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Microfinance as Poverty-Shame Debt

by Susan Engel on November 14, 2019

Microfinance started as a development intervention in the 1970s and by the 1990s it was the next big thing in development. Dramatic claims about its benefits continue to be made, summed up by Irish rock star Bono’s parable: ‘Give a man a fish, he’ll eat for a day. Give a woman microcredit, she, her husband, her children, and her extended family will eat for a lifetime” (quoted in Bateman, 2014). There’s a lot of great political economy research demonstrating the problems of microfinance, including that of Milford Bateman, so what can we add? We argue that the relationship between microfinance and people’s psychosocial well-being needs far more attention and that the deliberate or otherwise use of shame here and in other development interventions needs to end.

The key to an argument I have just co-authored with David Pedersen and published in a journal article in Emotions and Society derives from microfinance’s group collateral mechanism. If you are already familiar with it, skip this paragraph, otherwise please read on. The standard microfinance model comes from Muhammad Yunus who in the 1970s played a key role in establishing the Grameen Bank in Bangladesh. It offers the poor a source of credit at interest rates that are considerably lower than local loan sharks but still very high – 25 per cent per annum is average. Given the lack of physical collateral, microloans are based on group collateral. Groups typically have five members ‑ generally women as they are more reliable with repayments. Initially one or two members obtain loans, usually specified for a microenterprise, and if these are repaid, other group members become eligible. If a member defaults, other group members apply peer pressure to ensure repayment. Group collateral is said to be behind the 97% repayment rate, which microfinance institutions (MFIs) use to demonstrate the success of the model.

Our new article argues that microfinance increases sentiments of shame in recipients in order to ensure repayment, which negatively impacts defaulters’ psychosocial well-being and is linked to instances of violence and self-harm.We apply contemporary shame theory to microfinance practice, which argues that shame arises from critical self-assessment brought about by a sense of negative evaluation by others. Unlike guilt, which generally results in positive reparative action, shame is about who one is, not what one has done, and thus emerges through feelings of helplessness, deficiency and withdrawal. It often leads to a range of severe and harmful psychological consequences including low self-esteem, anxiety, depression, anger and even suicide. Shame has been found to be quite universal, though local contexts and meanings shape people’s precise experiences and understandings. In collectivist cultures, pressures to conform are said to be greater, as are the consequences of shame, which suggests that the impacts of shame are more pronounced in such societies. This is important as microfinance predominates in developing, and often more collectivist, countries. Further, microfinance targets the poor where a potent poverty-shame relationship is already at play ‑ poverty is a constant source of shame that deepens experiences of poverty and further impacts psychosocial well-being (Walker 2014).

Applying shame theory to microfinance reveals several issues. Group meetings are conducted openly to reduce the risk of mismanagement and corruption, but it also increases group surveillance of borrowers. In this sense, group collateral works deliberately as an “economy of shame” (Karim 2011), as public shaming is an effective way to pressure borrowers into repaying. Public shaming of defaulters usually occurs during weekly group meetings, though in the event of an absentee, group members and MFI officials often approach the residence of the defaulter to demand payment. This personalisation of microfinance debt renders experiences of shame more potent than they would be in the case of transactions with commercial financial institutions.

Yet, while the public nature of microfinance personalises interactions between debtor, group and lender, repayment pressure is, at the same time, the product of the impersonalising effect of debt, which serves to justify actions that would otherwise be regarded as unethical or intolerable (Graeber 2014). Thus, peer groups do not just shame people but there are all too frequent reports of defaulters suffering from frequent verbal abuse, being locked up, having their possessions or house sold off, or even outright violence to ensure repayment.

Shame-related violence occurs within households too. Research demonstrates that intimate partner violence tends to increase when microfinance is first introduced or during times of stress. This is when men are most ashamed about the downgrading of their traditional patriarchal position, which does not of course justify violence!

From a shame theory perspective, experiencing shame under conditions of extreme poverty combined with increasing debt is very likely to be linked to poor mental health and even suicide. Looking for shame-related clues, we searched academic databases, media reports and grey literature to gather reports of microfinance-related suicide and self-harm. In India, Bangladesh, Sri Lanka, and Nigeria we found all too many reports of death by suicide with clear shame-related clues. The severe harassment aimed at shaming defaulters into settling debts doubtlessly influenced people’s decision to take their own lives.

Clearly, microfinance is not the benign tool for financial inclusion and empowerment that mainstream development organisations proclaim. Rather the practice unintentionally (perhaps), but nevertheless actively, deploys shaming techniques to maximise loan repayment. It does so by personalising people’s debt relations and making them a matter for group concern. But, at the same time, money-debt’s impersonalising nature facilitates coercive, disciplinary and intolerable actions. The impacts of the personalisation of responsibility for repayment, combined with the depersonalised moral obligation of repaying money-debt at any cost have created a particularly harmful form of poverty-shame. Indeed, shame is so entwined with microfinance that, read alongside other critical research highlighting the structural problems of microfinance, the only conclusion can be that a radical reconsideration of it as a development tool is required.


Bateman, M. 2014. The Rise and Fall of Muhammad Yunus and the Microcredit Model, International Development Studies Working Paper Series #001 January.

Graeber, D. 2014. Debt: The First 5,000 Years. Melville House: Brooklyn.

Karim, L. 2011. Microfinance and its discontents: Women in debt in Bangladesh. University of Minnesota Press: Minneapolis.

Walker, R. 2014. The Shame of Poverty. Oxford: Oxford University Press.

Susan Engel
Susan is Senior Lecturer in Politics and International Studies at the University the Wollongong. Her research falls into three main areas: 1) the growth of multilateral development finance; 2) the theory and structures of aid and its future directions; 3) exploring specific development challenges like sanitation and microfinance utilising a framework from emotions research. She has published a book on the World Bank in Indonesia and Vietnam and 25 journal articles and book chapters. Susan is currently working on a co-authored book with Dr Adrian Bazbauers titled The Global Architecture of Multilateral Development Banks: A System of Debt or Development? (Routledge) and as part of an editorial team for the first Routledge Handbook of Contemporary Development. Susan worked in the government, community, and aid sectors before becoming an academic and has volunteered with indigo foundation, a not-for-profit community development NGO, since 2002.

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