In 2012, Demirguc-Kunt and Klapper posited that effective and inclusive financial systems are likely to benefit poor people and other disadvantaged groups because without inclusive financial systems, poor people must rely on their own limited savings to invest in their education or become entrepreneurs – and small enterprises must rely on their limited earnings to pursue promising growth opportunities. This can contribute to persistent income inequality and slower economic growth. (2012, p. 1) Twenty years earlier, McKinnon the “financial liberalization” school, claimed that the development of the financial system is at the heart of the economic development process.
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Roy Mersland, Stephen Zamore, Kwame Ohene Djan and Tigist Woldetsadik Sommeno
Over the past four decades, microfinance has grown from small local initiatives into a global phenomenon practiced in many markets, mostly in low-income economies but also in well-developed markets like the US and the EU. Interestingly, microfinance institutions (MFIs), that is, providers of financial services to end customers, often have several cross-border stakeholders, including shareholders, donors, lenders, and providers of technical assistance and advanced IT systems. Moreover, important “think tanks” like the CGAP provide the industry with global policy guidelines. Thus, microfinance is a very international industry and empirical evidence shows that international stakeholders as well as policymakers influence the performance of MFIs (Mersland et al., 2011; Mersland and Urgeghe, 2013). The purpose of this chapter is therefore to give an overview of the internationalization of the industry and to suggest relevant theories when studying cross-border microfinance partnerships. Moreover, we present initial statistical evidence of how internationalization can influence MFIs’ performance and the type of services they offer. Based on our initial results, we suggest a research agenda for future studies.
Islamic finance can be defined as finance that conforms to Islamic law (Sharia) derived from the Qur’an and other sources. It has considerably expanded over the last two decades, with Islamic financial assets increasing from $150 billion in the mid-90s to $1880 billion at the end of 2015 (Islamic Financial Services, 2016). Islamic finance is particularly prominent in Southeast Asia, South Asia, and in Middle Eastern countries. According to Obaidullah and Khan (2008, p.6) in a report for the Islamic Development Bank, “microfinance and Islamic finance have much in common . . .. Both focus on developmental and social goals. Both advocate financial inclusion . . .. Both involve participation by the poor.” It therefore appears natural that Islamic microfinance has emerged to supply microfinance tools which are Shariacompliant. Our objective in this chapter is to describe and to discuss Islamic microfinance. We aim at explaining how Islamic microfinance works nowadays in the world. To this end, we explain what characterizes Islamic finance and present the differences between Islamic microfinance and conventional microfinance. Literature on Islamic microfinance is still very limited, which limits the current knowledge we have on the effects of Islamic microfinance.
Marek Hudon, Marc Labie and Ariane Szafarz
For a long time, scholars and practitioners have questioned the link between economic development and the financial sector. Undeniably, there is a deep connection there, but causalities are hard to capture, and are therefore controversial. Arguably, causal links exist in both ways depending on the precise variables considered. Whether the development of the financial sector follows economic development, or the reverse, is a key issue when it comes to drafting policy recommendations for development aid. This book focusses on the segment of the financial sector that affects the situation of the unbanked and marginalized people. By bringing together original and multidisciplinary contributions from world-renowned scholars in the field, it has the ambition of providing the readers with an up-to-date state of the art on key issues of research in microfinance and financial inclusion. In line with the editorial policy of the series, each chapter also opens avenues worth exploring in future academic work. This introductory chapter explains how the issues addressed in this volume emerged from the field. Next, we describe the plan of the monograph and briefly evoke a few promising topics left aside to fulfill space constraints. Contemporary microfinance appeared in the 1970s, when it appeared that injecting capital through development banks was not the universal cure for poverty (Hulme and Mosley, 1996). At the same time, the ideological context was favorable. The 1980s have witnessed a strong political push in favor of deregulating markets, stimulating private enterprises, and favoring as much competition as possible (Weber, 2004). This was fertile ground for the development of microfinance institutions. First, microfinance carried the great hope that subsidies would make it possible to design organizations financing excluded people and turn them into microentrepreneurs. Their private businesses would generate additional incomes, leading to significantly improving their livelihoods. In a nutshell, poverty understood as a lack of income could be solved by microcredit, which allowed the poor to work their own way out of poverty. Second, microfinance was built on a promise that microfinance institutions (MFIs, as they got called) would break even after a few years and provide financial inclusion to more and more people (Morduch, 1999a). The accuracy of this past prediction is still open to discussion. While, undeniably, microfinance has undergone a tremendous development during the last three decades, leading to more financial inclusion than ever, several original assumptions were severely confronted with reality. First, microcredit does not necessarily generate income through entrepreneurial activities since part of it is used for consumer loans. Second, the initial target pool of borrowers, made up of the poorest of the poor, is hard to reach. Last, the objective of smoothing the impact of economic shocks appeared to be more limited than expected.
The term governance refers to how the rights, claims and obligations are divided among the stakeholders of an organization. Governance deals with the rules and regulations shaping ownership, management and its monitoring. The governance of an organization consists of a set of internal as well as external mechanisms that are in place to make sure that the interests of its stakeholders (shareholders, banks, employees, government, and society as a whole) are taken care of by management. Since the corporate scandals of the early 2000s, governance has received a lot of attention, both from academia as well as from policy makers. Governance is also important for microfinance. According to the Centre for the Study of Financial Innovation (CSFI), governance is one of the main concerns microfinance institutions (MFIs) have to deal with, especially in the last couple of years. In particular, the reports stress concerns related to the low quality of management and lack of professionalism, cronyism, and lack of transparency and disclosure.
Brian Hathaway and Tyler Wry
A vibrant line of research on microfinance has emerged at the intersection of management and organization theory. This research broadly addresses two sets of questions: first, what types of challenges and opportunities emerge from the combination of financial and social goals that microfinance exemplifies? And second, how does the “macro” embeddedness of such “social enterprises” shape and constrain their behavior as they craft responses to these pressures? As one of the most pervasive and controversial forms of social enterprise, microfinance has been eagerly studied and serves as the empirical setting for many of the most influential pieces on social enterprise in the management literature.
Anastasia Cozarenco and Ariane Szafarz
Microfinance-like activities have existed in developed countries long before Mohammad Yunus coined the term “microcredit” in the 1970s. Several past financial institutions in Western Europe and North America parallel with contemporary microfinance institutions (MFIs). These institutions include the Monti di Pieta, founded in Italy in the 15th century to provide low-interest loans to the poor (Di Castri, 2010), the English lending charities dating back to the 15th century, the Irish loan funds active between 1720 and 1950 (Hollis & Sweetman, 2001), and the Italian Casse Rurali established since 1883 (Hollis & Sweetman, 1998). In the middle of the 19th century, a spectacular cooperative movement was initiated by the English Rochdale Society of Equitable Pioneers. At the same time in Germany, Hermann Schulze-Delitzsch and Friedrich Raiffeisen launched the concept of credit cooperatives (Guinnane, 2011; Perilleux & Nyssens, 2017), which later inspired the development of cooperatives and credit unions in Europe (Italy, Spain, France, and so on) and North America, and beyond. These institutions and their modern successors confirm that microfinance is a worldwide phenomenon, in line with Yunus’s (1999, p.175) statement: “Whenever I am asked if Grameen can work in other countries, I respond emphatically that it can work wherever there is poverty, including wealthy countries.” Despite their specific structures and operations, the historically distant institutions shared notable features with modern MFIs. First, they served the social purpose of filling the gap between pawnshops and traditional banks reluctant to serve the poor (Hollis & Sweetman, 1998). Second, they often required the presence of cosigners, so announcing the implementation of group lending (Guinnane, 2011). Last, like current MFIs, the pioneering institutions aimed at harnessing local information and took advantage of the social ties existing among their clients (Hollis & Sweetman, 2001).
Adriana Garcia and Robert Lensink
Proponents of the microfinance movement long assumed that poor people remained poor because of their lack of financial capital. Poor people were supposed to possess sufficient business and production knowledge, so that offering them a small loan would lead to high returns and a sharp reduction in poverty. Muhammad Yunus (2007: 225) stated this prediction very clearly: “Rather than waste our time teaching them new skills, we try to make maximum use of their existing skills. Giving the poor access to credit allows them to immediately put into practice the skills they already know.” The idea that a shortage of credit is the main obstacle to initiating a growth process has been endorsed by many researchers and international organizations. The immediate policy advice would be grant access to credit to the poor. Credit, and nothing but credit, would be all that was needed. Recent theoretical evidence challenges this assumption and questions the role of microcredit in alleviating poverty (Banerjee 2013). Rigorous impact evaluations suggest that simply providing access to financial capital does not have transformative effects. Banerjee et al. (2015) conclude, on the basis of randomized controlled trials conducted in Bosnia, Ethiopia, India, Mexico, Morocco, and Mongolia, that microcredit generally fails to help poor people raise their incomes or consumption above subsistence levels. Similar conclusions come from Karlan and Zinman (2011) in the Philippines, De Mel et al. (2008, 2009) in Sri Lanka, and Fafchamps et al. (2014) in Ghana.
Edited by Marek Hudon, Marc Labie and Ariane Szafarz
Johan Bastiaensen, Frédéric Huybrechs and Gert Van Hecken
Building on the argument for a ‘double bottom line’ of financial and social/poverty objectives, some argue for a third bottom line to engage with environmental crises (Hall et al., 2008; Huybrechs et al., 2015). In this chapter, we provide an overview of nascent practices of ‘green microfinance’ and develop a perspective on how (micro) finance relates to the transformation to sustainability. This topic is new on the microfinance research agenda. Garcia-Perez et al. (2017: 3390) report a shallow presence of environmental issues in only 8 percent of microfinance studies, concluding that ‘(t)he environmental dimension features both a very small number of papers and very generic information processing’. As we argue below, this relates to the complex challenging nature of the topic which requires a wide-ranging research approach.