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

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

    Can Contribute to and Learn From the Study 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 implications of micro-financing are being recognized—thanks, in part, to the Nobel Prize Award to Prof. Yunus and the Grameen Bank—political scientists have an opportunity to contribute to and learn from the study of this financial instrument. This paper traces the existing microcredit—and more broadly the microfinance—literature to delineate the ways in

     which microcredit can contribute to the political awareness and activism of the poor, i.e., their political empowerment. I argue that the link between microcredit and political empowerment is self-efficacy and social capital, which can be generated from a particular form of micro- credit lending where clients apply for loans as a group and share responsibility 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 will not only fill an obvious gap in the literature, but it will also help micro- finance institutions, donor communities and governments to better understand the wider political implications of microfinance and the

     ways by which to measure them.

    Muhammad Yunus, a Bangladeshi economist, and the Grameen Bank he founded 30 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 a broader definition of peace, awarded by the committee not for traditional conflict  resolution but rather development work in a broader sense. This award and the fact 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 a lot 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 this type 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 the political 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 generated from a particular method of lending where clients apply for loans as a group and share responsibility for repayment. In the first part of the paper, I discuss

     what microcredit (and more broadly microfinance) is and how it contributes to economic and social development as extensively studied in the literature. Next, I demonstrate how microcredit can theoretically enhance self efficacy in clients and 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 can become instrumental in strengthening political empowerment. Finally, I generate an 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 the Central Asia and the Caucasus region; a region, which I argue, provides a fertile laboratory to analyze the political effects of microcredit. This study can not only  contribute to the development of the microcredit literature by bringing politics in, but it also can help microcredit institutions, donor communities and the gov- ernments better understand the wider political implications of microcredit and the 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 exclude the poor. In developing countries, microfinance has demonstrated its potential for delivering a full range of commercial financial services to micro-entrepreneurs and poor families that are conventionally considered ‘‘unbankable’’ due to high trans- action costs, perceived risks, low margins, and because the poor lack traditional collateral. 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 and equips the poor to make their own choices and build their way out of poverty in a 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 through their own efforts’’ and as such is different from other anti-poverty policies, such as 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 Millennium Development 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 Bank Rakayat in Indonesia introduced the practice to the developing world.3 These institutions helped prove that the poor are, in fact, more reliable in paying back their loans than conventional bank clients. They also showed that microfinance institutions could cover their costs and become sustainable businesses that can attract 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, the microfinance 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 access to these basic financial services (UNDP 2005). The potential clients of microfi- nance services are usually individuals with entrepreneurship potential, including the unemployed who do not have access to conventional bank services.

     As the outreach has expanded, the definition and breadth of microfinance have 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 needs loans but most people need to save money and insure against risks. In fact, it is argued that globally there are many more savers than borrowers (Helms 2006). Micro-savings, for instance, enable low-income households to accumulate resources for future purchases and investmen