Building up debt traps: Risk, climate adaptation and microfinance

How to adapt to a changing climate is one of the foremost questions of our era. In the last decade, microfinance has shot to prominence as a highly-promoted tool of adaptation to climate and environmental change. In an abridged version of a 2009 report commissioned by the Grameen Foundation and Oxfam US, Dowla argues that ‘within the populations that will be most affected by global warming, the plight of many individuals is linked to the ability of microfinance institutions to adapt to the consequences of climate change’.

With access to already-existing as well as newly-adapted financial products and ser­vices, the argument goes that people and communities will be better placed to reduce risk, diversify their livelihoods, and build assets. ‘Green microfinance’ would facilitate adaptation in two key ways: ‘by improving ex-post [after the event] risk recovery’ via coping capacity enhancement, and ‘by improving ex-ante [before the event] risk reduction’ via adaptive capacity enhancement. Recommended strategies include improving access to microcredit for climate change responses as well as promoting insurance schemes to reduce the burden of climate risk on society.

In contrast to these emerging discourses and practices that frame microfinance as a key tool of climate adaptation, our recent research with rice farmers in rural Cambodia finds that microfinance loans are leading to an over-indebtedness emergency that significantly undermines borrowers’ long-term coping and adaptive capacity in a changing climate. Such loans often push households to borrow more, work more, sacrifice food quality and quantity, quit farming, and erode and sell their assets, including land. The cost of financialised coping strategies can trap rural populaces in financial obligations which they struggle to service and which manifests ultimately as over-indebtedness. Microfinance ends up promoting a particular form of climate adaptation: one that is individualised, incremental, and geared towards the further integration of populations into processes of capital accumulation.

This form of adaptation is highly profitable. Indeed, as Dowla argues in that same paper, each new climate-linked shock ‘opens up opportunities for the microfinance institutions and their clients’. Yet the corollary to this profitability is that the costs of such an adaptation tend to be borne by the poor, who find themselves exposed not only to the rigours of the environment but now the global market too.

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Exploring the Platform Political Economy of Self-Help in Africa

Informal savings group in Tarime district, Tanzania. Photo: Daivi Rodima-Taylor

Self-help groups can be found in many areas of Africa—including the chama groups of Kenya, isusu of Nigeria, and stokvels of South Africa (Ardener and Burman 1995). Their customary rotating credit arrangement is also popular among African diaspora communities (Hossein 2018; Ardener 2010). A significant rise has occurred in these groups at the wake of the neoliberal restructuring reforms of the 1980s-90s, with a decline in formal sector employment and state-funded producer cooperatives. At present, these mutual support groups are targeted by FinTech platforms as well as conventional banks with various financial products and software apps. My recent research explores of the contentious interplay between the formal and informal finance in these emerging digital interfaces in Africa. It studies the intersection of FinTech with the social economies of African mutual help groups in Kenya and South Africa, situating this dynamic in longer-term colonial legacies and present-day policies of extractive financialization (Rodima-Taylor 2022).

Informal mutual support groups with their saving-credit patterns have long served as an inspiration for the development industry. The initially successful Grameen micro-finance model drew on pre-existing reciprocities and mutually negotiated liability in largely informal contexts. However, as the microfinance formula shifted from socially situated lending towards ‘fast-scaling’ and universalizing group lending in an expanding range of localities, the industry was faced with repayment crisis (see Haldar and Stiglitz 2016). The recent conceptual shift from microfinance to digital financial inclusion foregrounds mobile payments and fee-based service delivery, with payment industry also experimenting with new sources of value such as customer data (Maurer 2015). Microloans have remained an important part of the digital financial inclusion enterprise, with poorly regulated lending apps fueling over-indebtedness. As informal savings groups and mutual support associations have become central in the livelihoods in many low-income communities, I suggest that more attention is needed to the intersection between the self-help groups and FinTech initiatives in the global South.

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Misunderstanding the average impact of microcredit?

Photo: Peter Haden. Microfinance center leaders tally the week’s loan payments in India.

By Milford Bateman and Maren Duvendack

A recent article on the “average impact of microcredit” by Dr. Rachel Meager (LSE) has received much praise over the past few weeks. Meager deploys Bayesian hierarchical modelling to provide a new take on the argument in favour of a reformed system of microcredit. Her work builds on the data provided by six randomized control trials (RCTs) conducted by Abhijit Banerjee and colleagues (see Banerjee, Karlan and Zinman, 2015). Meager makes an attempt to exculpate the microcredit model from the awkward fact that its impact on the poor has been very much less than originally envisaged. She also claims to show that the critics have overstated the negative impact of microcredit. Microcredit should therefore continue to be a policy intervention, she goes on to say, but there need to be changes in the operating methodology for a more meaningful development impact to be possible in the future.

While seemingly a well-meaning attempt to explore the impact of microcredit, we were struck by the way that her overall argument appears to seriously misunderstand, and it definitely misrepresents, the existing research on microcredit as a development instrument. Read More »

The Curious Case of M-Pesa’s Miraculous Poverty Reduction Powers

M-PESA kiosk outside Kibera centre in Nairobi. Picture credit: Fiona Graham / WorldRemit

By Milford Bateman, Maren Duvendack and Nicholas Loubere

Over the past decade the expansion of digital-financial inclusion through innovations in financial technology (fin-tech) has been identified by the World Bank, the G20, USAID, the Bill & Melinda Gates Foundation, and other major international institutions, as a key way to promote development and alleviate poverty in the Global South (GPFI, 2016; Häring 2017; World Bank, 2014). Perhaps the most influential and widely reported publication pushing forward this narrative is an article examining M-Pesa written by US-based economists Tavneet Suri and William Jackand published in the prestigious journal Scienceentitled ‘The Long-run Poverty and Gender Impacts of Mobile Money’. M-Pesa is a mobile phone, agent-assisted platform for transferring money from one person to another. It was originally developed with funding from DFID and has quickly become a darling of the digital-financial inclusion movement. In this particular article, the authors make the far-reaching claim that ‘access to the Kenyan mobile money system M-PESA increased per capita consumption levels and lifted 194,000 households, or 2% of Kenyan households, out of poverty’ (Suri and Jack, 2016: 1288).

Suri and Jack’s article in Science has sent ripples through the global development community and has servedas perhaps was intendedto solidify support for upping the promotion of digital-financial inclusion initiatives across the Global South. Importantly, the article’s claims of unprecedented poverty reduction have been uncritically picked up by all of the international development agencies and microcredit advocacy organisations, as well as by many mainstream economists, so-called ‘social entrepreneurs’, tech investors, and media outlets. Much like microcredit in the 1980s, fin-tech and digital-financial inclusion is now very widely seen as a key—if not the keyto reducing global poverty and promoting local development.

In this post we summarise our recent article entitled ‘Is Fin-tech the New Panacea for Poverty Alleviation and Local Development?’ (Bateman, Duvendack, and Loubere, 2019), which challenges Suri and Jack’s findings, and urges the global development community to take a second, more critical look at their study. We argue that the article contains a worrying number of omissions, errors, inconsistencies, and that it also employs flawed methodologies. Unfortunately, their inevitably flawed conclusions have served to legitimise and strengthen a false narrative of the role that fin-tech can play in poverty alleviation and development, with potentially devastating consequences for the global poor.Read More »

Make Microfinance Great Again: A Shift Towards Flexibility

6925521070_420f1882d6_o.jpgMicrofinance has been widely hailed as one of the most innovative tools for fighting against poverty. It has generated global attention over the last two decades, especially since the UN declared 2005 the ‘Year of Microcredit’ and the 2006 Nobel Peace Prize was awarded to microfinance pioneer Muhammad Yunus and the Grameen Bank. This led to a significant expansion of the sector in the last decade. According to the World Bank (2015), the microfinance industry is estimated to have $60-100 billion in loans outstanding, and several thousand microfinance organizations reach an estimated 200 million clients. 32.5 million of these clients are in India and 90 percent of them are women.Read More »

BLOG SERIES: Inclusive or Exclusive Global Development? Scrutinizing Financial Inclusion


“Financial inclusion is a key enabler to reducing poverty and boosting prosperity.”

The World Bank (2018)

“[Policies of financial inclusion] serve to legitimize, normalize, and consolidate the claims of powerful, transnational capital interests that benefit from finance-led capitalism.”

–  Susanne Soederberg (2013).

Financial inclusion has been high on the agenda for policy-makers over the past decade, including the G20, international financial institutions, national governments and philanthropic foundations. According to Bateman and Chang (2013), it’s the international development community’s most generously funded poverty reduction policy. But what lies behind the buzzword? How can the two quotes above portray such starkly opposing views?Read More »

Caveat emptor: the Graduation Approach, electronic payments and the potential pitfalls of financial inclusion


By Paulo L dos Santos and Ingrid Harvold Kvangraven

The Graduation Approach to poverty reduction is inextricably bound up with programmes promoting financial inclusion. Proponents for the approach see it guiding a series of interventions that encourage poor households to ‘graduate’ into ‘mainstream development programmes’ which are centred on the provision of credit and other financial services (BRAC 2014). Indeed, the approach has been presented as a way to address the needs of those “too poor for microfinance services” (UNHCR 2014). The presumption is that the development and poverty reduction needs of ‘graduates’ will be well served by financial inclusion initiatives.Read More »