What impact does microfinance have on inequality?

Republished with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

In the three decades since Muhammad Yunus founded the Grameen Bank, the world has come to recognize the power of microfinance. Lending small amounts of money to people traditionally viewed as too poor to be good credit risks can have a profound poverty-reducing impact across a society.

Unsurprisingly, the way those lenders operate can be seriously affected by gender inequality in individual societies. But as Tyler Wry, a professor of management at Wharton, discovered in his most recent research with Eric Zhao of Indiana University’s Kelley School of Business, we may have an overly simplistic view of how patriarchal power manifests itself, and how it impacts microlenders. In this interview with Knowledge@Wharton, Wry shares their findings — which are detailed in the paper, “Bringing Societal Institutions Back In: How Patriarchy Affects Social Outreach” — and talks about what those findings mean even for societies that can be viewed as progressive and egalitarian.

An edited transcript of the conversation appears below.

Deconstructing patriarchy and poverty reduction

My research looks at the lending practices of global microfinance organizations — small financial institutions that make loans to poor people in the developing world. The idea behind these organizations is that by extending financial products to poor people, you can actually help them disrupt cycles of poverty. So lots of people are really, really excited about these organizations, in particular because they lend to women at a high rate. This is important because women tend to be poorer both around the world and within every country therein.

This research examines the relationship between patriarchy and the lending practices of these microfinance organizations — looking at different ways the patriarchy manifests in a society, and how it affects these practices in some counterintuitive ways.

Fundamental Findings

The baseline finding is that when you have a high level of patriarchy in the state, in religion, in the professions and in the family so, really suppressing women — it makes it harder for microfinance organizations to lend to them for a number of different reasons, mostly due to a difficulty in attracting resources. It can be tough to attract money, tough to attract female customers, and it can also be tough to attract female employees who would actually make and monitor the loans.

“If you’re not taking into account things like patriarchy and other sources of inequality in society, you’re really missing half of the picture.”

Now what’s interesting is that we see some countries where patriarchy is stronger in some sectors than in others. You see women being particularly disadvantaged in religion and the family, but they have more equal influence, greater presence, in government and in the professions. In these countries, we actually see the greatest outreach to women. It seems that this contrast between high levels of gender inequality in some sectors and lower in others actually creates awareness of women’s issues and a motivation to do something about them. So we see a lot more local funding support for these microfinance organizations. We also see many more women employees in these organizations, as well as women loan officers. And this appears to be driving the effect of higher levels of lending to women.

Key Takeaways

If you’re in the microfinance industry, it’s not enough to pay attention just to economic factors. We have a lot of research that looks at the business environment and the quality of internal practices of microfinance organizations, and how this affects their operations and their outreach. But I think what this research really shows is that if you’re not taking into account things like patriarchy and other sources of inequality in society, you’re really missing half of the picture. Particularly in countries where there are either high levels of gender inequality across sectors, or low levels, where it actually seems to mask inequality in some ways, you need to do different things to actually ensure you’re getting the outreach that you want.

When patriarchy is high across the board, it’s probably important for these organizations to start looking at foreign sources of funding, because the local support just isn’t there. On the flip side, in countries that are more equal across the board, the research really implies that there’s probably a need for some awareness and some outreach efforts to actually educate people that women’s issues and women’s poverty are still important to address.

In addition to that, there’s a broader implication in terms of thinking about the cultural environment of business and social outreach. The research that is out there right now tends to focus on cultural or institutional pressures as things that lead business to do good in society, and the rationale is that business is profit-seeking … and it would not do good things if it were not for external pressures with people saying, “We will reward you for doing this, or punish you if you don’t.” What we show is, that’s part of the story, sure. But if you really want to understand social outreach and organizations like microfinance — or, theoretically, any kind of organization — you need to understand the sources of the problem that they are trying to address. If an organization is trying to address poverty, you need to understand where poverty comes from. If it is trying to address women’s issues, you need to understand how those are rooted in society, and the different ways that this pushes back against the desire to actually do good in the world.

Surprisingly Disconnected Effects

The most surprising thing for us when we started to look at this data was what we observed about countries that have this more mixed profile of gender and equality. The assumption in the literature to date has been that gender inequality is pervasive in society, and it is to a certain extent, but this has led to an empirical strategy where people are measuring patriarchy with a single measure or an index measure. The assumption is that the stronger the patriarchy is in society, the greater the effect it’s going to have. So when we started to decompose this, and look at different indicators, and see how they didn’t always cluster together, that was really surprising. It’s a different way of modeling gender inequality in a society, and we’re surprised not only to see it in existence, but also to see the kinds of effects it drove in terms of the local support for microfinance. So by far, that was the most surprising finding.

“You think of Canada as this great progressive place, but women still are more likely to be poor and more likely to live in extreme poverty. But it gets masked.”

An Ostensibly Egalitarian Example

I think an interesting story in the news that’s relevant to this research is the new government in Canada. The Liberal Party came in after 12 years of Conservative rule, and Prime Minister [Justin] Trudeau decided that half of his cabinet ministers are going to be women. Now, I personally think this is a great thing, but it initiated a lot of pushback, a lot of consternation among people saying, “Well, we need to just have the most qualified people, and this is discrimination against men.”

This really gets at one of the things this research uncovered, which is when you have a society that is more egalitarian — at least ostensibly — even then, the women are still systematically disadvantaged in these countries, including Canada. You think of Canada as this great progressive place, but women still are more likely to be poor and more likely to live in extreme poverty. But it gets masked. And you get this pushback when someone like Trudeau comes in and says, “You know, we need to have more women represented in our cabinet,” with people thinking, “Well, wait, this is discrimination against men.” When in actual fact, women still are disadvantaged. This is something that we are picking up in our research as well, as early as the microfinance stage. I think the example of the Canadian government nicely illustrates how it applies in something even as contemporary as Canadian democracy.

Changing the Conversation

I think one misperception this research might dispel is that you can understand gender inequality as a single thing. The common perception is that gender inequality ranges from strong to weak in a society. We really start to unpack that, and show that it’s not always the case. When you start to get to this deeper level of analysis, you can actually see some things working that wouldn’t be apparent otherwise.

In addition to that, I think that we really show that it’s not enough to just assume that because a marginalized group has made advances in society, they aren’t still marginalized in deeper, more fundamental ways. Even in Canada, women are still more likely to be poor. Even in the United States or Sweden. Just because there have been advances doesn’t mean there’s still not work to do; I think we nicely push back against that misperception and show that, yes, there is stuff you need to do. Especially in microfinance and the developing world, there is a big need, even in ostensibly more egalitarian societies, and if we’re not paying attention to this, we’re really missing one of the fundamental things that microfinance or any similar poverty reduction intervention is trying to accomplish.

Breaking New Ground

One of the things that really sets this study apart from existing research is that it’s the first that has looked at the influence of patriarchy on the lending practices of these organizations. Research to date — at least the big, large-scale empirical research — has tended to use an economic or finance perspective. That type of research looks at all sorts of great things, and derives all sorts of important insights. But it misses this cultural dimension. By bringing this to the table, we’re giving a richer picture of the environment these organizations work in, and some of the contextual features that affect the prospects of their success or failure as it relates to social outreach.

“We really show that it’s not enough to just assume that because a marginalized group has made advances in society, they aren’t still marginalized in deeper, more fundamental ways.”

In addition to that, our study as it relates to gender inequality goes well beyond what’s been done so far. Instead of looking at gender inequality with a single variable, we’re decomposing it into multiple measures, and showing that when you do this, one, you get a more fine-grained understanding of some of the mechanisms that are driving the effects that we’re interested in. Also, you see things that wouldn’t be apparent at all with a single indicator. All of this stuff about the contrast between high levels of gender equality in some parts of society and lower equality in others — this is really what drives the effect. If you looked at it the way people have done in studies of gender and gender equality so far, you would miss the effect entirely.

Next Steps

We plan to follow up on this by looking at different dimensions of outreach by microfinance, as well as some different forms of poverty and how these work in similar or different ways than gender inequality, and what this means for the actual internal operations of these microfinance organizations. So we’ve started to expand the analysis beyond just gender inequality to look at other institutionalized forms of inequality and poverty in society. So things based on religious, ethnic, linguistic fractionalization, and what this does to outreach of these organizations.

We’re also starting to look at how the nature of poverty, be it rooted in gender or other forms of systematic discrimination, affect the balance between social outreach and financial performance of these microfinance organizations. What’s interesting is we’re starting to see the level at which the social and the financial performances become compatible, versus pulling apart from each other, is really systematically affected not only by the quality of market institutions in the country, but also the nature of poverty. When poverty is categorical — based in gender or other forms of categorical inequality — the transaction costs are higher for these organizations in terms of the outreach that they’re doing, and this makes it much more expensive to try and address poverty, and really starts to tweak the level at which you can use sustainable outreach. That’s where our research is going. It will be interesting to see what comes next after that.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Tyler Wry is a professor of management at Wharton. 

Image: A coordinator processes a smart card as she collects money from a woman. REUTERS/Danish Siddiqui.