Points to Ponder: What is Microfinance?

By Diane Lourdes Dick.  What is microfinance? Does the term refer to a series of financial transactions, or does it suggest a social movement? Is microfinance defined by qualitative factors, or in terms of the economic value of each loan? If the latter, is the value ceiling set in real or relative terms? If the former, what are those qualitative factors? These questions are repeatedly raised by those engaged in microfinance activities.

For example, the question of how to define microfinance arose earlier this week at the Multilateral Investment Fund’s (MIF) third annual Caribbean Microfinance Forum. One panelist articulated a definition that includes loans to individuals and small businesses in amounts ranging from $1,000 to $10,000. This definition clearly relies upon a quantitative measure, set in real terms. In contrast, many other uses of the term microfinance suggest a qualitatively-based definition, relying upon factors that take into consideration the socioeconomic condition of borrowers. For instance, the Wikipedia entry for microfinance defines the term to include the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.” Definitions of this sort suggest that microfinance is not merely a series of transactions, but also a movement to bring about social change.

In light of these divergent uses of the term microfinance scholars and activists continue to echo the need for clearer definitional terms. Mohammad Yunus, who received the Nobel Prize in 2006 for his work in microfinance, proposes a definitional framework to identify subsets of microfinance transactions. For instance, the phrase “traditional informal microfinance refers to highly localized, informal lending transactions. In contrast, cooperative microcredit refers to lending transactions that take place by and through cooperative credit enterprises, such as credit unions.

More precise terminology is important, because as Gert van Maanen explains in a leading text on microcredit, the terms microfinance and microcredit implicate two conflicting schools of thought. On the one hand, microfinance is perceived as a social movement, with development goals. On the other hand, microfinance is construed as a commercial enterprise, with profit motives. When activists, policymakers and journalists engage in the broader discourse about microfinance, consensus building is constrained by language that assumes away the substantial differences in opposing schools of thought.

As with most social questions, language both shapes and constrains discourse, shielding distinctions that have important policy implications. In light of recent efforts to develop legal and industry frameworks to regulate microfinance, it is perhaps more important than ever that we consistently use more specific terms that define the various transactions and social movements that are collectively referred to as microfinance.

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