Posts by Ella

Financial services promoted to the poor despite their failure to address the causes of poverty

Anni Piiroinen

First came microcredit, then financial inclusion. Now new technologies are used to extend financial services everywhere. However, data collection by fintech companies raises significant ethical questions.


The quest to bring financial services to everyone has gathered force during the last decade. A new goal in international development is universal financial inclusion, in other words extending services to the 1.7 billion people that currently remain ”financially excluded”.


Financial inclusion requires giving access to diverse financial services to people who have been largely ignored by formal financial institutions. These services include saving, borrowing, transferring money and insurance.


Expectations about the potential impacts of financial inclusion are high. Many claim that it supports central development goals, such as economic growth, poverty reduction, income equality, gender equality, welfare and empowerment for the poor.


Proponents of financial inclusion see it as a necessary element of sustainable development, and it has been featured in the United Nations Sustainable Development Goals (SDGs) as a way to reduce poverty and hunger.


“Financial inclusion as a story, a solution and a project is everywhere. In every sphere of development there is an argument that financial inclusion is the missing piece that will make things fall into place,” says Sally Brooks, a researcher at the University of York.


Financial inclusion has been promoted by a range of actors, including the World Bank, the Bill and Melinda Gates Foundation, the Better Than Cash Alliance, the MasterCard Foundation and several private corporations. More than 90 developing countries have joined the Alliance for Financial Inclusion, which strives to help their members implement policies that support financial inclusion. The diverse group of proponents has also been joined by fintech companies providing financial technologies.


Many donor countries have also embrace the notion of financial inclusion, including Finland. Finnfund has invested in several foreign financial actors committed to supporting financial inclusion. Finnpartnership has also channeled funding to Finnish companies supporting and utilizing fintech systems in developing countries.


“Fintech and financial inclusion are current fads in development programmes. As expected, the Finnish government and the Finnish companies it supports join this bandwagon,” says Bonn Juego, a postdoctoral researcher of International Development at the University of Jyväskylä.


Roots in microloans


The idea of pro-poor financial services in itself is not new. Muhammad Yunus popularized the idea of microloans after experimenting with them in Bangladesh in the 1970s. Yunus’s now-famous idea was to offer small loans to poor people, especially women, to invest in their businesses.


This way people could increase their income and also create employment for others. At the same time, official microcredit lenders would enable people to avoid traditional loan sharks and their high interest rates.


The idea of microcredit became very popular over decades that followed, as Milford Bateman describes in their book Why Doesn’t Microfinance Work? In the 1990s important development actors such as USAID and the World Bank called for a new kind of microfinance, which would be provided by microfinance institutions (MFIs) functioning as traditional profit-seeking companies.


Microcredit was thus tansformed from a small, NGO-led project relying on public development funding into a commercially sustainable system.


“Microfinance went from being an NGO-led project to a business. These businesses became more and more business-like to the point where they became ready for incorporation into global markets,” Brooks recalls.


Microfinance was increasingly incorporated into mainstream financial markets. In an article titled The Financialization of Micro-Credit, Rob Aitken describes how microborrowers and their surrounding networkd were brought into the sphere of mainstream financial markets so that they became attractive investment opportunities for profit-seeking investors.


New financial actors and techniques like microfinance investment vehicles (MIVs) and the securitization of microcredit connected profit-seeking investoors to poor microborrowers in an unprecedented way, all in the name of development.


Propelled by these changes, microcredit soared to new heights in the early 2000s. Lending was growing rapidly, from USD 12.2 billion in 2004 to USD 25.6 billion in 2006, as Philip Mader points out in The Political Economy of Finance.


New microfinance investment funds were set up and MIVs were expanding their portfolios. 2005 was officially declared The International Year of Microcredit by the UN, and in 2006 Yunus and Grameen Bank were awarded Nobel Peace Prize “for their efforts to create economic and social development from below”.


Wave of criticism against microcredit


However, during the 2000s, microcredit was met with heacy criticism from individuals like Thomas W. Dichter, who wrote an article titled Hype and Hope: The Worrisome State of the Microcredit Movement. People who had followed the phenomenon at grassroots level were reporting that microloans were failing to lift people out of poverty.


Among other reasons, microcredit was failing because it was difficult to expand businesses due to the lack of demand and because loans were used to pay for everyday expenses instead of entrepreneurial activity, It was especially hard for the poorest to benefit from loans, and they could even be worse off due to high interest rates.


In 2011, an extensive review of existing microfinance evaluations titled What is the evidence of the impact of microfinance on the well-being of poor people? looked at existing research on microcredit and found no robust evidence of its development impacts, suggesting that the “microfinance phenomenon” had essentially been built “on foundations of sand”.


At the same time the downsides of commercialised microcredit were becoming increasingly clear. In 2007, the initial public offering (IPO) of Banco Compartamos, Mexico’s largest microfinance bank revealed the inequality and exploitation that characterised parts of the industry.


The bank had been charging extremely high interest rates from customers (sometimes over 100 percent) while reaping high profits and generously rewarding its directors and senior managers. Through its IPO the bank raised an astonishing 473,9 million dollars.


Another setback came in 2010 when dozens of heavily indebted farmers committed suicide in the Indian state of Andhra Pradesh, once known as the Mecca of microfinance. The reputation of microfinance institutions was tarnished and they began to appear no different from traditional loan sharks exploiting the poor to get rich.


Financial inclusion: microfinance rebooted


The growing critique did not put an end to the growth of microfinance. The strength of the microfinance agenda was proved in the aftermath of the Global Financial Crisis when neither the mounting critiques nor the greatest financial crisis since the 1930s could deter the position of microfinance. Instead, financial inclusion became a new central paradigm of international development.


“Just as there was quite a momentum in terms of findings that were showing how deeply flawed the microfinance model was, it reinvented itself as financial inclusion,” Brooks explains.


She continues to be puzzled by the way evidence against microfinance has been ignored and by the tendency in international development to forget its history.


“It makes you question the role of evidence in an era of supposedly evidence-based policy.”


Not only did the project to expand financial services survive, but its reincarnation as financial inclusion has thrived and expanded in scope. The goal is no longer to only offer credit but to promote wholesale financial inclusion.


In Contesting Financial Inclusion, Mader explains that the demands placed on the poor are now much higher than with microcredit originally: they should use diverse financial services, improve their financial skills and constantly assess risks around them.


Financial inclusion has also encouraged new actors to join the project. In addition to MFIs, the proponents of the new paradigm include large banks, technology firms and mobile network operators, for whom financial inclusion opens up new markets and business opportunities.


These actors form complex networks with development institutions, states and investors. What we have here is thus a project of entirely different scope than a decade ago.


Setting up digital rails


A lot of the current hype around financial inclusion concerns new financial technologies provided by fintech companies. These technologies have been key to getting financial services to new populations.


According to Brooks, who has been researching the rise of fintech in international development, we are currently witnessing the setting up of a new infrastructure for digital payments, or what Bill Gates has called the “digital rails”. These rails include mobile payment systems, which allow people to send money to each other through mobile phones.


Of course, these payment systems only work if people actually use them. Part of the project of financial inclusion has been to encourage people to use digital payments instead of cash. For instance, the UN- based Better Than Cash Alliance strives to promote the use of digital payment systems as part of financial inclusion.


“Cash is being framed as this kind of dark money,” Brooks describes.


The stakes of moving from cash to digital payments are high, especially for the companies that are able to control payment systems. When people have no choice by to use digital payment systems, there is a possibility to charge rents for using them.


“It may be very small rents but it is a lot of transactions. There is a lot of money to be made,” Brooks points out.


Digital technologies are also used to estimate the creditworthiness of people with no history of using formal financial services. In their article The digital revolution in financial inclusion: International development in the fintech era, Brooks and Daniela Gabor show how fintech companies record data about the behaviour of potential financial service users. Companies are creating so- called digital footprints, which can be used to determine the creditworthiness of people.


Furthermore, fintech companies can also use data to “nudge” people to act in financially responsible ways. In other words, digital technologies become techniques of governing behaviour.


Efforts to collect data and to use it to shape behaviour raise difficult questions about ethics, especially since there are opportunities for private fintech companies to profit from them. Yet their implications have barely been discussed.


“We should at least stop and say, if monetisation of digital footprints is going to be profitable in the future, who is going to be paying for that and how come?” Brooks says.


She asks us to pay more attention to who is controlling the collection of data and profiting from it. If large, foreign- owned, multinational financial companies such as Visa and MasterCard, both of whom are members of the Better Than Cash Alliance, play a central role, how does the local society benefit from selling its data, besides through expanding financial servicesø In an article titled Left to Other Peoples’ Devices? A Political Economy Perspective on the Big Data Revolution in Development, Laura Mann asks us to think harder about how local people and societies could reap economic and political benefits from selling their data.


Financial inclusion fails to address the structures of poverty


Even though financial inclusion is promoted as a solution to major development challenges, today its proponents speak less than before about the ability of financial services to reduce poverty. According to Mader, there has been a shift to emphasising the role of financial services as tools to better manage the money people currently have.


“[T]he new mission of financial inclusion actors is not to raise poor people’s income anymore but rather to provide the financial tools that will supposedly help them to manage their money,” researcher Vincent Guermond and economist Ndongo Samba Sylla explain in their article When monetary coloniality meets 21st century finance: development in the franc zone.


And yet, expectations are high. Financial services are claimed to help people to better adjust to unexpected expenses, to cope with sporadic income streams and to invest in entrepreneurial projects and education.


The actual impacts seem to be considerably less impressive. A recent Gallup Global Financial Health Study stated that the use of financial services does not clearly correlate with people’s economic security or their ability to control their financial situation. In Kenya 82 percent already have some sort of an account, but only nine percent of the people in the study were financially secure.


The macro impacts on economic growth and equality remain equally questionable. Mader has pointed out that existing research about the connection between economic growth and the financial sector, which has been often cited to support financial inclusion, actually says nothing about expanding financial services to the poor but focuses on the financial sector in general.


Even though financial services can certainly bring some benefits to people by making it easier to transfer money and by providing more options to manage their money, the hype around the development impacts of financial inclusion seems exaggerated to say the least.


In the end, it is also important to look at what financial inclusion is not about. Gabor and Brooks point out that the financial inclusion paradigm targets individual behaviour of marginalised people, but “envisages no material change in the (changing) structures that generate marginality”. The economic and social structures producing inequality and poverty are left untouched.


The article was originally published in Finnish by Kepa (now Fingo) on the 3rd of October 2018. Link to the original article: “Köyhät halutaan rahoituspalvelujen piiriin – köyhyyden syitä ne eivät kuitenkaan poista”.



Reinventing REDD+

Sabaheta Ramcilovic-Suominen

One policy that attracted a record popularity, international talks and criticism in policy fora and scientific debates is the “Reducing Emissions from Deforestation and Forest Degradation” (REDD+). As the title indicates, the policy aims at reducing global carbon emissions via limiting deforestation in localities in the ‘Global South’. In addition, the policy suggests that the polluters in the ‘Global North’ will “offset” their carbon emissions by purchasing the so called ‘carbon credits’, the profit from which will be paid as a compensation to those restraining from deforesting.

It is important to highlight that the countries in the ‘Global North’ within this policy instrument do not restrain from consuming and importing the tropical wood from the ‘Global South’. This means the profit from timber and other industries thriving on deforestation is ensured, suggesting therefore that these large-scale profitable industries are not likely to be affected, but that the reductions of emissions will need to come from addressing other sources of deforestation. The large-scale profitable industries will also not be affected because of the uncertain and low payments for carbon at the global market, rendering REDD+ payments uncompetitive compared to the large-scale industries driving deforestation. For example, rubber, palm oil, or any other kind of tree and agricultural plantation, produced mainly for consumers in the ‘Global North’ and other rich countries, is much more profitable than the payments REDD+ would generate by selling the carbon in today carbon treading markets. The same holds for timber industry producing timber for the rich countries, which are generating profits way larger than selling carbon would generate via REDD+ payments.

The governments in the ‘Global South’ realized the lack of financial incentives of REDD+, soon after the policy kicked off in 2010. Yet, no government has refused to participate in REDD+. Instead REDD is being reinvented. Thanks to the donor aid for ‘readying countries for REDD+’ financial incentives to engage in REDD+ are high. Public and private finance from 2006 to 2014 are at more than US $10 billion. The ‘readying for REDD+’ donor funding comes in handy for international development agencies, as well as for the national governments to continue the ‘development as usual’ practices. These actors do what they have been doing in the past few decades, but now with new funding and new justifications – the justification of tackling climate change.

Studying REDD+ pilot projects on the ground, I find that the government, along its international development partners, address small-scale forest activities practiced by the villagers, many of which are the key and often the only livelihoods to those villagers. An example is the practice of shifting cultivation, which is the only farming practice possible in the mountainous areas in the norther regions. The practice include burning vegetation – forest included – to farm crops for a few seasons and then shift to another forest patch; however returning to the old patch once the vegetation has recovered and soil regained nutritional value. REDD+ prgramme in Laos is placed exclusively in the northern part of the country, where the government have been trying to eradicate shifting cultivation, since its independence in 1975.

REDD+ pilot projects in Laos are implemented as traditional forest conservation projects, which include activities such as: i. forest and land allocation and demarcation (a strategy limiting local population from using and entering certain forest areas), and ii. setting and strictly implementing regulations to limit hunting, fishing, tree-felling and shifting cultivation to certain areas only. At the local level, REDD+ donor funding provides support not only for implementing those interventions, but also it provides a narrative needed to legitimize these interventions. Climate change is used as an additional problem to blame the communities’ way of life. Climate change is presented as a direct consequence of the way in which communities use the forest, as well as the primary reason for all the calamities happening to them – from draughts and flooding, to frosts and pests.

While the international community proudly presents the REDD+ as the most “cost efficient” way of reducing global carbon emissions, I argue that it might well be cost efficient for them, but not for the local farmers who are pushed further to the edge of their existence, without any certain benefits from REDD+ policy payments. The REDD+ payments – when and if achieved – are not only insufficient to address the large-scale industries, but also to generate income at the local level. REDD+ feasibility study in Laos find that administrative costs, costs for building institutions and technologies needed for REDD+ are already reaching over the REDD+ payments to be generated from the entire area planned to be under REDD+ programme in Laos. They suggest that the payments when split per household in those areas are around 1 USD per household per year, which is evidently insufficient to compensate individual farmers for the lost benefits. Instead, REDD+ funds are being set up, which as their predecessors – the timber extraction funds – will be used for the so-called ‘community development projects’. I wonder thus, what if anything makes REDD+ different from any other forest conservation programme, which has helped the nation states to protect forest and alienate communities from the forests? It appears as the only difference is in the discourse and justification – with REDD+ they are doing it in the name of fighting climate change.


A shorter version of this blog post has been published as a column in Karjalainen, 22.7.2018

Save the date: 5th Joint Nordic Development Research Conference in Copenhagen 27-28 June 2019

5th Joint Nordic Development Research Conference in Copenhagen 27-28 June 2019

(as part of 2nd cycle of conferences: 2019-2025)

Based on the successful completion of the 1st cycle of joint Nordic Development Research Conferences1 the Nordic Development Research Associations (NFU, FSDR and FAU) along with Swedish institutions (Nordic Africa Institute, Development Studies/Uppsala University and Global Studies/Gothenburg University) have agreed to enter a 2nd cycle.

To ensure that individual researchers, research groups/programs, networks and organisations can plan accordingly, we would like to announce that the 5th Joint Nordic Development Research Conference will take place in Copenhagen Thursday-Friday 27-28 June 2019!

We will be back with a call for workshops/panels and more soon, but for now tick the dates! We hope to see you in Copenhagen next summer. Please also consider to make arrangements to bring in scholars in your networks from the global South and inform these accordingly.

Best regards,
Randi Solhjell, NFU
Ilona Steiler, FSDR
Henning Melber, NAI & EADI
Elin Bjarnegaard, (interim SDSN)
Fredrik Söderbaum (Global Studies, Gothenburg)
Sören Jeppesen, FAU