RFG Deep Dive
by Luca-Sofie Raißle
Luca-Sofie is 23 years old and completed her Bachelor's degree in European Studies at Maastricht University this summer. During her studies, she was able to deepen her interest in topics such as justice and globalisation. Her areas of specialisation include (economic) development cooperation and a critical examination of humanitarian aid - a topic she also investigated in her Bachelor's thesis. She is particularly fascinated by the international system, especially the structures and decision-making processes of the United Nations, and how economic contexts shape international relations and decision-making processes.
Since industrialisation, global structures have been characterised by asymmetrical power relations between more and less industrialised and countries. These imbalances often result in relationships of dependency that are particularly damaging to the global South - often the result of colonial exploitation and economic marginalisation. While there are also arguments in favour of mutual dependencies and that the global North is also dependent on the resources and markets of the South (see Celia Parbey), the structural disparity remains: Post-colonial interdependencies ensure that the South, despite its resources, often remains in subordinate positions and continues to experience economic, political and social disadvantages. While the industrialised countries in the global North benefit considerably from capitalism and globalisation, many countries in the global South continue to face major economic and social challenges. Development cooperation (DC) developed after the Second World War on the premise of countering these inequalities. However, this was long (and still is) characterised by Western, neoliberal ideas based on free markets and individual responsibility These approaches also influenced the distribution of financial development cooperation (FC), often guided by geopolitical interests (Sagoe 2020). Even today, development policy and cooperation is not free of Eurocentric values (see blog post ‘Fast Forward Feminism’) and is mobilised for geostrategic purposes.
This foto was generated with KI
The development of development cooperation, in particular its criticism
There has been considerable criticism of the so-called ‘top-down’ approaches in recent years. The idea of assigning values and ideas that do not fit local circumstances or experiences from above and motivated by one's own interests seems absurd. It is therefore necessary to involve those who maintain and implement development cooperation more closely and to utilise their professional expertise. The loud voices highlighting the injustices of development cooperation are constantly giving rise to new ideas, including strategies such as microcredit and microfinance, which are intended to focus on localisation [1] and ownership in order to improve the development cooperation system. The idea of microcredits developed by Muhammad Yunus and realised with Grameen Bank seems promising at first glance: microcredits should enable people to overcome poverty (SDG 1)[2] by setting up their own small businesses. But the question remains: Can microcredit really fight poverty, or does it lead to a debt trap and reinforce neoliberal principles that ignore the structural causes of poverty?
The connection between neoliberalism and development policy will be analysed below. Microcredit serves as an example of how neoliberal approaches influence the Global South. This is done by transferring the responsibility for overcoming poverty to the individual without taking into account the possibility of knowledge deficits that can lead to economic misbehaviour and thus to a debt trap. Due to its geographical location, its well-developed microfinance infrastructure and, in some cases, its highly developed urban regions (Agarwal et Al. 2018), Rwanda will serve as a case study for this discussion. The focus is particularly on rural areas, as they lag behind urban areas, such as the capital Kigali, both economically and socially. According to the United Nations, 42% of the population in Rwanda are considered poor (United Nations).
Neoliberal influences and/or through microcredit?
Muhammad Yunus' idea of microcredit has gained importance in the wake of the growing awareness of asymmetry in development co-operation. Yunus recognised that even the smallest amounts (often just a few dollars) in the so-called emerging countries can be enough to give women in particular the opportunity to set up small businesses and counteract poverty. In this way, economic self-determination and empowerment should be made possible by contributing to the household income. His vision that ‘everyone is an entrepreneur’ (Yunus 2012) spread immediately and was well received worldwide.
The idea of microcredit quickly gained international interest. Especially in the 1980s, during the peak of neoliberalism (Langen 2021), it was supported by politicians such as Hillary Clinton and philanthropic organisations such as the Bill & Melinda Gates Foundation (Cordeiro 2020). Microcredit was hailed as an innovative way to give the poorest people the opportunity to escape poverty through small, self-employed businesses.
The basic idea of microcredit fits well with the neoliberal mindset based on individual responsibility and free markets. Doing good in and through individual responsibility reflects the philosophy of the Washington Consensus - a set of economic policies, such as privatisation and trade liberalisation, that promoted market liberalism (Feyder 2015). The Washington Consensus, which emerged in the 1980s, significantly influenced development cooperation in the 1990s and early 2000s with regard to the above-mentioned guidelines, such as privatisation. This approach promised economic growth by reducing the role of the state and focussing on citizen ownership. Microcredit seemed to follow exactly this logic: The poorest should lift themselves out of poverty, which at the same time promised high profits for the lenders, mostly international financial institutions (Feyder 2015).
There are different types of microcredits, which are either granted to individuals or provided as group loans. The basic idea behind microcredit, as developed by Muhammad Yunus, is based on the observation that even a small amount - around USD 27 - can be enough to help a person break out of poverty by setting up their own small business. Yunus promised to be able to achieve ‘the end of poverty within a generation’ (Yunus 2008).
Individual loans are granted to individual entrepreneurs who are solely responsible for repayment. These loans are particularly suitable for people who already have a certain degree of economic stability or a clear business plan. Although individual loans offer more autonomy, they often have higher requirements in terms of collateral or the ability to repay.
Group loans, as popularised by the Grameen Bank model, are based on the principle of collective responsibility. Several borrowers join together to form a group that is jointly responsible for repaying the entire loan. This creates a shared responsibility within the group, which ensures that repayment is made on time. This system has become best practice in many rural communities where formal collateral is often not available but social cohesion is strong (Armendáriz & Morduch 2006, Giné & Karlan 2014).
Problems and risks of microloans
However, although microcredit appears promising at first glance, it has also been shown to have problematic aspects. While the original idea was based on social support and economic independence, the microcredit sector has increasingly been taken over by profit-orientated actors. Large companies and investment funds discovered the microfinance market as a lucrative business area: they realised that new markets could be opened up in many ‘developing countries’ that promised them high returns - a classic example of neoliberal market liberalisation (Bateman 2010).
A decisive turning point was the realisation that in many cases microloans do not lead to economic independence as hoped, but often drive borrowers into a debt trap. Small entrepreneurs who are unable to repay their loans often have to take out new loans to service the old ones. This leads to a spiral of debt and dependency. Microfinance institutions benefit from the high interest rates and fees that are often embedded in loan agreements (Bateman 2010).
The microcredit sector is often sold as the ultimate freedom - an opportunity for the poorest to become independent of state aid. However, the reality is that the neoliberal ideology behind this concept often fails to address the structural problems of poverty. Poverty is a complex, systemic problem that cannot be solved by individual loans alone. The idea that everyone can break the cycle of poverty by acting on their own responsibility ignores major economic and social inequalities between industrialised countries and low/middle-income countries, as well as the lack of structural reforms in industrialised countries, e.g. political rethinking, removing the donor position from neo-colonial patterns of thought (Ulrike Hermann 2022, Fabio de Masi 2023).
In his study ‘When Finance Meets Big Data: Financial Technology and the Scramble for Africa’, Fabio de Masi shows how the microfinance market in Africa is increasingly being discovered by Western companies as a profitable financial market (2023). Under the guise of fighting poverty, these companies are tapping into new markets and using technology to automate and scale lending and financial transactions. While this may seem like progress at first glance, the question is whether it actually benefits local communities or rather channels profits into the hands of international investors.
Gender equality (SDG 5) is an important keyword in this context. Microloans are primarily granted to women (Cepeda et Al. 2017). This conditional granting of microloans obviously leads to more women taking out loans; this is recorded as a positive development in figures. However, there are also reports of a direct link between the granting of microloans to women and gender-based violence (GBV). This is due to the fact that only women are able to gain access to loans and that men gain access to the money through their wives, sisters and daughters, sometimes by force (Cepeda et Al. 2017). This shows that the conditionality of lending solves a problem on the surface but, can lead to more violence and problems in the depths.
Microcredit in Rwanda: economic growth and challenges
Although Rwanda has one of the highest economic growth rates in Africa, it remains one of the poorest countries on the continent. This paradox illustrates the weakness of GDP measurement as an indicator of social prosperity, as it does not provide any information on social inequality, poverty or quality of life (see Jason Hickel and Ulrike Herrmann). Rwanda has also been caught up in the global microfinance wave. The portfolio of a single foundation in Rwanda alone totals around EUR 2 million and grants microloans of between USD 50 and USD 1,000 to around 10,000 people (Rooyen et Al. 2012, VisionFund Rwanda).
The microfinance sector developed from 1975 onwards, but grew rapidly, especially after the genocide in 1994, as international aid money and government grants flowed into this sector to promote reconstruction. However, this unregulated expansion led to instability. In 1995, the government began to reform the sector. Despite this, nine microfinance institutions collapsed in 2006, causing many people to lose their savings. In response, the government introduced a national microfinance policy and passed a law (Law No. 40/2008) in 2008 that established the National Bank of Rwanda as the supervisory authority. By 2016, the number of microfinance institutions had shrunk, partly due to the reorganisation of SACCOs (cooperative banks) (AFR).
As mentioned at the beginning, Rwanda's major cities, especially the capital Kigali, have a well-developed infrastructure and a comprehensive transport network (Hudani 2024). Nevertheless, there is a significant development gap in the country's rural areas, leading to a clear division of the country in this area. Although the state regulation of microcredit lending offers somewhat more structure and transparency, for example through a credit register, the granting of microcredits remains underfunded. The inadequate funding can be seen in the shrinking number of microfinance institutions, which make access to loans more difficult and thus reveal that the main motivation for granting loans is economic success. This leads to the conclusion that the institutions would otherwise probably be better subsidised (also by international donors).
However, it is positive to see that the stronger commitment of the Rwandan government could lead to loans being geared more towards local needs, thus realising the idea of localisation. In this context, localisation is ensured by using the administration's own local knowledge. This differs from the specification of the local context by international donors, who do not have the necessary knowledge. An important grey area becomes clear here: due to the individual responsibility that arises, criticism can (and should) be levelled - because postcolonial commitments are not the task of individuals. In this regard, it should be noted that insufficient knowledge in the area of financial literacy is associated with an increased risk of debt. Local measures should therefore be seen as positive. Nevertheless, in view of the growth strategy proclaimed by Rwandan President Paul Kagame, there is still a considerable need for improvement. So far, only the large cities have benefited from this strategy (Hudani 2024).
Furthermore, the ideological understanding of roles, harbours the risk that the conditional granting of microloans is associated with dangers for Rwandan women. Sexual and gender-based violence (SGBV) is a significant problem in Rwanda. In their study, Nuwabaine et al. found that of the surveyed group of Rwandan women of reproductive age, 48 % are less affected by SGBV in a male-headed household (2023). However, the trend that SGBV is declining only implies a superficial security, as traditional role models are reinforced here, such as the role of the man as the main breadwinner of the family. What are the consequences when women share in the household income or even take on the role of main breadwinner? Much better approaches that are sensitised to local conditions are therefore required. The granting of loans will not suffice as empowerment and tends to show declining trends (Karim & Law, 2016).
Statistics from Minecofin, the Rwandan Ministry of Finance and Economic Planning, show that the debts of private borrowers increased in 2023 (Minecofin 2023). In Rwanda, the risk of falling into debt through microloans is present and represents a problem in the entire concept of microloans, as the goal of achieving economic independence is missed just as much as that of female empowerment.
Germany's role in development cooperation
With its development policy, Germany occupies a prominent position as one of the largest co-operation partners in Rwanda. KfW (Kreditanstalt für Wiederaufbau), the German development bank, has initiated a corresponding project together with the Rwandan government with regard to the granting of microloans. The EGCF project (Export Credit Guarantee Facility) aims to promote job creation in growing and export-oriented small and medium-sized enterprises (SMEs) in Rwanda, including women-owned businesses (Minecofin 2023). Germany's exact role in Rwandan microcredit lending cannot be clearly determined, as a large part of the market is in the private sector. Nevertheless, there are a large number of German NGOs (non-governmental organisations) that consider the granting of microloans to Rwanda to be their task and are also supported by the German government.
Microcredit - a double-edged sword
What began as a socially orientated innovation by Muhammad Yunus has increasingly developed into a tool that prioritises profit over people. In many cases, microloans reinforce the inequalities that they are supposed to combat (Cepeda et Al. 2017, De Masi 2023). The economic interests of industrialised nations, the neoliberal orientation and the shifting of responsibility for poverty to individuals are among the central points of criticism. There are also risks such as an increase in GBV and the danger of borrowers quickly falling into a debt trap. These negative effects raise doubts as to whether microloans can be a sustainable solution to poverty.
With reference to the current practice of granting microloans, such as in Rwanda, it can be stated that the loans granted do not fulfil the requirements placed on lending. The granting of microloans has neither led to an overall reduction in poverty nor to female empowerment. On the contrary, microcredits have actually led to backward trends. However, it would not be appropriate to generalise and portray the entire microcredit system as functional. Rather, the problems listed in this article should be addressed.
Finally, I would like to use this article to present suggestions on how the microcredit landscape could be improved. It would be advisable to promote financial education for people who take out microloans in order to minimise the risk of non-repayment. Furthermore, the local value chain can be strengthened through the formation of cooperatives and support for the formalisation of businesses. Technical assistance to countries in the Global South could help to strengthen legal and economic structures, which would give small and micro enterprises a better chance of obtaining successful microloans. With regard to SGBV, work on gender structures is of particular importance. Microloans should not be used as an instrument for gender empowerment, as this would only generate positive statistical results. Instead, it is important to identify which obstacles exist for women to invest in and benefit from a business in the long term.
Footnotes:
[1] The concept of localisation, as set out in the Grand Bargain of the World Humanitarian Summit, includes the empowerment of local entities and the inclusion of local knowledge about traditions, the urban environment and ways of life. The transfer of responsibility to the local level, away from the donor countries, is also central.
[2] SDG 1 ‘No poverty’: Defined as surviving on less than USD 2.15 per person per day (purchasing power parity 2017).
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