crowded enough to ensure that almost everyone made a few sales. Besides,they informed, being in a large group provided them with increased visibility and a senseof camaraderie that helped them to compete successfully with independent male vendors.One woman pointed out that while it was sometimes beneficial to be in a large group,vendors were often forced to undercut each other’s prices to make a sale leading occa-sionally to hostility among the women.

Such situations may arise from one of the most entrenched assumptions of microcredit– that the poor who are engaged in some kind of economic activity already know whatthey need to know about business and only lack credit (Chowdhury 2007; Yunus andWeber 2008). In reality, this is not always true for all borrowers. Those who started outfrom relatively stronger positions are also generally those who are most likely to benefitfrom access to credit. Most borrowers respond to market forces in the manner that theydeem most appropriate, but many are often not fully informed about the consequencesand repercussions of their actions or those of the networks and institutions through whichthey operate. These uncertainties and inconsistencies occur at several levels.

First, there is the danger of what Osmani (1988) calls the ‘micro-level mismatch’ betweenthe income-generating asset of choice and the availability of complementary resources toutilize the asset to generate a sustainable livelihood. Livestock and poultry raising providegood examples of this. The high mortality rates reported for livestock in parts of India areoften due to inadequate protection for cattle from inclement weather in areas where peopleoften lack adequate shelter themselves. Other factors may include borrowers’ lack of accessto grazing land, to sources of fodder, and to veterinary services. Additionally, the smallamounts of money that the poorest borrowers work with usually means that the most vul-nerable borrowers are also least able to secure potential economies of scale and most likelyto be trapped within isolated, marginal, or high-risk segments of the informal economy.One woman in West Bengal, India, who earned her livelihood from parboiling ricebemoaned: ‘The price of paddy I buy is high because of the small quantity I purchase andthe price of rice I sell is low because of the small quantity I sell’ (Swaminathan 1990, p. 20).

Mismatches between supply and demand also occur quite often. On the supply side,the failure to align assets selected for an enterprise with their availability is a frequentone. For example, the shortage or unavailability of hardy and productive breeds of cattleoften leads to large-scale purchase of poorer quality animals with lower yields and highersusceptibility to disease. On the demand side, enterprises involving, for example, cyclerickshaws and sewing machines, might be profitable and even reasonably lucrative if theyinvolve a few new entrants. However, because so many people tend to invest in suchenterprises when credit becomes available, the markets for these goods and servicesbecome quickly saturated, and demand invariably does not keep up with the expandingsupply. The potential for this to occur is exacerbated by the fact that such interventionsare usually directed at a section of the population that had on account of its poverty beenexcluded from mainstream market opportunities and were only familiar with limited andeasily saturated segments of the market. A study in Uttar Pradesh, India, for instance,revealed that in a certain village of 143 households, 20 people had taken out loans toopen grocery shops (Kabeer 1998).

In a very thoughtful recent critique of the microfinance movement, Muhammad(2009) refers to microcredit as ‘a glorified form of subsistence.’ In the informal sector,borrowers are reduced to ‘copycat’ behavior, everyone selling the same thing, and moresellers saturating the market as more microcredit becomes available. They are limited bylow skills and an inability to add value, which is why the informal sector is characterized



by low ‘barriers to entry.’ To be sure microcredit has helped someone here and there tobuild up a tiny business; enabled someone to buy a bicycle and thus become an owner ofa productive asset, but such examples are far fewer than the cases of those who are caughtin subsistence activities with no prospect of comparative advantage (Dichter 2005). Theselimitations also mean that NGOs can make a major difference in the following areas.

Enterprise developmentGiven their experience in education and community organization, NGOs can play amajor role in providing poor people with the information and skills to choose viable eco-nomic activities, and to access necessary backward and forward linkages, including careand maintenance of their assets, raw materials supplies, markets and insurance. Manyorganizations in South Asia have taken on such challenges with varying levels of success.Specific economic strategies undertaken by NGOs include enterprise development(through increased access to skills and businesses, management training, improved tech-nologies, and production packages) and marketing strategies (through increased access tomarkets). Some of these are very innovative and make special effort to take account ofpeople’s specific needs. For example, the Aga Khan Rural Support Program (AKRSP) inNorthern Pakistan provides both subsistence and graduated packages so that women canstart off by improving their existing subsistence-level household activities and graduate onto commercial production (Carr et al. 1996). After experiencing difficulty with collectiveproduction packages, the NGO adapted its program to women’s preferences by introduc-ing individual packages. As well, AKRSP adopted the dynamic strategy of trainingwomen from the communities to provide advice, guidance, training, and inputs to otherwomen as ‘master trainers.’ This is especially important and useful in remote areas andwhere seclusion norms are prevalent, limiting women’s mobility and contact with men(Chen 1996). An Indian NGO called AWARE (acronym for Action for Welfare andAwakening in Rural Environment) uses a similar strategy to train community leaderswho, in turn, not only share their awareness and mobilize other women in their commu-nities but also prepare others as leaders in their own right (Narasimhan 1999). TheBangladesh Rural Advancement Committee (BRAC), one of the world’s largest indige-nous NGOs, has not only introduced some highly creative models for enterprise develop-ment but also forged extremely productive linkages with the private sector and withgovernment. For example, BRAC’s poultry program is now co-administered by the Gov-ernment of Bangladesh and receives valuable inputs (in the form of chicks and veterinaryservices) and training from government departments (Smillie 2009). Many NGOs thatprovide microcredit services, including World Vision, Oxfam, CARE, and OpportunityFoundation, have tried to incorporate private sector linkages into their poverty alleviationand microenterprise-promotion programs (Remenyi and Quinones 2000). Such examplesshow that NGOs can play a very active role not only in establishing backward and for-ward linkages for economic activities but also that they can persuade governments andthe private sector to provide useful services.

Although most microcredit NGOs provide services that help women generate self-employment, some of them also directly provide jobs. Thirteen BRAC handloom andembroidery production centers, for instance, directly employ 40,000 women and provideattractive working conditions in a safe and nonexploitative environment (Aarong 2009;Carr et al. 1996). By 2007, Aarong, BRAC’s handicraft unit, earned US$30 million insales and contributed US$4.6 million to BRAC’s health and education programs (Smillie2009). Other organizations create jobs for women by training them to provide services toother women in the communities. These include the ‘paraprofessionals’ in a variety of



organizations: barefoot accountants and master trainers in AKRSP; barefoot doctors,teachers, lawyers, and vets in AWARE and BRAC. Although it is the communityreceiving the service that pays the wages of these workers, it is the NGO that trains andprepares them to take on these responsibilities.

Market strategiesPrograms that promote entrepreneurship often tend to give inadequate attention to mar-ket trends and to the marketability of the products. Market constraints are usually of twotypes. There may be no real demand for the product because the market is saturated.Alternately, there may be demand for the product but poor entrepreneurs may not beable to sell it because of inadequate access to markets or lack of information about wherethe markets are. NGOs have attempted to find solutions to both these problems. In thecase of flooded markets, BRAC, AKRSP, and Proshika (a Bangladeshi NGO) haveassisted women in shifting from traditional activities, which have few or no barriers toentry, into nontraditional activities which demand improved technical skills and increasedamounts of capital, but provide higher returns due to greater market demand (Chen1996). Sericulture, tailoring, and construction training are a few examples. In many cases,the larger NGOs have internal technology development capacity that is used to provideappropriate technologies to help diversify and upgrade the range of enterprises and occu-pations open to women (Baruah 2008). Some NGOs have also developed effective strate-gies to deal with market information and access. The Women’s Development Fund in SriLanka established a market information service that its members can use to find andconnect with potential buyers (Carr et al. 1996). AKRSP has linked its women’s organi-zations with merchant marketing cooperatives and truck drivers to facilitate timely accessto markets for their perishable food products.

INNOVATION, FACILITATION, AND ORGANIZATION

Entrepreneurs and small businesses need to develop skills and capacities. NGOs can pro-vide assistance by creating training and teaching institutions or by working with existinginstitutions to teach relevant business skills. Small businesses also need to develop thecapacity to become and remain competitive. With their wealth of experience in commu-nity organizing and mobilizing, NGOs can work to forge coalitions and alliances betweenbusinesses to develop new products or new techniques for production that maximize useof local resources.

Much research suggests that organizing is especially vital for women’s economicempowerment. There are several reasons for this. Poor women have very few financialresources or assets but pooling together what they have can have significant impact.There are many well-documented cases of women combining their savings as a means ofacquiring credit for productive purposes. NGOs like Proshika and AWARE have orga-nized women to pool their resources to acquire essential services such as tube wells andsolar panels. In other cases, women have pooled their labor to undertake tasks such asstarting nurseries or catering services that would have been difficult to do on an individ-ual basis. Commenting on AWARE’s success in mobilizing rural women in India,Narasimhan (1999) notes that because the women themselves decide whether they wanta water tank or a community latrine, for example, utilization of the facility is maximizedand sense of ownership is very high.

NGOs can also provide an ideal medium through which essential services such as healthand childcare can be channeled to women living in poverty. Providing low-cost housing



for families and hostels for low-income women is another area in which NGOs can makea major difference. Organizations like the Nari Udyog Kendra in Bangladesh that providessafe, affordable housing for single women working in garment factories, and also lobbiesfor better and more affordable transportation for working women provide very valuableservices in support of women’s economic empowerment (Nari Udyog Kendra 2000).

Some NGOs have used unionization strategies to organize women and to enable themto cooperate rather than compete for jobs, and thus bargain for increased wages andbetter working conditions. The Self-Employed Women’s Association (SEWA) in Gujarat,India, organized tobacco workers to fight for their entitlements (Chen 2008). In turntheir actions also led to a rise in men’s wages and working conditions. Even without reg-istering as unions, NGOs can enable women to raise their bargaining power and hencetheir income through cooperation rather than competition. For example, women embroi-derers represented by the Lucky Mohila Samiti in Dhaka, Bangladesh, decided upon ajoint rate for their work below which the group collectively agreed not to sew (Carret al. 1996). Women organized by the AKRSP in the Khyber region of Northern Paki-stan were able to set a price for potato seed below which none of them would sell tomerchants (Chen 1996).

SOCIAL INTERMEDIATION

NGOs can engage in nonfinancial intermediation in support of microfinance. It has beenargued in the context of both government and nongovernment programs that credit maynot be an appropriate intervention for the very poorest whose raw labor is the only assetat their disposal (Harford 2008; Rath 1985; Robinson 1991). This is the group that isfearful of institutions and of being indebted, and they are likely to lack the necessaryresources to transform loans into viable economic activities. For some within this group,programs of employment generation are likely to carry greater potential to meet theirneeds. Employment schemes linked to enterprise development infrastructure may help tomake credit interventions more useful for a wider section of the poorest people, andNGOs can be effective in bringing people who currently do not have the skills andknowledge to use credit effectively into the microcredit fold. NGOs can also play a vari-ety of very important roles including preparing people to become good borrowers andsavers, helping people to manage their own finances or their financial groups, andenabling people to put the social and cultural capital they have to better use (SEWABank 2003). Because such activities necessitate close interaction with people at the grass-roots, they are a good fit with the classical characteristics of NGOs. The main trade-offinvolved is that such activities are less likely to be financially self-sustainable and need tobe thought of as investments in human capability.

Conclusion

Microcredit programs currently enjoy tremendous popularity within mainstream develop-ment organizations and donor agencies. Microcredit enthusiasts across the world vowedto provide such loans to 100 million of the poorest families of the world by the year2005, demanding at least US$21 billion from governments, aid organizations, commerciallenders, and other sources. The Grameen Bank and its founder, Dr. Muhammad Yunus,were awarded the 2006 Nobel Peace Prize. With renewed vigor and validation, the 2006Global Microcredit Summit in Halifax, Nova Scotia set itself the goal of reaching 175million poor around the globe by 2015. Despite such global enthusiasm, deficiencies in



the provision of microcredit services are gradually being acknowledged. While identifyingways to make microfinance more accessible and affordable to low-income populations, itis difficult to ignore that the use of microfinance carries implicit assumptions about howdevelopment should occur. As a development methodology, it is firmly embedded withina neo-liberal framework that seeks to increase access to existing financial resources with-out really challenging the entrenched status quo of unequal power relations between dif-ferent groups of people. Speaking about inequality in Brazil, Archbishop Helder Camaraonce wryly observed that when he fed the poor, he was called a saint, but when he askedwhy they were poor, he was called a communist! Despite other calls for less capitalisticand more radical approaches to address poverty and inequality on a global scale, microfi-nance has enjoyed tremendous popularity precisely because it sits easily with the broaderneo-liberal macroeconomic trends around the world. Microfinance and its associatedgoods and services will probably continue to enjoy tremendous support from govern-ments, NGOs, and donor agencies for many years to come. This should not foreclose thepossibility for more creative and complex engagement with the deep-rooted structuralinequalities that permeate human societies around the world today as well as for moreboldly original visions and innovative solutions to promote human dignity and socialjustice.

Short Biography

Bipasha Baruah is an assistant professor of international studies at California State Univer-sity, Long Beach (CSULB). She is interested in the study of gender and globalization,grassroots women’s organizations, urban land and housing rights, urban basic servicedelivery, and informal sector labor issues in South Asia. In addition to academic appoint-ments, Dr. Baruah has served as a consultant to the Canadian International DevelopmentAgency (CIDA) and the Canadian Department of Foreign Affairs and International Trade(DFAIT). She has worked as a researcher and a development practitioner in India, Indo-nesia, and the Eastern Caribbean countries of St. Vincent and the Grenadines, St. Lucia,and St. Kitts and Nevis.

Note

* Correspondence address: Bipasha Baruah, Assistant Professor, International Studies Program California StateUniversity, Long Beach, 1250 Bellflower Boulevard Long Beach, CA 90840, USA. E-mail: [email protected].

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ngos in microfinance: learning from the past, accepting limitations, and moving forward

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