Why do social businesses like microfinance fail?

Did you know that inequality kills? Every four seconds, inequality claims a precious life, silently depriving people of essential services such as food, shelter, education, jobs, and medical care. 

In 2022, Oxfam reported that the COVID-19 pandemic has exacerbated this crisis, with the wealth of the world’s ten richest people doubling while the incomes of 99% of humanity have worsened. 

This discrepancy highlights how widening economic, gender, and racial inequalities, as well as the inequalities between countries, are driving deep divisions in our world. But what if businesses, which are often seen as sources of problems, could tackle these grand challenges?

Institutionalised by 2006 Nobel Peace Prize winner Professor Muhammad Yunus, Chairman of Yunus Centre, microfinance as a social business has emerged as a global template for addressing foundational issues of poverty and gender inequality, which have far-reaching effects on human development and societal progress. 

More importantly, microfinance organisations offer a lifeline to women excluded from traditional banking systems. Specifically, those who face significant barriers to accessing financial services due to cultural norms, lack of collateral, and legal restrictions. 

By providing financial services, microfinance organisations create opportunities for millions of women to invest in businesses and embrace entrepreneurship. 

It facilitates the achievement of the United Nations (UN) Sustainable Development Goals (SDGs) namely poverty alleviation (SDG 1) , gender equality (SDG 5) , the promotion of decent work and economic growth (SDG 8) , and the enhancement of industry innovation and infrastructure (SDG 9) . 

This promising solution, however, is not without controversy. Research shows that microfinance can perpetuate economic vulnerabilities, with some women falling into debt traps or worse, leading to tragic outcomes such as suicides. 

This raises a critical question: Why do social businesses like microfinance fail? And how can organisations applying social business models be improved to better serve the needs of marginalised communities?

To study these research questions, Soniya Rijal, a PhD candidate at UNSW Business School, was awarded a UNSW Business School SDG Research Grant, that support Business School HDR Candidates to undertake research that could contribute to the UN SDGs 2030.

This grant enabled Soniya to conduct field research and collect data directly from beneficiaries of microfinance organisations in Nepal. Grounded on interviews with 20+ frontline workers (FLWs) and 78 female beneficiaries, along with 39 hours of field observations of seven microfinance organisations in Nepal, Soniya developed a theoretical model that highlights the following insights:  

(1)  An organisation’s standardised practices trigger paradoxical tensions for its beneficiaries

Standardised practices

• Group lending model: Organizations require beneficiaries to participate in group lending, where they form groups and approve loans collectively. This model relies on peer pressure and mutual support to ensure loan repayment.
• Strick repayment schedules: Beneficiaries must adhere to strict repayment schedules, often making regular weekly or monthly payments, which can create financial strain and pressure.
• Monitoring and Recovery Activities: Beneficiaries also monitor each other’s loan use and participate in recovery activities, making them responsible for ensuring group compliance.

The roles introduced by the organisation’s standardised practices for beneficiaries raised paradoxical tensions.

• The standardized practices, meant to ensure proper use of financial resources and accountability, complicate participants’ lives by adding new social duties.
• Women, in particular, struggle with these additional responsibilities, which interfere with their traditional roles as mothers, wives, friends, neighbours, and business owners.
• This expanded role of women as microfinance beneficiaries and as members of their families and communities became both important and contradictory. Consequently, they found themselves pulled in different directions, trying to balance the program with their existing roles in the family and community.
• These paradoxical tensions, in which beneficiaries constantly juggled multiple roles and the pressure to conform to organisational standards, resulted in emotional exhaustion and psychological stress, dampening their entrepreneurial spirit.

(2)    Organisation’s frontline interventions in supporting women to navigate paradoxical tensions in mitigating the negative consequences of standardised practice

Soniya found two common approaches that frontline workers undertake on the ground. These approaches can either support women in navigating the paradoxical tensions or exaggerate them.

The transactional approach in frontline intervention

• Frontline workers who strictly follow organizational rules without emotional engagement leave beneficiaries feeling ashamed, humiliated, and frustrated. This approach shifts beneficiaries' focus to personal or familial needs at the expense of their entrepreneurial goals and deepens their economic vulnerabilities as they often borrow more from other sources.
• FLWs' transactional approach hindered beneficiaries' ability to pursue entrepreneurial activities effectively, as negative emotions limited their capacity to manage multiple social obligations. This often led to increased borrowing from other microfinance organisations or personal loan sharks, deepening economic vulnerabilities.

Affective approach

• Frontline Workers, who demonstrate care and understanding, encourage beneficiaries to balance their contradictory roles, promoting feelings of trust, confidence, and belonging, which empower them to address multiple roles simultaneously.
• Frontline Workers’ affective approach also fostered a sense of safety and support, enabling beneficiaries to navigate their challenges constructively. This emotional support energizes beneficiaries to invest in their entrepreneurial pursuits, enhancing individual well-being and fostering social cohesion.

Soniya’s research findings contribute to global institutions (such as the World Bank, United Nations Development Programme, and Global Alliance for Banking on Values) and Australian institutions (such as Australian Microfinance and the Australian Council for International Development) by offering insights on how to implement social business models on the ground to address social problems. Specifically, her research highlights:

Understanding Local Dynamics for Effective Poverty Alleviation

• Poverty alleviation requires more than just financial aid; initiatives must be deeply rooted in the local cultural and economic contexts.
• Organisations should embed themselves within communities, tailoring their approaches to address specific challenges and nuances rather than relying on standardised templates.

The Importance of Affective Social Interactions:

• If microfinance programs are too rigid and don't adapt to the needs of the people they serve, they can harm well-being instead of improving it. That's why these programs need to focus on people first, showing understanding and empathy.
• Instead of strictly following rules and treating social interactions with beneficiaries as mere transactions, social businesses should adopt a human-centred approach that prioritises the feelings and needs of individuals over rigid procedures.

Encouraging Entrepreneurial Roles through Support and Confidence:

• When beneficiaries feel supported by their institutions, they are more likely to adopt new technologies, explore unconventional markets, and invest in community-benefiting infrastructure. Microfinance programs thus need to find ways to reduce the feelings of shame and humiliation and replace them with confidence, encouraging beneficiaries to pursue entrepreneurial roles.

Looking ahead, Soniya states “the key to successful social business models lies in shifting from rigid, transactional approaches to fostering emotional connections that prioritise the wellbeing and aspirations of those they serve.”

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References

• Bote, R., Wang, T., & Genet, C. (2023). You Say Social Agenda, I Say My Job: Navigating Moral Ambiguities by Frontline Workers in a Social Enterprise. Journal of Business Ethics.
• Chakrabarty, S., & Bass, A. E. (2014). Institutionalizing ethics in institutional voids: Building positive ethical strength to serve women microfinance borrowers in negative contexts. Journal of Business Ethics, 119, 529-542.
• Chiu, T.-K. (2014). Putting responsible finance to work for Citi microfinance. Journal of Business Ethics, 119, 219-234.
• Cobb, J. A., Wry, T., & Zhao, E. Y. (2016). Funding financial inclusion: Institutional logics and the contextual contingency of funding for microfinance organizations. Academy of Management Journal, 59(6), 2103-2131.
• Doering, L., & Wry, T. (2022). The challenges of supporting necessity entrepreneurs: Understanding loan officer exit in microfinance. Journal of Business Venturing, 37(2).
• Nilakantan, R., Iyengar, D., Datta, S. K., & Rao, S. (2021). On ethical violations in microfinance backed small businesses: family and household welfare. Journal of Business Ethics, 172, 785-802.
• Singh, J., Dutt, P., & Adbi, A. (2021). Microfinance and entrepreneurship at the base of the pyramid. Strategic Entrepreneurship Journal, 16(1), 3-31. 

1. SDG 1 Target 1.4: Ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership and control over land and other forms of property, inheritance, natural resources, appropriate new technology and financial services, including microfinance.
   
2. SDG 5 Target 5.7: Equal rights to economic resources, property ownership and financial services.
3. SDG 8 Target 8.3: Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity, and innovation, and encourage formalisation and growth of micro-, small- and medium-sized enterprises including through access to financial services. 
4. SDG 9 Target 9.3: Increase the access of small-scale industrial and other enterprises, particularly in developing countries, to financial services, including affordable credit, and their integration into value chains and markets.