With many developing countries suffering from various challenges, especially poverty, many stakeholders, particularly the developed countries, which recognize the potential resources in the new economy countries, as well as the need to help them, have instituted various social activities geared towards addressing these situations. Through non-governmental organizations among other mechanisms, various stakeholders have sought to enable the poor to uplift their conditions and ultimately alleviate the rampant poverty that affects them. This has seen the advent and continued development of microfinance and microfinance related activities, especially in developing countries such as Nigeria among other African, Asian and Latin American countries. Essentially, microfinance can be viewed as a variety of financial, particularly banking services that target low-income individuals or groups, especially women and the unemployed, or those who cannot access typical banking services. These services are mainly provided by microfinance institutions (MFI’s) and include financial facilities such as savings, loans, insurance, deposits and payment services as well as remittances like microloans, which are provided for various purposes particularly for micro enterprise formation and development. This paper discusses the link between social entrepreneurship and microfinance, why some microfinance companies are considered corrupt as well as how microfinance makes the poor poorer.
Social Entrepreneurship, Microfinance and Corruption
The 21st century has seen the rise of many philanthropic individuals and businesses, mostly organized and acting through foundations and non-governmental organizations among other platforms, whose goal is the betterment of the disadvantaged in society. These individuals and businesses are driven by the desire to start positive social change through provision of various forms of aid, including financial and physical resources, even though some still benefit from these activities. This trend has morphed into the concept of social entrepreneurship with social entrepreneurs being the primary drivers and advocates of this trend. Basically, social entrepreneurship is defined in terms of recognizing various social problems and the subsequent utilization of various entrepreneurial principles to develop, organize, as well as manage social ventures in the achievement of a specific social change. Unlike other forms of entrepreneurship, especially profit-oriented entrepreneurship, which involves measurement of performance in terms of overall profits and returns, social entrepreneurship measures performance in terms of positive returns to the society (Mair and Marti 36). This trend has not only expanded to the national level but also internationally into a global social entrepreneurship trend with a main objective of broadening cultural, social as well as environmental goals.
The link between social entrepreneurship and microfinance is highlighted by various elements of microfinance and social entrepreneurship, especially the goals and objectives as well as the results garnered from relevant initiated activities. Social entrepreneurship is essentially guided by a relatively higher calling and priority in promoting social value, capital and development, as opposed to economic value and other monetary related returns. As Muhammad Yunus, the person credited with the origins and continued advocacy of microfinance and social entrepreneurship, affirms, failures of the capitalist system highlighted by rampant food crises and poverty must be met with a change from money obsession to human caring and solving social problems (Kozlowski par.1-4). Social entrepreneurship is also viewed as a process which catalyzes social change while addressing vital social needs in a manner that highlights the lack of focus on direct financial benefits rather than positive social change for the entrepreneurs. Like social entrepreneurship, microfinance records results in terms of positive social change in form of enhanced social capital for communities and disadvantaged individuals. Moreover, microfinance is highlighted as one of the instruments that is utilized in promoting social capital as highlighted in Russia and Eastern Europe, determined as the major drive for social entrepreneurship (Mosley, Olejarova and Alexeeva 409).
Being the primary providers of microfinance to poor people, microfinance institutions are faced with a variety of problems ranging from the lack of microfinance models for the poor to the high costs and risks involved in lending to the poor, who may even default on their payments. Capital availability is a major hurdle for microfinance institutions, despite the increased growth in the microfinance sector, due to money shortage in post-recovery of the recent financial crisis period and lack of awareness of funding sources by MFI managers. As such, these constraints have led various microfinance institutions to choose carefully who gets to be provided with available financial services, which is where corruption comes in. Corruption is characterized by abuse and misuse of power by people in positions of trust and authority ranging from administrators to political appointees, for private dishonest gain or benefit. This vice is perpetrated in form of fraud, bribery, extortion and embezzlement among others, where the lack of these resources by some microfinance institutions paves way for corruption as the provision of financial services shifts to those who can bribe the officers in charge. As identified in microfinance remittances in small developing countries such as Tajikistan, Guinea-Bissau, Grenada, Moldova, West Bank, Honduras and Gaza Strip, microfinance activities cannot solve economic and social problems when these regions are challenged by rampant corruption (Castello and Boike 589).
Primarily, microfinance institutions present opportunities to individuals with low income as well as the marginal poor in accessing essential services and opportunities including financing in a bid to establish income-generating businesses and activities, developing and managing assets as well as protecting them from associated risks. However, these institutions can be subject to corruption, where grant loans and grant fictitious loans are given to ghost borrowers through a hideous transfer of funds into personal accounts. This brings to the fore the case of Benin which suffered from corruption with regard to a microfinance program that was managed by the government, where remittances where highly inflated contrary to amounts that were supposed to be given. Principally, it was reported that the government-managed microloans to the poorest microfinance program established for the benefit of the Benin poorest was heavily affected by corrupt practices of various officers in the program (Anonymous 18094). Based on the assumption that loan intermediaries collected loan payments and other debt remittances from borrowers based on a promise for repayment, a highly placed official in the government of Benin asserted that the officers failed to remit the collected funds to the funds’ banks. Therefore, it is corrupt practices and news like these that makes people believe that microfinance companies are corrupt and are just out to exploit their efforts and meager resources.
Corruption in microfinance institutions can also involve officers in charge making loans to friends, family and other relatives as well as close associates who do not or are instructed not to repay the amounts remitted to them. In addition to reception of kickbacks from various clients where bribes are paid up for one to get a loan and get approval for bogus loans which are there after shared, providing close associates with loans highlights a widely used tactic in microfinance corruption. Benin’s government-managed microloans to the poorest microfinance program essentially highlighted how microfinance made poor people poorer, especially when the subcontracted local community benefited from the borrowers' desperation where they charged 7 dollars instead of the 2 dollars required (Anonymous 18094). This also highlights why microfinance would fail to work not only in Benin but also in other developing countries even though the vice can be avoided through various ways, especially in terms of regulations that require decision making to be made by a group and not on individual level. Corruption in microfinance institutions can also be exemplified by officers who actually steal cash or provide micro credit among other financial services to finance illegal activities which funnel funds to individuals who are not supposed to get the funds.
Microfinance companies are also considered corrupt due to faulty practices involving manipulation of financial data where officers in charge misstate or misrepresent financial data, that is, they record non-existing payments or sometimes do not record incoming payments. As such, money set aside for the benefit of the poor is siphoned to other areas and unscrupulous individual’s pockets as highlighted after the ouster of Mohammad Yunus, the Nobel Prize-winning Bangladeshi economist, primary microfinance advocate in developing countries and Grameen Bank managing director. The Bangladeshi president is quoted as saying that Yunus "spent years sucking the blood of the poor”, after which the event saw the unfolding of unfortunate but necessary events involving closure of many private microfinance institutions in India due to various forms of corruption (Tharoor par.1-5). The microfinance institutions that were closed in India’s most populous states involved levies of exorbitant interest rates ranging at 24 to30 percent annually geared towards the sustenance of the promoter’s profits and salaries. Other microfinance projects involving corruption similar to that of India was also experienced in Mexico, where borrowers were bled dry of their savings by microfinance companies who were supposed to help them. These cases of India highlights how microfinance is making the poor poorer among other dire consequences, especially when such cases of corruption lead to a wave of suicides by borrowers who are unable to pay the debts involving amounts remitted to them to aid them to attain social capital. Moreover, these practices in corruption show why microfinance cannot work in various countries, particularly in developing countries even though with better regulations, related activities can be quite beneficial.
Like social entrepreneurship, microfinance represents a viable platform and instrument that can create and facilitate social change through a variety of ways but primarily through lending of funds in terms of savings, loans, insurance as well as deposits and payment services. Essentially, social entrepreneurship utilizes microfinance as an instrument in affecting change which underlines the close relationship between microfinance, social entrepreneurship and microfinance institutions. Like conventional banking and banking operations, microfinance institutions charge their borrower’s interests on loans remitted even though the interest rates are generally lower compared to those offered by regular banks. However, many microfinance institutions have turned against the very people, whom they are supposed to help, as exemplified by microfinance institutions and related projects being negatively affected by rampant corruption. Microfinance institutions in countries such as India, Guinea-Bissau, Mexico and Benin are identified as being negatively affected by corruption, even to the extent of causing death through suicide by borrowers.