To what extent is Microfinance Ethical in Indigenous Communities?
Authors: Imma Permanyer-Puig, Anjola Oluwo & Sara Tiron | London School of Economics and Political Science (LSE)
Microfinance is a banking service provided to low-income individuals to support the development of communities in deprived areas. The vast majority of Microfinance activities are related to credit, however, they can also involve insurance, no-interest loans and saving facilities. Microfinance has been widely used in Indigenous communities across the world. There are more than 370 million Indigenous people scattered across 70 countries worldwide. They make up for only 5% of the population, they account for 15% of the world’s extremely poor- which today means living on less than 1.90$ a day (Tryon, 2021). Thus, at a first glance, Microfinance seems to be an effective way to alleviate poverty in Indigenous communities. However, Indigenous communities often have distinct socio-economic and cultural beliefs which make us question the ethical considerations of Microfinance in Indigenous communities.
For the purpose of this article, we will define unethical microfinance initiatives as endeavors which either do not make a difference or make the situation worse by ignoring the specific needs of Indigenous communities. Additionally, ethical microfinance initiatives should take into account the distinctive characteristics of indigenous communities. This should be done by including Indigenous people in the decision making process, thus giving them power to deliberate on microfinance’s use in their communities. This is vital as Indigenous communities have different characteristics, therefore each initiative should adapt to the specific community’s needs (Pieratos & Cornelius, 2021). In order to judge how ethical microfinance is, this article will consider the challenges and benefits of using Microfinance in Indigenous communities in Canada and Guatemala.
Case study: Guatemala.
Guatemala is a very diverse and multi-ethnic country with 40% of the population identifying themselves as Indigenous (Crowther, Naomi 2015). Making up half the population, the most predominant group are the Mayas (Way, 2012), who live in dispersed rural settlements in the North, South-West, and North-West of the country. These communities make up 2/3 of the total households that live in extreme poverty (Lopez, 2012). This is due to Mayans disproportionately taking up low-paid work and the high unemployment levels, especially amongst women. Consequently, living conditions tend to be precarious, as these populations suffer from poor housing conditions, scarce access to healthcare, chronically malnourished children and lack of educational opportunities.(Brau, Hiatt, Woodworth, 2009).
After the signing of the Free Trade Agreement, which put an end to the 36 year-long war, several policies were implemented to initiate lending programmes. These aimed to develop market-oriented agricultural projects and to diversify artisanal production from an Indigenous perspective (Tzul Tzul, 2016). Supporting the fact that unemployment and poverty indexes are higher in the rural sector, these programs proved to be ethical as they were tailored to the needs of the population.
Similarly, the subsequent implementation of microfinance practices targeted areas inhabited by Indigenous people and with a high poverty rate. Moreover, the practices adopted an Indigenous influence, also referred to as ethnodevelopment, which allowed Indigenous traders to blend microfinance into their traditional and ancient commercial strategies (Tzul Tzul, 2016). Thus, these projects seemed to be tailored to the Mayan borrowers as they constructed bridges or highways from which they could benefit from. However, in practice, they failed to consider the implications of expropriating the land from these communities to complete the public infrastructure.
Microfinance today has had positive impacts on the development of these communities, as it is based on the provision of quick loans without collateral and technical financial support. A large number of these loans have been lent to Mayan women-led enterprises to boost their commercial awareness, and subsequently, their business profitability. As a result, women have felt empowered to create their own solutions to poverty to support their families and communities (UN WOMEN, 2020). This reflects the importance of pre-evaluating the needs and weaknesses of these societies to obtain the best results from using microfinance tools.
Guatemala’s population in the post-war era, especially amongst disadvantaged Indigenous communities, has become risk-averse to economic decisions. Evaluating this context, MFIs opted to support their economic development by facilitating commercial transactions between Indigenous businesses based in different populations. In one scenario, a local businessman bought the neighboring lands from another Indigenous farmer to expand its business. The ethical considerations are demonstrated in the preliminary analysis of the entrepreneur’s needs, which resulted in a satisfactory improvement in the communication and relationships between Indigenous populations, as well as new opportunities for Mayan businesspeople (Brau, Hiatt, Woodworth, 2009)
Other forms of microfinance have focused on improving healthcare services and their accessibility since although care is free, the cost of medicine and travel expenses represent considerable expenditure for Mayan families (WOMEN, 2020). For instance, a case study shows that a microfinance institution and a primary care organization, located in a rural disadvantaged area, collaborated to overcome logistical constraints and provided door-to-door health services to over 3500 clients. It is important to take into consideration that this MFI was a local NGO with financial resources and extensive knowledge on the low quality and scarce healthcare coverage of the hospital. Thus, the microfinance intervention resulted in the beneficial expansion of services and the training of staff (Colom, 2018). Even though this project proved to be ethical, it must not be ignored that microfinance has yet to prove its effectiveness when tackling other issues that Mayas face, such as racist discrimination by health workers.
Nonetheless, not all microfinance projects seem to have positive impacts. According to the findings from a survey of citizens from San Antonio Aguas Calientes, a Western highland village where the majority of the population identifies as Indigenous, some people argue that the microfinance system is flawed (Chester, 2014). In comparison to what has been stated so far, some respondents from this study seem to believe that the purpose of these policies is individual capital accumulation, neglecting the overall community and failing at the promise to reduce poverty.
Participants from this study, the borrowers, expressed three main concerns with the uses of microfinance. First, they argue that high-interest rates are an impediment to repaying the loans. Furthermore, the saturation of the microfinance sector has increased the simultaneous borrowing of financial products from multiple institutions. Lastly, borrowers on consumption loans are experiencing hardships as they cannot use these for enterprise development purposes. Consequently, to overcome these ethical deficiencies, lending institutions give training sessions, in which they encourage and allow social groups to adopt a monitoring behavior. In this way, some members credibly threaten those that are habitually tardily with payments (Wydick, 2001).
Case study: Canada
The approach typically taken in international development to tackle poverty is aid either in the form of money transfers or services (Shapiro, 2014). For Indigenous communities, this approach will be ineffective for two reasons. Firstly non- Indigenous people are not going to understand the complexities of Indigenous communities (Hagan, 2018). Methods of aid that may have proved to be successful in other countries may not be appropriate for the Indigenous context (Hagan, 2018). Due to Colonialism, many Indigenous communities are reluctant to engage in government or charity initiatives as in the past they have been deceptive and cruel (Windspeaker, 2013). For example, Canadian governments up until 1996 allowed residential schools to engage in practices that erased Indigenous culture, often through abusive methods, to help Indigenous children assimilate into the western world (Marshall, Gallant, 2012). Events such as this have led to a lack of trust towards the government and a lack of engagement in initiatives proposed by them. Microfinance helps overcome these issues as it gives Indigenous people the opportunity to solve Indigenous issues.
Secondly, every Indigenous community is different. Each community has a unique culture and set of challenges that need to be considered (Richardson, 2007). Assigning one solution to all these problems is unproductive and a waste of charitable donations as it cannot possibly address the wide range of issues that exist in the Indigenous communities. For example, Canada’s Inuit Indigenous group's biggest challenge currently are the consequences of global warming (Brown, 2003), while the First Nation Indigenous people of Canada struggle with issues ranging from poorer health and educational attainment (Indigenous Corporate Training Inc., 2019). Microfinance overcomes this as it allows Indigenous people to create solutions to problems in their communities that are tailored to the specific needs of their local area.
Microfinance is arguably a better solution for Indigenous communities than aid as Indigenous people’s lived experience makes them experts on the challenges their communities face (Hagan, 2018). Therefore giving them the chance to develop initiatives in their local community that they believe will be beneficial is a more appropriate response
However, Microfinance will not be effective in all indigenous communities and has the potential to create more harm than good. The First Nation Indigenous community in Ontario Canada lacks infrastructure, so much so that there are insufficient water supplies, overcrowded housing and issues with sanitation (French, 2021). In environments such as this launching microfinance initiatives would be unethical as the business ventures are likely to fail as there is not sufficient capital to support the development of people’s businesses (Parvin et al, 2020). As a result of this, Indigenous people would not make returns on their investments and would therefore lose money (Parvin et al, 2020). This would lead to them being in a worse financial state than if the microfinance initiative was never launched. In Indigenous communities that have poor infrastructure, microfinance would be unethical because it would exacerbate Indigenous communities' local economies. To avoid this happening the structural issues that exist in Indigenous communities need to be addressed first (Hickell, 2015). In Indigenous communities in Canada, the average income is lower than the national average (Wilson, Macdonald, 2010). Therefore it is unlikely that people in these communities will be able to afford the products of new businesses in the area. Before microfinance initiatives are launched in Indigenous communities investors first need to seriously consider if the community has the capital, skills and knowledge to support the business ventures.
Additionally, microfinance initiatives could be unethical in Indigenous communities as they may not align with the needs of Indigenous communities. The First Nation Indigenous community of Canada for years has been demanding reparations for colonialism (Patrik Jones, 2021) and the right to self-governance (Slowey, 2021). The launch of microfinance initiatives may come across as insulting to these communities because their demands are being ignored. The initiatives may appear self-serving as they are not being launched with the intent of addressing and overcoming Indigenous people’s needs (Adetunji, 2021). Microfinance initiatives should arguably only be launched in Indigenous communities only if there is existing demand for them. Otherwise, investors appear as disingenuous as they are not addressing and listening to Indigenous people.
Conclusion
There is much debate whether microfinance has a positive and effective influence over the populations targeted, or not. This paper has focused on the implications that financial services have in Indigenous communities in Guatemala and Canada. The financial services have been implemented as means to close the gaps in the provision of health services, as well as to empower and support entrepreneurial women. As such, it can be observed that microfinance has been proved to be ethical when it has aimed at boosting revenues of the entrepreneurial businesses or at heightening the skills of the Mayan populations.
Contrastingly, in Canada despite the many barriers that exist to prevent the success of MFIs so far they have proved to be successful. They have given many Indigenous people the opportunity to launch their small businesses and improve their lives. However, bigger issues such as low academic attainment, high incarceration rates, and inadequate housing remain unresolved. These are arguably some of the most pressing issues within Canadian Indigenous communities as it is enabling the cycle of poverty to be maintained. It is naive to suggest that launching MFIs will be able to address these issues as structural change and increased government funding are required. Therefore it is debatable if microfinance initiatives are ethical in Canada if they are not able to make a substantial difference
This paper has been unable to assess the quantitative evaluation of the economic development of these communities, due to the lack of numerical data evaluating the effect of MFIs. Therefore, we are unable to make long-term judgments. Moreover, due to cross-cultural differences, we cannot reach a single optimal international approach to implement microfinance in Indigenous communities. Overall MFIs in practice have been proven to be ethical and effective at helping Indigenous people's business endeavors and closing the gaps in accessibility to credit. However, structural issues such as insufficient infrastructure, poor healthcare have not improved despite MFIs increasing prevalence in Guatemala and Canada. This is not due to MFI being an ineffective approach to international development, but rather that MFIs’ services are not suited to tackle these issues. Therefore additional research needs to be done to assess the most significant issues in Indigenous communities and the best method to resolve them.
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