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To understand the impact of microfinance on women empowerment we look at two sets of literature; women's empowerment and microfinance institutions. In the first set of literature we review how microfinance institutions work and in the second set of literature we review what is understood as empowerment for women and how far microfinance institutions are successful in empowering women.
2.1 Informal credit markets in developing countries
Informal credit markets are those which are not regulated or monitored by the banking authorities and these account for much of business credit in developing countries. Despite the development of formal financial markets, and the propagation of micro-credit institutions, informal lenders continue to play a key role in the provision of credit to rural households in most developing countries. This is so because the process of establishing and maintaining a network of rural financial institutions is expensive, and managing their operations is difficult especially in the absence of proper training, monitoring, and incentive structures. The informal sector has commonly been viewed as unregistered sources of credit, such as money lenders, pawnbrokers and traders, along with rationing services and credit associations (ROSCAs), accumulating savings and credit associations (ASCRAs) and deposit takers. Moreover, formal providers are those that are subject to banking laws of the country of operation, those which provide retail services to the customers and engage in financial intermediation. According to the World Bank, the conventional provider categories of 'informal' and 'formal' have been complicated by the arrival of microfinance institutions (MFIs) that may be regarded as 'semi-formal' (World Bank, 1997).
Capital is an important element in the development of any project. Kurwijila and Due (1991:91) state that the main hurdle to micro-enterprise development is lack of capital. When the poor lack access to the standard sources of credit, they are exploited by loan sharks and other illegal market operators. Following this reason, it is recommended that increasing state efforts are required to eliminate informal finance, while enhancing the availability of state-sanctioned financial intermediaries, especially microfinance programs devoted to poverty alleviation.
Savings are an important determinant of wellbeing at both the individual and national levels. For individuals, savings may be motivated by investment opportunities, the desire to smooth consumption keeping unpredictable incomes in mind, or the need to accumulate resources for large purchases. Households in low-income countries have a variety of mechanisms available for saving. These mechanisms range from formal institutions such as banks and credit unions to less formal mechanisms such as holding cash, asset accumulation, and participation in rotating-savings-and-credit-associations (ROSCAs).
It is important to highlight the distinction between formal and informal institutions for several reasons. Informal finance mechanisms are quite prevalent in low-income countries. The advantage of informal mechanisms such as ROSCAs is the ability to overcome some of the information and enforcement problems that often lead to the absence of formal markets. Since savings groups are usually localized, agents on both sides of transactions often know each other personally. This helps in overcoming the informational problems such as adverse selection, moral hazard, monitoring, and verification. Further, participants in informal savings committees share a common social bond (for example, they tend to form among friends, family, neighbors, and coworkers) which provides incentives against voluntary default.
However, such institution is more vulnerable to local economic shocks affecting all group members. The formal sector is better on these grounds, and provides some additional advantages over the informal sector, both for the individual and the economy. For depositors, government insurance reduces the default risk of banking. A further distinction between the formal and informal sectors is that effective monetary policy typically relies on central bank or government control over the banking system. A large informal financial sector may compromise this ability.
Limited access to various sources of credit is seen to harm women more as compared to men. This is due to the specific credit needs of women as "their business requires smaller amounts of capital than are customarily lent, and repayment and collateral requirements must be fairly flexible." (Reichmann, 1989:135). Also, it is a legal requirement of many countries, asking women to get their husbands signed approval in order to obtain the loan. Lycette and White (1989:24) cite evidence from Peru that women borrowers usually receive smaller amounts of loans than men from the banks. However, there has been an ongoing debate that women are active in commerce and production activities which require less credit and therefore it is acceptable to provide them with smaller amounts of loan. For these reasons, it is not clear whether discrimination exists, preventing women from obtaining large loans or that women deliberately chooses to borrow less than their males.
The following table further highlights the major types of informal finance.
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2.2 Credit information, credit availability and access
Poor women face much inconveniency and problems in acquiring financial services along with the standard barriers that lower income people have to face when dealing with financial institutions. Illiteracy is a key feature that hampers both women and men's capacity to complete application forms necessary to be filled in order to apply for loan. It is also a known fact that female is more illiterate as compared to male in most countries all over the world.
Another drawback faced by women is that they lack the collateral which is required by the formal lending institutions to give out the loans. As already mentioned most of these institutions require the male head of household to sign the contract which makes it difficult for the female headed households to apply for the loan at the first place. On the whole, women especially in developing countries are unaware of their rights to apply for financial services.
In most developing countries, both men and women lack the confidence to engage in private enterprise and take loans from the banks for business purposes. The structure of the formal credit system is usually very hierarchical and it may appear less user friendly to small women entrepreneurs. Low-income women are mostly less educated and therefore are not used to dealing with formal procedures. Since banks are perceived to be powerful institutions therefore many women may not have the courage to approach them.
Despite the above listed difficulties, gaining access to finances can facilitate women to enhance their skills and eventually develop their own independent businesses. Women can boost their skills by accessing technology, raw materials and market information, thereby improving their economic roles. Improving women's economic position contributes to building their confidence, and ultimately improving their social and political role as well.
2.3 Microfinance products and services for deprived and vulnerable
As most of the formal sectors banking institutions are unable to reach rural populations, microfinance programs are seen as a potential solution for bridging the gap between the supply and demand for rural finance. These Microfinance institutions are committed to serving customers that have been excluded from the formal banking sector and claim to work with the 'poorest of the poor'.
Many MFIs permit people to access useful lump sums through loans. The currently most popular product (that offered by Grameen Bank and copied by many other MFIs) allows borrowers to repay the loan in small and frequent installments. The participation of the poor is thus made possible by the key feature of lending - tiny, often weekly, repayments (Matin and Sinha, 1998; Todd, 1996). Such an organization system allows borrower to repay out of existing income thereby allowing the borrower to invest the loan and utilize it the way that best fulfills their needs of the moment. For some borrowers these loans are directly invested in productive enterprises where the returns on additional investment is sometimes enough to make the regular repayments.
Microcredit is seen as a way to improve the income an employment opportunities of poor who can be self employed in many ways (Hulme and Mosley, 1996; Yunus, 1983; World Bank, 1994). The main aim is to provide the household with capital and encourage them to involve in income generating activities, thereby increasing their income and consumption. In Bangladesh, there are more than 750 organizations that are working in rural areas to provide credit and non-credit services to the target population, mainly women from landless households (World Bank, 1996). Grameen Bank and Bangladesh Rural Advancement Committee (BRAC) are the two main programmes. Grameen Bank is known for its innovative group-based lending programme. BRAC is famous for providing informal primary education and innovative health programmes to the poor. It lays emphasis more on human capital development such as literacy, skill-promoting training and awareness programmes.
Inspired by the Grameen Bank in Bangladesh there has been a rapidly increasing growth of microfinance institutions in Pakistan and as well as in other developing countries. Growth and diversity in its microfinance sector have been encouraged by the microfinance Ordinance 2001, which resulted in the establishment of the First Microfinance Bank in Pakistan. Table 1 below summarizes the nature of different microfinance institutions operating in the Punjab province of Pakistan, the year in which they were operationalized and the concentration of operations in rural or urban settings.
It is clear from the table that most of the NGO based institutions have a gender specific solidarity group approach to microcredit, where they are catering mainly to female clients. Most of the microfinance institutions working in Punjab province, except for the rural support programs, are either specialized institutions or have a specialized window for microcredit. Except for ASASAH, most of the institutions have been in business for quite long to warrant an impact evaluation. For this study we are interested in specialized institutions using a group solidarity model with a women specific focus. Thus, the province of Punjab was an obvious choice with well recognized and established NGO-based microfinance institution (MFI). Given the time and resources available for the study, we have limited our attention to the Lahore district of Punjab, which is the hub of urban microfinance activity in Pakistan, accounting for more than half of the total borrowers in the province.
2.4 Gender norms of Microfinance: lending and utilization
2.5 Community participation and group lending experience in microfinance
Grameen Bank is famous for introducing and expanding its relationships with its customers in a unique relationship which is without utilizing legal contracts of requiring collateral, Grameen bank assigns borrowers to "solidarity groups" of five members. Each group is than responsible for the debts of the other four, and in case any group members defaults on her loan, the others must repay the defaulted loan or lose eligibility for further loans from Grameen Bank. This compulsory interdependence is seen to powerfully encourage trust and mutual aid within the solidarity group (Hung, 1997:15).
The group-based lending is very attractive to women in low income societies. Very few women in Pakistan and Bangladesh work in the wage labor market. Therefore their productive inefficiency is associated with the lack of women's labor market participation which motivates them to become self employed by borrowing capital.
Group lending schemes have an informal advantage over outside lenders. Often obtaining information about each member of a group by an outside lender is costly and subject to misinterpretation, therefore group members can monitor each other with relative ease as well as train and help the other low-productive members. In Pakistan, social custom restricts direct contact between potential female borrowers and male outside lenders. In the case of a credit program, it is easier for women, when in the company of larger group to interact with the male coordinator. Therefore, informational advantages of group lending are thus greater for the women as compared to men. Moreover, adverse shocks may have an effect on the ability to repay loans and decrease income and consumption. There is evidence that women are more prone to adverse shocks, related to pregnancy, illness associated with child bearing, and care giving to other household members who fall ill, making them riskier for poorly informed outside lenders (Rashid and Townsend 1993).
2.6 Microfinance experience and gender empowerment
Some aspects of poverty are owed to the inequality between women and men, therefore it is important to understand and interpret the meaning of the term 'gender'. Women and men have different responsibilities in a given culture or location. Gender refers to the social roles of women and men, and is not to be confused with the biologically determined sexes of male and female. Gender is hence a relational concept that analyses women's social roles in relation to the roles of men and vice versa. Gender roles are subject to perceptions and expectations which arise from factors like class, ethnicity, age and religion.
Research done by UNDP, UNIFEM, and the World Bank indicates that gender inequalities in developing societies restrain economic growth and development. A recent World Bank report highlights that societies which discriminate on the basis of gender are much poor with slower economic growth, weaker governance, and a lower living standard of their people.  There is a very strong and positive correlation between gender empowerment and Human Development Indices, as projected by UNDP. Overall there is rising evidence that gender equality is a significant element of any development strategy.
Microfinance programmes that 'target women' in isolation may not be gender sensitive. A gender approach evaluates women's and men's social and economic position in the family and at the community level. According to Johnson, this approach examines how women and men's economic and social position is strengthened through microfinance institutions, and how traditions preside over the economic and social position of people in a society they live in (Johnson, 1999).
The concept of microcredit falls under a context where gender and labor ideologies clash: The first, the "gender" ideology, have always managed the relations between men and women. It confirms the place of the man in the society as the bread winner, while a woman is confined to reproductive roles at the house, as wife and mother. The balance of power inside the household is always in favor of the man who holds the decision-making power. The second one, the "labor" ideology is recent and entails that the employment of women is a need for the survival of their household. The new ideology is reinforced in the case of very disadvantaged households and those where families depend on the woman as the principal bread winner, a situation according to statistics, affecting 25% of Egypt's households (Nassar and Zarnouka, 1999). The pressure put by economic conditions has led to the preponderance of the "labor" ideology over the traditional "gender" ideology. Even more, today some people tend to say that women work does not contradict the traditional ideology as it is a prolongation of their role as mothers providing the basic needs of their families.
2.6.1 Microfinance utilization and economic empowerment
It is estimated that 70 percent of the world's population living on less than $1 per day are women (United Nations Expert Group on Women and Finance, 1995). However, it is also true that most low-income women are economically active in some form. Women producers and entrepreneurs are vital economic actors. Though their roles and the value of those roles are often undervalued in society, women need and deserve access to information, financial services, and markets (United Nations Expert Group on Women and Finance, 1995). Therefore, access to credit and other financial services are necessary to provide low-income women with opportunities to increase their incomes and their assets (United Nations Expert Group on Women and Finance, 1995).
The supporters of 'development serving people' argue that microcredit puts people in the heart of the process of development and policies elaboration. Secondly, the women's rights defenders believe that microcredit empowers women since it promotes development while focusing on eliminating gender differences. Thirdly, the poverty reduction approach encourages the offer of microcredit because it empowers the poor; make them economically independent and less vulnerable when facing economic crises. Finally, the offer of microcredit is supported by the economic growth experts because it promotes the development of the least advantaged and developed regions, promoting growth over the long term.
According to the State of the Microcredit Summit Campaign 2001 Report, nearly 14.2 million of the world's poorest women have gained access to financial services through microfinance institutions (MFIs), banks, NGOs, and other nonbank financial institutions. The report also states that women account for almost 74 percent of the 19.3 million of the world's poorest population which is now being targeted by microfinance institutions. These women have credit to invest in businesses that they own and control themselves. Many of them have outstanding repayment records.
Different theories showed the importance of microcredit as a tool to boost economic growth and to empower women. When women, who would otherwise stay at home, now, dedicate their time to reproductive tasks, integrate the labor market and new windows of opportunities emerge to them. Moreover, microcredit programs are increasingly targeting women due to a cost-efficiency rationale as women's repayment rates are much higher than men. Secondly, the equity concept because women have less access to productive employment in the developing countries and majorly because women invest largely in their children and households thereby creates a multiplier effect that improves the effectiveness of the credit funds.
If a microfinance programme specifically targets women, men may sometimes manipulate the programme, resulting in loans being disbursed in women's names for other uses. Hence, apart from considering static roles of women and men, we must also try to understand the dynamics of relations between women and men and how a microfinance initiative may alter roles and if this will affect microfinance operations.
2.6.2 Economic empowerment, social change and social empowerment
Microfinance progammes have assured social and economic transformation. Targeting women by providing access to credit is a strategic step taken in order to fulfill the promise of social development. Moreover, women are more likely to invest in household goods. Therefore, enhancing women's employment by providing microcredit is believed to be the most efficient gateway to bring social benefits (Armendariz de Aghion and Morduch 2005, Khandker 2003, Pitt et al. 2006).
The benefits of microfinance are achieved when access to microcredit is expected to raise household income by easing the credit constraints imposed on poor and low-asset households who are generally excluded from the formal sector, and by enabling them to invest in income-generating activities. In turn, income effects increase consumption levels and greater cause demand for health services and education services.
Granting loans to women promotes financial sustainability of microfinance providers and helps achieving greater social benefits (Morduch 1999, 2000). Moreover, women are perceived as more risk averse and hence better and safer customers. They are easier to monitor and upon whom peer pressure and the threat of social sanctions is expected to have greater impact than for men. On the other hand, microfinance enables women to invest in self-employed activities and generate their own income which allows them to bargain a larger share of household's resources.
Microfinance progarmmes are often associated with training programmes, which provide skill-based training and require beneficiaries to attend group meetings. These activities are expected to help women by providing them with a platform where they can engage in social and economic activities outside of the household and form networks of their own. Through these progammes women are expected to gain self confidence to challenge prevailing gender norms and negotiate a higher status within the household and at a community level. It is also hoped that making women's lives more public and their economic contribution more visible will help lower domestic violence due to the greater scrutiny from their peer group (Hashemi et al. 1996, Schuler et al. 1996).
2.6.3 Position, identity and household empowerment
A woman's role in the economy is an important determinant of her ability to provide health care services, education and safe housing for herself and her family. It also has an impact on her decision-making power, as well as her ability to speak and act against inequalities, injustice, and violence in her home as well as in the community. Acquiring working capital is a means to building a woman's confidence, self-respect, and the capacity to use her voice to shape her life and the lives of her family members (United Nations Expert Group on Women and Finance, 1995).
It has been illustrated that when microfinance programmes target women exclusively, women often act as a 'front' for men who want to gain access to credit (Haddad, 1999; Goetz and Sen-Gupta 1996). In the context of the Grameen Bank, Goetz and Sen-Gupta (1996) found that the majority of women borrowers in their study did control neither the loans received, nor the income generated from their micro-enterprises. A significant proportion of women's loans were actually controlled by male relatives, who had used the women as a front to access the credit on offer. Women may willingly keep control over cash they acquired; by contrast, loans enter into a difficult decision-making process with baffling impacts on the outcomes of the bargaining process.  In particular, there is evidence that many women resign the use of their loans to their husbands (Goetz and Gupta 1996, Kabeer 2001, Rahman 1999).
The motivation of a female borrower can be seen from her ability to help her husband, sons, or other relatives attain higher status and economic prospects. In fact accessing loans or other financial services is rarely taken independently. It is argued that when women can generate their own independent income, it makes their position stronger within the household and they can gain increased access to household resources. Microfinance is therefore a subject for discussion and joint decision-making in the family.
If women give out their loans to the male members of the household, it provides evidence for them losing the power to manage their loans and doubt the empowering prospective of microfinance. On the other hand, Kabeer (1998, 2001) anticipated that when women are in situations of imbalanced interdependence within the family they prefer interventions that empower the household as a whole rather than improve their individual situations.
Moreover, access to credit strengthens a women's bargaining position when she can freely invest this capital profitably in an independent activity. Women's bargaining position in the household is reinforced by the availability of credit when this capital is invested in a joint activity in which both husband and wife contribute in an equally important way.
On the contrary, "women-only" targeting of credit may place her at risk of domestic violence. Mostly these loans are used by men to set up ventures over which women have little or no control at all. Also there's a fear that in some cases women's small increases in income decreases male contributions to household expenditure (Mayoux, 1997). It is often wrongly assumed that just by giving loans to t women, they have been empowered and have attained the complete right and decision to utilize or control the loan, which is not the case always.