Muhammad Younas, Grameen Bank and the Nobel Peace Prize.pdf

8/17/2019 Muhammad Younas, Grameen Bank and the Nobel Peace Prize.pdf

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Muhammad Yunus, Grameen Bank and theNobel Peace Prize: What Political Science

Can Contribute to and Learn From theStudy of Microcredit

Oksan Bayulgen

University of Connecticut

Despite the vast literature on the economic and social affects of micro-financing in poor countries, little attention has been given to its politi-

cal implications. At a time when the broader development implicationsof micro-financing are being recognized—thanks, in part, to the NobelPrize Award to Prof. Yunus and the Grameen Bank—political scientistshave an opportunity to contribute to and learn from the study of thisfinancial instrument. This paper traces the existing microcredit—andmore broadly the microfinance—literature to delineate the ways in

which microcredit can contribute to the political awareness and activismof the poor, i.e., their political empowerment. I argue that the linkbetween microcredit and political empowerment is self-efficacy andsocial capital, which can be generated from a particular form of micro-credit lending where clients apply for loans as a group and shareresponsibility for repayment. Furthermore, I make the case for why the

Central Asia and Caucasus region would provide an appropriate case toanalyze the political effects of microfinance. Research in this area willnot only fill an obvious gap in the literature, but it will also help micro-finance institutions, donor communities and governments to betterunderstand the wider political implications of microfinance and the

ways by which to measure them.

Muhammad Yunus, a Bangladeshi economist, and the Grameen Bank he founded30 years ago jointly won the 2006 Nobel Peace Prize for pioneering the provision

of small loans to millions of poor people—also known as microcredit. The Norwe-gian Nobel Committee praised Yunus and the Bank for their ‘‘efforts to create eco-nomic and social development from below’’ and for providing ‘‘an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions’’ (Dugger 2006). The prize fell under abroader definition of peace, awarded by the committee not for traditional conflict resolution but rather development work in a broader sense. This award and thefact that the UN hailed 2005 as the year of microcredit reflect the growing appreci-ation that microcredit has wider implications for the development of societies that go beyond poverty alleviation. Although the economic and social affects of micro-credit are increasingly getting attention among practioners and development

scholars, its political implications are surprisingly understudied and underappreci-ated. Given this gap in developmental studies, the political science literature has alot to offer and learn by drawing on the possible links between microcredit and

2008 International Studies Association

International Studies Review (2008) 10, 525–547


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political empowerment. Only by the analyzing possible political implications of thistype of lending, can we fully appreciate the success Muhammad Yunus, the Gram-een Bank, and others achieve through their efforts and the ways in which they con-tribute to the development of their societies in the broad sense.

In this paper I trace the existing microcredit, and more broadly the micro-

finance, literature to delineate the ways in which microcredit can increase thepolitical awareness and activism of the poor, i.e., their political empowerment.1

I argue that microcredit and political empowerment can be linked in two funda-mental ways. The first is through self efficacy that results from improved socio-economic wellbeing and the second is through social capital that is generatedfrom a particular method of lending where clients apply for loans as a groupand share responsibility for repayment. In the first part of the paper, I discuss

what microcredit (and more broadly microfinance) is and how it contributes toeconomic and social development as extensively studied in the literature. Next, Idemonstrate how microcredit can theoretically enhance self efficacy in clientsand generate opportunities for political awareness and participation. Third, I

demonstrate how the interactions among microcredit clients in a group lendingenvironment can theoretically build trust, norms and networks which in turn canbecome instrumental in strengthening political empowerment. Finally, I generatean agenda for future research and discuss ways in which the theoretical hypothe-ses discussed here can be empirically tested. I do so by concentrating on theCentral Asia and the Caucasus region; a region, which I argue, provides a fertilelaboratory to analyze the political effects of microcredit. This study can not only contribute to the development of the microcredit literature by bringing politicsin, but it also can help microcredit institutions, donor communities and the gov-ernments better understand the wider political implications of microcredit andthe methods by which to measure them.

Microfinance: Access for All

In order to demonstrate how microfinance may possibly enhance political empow-erment, one needs to understand what it is and why it is so important in develop-ing countries. Conventional financial systems around the world typically excludethe poor. In developing countries, microfinance has demonstrated its potential fordelivering a full range of commercial financial services to micro-entrepreneurs andpoor families that are conventionally considered ‘‘unbankable’’ due to high trans-action costs, perceived risks, low margins, and because the poor lack traditionalcollateral. By providing financial services to the economically active poor, microfi-nance institutions (MFIs) expand the frontier of the financial sector, drawing pre-

viously excluded groups of people into active participation in the financial system,increasing the economy’s financial depth and generating more broad-based eco-nomic growth (World Bank, Agriculture and Rural Development Department 2004).

Access to flexible, convenient, and affordable financial services empowers andequips the poor to make their own choices and build their way out of poverty ina sustained and self-determined way. Thus micro-financing is a particularly inclu-sive, participatory and non-paternalistic development tool (Robinson 2001). It offers ‘‘hope to many poor people of improving their own situations throughtheir own efforts’’ and as such is different from other anti-poverty policies, suchas international aid and debt forgiveness which are essentially top-down rather

than bottom-up approaches (The Economist 2005). Microfinance helps the poor

1The terms microcredit and microfinance are oftentimes used interchangeably. Microfinance is the provision of

a full range of commercial financial services—credit, savings, deposits, insurance—to micro-entrepreneurs and poor

families. Microcredit is one of the instruments of microfinance.

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respond to economic opportunities, to reduce their vulnerability, and to invest their profits in their and their children’s future. The United Nations acknowl-edges that micro-financing is a critical contextual factor in realizing MillenniumDevelopment Goals (Littlefield, Murduch, and Hashemi 2003).2

Even though microfinance has seen tremendous growth worldwide in the last

decade supported both by governments of developing countries and by interna-tional donors, it was really during the 1970s when organizations like the Gram-een Bank in Bangladesh, ACCION International in Latin America, and BankRakayat in Indonesia introduced the practice to the developing world.3 Theseinstitutions helped prove that the poor are, in fact, more reliable in paying backtheir loans than conventional bank clients. They also showed that microfinanceinstitutions could cover their costs and become sustainable businesses that canattract investment capital.

Given the initial success of these pioneer institutions, outreach has substan-tially deepened throughout the past 20 years in many countries. As of 2003, themicrofinance industry around the world included between 10,000 and 15,000

institutions with an outreach of an estimated 80 million poor people. The mar-ket potential is also vast with an estimated 1–2 billion people who demand accessto these basic financial services (UNDP 2005). The potential clients of microfi-nance services are usually individuals with entrepreneurship potential, includingthe unemployed who do not have access to conventional bank services.

As the outreach has expanded, the definition and breadth of microfinancehave also evolved over time. Originally, microcredit has been the only product of microfinance. The term microfinance now, however, also includes savings, insur-ance services as well as money transfers. The role of savings and insurance ser-

vices has proven to be especially effective considering that not everyone needsloans but most people need to save money and insure against risks. In fact, it isargued that globally there are many more savers than borrowers (Helms 2006).Micro-savings, for instance, enable low-income households to accumulateresources for future purchases and investments, or to have reserve funds in caseof emergency. Access to these services protects the households by making themless vulnerable against external shocks. Similarly, micro-insurance is the protec-tion of poor people against specific perils in exchange for regular monetary pay-ments. Risk pooling allows many individuals to share the costs of a risky event.Micro-savings and micro-insurance also help with the financial sustainability of most microfinance institutions.

Despite the increasing diversity of microfinance services around the world,micro-credit, however, is still at the core of microfinance for many transitioningeconomies and thus is the focus of this paper. Micro-credit or micro-loans are gen-

erally directed towards funding both existing and startup enterprises. These loanshelp the poor develop their own businesses with the purpose of income genera-tion. The main characteristics of micro loans vary widely. For instance, small loanscan start as low as US$5 and go up to $10,000. Micro-loan maturity is usually quiteshort, rarely going beyond a year with weekly or even in some cases daily repayment schedules (Helms 2006). To cover the cost of services and ensure the financial sus-tainability of lending institutions, interest rates are usually higher than those of commercial loans but far below some of the informal moneylenders. Despite highinterest rates, however, repayment rates are relatively high among microfinance

2The Millennium Development Goals include eradicating extreme poverty and hunger, achieving universal pri-

mary educations, promoting gender equality and empower women, reducing child mortality, improving maternalhealth, combating HIV ⁄ AIDS, malaria, and other diseases, ensuring environmental sustainability, and developing a

global partnership for development.3The ideas behind providing alternative financial services for the poor are not necessarily new. Small, informal

savings and credit groups operated for centuries across the world. For a more detailed history of microfinance see

Helms (2006).

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clients. Microfinance institutions typically claim extraordinarily low loan losses of 1–3%, better than the rate for large banks in developed countries and much betterthan for the large credit-card companies (The Economist 2005). This low percent-age of delinquency has been credited to the lack of alternative opportunities forthe poor as well as their gratitude for being given a chance. According to Muham-

mad Yunus, the founder of the Grameen Bank in Bangledesh,

… The poor know that this credit is their only opportunity to break out of poverty. They do not have any cushion whatsoever to fall back on. If they fallafoul of this one loan, they will have lost their one and only chance to get out of the rut. (Yunus 2003:58)

There are also various loan products designed for different needs and charac-teristics of clients, such as group (peer) loans (business or consumer), individualloans (business or consumer), agricultural loans (peer or individual). However,between the individual and group lending, the latter product is considered by many to be a milestone in microfinance history. In this form of lending, self-selected groups of 3–10 people join together and apply for a loan. In addition tofulfilling individual credit liabilities, each member also shares some degree of responsibility for other members’ repayments, varying from legal guarantees tothe loss of future access to credit.

Microfinance Clients

It is important to note that microfinance operates at the intersection of threesets of actors. At the micro level, is the poor who need these financial services.Typical microfinance clients are self-employed entrepreneurs. In rural areas they are small farmers and others engaged in small income-generating activities, such

as food processing and trade. In urban areas they are street vendors, shopkeep-ers, service providers, artisans etc. (Helms 2006).

Many microfinance programs have been specifically targeting women as theirclients since the beginning of 1990s. There are several reasons for that. First,many believe women are among the poorest and most vulnerable in society andtherefore the segment of the population that would benefit the most from mi-crofinance. Others believe that investing in women contributes to greater eco-nomic growth and development in society. This is based on the evidence in theliterature that an increase in women’s resources result in higher wellbeing forthe household, especially the children. Another motivation for targeting womenis their generally good record on repayment. It is generally reported that women

have some of the best repayment rates among microfinance clients and are themost reliable borrowers, contributing significantly to the financial viability of mi-crofinance institutions. Finally, many NGOs use microfinance as an opportunity to mobilize women around gender issues. They consider microfinance as anentry point in the context of wider strategy for women’s economic and socialempowerment (Mayoux 2005). As a result, reaching and empowering women hasbecome one of the official goals of the Microcredit Summit Campaign since1997. It is, however, important to understand that not all microfinance institu-tions target women. Especially in the new developing areas like Central Asia,there is an attempt to widen the clientele for microcredit and create equalopportunities for women and men alike.

Microfinance Institutions

At the meso level is the microfinance institutions that provide financial servicesto the poor. These institutions range from highly formalized institutions to the



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informal sector. Institutions that belong to the formal sector, such as interna-tional development banks, commercial banks, state banks, rural banks, microfi-nance banks, fall under banking regulations and oversight. Semi-informal sectorinstitutions include credit unions, specialized NGOs, village banks and coopera-tives. Informal MFIs include saving and credit associations, non-registeredself-help groups, individual moneylenders etc. (see Figure 1). NGOs, non-bankfinancial institutions, commercial banks that specialize in microfinance, andmicrofinance programs in commercial banks account for about 18% of theroughly US$750 million total combined savings and loans accounts. Financialcooperatives make up 5% and government-owned financial institutions dominatethe scene with about three-quarters of the accounts (Helms 2006). Aside fromthe differences in their legal status, organizational structure and mission, theseinstitutions also vary in terms of the sources of funding for their operations.Sources can be internal (retained earnings, shareholder capital, deposits) orexternal (grants, donations, soft loans and ⁄ or commercial loans) or both (UNDP2005:19).

Microfinance has over the years evolved significantly from informal to formalproviders. Traditional moneylenders, deposit collectors, pawnbrokers, and rotat-ing savings and credit associations (ROSCAs) have been convenient and fast for

the poor with low-cost operations and easy access but some of these informalinstitutions have proved to be insecure, expensive (as in the case of moneylend-ers) or rigid and limited in operations. For instance, ROSCAs require regulardeposits of identical amounts from its clients and each individual’s money is tiedup until it is their turn to access the funds. They can also be highly risky sincethere are no formal mechanisms of preventing and compensating for others’ fail-ure to contribute. Similarly, self-help groups (SHGs) as in India provide financialservices to very remote areas and very poor rural women. Usually consisting of 10–20 people, they start by collecting members’ savings and then use these sav-ings to gain access to bank loans. Just like ROSCAs, however, they are inflexible.Their loan terms do not correspond to clients’ cash flows or product demands

(Helms 2006:40).Credit unions and credit cooperatives are more formal as they are often

grouped into federations at the regional and national level. These member-basedorganizations typically rely on their members’ savings as the main sources of funds but some also receive funding from NGOs and commercial banks. These

FIG. 1. The Spectrum of Microfinance providers. Note: ROSCAs = rotating savings and credit associa-

tions; ASCAs = accumulating savings and credit associations; CVECAs = Caisses Villageoises d’E´

pargneet de Crédit Autogérées; FSAs = financial service associations; SHGs = self-help groups; NGOs = non-governmental organizations; NBFI = nonbank financial institution. Source: Helms 2006.

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financial cooperatives are owned and controlled by their members and are usu-ally nonprofit. Members often share some common bond in terms of where they live, work etc. Despite being widely used, these types of member-based microfi-nance institutions face many governance and financial challenges. Oftentimestheir management is not sufficiently monitored, leading to high risks of fraud

and corruption. Moreover, their operations are limited to members and espe-cially the smaller ones offer very limited products (Helms 2006:42).

Out of all the microfinance institutions, the non-governmental organizationshave been the true pioneers of microfinance since the mid 1980s. Some areformed with the sole purpose of providing microfinance, others offer it in addi-tion to other services. Some NGOs are locally created and sustained; others arefounded and supported by funds from international donors. The best-knownmicrofinance NGOs include the Bangladesh Rural Advancement Committee(BRAC), Grameen Bank in Bangladesh, Foundation for International Commu-nity Assistance (FINCA), and CARE International. While some of these organiza-tions are increasingly behaving ‘‘commercial’’ to achieve sustainability and

independence from donors, others are continuing to be socially driven and arepushing to reach poorer and more vulnerable clients in remote areas. Eventhough NGOs have led the way in the development of microfinance, they face anumber of constraints, the two most important being the high-cost operationsand the limited range of services that they can offer. For instance, legally NGOscannot mobilize savings as banks and other intermediaries that are supervised by banking authorities can (Helms 2006:45).

Finally, the formal financial institutions are relative newcomers to the world of microfinance but ironically hold the most potential in terms of making financialsystems all inclusive. They often have widespread branch networks, and they already possess the infrastructure to offer a range of financial services. Some gov-ernment-owned banks were specifically founded with the clear mission of bring-ing development to rural areas. For example, Bank Rakayat Indonesia (BRI)’smicrobanking division is the largest and one of the best performing microfi-nance institutions in the world. Similarly, the postal networks in the Middle East and North Africa serve a large number of clients and play an important role inthe financial system (Helms 2006:50). However, the challenge with many govern-ment owned financial institutions is that they are not very reliable financial insti-tutions. They are usually politically motivated; they depend on large subsidies;they have weak loan collection mechanisms; and they do not adequately respondto the demands of poor clients. The private commercial banks and nonbankfinancial institutions (NBFIs) that specialize in microfinance, on the other hand,typically provide more sound financial services. For instance, Compartamos is

the largest dedicated MFI in Latin America, Share is one of the more prominent MFIs in India, and BancoSol in Bolivia is the first private commercial bank inthe world dedicated exclusively to microfinance (Helms 2006:51, 52). These insti-tutions generate their own resources and invest in technology and innovationthat can bring financial services closer to poor people. For instance, they extendaccess to financial services through cell phones or working through agents likethe town general store or telephone kiosk (Helms 2006:54).

Governments

Finally, it is important to note that at the macro level, the government plays an

important role in terms of defining and setting up the legislative and policy framework (macroeconomic stability, liberalized interest rates, and appropriatebanking regulations and supervisory practices) to sustain the financial servicestargeted to the poor. A good policy environment encourages a range of financialservice providers to coexist and compete to offer higher-quality and lower-cost



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services to large numbers of poor clients. Governments can also deliver financialservices directly and indirectly by disbursing credit to preferred groups or chan-neling resources to financial institutions through wholesale arrangements(Helms 2006:76). They can also proactively promote inclusion by offering fiscalincentives or requiring financial institutions to serve the poor. The interesting

and unique aspect of microfinance, then, is its ability to bring together the pub-lic, private and external actors for the provision of economic and social develop-ment and the realization of an economic right of the poor: that is the right toaccess to credit. It offers a new mechanism for linking rights obligations to non-state actors as well as to a rethinking of the role of the state in terms of safe-guarding these rights.

Effects of Microfinance on Development

Economic and Social Impact

The economic and social effects of micro-financing are extensively studied. In a

wide range of policy analyses and scholarly works, micro-financing has beenshown to be positively correlated with economic development by reducing pov-erty, improving welfare and allowing poor people to protect, diversify, andincrease their sources of income and assets (Pitt and Khandker 1996; Hulmeand Mosley 1996; Sebstad and Cohen 1999; Zaman 2000; Remenyi and Quinones2000; Morduch and Haley 2001; Barnes 2001).4 By creating jobs through self-employment and new businesses, micro-financing promotes a more productiveuse of capital and has a direct and positive impact on local economies.

Micro-financing is also shown to impact social development and quality of lifeby promoting environmental sustainability, improving family expenditures on edu-cation, thereby contributing to improving the human capacity of poor families,

and reducing family expenditures on health care through improvements in hous-ing, water, and sanitation and ensuring food security (Khandker 1998; Barnes2001; Chen and Snodgrass 2001; Chowdhury and Bhuiya 2001; Simanowitz 2002;Littlefield et al. 2003). Through income creation opportunities, microfinance canhelp fight social exclusion by integrating traditionally marginalized groups intothe economic system. Social empowerment, increased self-esteem and dignity areconsidered among the most beneficial outcomes of microfinance activities.

Along this line, there is also substantial literature on the relationship betweenmicro-financing and gender equality (Goetz and Sengupta 1996; Hashemi, Schu-ler, and Riley 1996; Cheston and Kuhn 2002; Pitt, Khandker, and Cartwright 2003). Despite some disagreements as to the actual effects of micro-financing

programs in various social contexts

5

, it is generally believed that sustainable mi-crofinance services can lead to women’s individual economic empowerment by stimulating women’s micro-enterprise development and leading to increasedincome under women’s control. It is assumed that women’s control over theseresources will then lead to increased well-being (health, nutrition, literacy, hous-ing) and reduced mortality rates for women and their children (Schuler andHashemi 1994; MkNelly and Dunford 1998; Pitt and Khandker 1998; Chowdhury and Bhuiya 2001; Pitt et al. 2003).

4 Almost all the studies focusing on the poverty reducing effects of microfinance argue that microfinance is not

the sole solution to reducing poverty. Financial services—especially credit which can turn into a debt easily—are

not usually appropriate for everyone. Many note that microfinance should not be seen as a substitute for investment in basic education, health and infrastructure.

5More rigorous research methods and wider regional comparative observations have shown that microfinance

does not always automatically benefit women. Many studies draw attention to the dynamics of gender relations in

which microfinance programs are embedded (Goetz and Sengupta 1996; Rogaly 1996; Buckley 1996; Mayoux 1998,

2001; Rahman 1999; Johnson 2005).

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Despite this extensive literature on the economic and social affects of microfi-nance, very little attention has been given to its political implications. To theextent that political empowerment by microfinance has been analyzed at all, thefocus has been almost exclusively from the perspective of gender (Hashemi et al.1996; Mayaoux 1999; Sebstad and Cohen 2000; Cheston and Kuhn 2002; Simano-

witz 2002; Pitt et al. 2003; Johnson 2005) and mostly within the context of family planning and in terms of self-esteem, status and gender activism in community.6

Political Impact

I argue in this paper that microcredit can have the effect of increasing the politi-cal empowerment of individuals in a society. The World Bank defines empower-ment as ‘‘the process of increasing the assets and capabilities of individuals orgroups to make purposive choices and to transform those choices into desiredactions and outcomes’’ (Alsop and Heinsohn 2005). Empowerment, then, isabout change, choice, and power. Political empowerment entails the ability to

make political choices and the freedom to act on it. The politically empoweredcan better influence the course of their lives and the public decisions whichaffect them and their communities. Individually empowered citizens can have asignificant impact on the development of their societies.

Political empowerment can be measured in terms of two indicators: politicalawareness and political participation. Political awareness measures the level of information on the publicly provided goods and services available to citizens, onthe performance of the elected officials in providing for these goods and ser-

vices, and on the rights and tools available to citizens to hold their officialsaccountable and to request goods and services from them. Essentially, politicalawareness depends on access to information.

The second indicator of political empowerment is participation. Poor peopleand other traditionally excluded groups are empowered not only when they areaware of issues, problems and remedies, but also when they are included inagenda setting and decision making regarding the state of their communitiesand their well being. Voting usually comes to mind first, but voting turnouts may understate the extent to which the poor can truly participate in public decisionmaking. Other indicators such as participation in community organizations, cam-paigning, contacting, petitioning, protesting, litigating, unionizing etc. also assesshow actively citizens engage with the processes of public decision making.

I hypothesize that microcredit can primarily strengthen political empowerment through two mechanisms. First, if microcredit improves the economic and socialconditions of the poor, the poor’s political empowerment will consequently rise

due to an increase in their self-efficacy. Second, in addition to increased self effi-cacy, microcredit can also increase the social capital in a society, which thenimproves individual’s access to political information and capacity to participatein politics. In the next section, I lay out the theoretical framework in under-standing the connections between microfinance, self-efficacy, social capital, andpolitical empowerment (see Figure 2).

From Microfinance to Political Empowerment

Self Efficacy

Socioeconomic status plays a key role in the development of perceived self-efficacy.Self-efficacy is typically defined as the belief in one’s own efforts to control desired

6For instance Hashemi et al. (1996) used eight indicators to test empowerment: women’s economic contribu-

tion to the household; mobility; ability to make small purchases; ability to make large purchases; ownership of pro-

ductive assets; involvement in major decisions; freedom from family domination; and political awareness.



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outcomes, as opposed to luck or the influence of others (Bandura, Barbarenelli,Caprara, and Pastorelli 1996, 2001). As microcredit improves the socioeconomic

conditions of its borrowers, it also enhances their sense of self esteem and self real-ization. Better living standards, access to better education, health care, and new technologies can contribute to the creation of new opportunities, increased reflex-ivity, and focus on self-fulfillment. Increased economic capacity allows individualsto focus not on survival but on their environment and on confronting those actorsthat are responsible for the welfare of their surroundings. Individuals withimproved socio-economic status view themselves as more effective in political mat-ters (Almond and Verba 1963; Dahl 1963; Milbrath 1965; Lane 1969). Politicsbecome more salient and political action more plausible with increased economicautonomy and better social wellbeing. Hence, political empowerment of micro-credit clients increases as their self efficacy improves over time.

…Giving the poor access to credit allows them to immediately put into practicethe skills they already know- to weave, husk rice paddy, raise cows, peddle a rick-shaw. And the cash they earn is a tool, a key that unlocks a host of other abilitiesand allows them to explore their own potential. …[They become] the architectsof their own fate. (Yunus 2003:140, 130)

Social Capital

Microcredit can also increase political empowerment by creating social capital insociety. I argue that this is especially a function of group lending in microcredit.

While microcredit can be loaned to individuals, group lending is also very com-mon in developing countries. In this form of lending, self-selected groups of 3–10 people join together and apply for a loan. In areas of the world where‘‘bowling leagues’’ are far less common, such associations may be one of the few

ways of generating social capital which can then provide the basis for politicalempowerment.

Despite a clear lack of consensus on its meaning, the most common definitionof social capital focuses on the ‘‘features of social organization, such as trust,norms, and networks that can improve the efficiency of society by facilitatingcoordinated actions’’ (Putnam 1993:167). Social capital is explicitly communal inthat it resides not in individuals but in the relations between individuals (Cole-

man 1988). Citizens are able to trust others in their community, according toPutnam, because of the horizontal networks of ‘generalized reciprocity’ within which their actions are embedded. Repeated interaction through participation inthese associations enables personal trust to form and then to develop into socialtrust and allows individual norms to transition into shared norms. Networks

FIG. 2. Effects of microfinance on political empowerment.

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‘radius of trust’ and allows people, who are not related to one another, to coop-erate to achieve a common goal- access to credit’’ (Dowla 2006:34).

Trust has been shown to emerge also vertically in the case of the GrameenBank experiment. In the context of the severe disconnect between the poor andthe traditional financial institutions, the Grameen bank believed and propagated

that the poor are credit worthy and that they can be trusted (Dowla 2006). In itsearly years, the bank’s founder, Muhammad Yunus, and his staff worked hard toconvince both the commercial and state bankers to provide loans for the poorand the poor to take the loans to set up their individual businesses. Building thepoor’s trust was a long and arduous process. But over time they were successfulin earning the trust of both sides. According to Asif Dowla (2006), the GrameenBank’s trust in its borrowers created a realization that the borrowers have toreciprocate by repaying the loans on time. This reciprocity created a reputationfor trustworthiness of the poor and had a positive spillover effect whereby otherinstitutions were able to benefit from this generalized trust. In a way, this particu-lar microfinance institution was able not only to connect borrowers to one

another through credit allocation, but also to serve as a bridge between the com-mercial and state institutions on one side and the poor on the other (Dowla2006).

According to some studies, in terms of norm creation that provided socialcohesion, the Grameen Bank has also been successful. The Grameen-type norms,routines and rituals such as regular attendance in meetings, insistence on timely repayment, and transparency in financial transactions have all helped in chang-ing credit norms and culture in countries like Bangladesh (Seibel 2000). Yunusargues that a norm like credit discipline is ‘‘meant to boost the borrower’s senseof self-reliance, pride, and confidence’’ (Yunus 2003:137). Lisa Young Larance(1998) further argues that the Grameen Bank center-meeting norms have helpedbuild individual recognition, shared identity, produce feelings of empowerment among members, increase exchange among people, and even reduce conflict among village members now that they know each other and their extended fami-lies. In performing the rituals of membership, individuals also developed astrong identity with the Grameen Bank. ‘‘The norms of Grameen Bank member-ship seem(ed) to provide members with structure to their lives that enables thistype of cooperation’’ (Larance 1998:3).

As for the norm of transparency, Dowla (2006) notes that by holding publicmeetings, the Bank provides a corruption-free environment.

In these meetings a group chairperson, a position that regularly rotates to prevent distrust, collects repayment from members and hands them over to the

bank worker who makes the entry in the ledger book. The bank worker disbursescredit in center meeting. This precludes the possibility of misappropriation of funds by the staff and bestows a sense of ownership to the members. (Dowla2006:20)

Yunus also points out that

…often borrowers would invite their children to join the meetings before school,so that these young ones could read them the notations in their passbooks andmake sure that everything was being done correctly. (Yunus 2003:66)

During annual workshops of center leaders of the Grameen Bank, the borrow-

ers have also established their own set of norms known as the Sixteen Decisions ,among which are the pledges to advance unity, courage, hard work, to educatechildren, not to commit any injustice, to collectively undertake larger invest-ments for higher incomes, to always be ready to help each other, and to take

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part in all social activities collectively (Yunus 2003:136). These norms have not only created a sense of identity and cohesion among borrowers but also reflectedtheir mutual awareness and aspirations to improve the quality of life in theircommunities. As with all public goods, the greater community also benefitedfrom the development of these norms.

Microfinance, as particularly depicted in the Grameen Bank experience, hasbeen shown to also contribute to social capital by forming productive horizontalnetworks beyond immediate family and kinship groups in a community. Accordingto Putnam, in order for the shared identity to transform into social capital, mem-bers must have the regular opportunity to gather and interact (Putnam 1993).

Along that line, H. Todd (1996) and Larance (1998) show how regularly held cen-ter meetings expand the social and information networks of the members to facili-tate economic and non-economic transactions. One of Larance’s respondents, forinstance, indicates that ‘‘because of these networks, she learned of and enrolled inthe government’s mass education program’’(Larance 1998:13). During centermeetings, the members share marketing information as well a range of topics such

as the best practices on cow fattening, livestock rearing, poultry farming, fish farm-ing etc. The members also use the networks to exchange scarce resources (clothes, jewelry, tools etc.), swap labor and childcare services, and to meet social obligationsin the village (Larance 1998). Moreover, the networks have eased mobility for

women who were secluded within their neighborhoods where they often interact only with their husbands’ kin (Dowla 2006:30).

Social Capital and Political Empowerment

How can the social capital created by microfinance translate into politicalempowerment? Despite the obvious and well-studied link in political sciencebetween social capital and democratic development, very little attention hasbeen given within the microfinance community and among development studies to the potential role micro-financing may play in fostering politicalempowerment by way of creating social capital in poor societies.9 There existsplenty of aspiration ⁄ rhetoric to create social capital and thus a more opensociety by means of microfinance, but little systematic analysis of what kind of political empowerment microfinance institutions have in practice been able tocreate.

Even though social capital was first introduced by Coleman (1998) and Bour-dieu (1983), Putnam was the first to link the concept to the study of democracy.Putnam argues that an abundant stock of social capital produces a dense civilsociety, which in turn has been widely argued to be a ‘‘key to making democracy

work.’’10 Social capital can help with democratic development in several ways.First of all, it provides a space for the creation and dissemination of discoursecritical of the present government (Paxton 2002:257). Group ties create a protec-tive environment to voice discontent without any sanctions. Some studies show that individuals are more likely to challenge authority in the presence of friends,colleagues etc. (Paxton 2002). Secondly, high levels of social capital provideresources for the organization and mobilization of oppositional movements.

9To my knowledge, Mosley et al. (2004) is the only study to date that has looked at this relationship in somedetail.

10In Making Democracy Work, Robert Putnam (1993) conducts an in-depth analysis of civic community, institu-

tional performance, and democracy in Italy. By analyzing the development of identical new regional institutions inItaly, this longitudinal study was able to determine the extent to which such institutions were ‘‘shaped by the social

context within which they operate’’ (Putnam 1993:8). He argues that in the more civic northern and centralregions, horizontal social relationships were more prevalent. In sharp contrast to this, vertical social relationships

characterize Italy’s southern regions, where politics is organized hierarchically, leading to patron–client relation-

ships.



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problems in their neighborhoods. Hashemi et al. (1996) also found that partici-pation in microfinance programs like the Bangladesh Rural Advancement Com-mittee (BRAC) had strong effect on women’s participation in politicalcampaigns and public protests in Bangladesh.

While few microfinance organizations explicitly seek political mobilization or

structure their programs in such a way as to deliberately nurture collectiveaction,11 participation in lending groups may have the effect of increasing theiraccess to information and awareness of political issues, actors, processes andchannels of influence. By contributing to client’s knowledge and self-confidence,increasing their level of trust in each other as well as in society, widening theirsocial networks, and increasing their ability for collective action microfinanceprograms may give their clients the tools and skills they need to participate moreeffectively in the decisions and policies that affect their lives. Informed citizensare better equipped to take advantage of opportunities, access services, exercisetheir rights, negotiate effectively, and hold state and non-state actors account-able. As some of these Grameen experiences demonstrate, microfinance can

have the potential to go far beyond credit delivery. It has the potential to changethe quality of its members’ lives and that of the community by creating and culti- vating a form of social capital.

Some Caveats

The theoretical links that I draw above between microcredit, self efficacy, socialcapital, and political empowerment are based on assumptions that are widely contested and debated in the literature. For example, there are a number of scholars who argue that a woman’s access to microcredit does not necessarily lead to an improvement in her socioeconomic wellbeing and then to an increasein her self efficacy because in many contexts men take the loans from women or

women choose to invest the loans in men’s activities.12 To the extent that theloans are used by women, some studies have found that income increases for

women as a result of these loans have been very marginal, and in some casesnegative (Hulme and Montgomery 1994; Montgomery, Bhattacharya, and Hulme1996). In some urban areas, the rapid expansion of microfinance programs hascontributed to market saturation in female activities and hence declining profits(Mayoux 2005). And, to the extent that women do initiate income generatingactivity, they are often encouraged to take up enterprises, such as sweater knit-ting, that do not disrupt practices of isolation and seclusion within their house-holds (Mayaoux 1995; Goetz and Sengupta 1996). A few studies have also shownthat small increases in women’s income come at the cost of heavier work load

and increased stress and health consequences for women. There is some evi-dence that microcredit and income-earning take women away from other socialand political activities (Mayoux 2005). Furthermore, some have found that with-out alternative care for children and the elderly, women’s commitment to out-side work has had adverse effects on the household. For instance, Mayoux and

Johnson (1997) find that in numerous cases daughters are withdrawn fromschool to assist their mothers, thereby continuing and entrenching the genderinequalities in society for years to come.

11Some MFIs actually consider themselves socially responsible and divert some of their revenues to community

building efforts. For instance, according to Zhanna Zhakupova, her organization—the Asian Credit Fund in Kazakh-stan—has various community projects to help improve the lives of their clients and their families. Author’s interview

in Almaty, June 19, 2006.12Studies have found that on average women borrowers surrender nearly 40% of their control over the invest-

ment decisions they make to their male partners (Armendariz and Roome 2008) and that over 90% of the returns

women realize from their investments are handled by their husbands (Goetz and Sengupta 1996).



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Microfinance has also been found to increase tensions between men and women, leading to more hardship on women in society. The fact that some mi-crofinance programs exclude men prove to be counterproductive as men feelincreasingly threatened in their role as primary breadwinners within the family (Mayaoux 1999; Rahman 2001; Armendariz and Roome 2008). Some anectodal

evidence has suggested that divorce rates and possibilities for divorce and vio-lence in the family have increased for women since they started receiving theloans (Mayoux 2005).

There are also a number of scholars who question the positive role of microfi-nance in creating social capital. Kabeer (1998), for instance, argues that people

who are in entrepreneurial competition with each other do not have a naturalaffinity to form into groups together. Credit is considered finite, making cooper-ation among competitors especially difficult.13 Rankin (2002) points out how richer members of microfinance groups may, in time of economic stress, expelpoorer members who they fear may not be able to repay loans. Her examples of microcredit experience from Nepal and other ethnographic research in South

Asia demonstrate that groups also tend to exclude members based on caste andethnic identities. Similarly, Montgomery (1996) demonstrates in detail some of the exclusionary pressures BRAC’s Rural Development Program in Bangladeshexerts on the poorer and more vulnerable members. Montgomery (1996) andTodd (1996) further point out that norms like mutual support, trust, reciprocity may not form over time because credit is viewed as a privilege that each memberfiercely protects as an individual right. Monitoring one another’s consumptionand repayment patterns can generate an environment of hostility and coercionthat atomizes rather than unites the clients. Because credit also means debt, mi-crocredit groups may put severe strains on existing networks if repayment becomes a problem.

Finally, one needs to be cautious about assuming that social capital wouldautomatically lead to political empowerment. Optimism in the positive effects of social capital ignores recent debates in the literature about its potential draw-backs. Critics argue that social networks that provide people with access to mar-kets through reputation and repeated transactions can exclude new entrants(Collier 1998). In addition, community pressure may be harmful to individualsas traditions can stifle individual growth and creativity and members who do not comply with norms and their families can be ridiculed or ousted from the com-munity. Furthermore, communities with dense social capital, particularly if orga-nized along ethnic or religious lines, can be harmful to each other and tosociety as a whole.14 What this means is that in microcredit programs, if thesocial capital that is created is exclusionary and coercive, then group loans could

in fact entrench rather than challenge some already existing modes of inequality and subordination in society. Instead of increasing political empowerment, thistype of social capital that is created by microcredit may perpetuate the powerless-ness of the poor and especially the marginalization of poor women.

Future Research on Microfinance

I have outlined some of the potential theoretical contributions and drawbacks of microfinance for political empowerment. More research has to be conducted inthe future to empirically test and verify the hypothetical links discussed in thisanalysis. Future research could benefit substantially from large impact surveys

that compare microcredit clients to non-clients in societies where microcredit

13 Author’s interview with Olga Tomilova (CGAP) Almaty, June 20, 2006.14For further overview and critique of original uses of the concept by Coleman and Putnam, see Evans (1996);

Foley and Edwards (1999); Harris and de Renzio (1997); Fukuyama (2002); and Paxton (2002).

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programs are employed. In such surveys, the sample could further be dividedamong group and individual clients to test the different effects group and indi-

vidual loans may possibly have on political empowerment. A typical survey on microcredit clients should generally consist of four parts.

In the first part, the researcher should ask questions that reveal whether or not

the socioeconomic conditions and the self efficacy of clients have improved sincethey gained access to micro-loans. The second part of the questionnaire shouldbe designed to find out whether or not social capital (trust, norms, and net-

works) is actually being produced by group loans. Some scholars assert that whether or not microfinance creates social capital depends on the existence of social capital prior to the initiation of lending programs. Studying group lendingin various parts of the world, Berenbach and Guzman (1992), Fuglesang andChandler (1993), Mosley et al. (2004) conclude that group lending is generally successful because of the positive preexisting relationships among borrowers.They assert that mutual support is inherent in lending group self-selection andthat only in places where social capital already is strong can group-lending pro-

grams be successful and have a substantial effect on community building. Forinstance, according to Pitt and Khandker (1996) these programs have been suc-cessful in Bangladesh, Cameroon, Malawi, South Korea, and Malaysia but haveshown mixed success in India, Egypt, Venezuela, Kenya, and Lesotho. The survey questions should be designed in a way to elucidate the social links and level of trust that existed in these societies before microcredit groups were formed.

A third set of questions needs to address the type of social capital that is gen-erated from microcredit. To distinguish between negative and positive externali-ties of social capital (that are addressed above), some scholars are now emphasizing the differences between ‘‘bonding’’ and ‘‘bridging’’ social capital.

According to Putnam (2000), ‘‘bonding’’ social capital results from ties to peo-ple who are similar in terms of their demographic characteristics, such as family members, close friends, work colleagues etc. ‘‘Bridging’’ social capital on theother hand refers to bonds among people who do not share many of these char-acteristics (Putnam 2000). As such societies that have more bridging social capi-tal than bonding social capital are considered more inclusive and civic minded.In recent years scholars have added a third conceptual classification of socialcapital—‘‘linking’’ social capital—to the mix. This type of social capital refers toone’s ties to people in positions of authority, such as representatives of public(such as the police, political parties) and private institutions (Grootaert et al.2004). In societies where there is abundant linking social capital, trust and coop-eration is enhanced vertically between individuals and institutions. These classifi-cations help clarify and refine the possible affects of social capital in different

contexts. Hence, in drawing the links between microfinance, social capital, andpolitical empowerment, one needs to design questions that distinguish amongdifferent types of social capital and be aware of their varying effects.

Finally, the last part of the survey should have a battery of questions regarding whether or not the clients feel more politically empowered since they startedreceiving microloans. Here questions measuring the improvements in the degreeof political awareness and political participation of clients would provide strongindicators for political empowerment. The analysis once again needs to be sensi-tive to the context in which these programs operate. Does microcredit have posi-tive effects on political empowerment only in contexts where there are already opportunities and incentives to participate in politics? Many scholars in the liter-

ature question the direction of causality between social capital and democraticdevelopment and insist that the direction may actually need to be reversed (Fox1996; Levi 1996; Offe 1999; Paxton 2002). In other words, they argue that socialcapital can only be generated if democratic institutions permit the formation of

voluntary organizations and networks and if individuals are allowed to participate



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in these organizations. Moreover, as Berman puts it, social capital is by itself a‘‘politically neutral multiplier’’ (Berman 1997). It is neither inherently good norinherently bad. In Berman’s view whether it strengthens, weakens, or leavesunchanged citizen’s democratic empowerment depends on the nature andcapacity of the mediating institutions, such as political parties. These caveats with

the concept of social capital forces us to get a better understanding of what insti-tutional conditions and ⁄ or combinations of different dimensions of social capitalgenerate outcomes that empower individuals politically.

A side issue that might be worth investigating in such a survey is whether ornot microcredit has differential effects on the empowerment of women andmen. As stated before, many microcredit programs target women and strive tocorrect the gender inequalities in society by empowering and mobilizing women.This may not only have negative externalities on the relationship between a manand a woman in a family (as discussed above), but it may also have spillovereffects on the way women and men develop and assume political roles in society.Especially in contexts where microcredit programs selectively target clients, this

might be a relevant topic to analyze.The link between microfinance, social capital, and political empowerment isan understudied topic in the literature and warrants significantly more attention,particularly outside of the Southeast Asia context. In that regard, a study that looks at the type and extent of social capital created by microfinance in otherdeveloping regions would be particularly pertinent in understanding not only the context-specific social capital that may be generated but also the conditionsunder which microfinance can help produce self efficacy and social capital whichin turn may enhance political empowerment.

A Possible Case Study: Central Asia and the Caucasus

There are many places in the world where the theoretical connections betweenmicrofinance and political empowerment could (and should) be tested. My ownresearch focuses on the political effects of microfinance in the newly autono-mous region of Central Asia and Caucasus (CAC).15 This region provides a par-ticularly fertile laboratory to study this relationship for several reasons. First,since the fall of communism the social costs of transition to capitalism in thisregion have been particularly severe. Poverty levels have increased, the gapbetween the rich and poor has widened, and unemployment has reached highlevels.16 The poor in this region are relatively distinct because they are generally

well educated. For this reason, they have often been called the ‘‘new poor’’because prior to the collapse of communism they had secure jobs and regular

pensions (Forster et al. 2003). Having lost their jobs in the former state sectorsduring the transition, many are now unable to maintain their standard of living.Moreover, several countries in the region have also been torn apart by conflict,

which has further impoverished and displaced their people. This processincreased social vulnerability for significant parts of these societies.

During the transition of 1990s, the self employed and small businesses wereespecially hard hit due to high inflation levels, unpredictable taxation, excessiveregulation and corruption. Because many banks, especially the public banks,

were beset by weak governance, bad debts and undercapitalization, many entre-preneurs could not find the much-needed credit to sustain themselves and start

15This region consists of 8 former Soviet republics: Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan, Tajiki-

stan, Georgia, Azerbaijan, and Armenia.16 According to UNDP (2004) statistics, in Kazakhstan, which is the wealthiest of all the CAC countries, about

58% of the poor are people of working age, unemployed, or with salaries so inadequate that they cannot provide

for themselves.

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new businesses.17 Moreover, most small businesses in the region had neither thetrack record of borrowing nor the collateral required by commercial banks. Inthis way, microfinance filled an important void in these transitioning economies.MFIs have been able to fulfill the financing needs of many of the self-employedas well as the micro and small enterprises because ‘‘they focus[ed] their loananalysis on client’s character, cash flow and commitment to repay the proposedloan, rather than on collateral or business experience’’ (Forster et al. 2003:11).

Despite the fact that micro-financing arrived in Central Asia and the Caucasusonly during the mid 1990s and that it has limited current outreach- reaching1.7% of all borrowers between the ages of 15–65 in the Caucasus and 1.1% inCentral Asia (see Table 1)—it is a fast growing market. In Central Asia, forinstance, microfinance institutions have an annual portfolio growth rate of about 40% and a client growth rate of about 20–30% (World Bank, Agriculture andRural Development Department 2004). CAC lacks much of the supporting insti-tutional architecture of higher income regions but still has some of the most profitable institutions and deepest outreach among the post-communist states.MFIs in this region have low average loan balance per borrower—US$345 and$447 in Caucasus and Central Asia respectively—which suggests that they are

serving the poorest segments of the population (MIX [Microfinance InformationExchange] 2004).There is a significant potential for microfinance to grow in this region. The

demand for microfinance far outstrips the supply. In Kazakhstan, for instance,the demand has been estimated to include between 140,000 and 220,000 clients

with a total value of the microfinance market exceeding US$ 800 million. By 2004, reports indicate that around only 50,000 people received credits (UNDP2005). Similarly, as of June 2004, USAID estimated that Georgian microfinanceinstitutions have also reached less than one third of the potential clients andserve less than 10% of the effective loan demand (Pytkowska and Gelednidze2005).

In addition to the economic and social costs associated with the transitionfrom communism, the resilience of authoritarianism is another reason why thisregion is appropriate for studying the nexus between microfinance and politicalempowerment. Despite the transition to democracy in the beginning of 1990s,these states are still captive to strong authoritarian or pseudo democratic leaders

with few incentives to introduce real democratic reform. After more than a dec-ade of stable authoritarianism, many students of this region acknowledge that the impetus for democratic change needs to come from below and perhaps as aresult of changing economic interests and balance of power in society (Bayulgen2005). Colton (1995) for instance, argues that ‘‘political interests will emerge aseconomic transformation spawns property rights and a civil society, in whichmembers have pecuniary and psychic stakes in what the government does’’

T ABLE 1 Depth and Outreach of Microfinance in Central Asia and Caucasus (2004)

No. of MFIs

Total gross loanportfolio (US$)

No. of activeborrowers

Borrower ⁄ Pop.15–65 years old

Caucasus 99 203,747,957 186,356 1.70%

Central Asia 376 438,841,627 371,924 1.10%

Source: Pytkowska and Bankowska (2004).

17 When the transition started in 1990, mainstream banks had almost no experience using key elements of finan-cial intermediation. The transition economies had to create a functioning financial system from scratch. Almost all

these countries were confronted with financial crises during the 1990s when bad lending practices led to the insol-

vency of many banks.



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(Colton 1995:749). In this context, microfinance may be one of the most viableand effective long-term tools to generate much-needed social capital that thenmay empower individuals to take part in the important decisions regarding theirfuture and that of their country.

Some Limitations and Expectations

A study that analyzes the effects of microfinance on the political empowerment of CAC region needs to take into account several limitations. First, microfinancesector in this part of the world is only a decade old and still has limited outreachin these societies. Hence, one will most likely find only nascent political effectsof microfinance at this point. The time lag, however, does not make this exercisefutile. An assessment of the trends that have emerged in the last decade can giveus an idea as to where the region is headed, and whether or not alternativesources of power are being created in these weak societies. At a time when stu-dents of this region are trying to understand why authoritarianism has persisted

for so long in this part of the world, a study like this can help us understand theconditions necessary for these societies to break away from authoritarian regimesand build democratic norms of trust and participation from scratch.

Second, in analyzing the effects of microfinance, one needs to refrain fromassuming that microfinance can by itself solve the democratic deficit facing thesesocieties today. Thus, instead of claiming sole causality, it needs to be stressedthat microfinance acts as a catalyst for building and strengthening the social cap-ital which is one of the conditions necessary for political empowerment.18 More-over, it would be wrong to assume that microfinance automatically has positivepolitical effects. As the literature also clearly shows the level of social trust andnetwork opportunities that existed prior to the microfinance programs as well asthe policy environment created by governments to encourage or discourage theexpansion of these services to various segments of the population all matter inunderstanding the contribution of microfinance to this region. For this reason,one should not assume microfinance experiences to be uniform across the CACregion.

Finally, such a study needs to emphasize the role governments play in themicrofinance sector of these countries. Traditionally, the allocation of credit has been a powerful tool for governments to spread patronage. In this way,credit oftentimes serves political rather than developmental purposes, espe-cially in countries where state ownership and control of the financial systemis strong. In the CAC region, initially governments’ reactions to microfinancehave been mixed. At first, given its proven track-record of alleviating poverty,

governments in the region gave it the status of a ‘‘magic wand’’ to solve vari-ous social problems.19 They established micro-credit programs and evenowned some MFIs themselves. Over time, however, due to inexperience andpolitical interference, most of these institutions proved to be inefficient andineffective.20 As a result some of these governments came to the realizationthat external funds, expertise, and private initiative are needed to get the mi-crofinance industry up to its feet. At the same time, however, these govern-ments have been reluctant to grant some of the MFIs, i.e., the non-bankNGOs and non-financial institutions, the status and legality that the conven-tional banks enjoyed in the financial system. One reason for this has beenthe resistance and lobbying efforts of commercial banks to prevent too much

18 Author’s interviews with Zhanna Zhakupova (Asian Credit Fund) June 19, 2006; Olga Tomilova (CGAP) June

20, 2006.19 Author’s interview with Olga Tomilova (CGAP).20 Author’s interview with Andrey Rudetskih (UNDP) Almaty June 23, 2006.

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competition in the financial sector. In fact, some argue that this resistancepartly explains, especially in Kazakhstan, the current restrictions on the micro-finance legislation.21 Another reason is most likely the general distrust of NGOs. Considering the latest colored and flower revolutions in this regionand the role some NGOs played in these movements, it is no surprise that

such institutions—especially those that have financial power—are viewed withgreat suspicion and apprehension.

Conversely, non-state MFIs are also concerned about state intervention in thesector. As one analyst put it, the fear is that the governments might embrace mi-crofinance too much, causing distortions in the way the market works throughgovernment subsidies, low interest rates, loan forgiveness etc.22 The irony andthe reality, however, is that for the microfinance industry to prosper and to havea positive effect on political empowerment, the cooperation of all these actors iscrucial. A strong microfinance industry can neither exist with sole government ownership nor can it exist without any government involvement. Microfinancecannot develop in a vacuum. It needs a stable macro environment to develop

and prosper.23

Conclusion

In this paper I surveyed the literature to demonstrate the theoretical connectionsthat can be drawn between microfinance, self-efficacy, social capital, and politicalempowerment. It is obviously a first cut into a fruitful area of research. I havealso delineated the general contours of future research and tried to make thecase that the CAC region would provide an appropriate venue to analyze thepolitical effects of microfinance.

Despite the vast literature on the economic and social affects of micro-financ-ing in poor countries, little attention has been given to the political implicationsof micro-financing. At a time when the broader development implications of micro-financing are being recognized—thanks, in part, to the Nobel Prize Awardto Yunus and the Grameen Bank—political scientists have an opportunity to con-tribute to and learn from this financial instrument. Research in this area will not only fill an obvious gap in the literature, but it will also help microfinance insti-tutions, donor communities and governments to better understand the widerpolitical implications of microfinance and the methods by which to measurethem. The reason why Yunus and the Grameen Bank received the Nobel PeacePrize has everything to do with the economic, social as well as political transfor-mative power of microfinance. Political science can contribute to the literatureon microfinance by drawing attention to the political implications of this power-

ful development tool.

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