Summary
Microfinance is often celebrated for encouraging entrepreneurship. Yet millions of borrowers use these loans to meet pressing needs. We demonstrate how borrowers and loan officers sustain this ambiguity in the use of microloans through practices grounded in Ubuntu, an African philosophy of communal care. Our findings suggest that the true value of microfinance may not lie in creating entrepreneurs, but in providing communities with a reliable system to help them navigate scarcity together.
A Different Kind of Financial Story
In a rural South African village, a group of women meet up regularly with microfinance loan officers to make repayments on their loans. One woman has invested in her small shop and piled up stock. Another has used her loan to pay her children’s school fees. A third used her loan to buy groceries during a difficult month.
From the outside, only the first example fits the textbook definition of microfinance: loans funding entrepreneurial activity. Yet these different uses of credit do not create any tension. Everyone in the group meeting knows what it is like to live in poverty. Despite using their loans for different purposes, borrowers continue to meet their repayment obligations, with no loan defaults or missed payment.
The Gap Between Promise and Practice
For decades, the idea that microfinance loans can unlock entrepreneurial potential and lift people out of poverty has inspired policymakers, development agencies, and financial institutions. This remains the key message to this day.
However, a growing body of research suggests that borrowers often use these loans in ways that diverge from the original vision. Our research, published in the Journal of Management Studies, explores this divergence through what we call “loan-use ambiguity”. Rather than asking how to eliminate this gap, we asked a different question: How is this ambiguity sustained?
To answer this question, we conducted extensive fieldwork with the Small Enterprise Foundation. For over a year, we immersed ourselves in the world of microfinance. We travelled with loan officers to villages, attended repayment meetings, and spent considerable time with borrowers in their homes and workplaces. This approach allowed us to better understand how obligations of care, reciprocity, and communal responsibility influence loan use and repayment decisions in real life. It was essential to identifying how Ubuntu influences routine practices that would remain invisible through interviews or survey data alone.
Three Practices Sustaining the System
We found that microfinance functions under ambiguous loan use not because of strict adherence to rules, but because of a set of practices between borrowers and loan officers who live and work in the same community, within which Ubuntu is lived and fostered.
We identified three practices:
A Strong Commitment to Repayment
Repayment is serious business, not just as a contractual obligation, but also as a matter of trust and dignity. This commitment ensures the continuity of the system. Regardless of how loans are used, repayment is the number one priority for borrowers and loan officers alike. Importantly, repayment does not depend solely on the success of an individual microenterprise. Instead, repayment capacity is often sustained collectively through family and community networks.
Empathy and Flexibility
Loans often serve as a form of collective aid. Borrowers may redistribute part of their loan to help family or community members who are facing immediate financial difficulties. Rather than strictly enforcing business-only use, loan officers recognize the importance of this practice while ensuring that borrowers can repay the loan.
Upholding the Ideal of Entrepreneurship
Even when loans are used for household purposes, borrowers maintain the façade of entrepreneurship. As long as it appears to be entrepreneurship from the outside, loan officers can fulfil their obligations while retaining flexibility in practice.
Rooted in Ubuntu, these practices work together to sustain ambiguity in loan use, thereby keeping the system alive and supporting the community.
The Real Success Story Lies Beyond the Numbers
Microfinance is often evaluated quantitatively, and repayment is considered a sign of successful entrepreneurship. However, this may be too narrow a perspective. The enduring success of microfinance may lie in its ability to help people secure predictable financial resources amid everyday uncertainty. In that sense, the apparent ambiguity between the theory and practice of microfinance should not necessarily be resolved but rather better understood. Loan use often diverges from business purposes, but this does not necessarily mean failure.
For practitioners, policymakers, donors, and impact investors, the implication is clear: ambiguous financial services can be effective in communitarian poverty settings because they better align with how people really use money to cope with uncertainty. Replacing rigid “business only” rules with adaptable approaches supports loan officers’ judgment and borrowers’ ability to stay afloat in unpredictable conditions. Evaluating microfinance based on its role in helping households navigate financial ups and downs and support one another provides a more accurate picture of its value, ensuring that people can continue making the most of it, whether they are entrepreneurs or not.
