Microfinance and development finance in India: research implications

This paper appraises options for research relating to microfinance in India, doing so in the broad context of rival macro pressures to accelerate economic growth, maintain political order, reduce poverty and adapt to climate change. This paper first set out a general well-being regime framework that can be used for this analysis and sketch the role microfinance plays within it. Section 2 uses it to inform a brief historical discussion of the evolution of microfinance in India. Section 3 develops the analysis further by considering possible effects of three external drivers of change: rising political aspirations; climate change and food insecurity; and new information and communication technology (ICT). Section 4 uses these examples to discuss methodological options for policy-relevant empirical research. It also suggests that microfinance is an important arena for exploring empirically the tension inherent in the idea of development management. The term microfinance is widely used to refer to institutions governing savings, credit, insurance and monetary payments by relatively poor people, including those regulated by both official laws and informal norms. Analysis of microfinance is widely framed as a purely micro issue, centered on the motivation and behavior of specific users and providers. However, such analysis is almost invariably located - whether explicitly or implicitly - in a wider view of how the state, markets and society institute poverty. In India as elsewhere, for example, private microfinance organizations is viewed positively as a force for promoting financial inclusion by “making markets work for the poor”; and at the same time viewed negatively as a smokescreen behind which the state can retreat from a ‘social banking’ strategy of mobilizing much larger resources to challenge pervasive and chronic indebtedness. Following Brett (2009) this paper regards such seemingly polarized views as jointly contributing also to an intermediate “pluralist liberal orthodoxy” struggling to identify the least worst combination of state, market and civic mechanisms for addressing poverty and oppression in countries where their potential to do so is deeply compromised by capacity constraints and vested interests. Microfinance – along with all potential instruments of development – needs to be appraised against country-specific historical realities. Evaluating it instead in relation to a universal view of its role in some idealized market or state-led view of development can be viewed either as a naïve and idle distraction, or as irresponsible and self-serving.