January 7, 2019

Governance, Knowledge and Innovation

José Manuel Mendes e José Reis

Microcredit in its informal version has a history of centuries, especially in less developed countries where, to date, it is one of the few opportunities for the poor to increase their incomes. It was mainly in its formal version popularized by M. Yunus from the 1970s onwards. XX that microcredit gained greater visibility as microfinance institutions were able to find innovative ways to address the problem of poverty and exclusion. Among them is the granting of microcredit intending to develop sustainable economic initiatives that allow the borrower to create his own job and improve the living conditions of his household. The successes of this approach to poverty and social marginalization by these microfinance institutions are, on the one hand, having as social vocation to seek to improve the economic situation of the most vulnerable populations and, on the other, to do so by including them in the economy. In order to make business initiatives viable, microfinance institutions have developed follow-up and support practices for borrowers and their businesses, in addition to their financing. That has resulted in high compliance rates, which is an indicator of the sustainability of these initiatives. The fact that the poor are able to make a profit for themselves - thanks to the mechanisms that microcredit institutions have developed for the selection of applications, to set up reimbursement modalities, to encourage compliance with them and to ensure the proper application of the amounts granted - has drawn the attention of States for an alternative way of dealing with the problems of poverty, unemployment and social marginalization in a more sustainable and less assistentialist perspective. It also drew the attention of the private sector, which once had little interest in granting small amounts of credit to poor clients without guarantees given the high transaction costs and associated risks, and now realize that this is a niche market not only potentially profitable but of enormous size given the millions of individuals who still today do not have access to formal financial services worldwide.

But microcredit, as a social phenomenon and object of study, is emerging in controversy. Concerning the role of the State, many consider that to allocate public funds to microcredit is to subsidize initiatives that, because of their small size, will have little opportunity to reach a level of efficiency that will avenge them in a competitive market, diverting public support from other social development initiatives or support to SMEs which also face funding problems. The private sector, in its turn, is increasingly present in the sector in the form of profitable microfinance institutions or microcredit lines / programs of conventional commercial banks or financial institutions. But it is discussed the growing speculation, competition and the option for other risk taking with greater probability of increased profitability, favoring the interests of investors to the detriment of poor customers. And that was criticized, especially in the wake of the crises of over-indebtedness and the resulting economic and social consequences. At the same time advantage was taken to challenge the original vocation of microcredit to free disadvantaged situations and dependence, poverty and exploitation.

It is our understanding that microcredit has virtues and defects and that there is no single answer to the question: what is the real impact of microcredit? And there is hardly a single model of virtuous microcredit, applicable to all geographic, social, legal, economic or institutional contexts. What we retain from the analysis of microcredit is that, like other phenomena that are easily classified as economic or financial, microcredit is first and foremost a social phenomenon, affected in its various forms, its strengths and weaknesses and its impacts by the characteristics of the social context in which it is inbedded.

Classical Economics, but also social theory, have over-centered the analysis of society in the market since the industrialization and the emergence of the capitalist economy of the nineteenth century. As Polanyi (2012 [1944]) maintains, instead of perceiving economic relations in their social context, the market was taken as the main mechanism of regulation of social life.

In our view there are today, as in the past, forms of economic organization to which the categories of rational agent or maximization of profit do not apply. There is a plurality of forms of economic activity that escape the (neo) classic categories and that are not limited to what many define as pre-industrial community economies, which in itself is already a reductive definition of them. Thus, we have sought not only in non-orthodox economic perspectives, especially institutionalist currents, but also in the new Economic Sociology, but also in evolutionary Anthropology, Biology and Psychology, support for thinking about economic phenomena in a more pluralistic and comprehensive way, in diversity complexity they manifest in practice. This has led us to consider the presuppositions of the mainstream view of man as an economic agent and of how economic life is organized confined to the market; we consider that, as several authors maintain, there are no reasons to take man only as a rational, calculating and maximizing subject of his benefit in the market or that the latter has the ability to regulate and always tend to balance. Financial crises that become economic and social and reach global dimensions reveal the limitations of the market mechanism in the allocation of scarce resources to the satisfaction of the needs of individuals. And there is a theoretical basis for sustaining that economic life is not necessarily a context of fierce competition for scarce resources and that man has a penchant for sharing and cooperation. This ability to cooperate is behind the evolutionary success both of human as non-human collectivities, so we reject the idea of a calculating and hedonistic homo-economicus and characterize forms of economic organization in which notions such as solidarity, common good, trust, altruism, co-responsibility and reciprocity are social, institutional, and therefore normative aspects to which economic relations are subject.

We do not find these ties of altruism and reciprocity only in traditional rural communities, but in other types of local economic initiative in which civil society's ability to overcome state and market failures and organize, not against political ideologies or imperatives of profitability, but in view of the interests of the members of what we call community, in the relational sense of the term.
It is here that we believe that the virtue of the original formal microcredit resides. We regard it as initiatives that, first and foremost, have as social mission to benef the borrowers involved and contribut to local development. The protagonists are third sector institutions or institutions within more holistic interventions aimed at improving the overall situation of the most disadvantaged populations, taking into account the various dimensions of poverty and social exclusion. It is assumed that there is a set of different needs that need to be addressed in each specific context. Socially and economically sustainable microcredit initiatives must be financially efficient to attract private sector investment that allows them to scale up their operations to meet the social purpose of serving those who do not yet have access to and are in precarious or exploitative situations; they may also need the support and supervision of national and international political institutions that recognize the merits of finding a viable way to fight poverty. However, in our view, in addition to state and market, and relations of redistribution or mercantile exchange, we should see them as relations of reciprocity or initiatives of solidarity and local nature, in which the quality of relations established between members lending groups and between borrowers and intermediaries or microfinance institutions can make a difference between the success and failure of microcredit initiatives. Finally, seeking to understand all the factors that contribute to the success or failure of microcredit for creditors and borrowers leads us not to forget that there are a variety of actors involved in microcredit, with institutional missions and, consequently, distinct actions that explain the variety of the results of the microcredit concession.

There will be, in its formal definition, only microcredit, but various forms of microcredit in distinct political, demographic, economic and geographical contexts. Because it is the character of the social relations that are established, of social representations and normative aspects that condition the action in the microcredit that is treated, we understand that to perceive the different logics that animate the authors involved - mainly looking at the role of State, market and third sector, and the consequences of its actions - implies in our view, not only the social framework of microcredit, but its institutional analysis that we propose to carry out in this work. It is because of this that the research problem that accompanies us throughout this thesis can be formulated as follows: to what extent the institutional context explains the variety of logics and forms of action of the agents involved in microcredit, their performance and the resulting impact to borrowers."

Key words: Microcredit; institutionalism; social embeddedness of economic activity; reciprocity; State, market and third sector