Microfinance Horizon

Author: Basanta E. P. Thapa

Abstract:

The goal of this paper was to assess whether the application of the term ‘revolution’ to microfinance is justified. For this purpose, I briefly elaborated a universal definition of revolution to provide my assessment with tangible criteria.

As shown in the short historical overview of development finance I provided, one sensible approach to my overall question is the comparison of microfinance with development banking. Not only because development banking was the last dominant manifestation of development finance before microfinance, but also because development banks originate from a different school of thought than microfinance.

Comparing the practices of development banks and microfinance, I find that the supposedly revolutionary methodological innovations of microfinance were already employed by informal financial service providers in the heyday of development banking and well known to experts of development finance. Rather, the non-implementation of these practices can be attributed to the specific political economy of development banks due to their state ownership. In turn, the political economy of microfinance institutions plays a vital role in their dual emphasis on financial self-sustainability and social mission, the essence of the “microfinance promise”.

As the notion of a methodological revolution can be refuted because the methods were already known, but merely not implemented, I then turned to the idea of a policy paradigm shift or policy revolution as the cause of the changes in political environment that is the root of the differences in political economy for both approaches. As the different political economies are the explanations for the implementation of the methodological ‘innovations’ of microfinance, the interpretation of microfinance as a policy revolution seemed sensible.

Although the paradigm shift from state-led development to Washington consensus was the most important trigger for the rise of microfinance, this does not suffice to interpret the ‘microfinance revolution’ merely as a facet of this paradigm shift (which would anyway delegitimize the idea of a separate ‘microfinance revolution’).

Rather, the examination of which parts of the rise of microfinance can be attribute to a true policy paradigm shift and which are merely signs of policy learning, as defined in the beginning of the chapter, can only be answered by looking at the idea of microfinance as a scientific revolution.

Here, it is important to be distracted by the many differences in middle-range theories, as I have shown with the example of financial repression, but to focus on the bigger, paradigm-like complexes of thought that might be the “fundamental norms” required in the definition of scientific revolution as worked out in the beginning of the chapter.

While the examination of structuralism, the complex of theories closest to a paradigm development banking has, shows that microfinance certainly belongs to a different, more market-oriented school of thought, the subsequent analysis of development banks and MFIs from the perspective of modernization theory rejected the notion of a scientific revolution. Both approaches of development finance are well founded in modernization theory and thus do not differ sufficiently in “fundamental norms” to constitute a scientific revolution.

In conclusion, it can be said that the term ‘microfinance revolution’, although a nice metaphor for the explosive growth of microfinance, does not withstand a rigorous examination with proper definitions of revolution. My comparison to development banking shows that although a lot of incremental progress has been made in terms of program design, research on financial development and impact assessment, all of this falls short of a true revolution. Much rather, greater shifts in the political environment are the reason not only for the change in approach from development banking to microfinance, but also for the rapid ascension of microfinance.

Considering the hype created around microfinance in the last few years, it is even striking how little has changed in the fundamental approach and understanding of development.

To answer the central research question shortly: Calling microfinance a revolution cannot be justified on the basis of a comparison with 1970s development banking.

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