For quite a long time there was a wide consensus around the idea that poverty could be alleviated by giving the poor access to finance (see for example Beck et al. (2007)). It was argued that the lack of capital to finance the development of small production units could be overcome by means of the microfinance techniques, such as microcredit. This approach to poverty reduction has become mainstream in many developing countries. Most of these projects have been undertaken by grassroots organizations, in many cases supported by international institutions. Lately, however, the effectiveness of microfinance in terms of poverty reduction has been put into question. Taking Africa as example, according to a recent report of the World Bank, there are more poor people in Africa today than in 1990, and 7 of the 10 most unequal countries in the world are in Africa (Beegle et al. (2016)).
As a result of these worrying numbers some analysts are claiming that instead of providing tools for overcoming situations of structural poverty, the microfinance approach tends to exacerbate the causes underlying social and economic exclusion. Richard Itaman defines the financialization of development as “the growing focus on financial expansion and the misplaced belief that development can be achieved solely through financial development policy. In essence, it is the pursuit of financial development rather than more comprehensive development approaches, such as the developmental state. The financialization of development is further underpinned by the increasing exclusion of the state from the development space and its replacement with private capital. It aims to capture and include the poor in developing countries into the cycle of financial expropriation, through access to credit. Inherent in the process, is the potential to re-direct capital away from developmental investment and into the financial system. Such finance then tends to be used for speculation and profiteering as opposed to pursuing development objectives. As a result, underdevelopment persists” (Itaman, 2017).
The financialization of development has been further boosted by the spread of electronic payment platforms across developing countries. For instance, in Kenya the M-PESA system, a mobile phone-based money transfer, financing and microfinancing service, launched in 2007 by Vodafone, exhibited a rapid growth that in only two years reached 40% of adult population and a volume of transactions equivalent to 10% of GDP (Mas and Radcliffe, 2010). These striking results made many influential actors argue that the expansion of electronic payment systems should be used to promote financial inclusion, that is, to extend the reach of credit, savings and insurance services to those households, communities and regions (Dos Santos and Kvangraven, 2017).
Recent evidence suggest, however, that the widespread belief in microfinance as an effective approach to poverty reduction and electronic payments systems as its more advanced implementation tool should be taken with caution. According to Dos Santos and Kvangraven (2017) there are two main reasons why these proposals may be failing to deliver positive results. First, even though electronic payment systems can generate important cost reductions in the management and safeguarding of cash as well as in money transmission services (mainly remittances), the high concentration in the provision of these systems implies that the gains produced by them are unequally distributed. Second, there is wide evidence that the use of electronic payment systems have been used to widen the ability of for-profit enterprises to extend credit to low and middle income households and communities, often accompanied by predatory lender behavior, uncompetitively high rates of interest and monetary and welfare losses for borrowers.
The reasons why microfinance may be unable to deliver sustainable solutions to poverty and inequality are straightforward: poverty exists as a result of a systemic process related to the dynamics of capitalism. Any attempt to reduce poverty should tackle some of its greatest problems: the way monetary systems work and the way power is exerted (and by whom in benefit of whom). In this regard, digital applications like cryptocurrencies and decentralized autonomous organizations can make a great contribution. The study and development of these alternatives is of paramount importance if structural transformations are to be expected to take place.