’Tis the season of giving, or – for some – online microfinance

No fooling Santa. francemora via shutterstock

At this time of the year, our mailboxes and inboxes get flooded with Christmas appeals. Many of them feature heart-wrenching and guilt-inducing images of people in need, the idea being that they tug at our purse strings. This method of fundraising has provoked debates over the idea of “poverty porn” and the risk it runs of people getting tired of these images.

There is one kind of appeal that is different. It asks people to lend small amounts of money to budding entrepreneurs around the world, usually in developing countries. What has become known as microcredit or microlending has proven extremely popular with everyday people in the Global North.

Enduring popularity

My research has shown that microcredit’s representational practices and the affective connections it forges between lenders and borrowers have much to do with it.

Firstly, images of microlending replace sad faces with smiling women, often in colourful traditional clothes in their places of work. These are photos of strong, responsible, enterprising women who work hard to elevate themselves and their families out of poverty. They are market women, vegetable growers, tailors and artisans. Men are usually absent from these depictions, much as they are absent from microcredit at large, although that is slowly changing.

These photos are usually accompanied by narratives of success, which generally take a standard format that recounts how a woman received a loan, started a business, grew it successfully and thereby escaped poverty. These representations speak of values with which the people asked to make loans can identify: improving one’s home, sending one’s children to school, growing a business. More often than not, these stories are positive and upbeat.

One of the women you can find out about and sponsor on Kiva. hodag, CC BY-NC-ND

Double investment

In recent years, microlending has moved online, whereby it has managed to reach and win over wider audiences. For example, in the US, a social enterprise called Kiva has lent more than US$645m to close to 1.5m people in 85 countries around the world (including the US itself) since it was founded in 2005. The money has been raised, often just US$25 a time, from more than 1m lenders, mainly residing in the US, Europe and Australia, but also from developing countries. There are similar websites in France, China, India and other places.

Microlending websites strengthen the connections between lenders and borrowers by sending regular updates to lenders, keeping them informed of how the recipients of their loans are getting on. This gives investors satisfaction, both financially and emotionally, to see their borrowers succeed. It’s a double investment.

Online microfinance is successful by cultivating a sense of person-to-person connection, seemingly linking one lender with one borrower to reinforce this. It is similar to the charities which ask you to sponsor a child, but these connections hide the intermediary organisations, such as Kiva and its many microfinance partner organisations that are disbursing the loans on the ground.

Often, they aggregate the Kiva money, so that the loan made to a particular “Kiva entrepreneur” via their website is usually given to another borrower at the partner organisation. So the person-to-person connection is often an illusion rather than reality.

Nevertheless, the promised transparency appeals to donors who have become wary of NGOs’ overheads and inefficiencies and want to know exactly where their money goes and what difference it makes. In contrast to one-off donations, lending is also a two-way exchange that keeps money in circulation, so that it can be given over and over again.

Increasing criticism

Microcredit is based on ideas popularised by Muhammad Yunus, founder of the Grameen Bank in Bangladesh, who was awarded the Nobel Peace Prize in 2006 for his contribution to making the poor, and especially poor women, worthy of inclusion into formal financial systems.

In order to make up for the fact that the poor often have insufficient goods or property to make them eligible for loans from mainstream banks, Yunus organised them into small lending groups where women cross-guarantee each others’ loans. He thereby replaced physical with social collateral. Yunus himself has contributed much to microlending’s success, through his charismatic personality and his insistence on microcredit’s simplicity.

What the positive stories of microcredit ignore is that microcredit is also trading in debt and should more honestly be called microdebt. This has attendant risk. While in financial circles (and on Kiva), the risk is usually attributed to lenders, many critical scholars have shown that it is poor women borrowers who are exposed to multiple risks when taking on loans, no matter how small. High interest rates, hard to understand contracts, predatory lending and abusive loan recovery practices, often in the absence of consumer protection legislation, have all been fuelled by micro-credit’s commercialisation.

The real impact microcredit can have in terms of alleviating poverty has also not been fully established.

In spite of these criticisms, the general public remains largely supportive of microlending. This is often because they are not aware of them. So, if you receive a Kiva gift card or are asked to Lend with Care this Christmas, it’s worth doing your research before you click the “lend” button.

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