Empowering the Unbankable: Microfinance and Political Development in Central Asia and the Caucasus.

In Central Asia where financial services are limited and controlled by the state, microfinancing, which has seen tremendous growth worldwide in the last decade supported by international donors, provides a significant opportunity for economic and political development. Microfinancing offers mechanisms for serving sectors of the economy that the formal financial system usually considers 'unbankable'. Around the world it has shown to be positively correlated with reducing poverty and improving welfare by allowing poor people to protect, diversify and increase their sources of income and assets; safeguarding the poor against extreme vulnerability by smoothing income fluctuations and maintaining consumption levels; improving family expenditures on education, thereby contributing to improving the human capacity; and reducing family expenditures on health. By supporting small scale economic activities, microfinance also helps promote broad economic participation, develop social capital, and empower the economically active poor against the state. This paper attempts to assess the contribution of microfinance to community-building and political participation in Central Asia by examining the main linkages between microfinance and social capital. Despite the fact that the microfinance sector in Central Asia is less than 10 years old with limited outreach and impact, I argue that by encouraging mutual trust and dependence within borrower groups, by providing an alternative to existing corrupt channels of financial services, and by setting support organizations which encourage association between citizens, microfinancing may be starting to contribute to building an economic society that can potentially feed into some increase in political participation and breakdown of the authoritarian hold on political power. In the long run, microfinancing may provide an incredible opportunity for foreign donors to push the forces of democratization in Central Asia by empowering the lower and middle classes. ..PAT.-Unpublished Manuscript [ABSTRACT FROM AUTHOR]