Undercurrent-Issue-Fall-Winter-2014-3

One Size Does Not Fit All: A Study of Microfinance Practices in PeruBy: Sarah SilverbergAbstract - Microfinance enables many Peruvian women to start businesses and fight poverty. Whilemicrofinance has many economic and social benefits, it also causes problems within communities. Theimportance of gender relations thus emerges, as they subtly explain why microfinance is not poverty’scure. The group-lending system and the accompanying peer pressure have created social problems,mental health problems and power struggles. While microfinance empowers women to be moreindependent, the machismo society of Peru can lead to problems such as domestic violence and theft.Furthermore, the problems of poverty run far deeper than financial instability. Microfinance cannotcompletely solve poverty, because it does not cater to different abilities of clients and various businesssectors. The moderate-poor are helped while the extremely impoverished are increasingly ignored; loansto men are increasing, while those to women are not. Lastly, microfinance cannot be a ‘one size fits all’solution, because not all people are necessarily entrepreneurs.One day our grandchildren will go to museums to see what poverty was like.Mohammed Yunus (2006)INTRODUCTIONSince the advent of the microfinance movement in the last half-century, the world has tried toreduce poverty by enabling the poor to help themselves. Microfinance is the provision of small-scalefinancial services to low-income clients including loans, credit, savings, insurance, and fund transfers.These loans are typically smaller than those issued by a bank, and cater to clientele who are not usuallyeligible to apply for financial services, particularly women. Since the 1970’s, there have been manymicrofinance organizations across Peru working to decrease poverty, and it will thus be the principlecase study examined in this paper.The advent of microfinance has empowered thousands of entrepreneurs in developing countriesby providing small-scale loans to low-income clients, looking to start or expand their own business.These loans are smaller than those issued by banks and cater to clients who cannot apply for largerloans. Typical loans require collateral, yet much of microfinance institutions’ (MFIs) clientele do not ownanything of sufficient value to serve as such. Microfinancing uses other strategies to ensure repaymentof loans, such as group lending. In addition, MFIs largely focus on lending to women, a segment of thepopulation often excluded from the formal labour force (Pait, 2009). By enabling the poorer part of thepopulation to increase its output, and by increasing employment and standards of living in developingcountries, microfinance is addressing the countries’ economic status while also working on equityissues. Although it is not a perfect solution to poverty, microfinance sets a foundation for development inan increasingly globalized world.All of these financial services complement the recent economic growth in Peru. The 1990s and2000s saw the development of stable exchange rates, low inflation, and open trade (León, 2008). Yetwhile there has been some growth, fifty percent of the population remains below the poverty line,particularly in rural regions (León, 2008). Although microfinancing has improved the situation of povertyin Peru, it has not succeeded in significantly decreasing poverty. There are significant drawbacksassociated with microfinance institutions’ group lending practices, from issues that arise from Peru’smachismo society, from the type of clientele sought, and from problems with the ‘one size fits allsolution’ in addressing the deeper roots of poverty. In light of both the benefits and consequences ofmicrofinance and their impacts on the lives of women, this paper seeks to understand the implications ofmicrofinance in Peruvian society and evaluate whether the benefits outweigh the consequences. Whilemicrofinance has the potential to empower women, change the oppressive culture in which many45