Why does Microfinance Fail in Rural South India? The Social Regulation of Self-Employment

This paper uses a political economy approach and first-hand data from rural South India to explain why the effects of microfinance on self-employment can be limited. It also uses qualitative insights related to the fabric and functioning of local economies to illustrate how caste and gender-based social regulations shape local market, determining who can produce or sell what, to whom, and at what price. The paper covers the following sections in detail:

• Background of the global microfinance movement;
• Literature review of research papers that study the limited impact of microfinance on self-employment;
• Analysis of whether caste and gender statistically influence the chances of being self-employed;
• Investigation of whether business characteristics such as investment, returns, and expansion of businesses are driven by gender and caste;
• Discussion of whether access to finance is a necessary and sufficient precondition for economic development.

The paper finds that, despite taking up microfinance loans, a vast majority of households do not engage in entrepreneurial activities. It also finds that women and lower castes have a significantly lower chance of starting up a business and even when they do so, their businesses are smaller, less profitable, and concentrated in very specific sectors.