Why do the poor need financial services?

Some ideas

Some evidence from research from informal finance

Some implications for microfinance providers

Rutherford, Tokyo November 2008: Introduction

Monowara works in a tea stall and her husband drives a rickshaw

Their income is small, irregularand unreliable

Much of it is spent quickly on basics –food and the means to cook it

Rutherford, Part I: Ideas

As a result, they lack cash to buy anything else – clothes, medicines, schooling, household goods, tools, a home, a business, land…

What can they do? Hope for gifts? Sell assets (which then need to be replaced)? Go without?

Or dig, somehow, into past or future income?

Rutherford, Part I: Ideas

That task – getting access to past income (via savings) or to future income (via loans) for expenditure now – is what financial services do. It is in huge demand by the poor

It is used to cope with life-cycle needs, emergencies, and opportunities

It is needed to manage money on a day-to-day basis, and to plan for future expenditure (whether anticipated or unexpected)

Arguably, the poor need financial services more than any other group

Rutherford, Part I: Ideas

Finance is the intersection of time and money. ‘Financial diaries’ study households every few days for a year to see how they manage their money

Diaries done in Bangladesh, India and South Africa show that the poor are intensive money managers

Far from living ‘from hand to mouth’, they constantly seek opportunities to save and to borrow

Rutherford, Part IIa: Evidence from research

Of 250 poor and near-poor ‘diary’ households:

All saved and borrowed, using not less than 4 and some as many as 10 kinds of instrument

Some instruments, such as reciprocal borrowing and lending among friends and neighbours, were universally used

Households intermediated sums that were often larger than their total annual income

Poor households regard money management as a vital everyday task

Hosneara had five different ways to save

Rutherford, Part IIa: Evidence from research

Informal finance has developed many elegant ways of satisfying the primary money management task – turning savings into usefully large lump sums

You can ‘save up’ using a mobile deposit collector

Or ‘save down’ using a moneylender

Or ‘save through’ using a ROSCA

In each case, a series of small savings is transformed over time into a usefully large lump sum of money

Rutherford, Part IIb: Evidence from informal finance

Saving up (save now, get the lump sum later)

Mrs K works as a deposit collector

Each day she collects a small deposit from her many clients

After an agreed number of days she returns most – but not all – of the money to the saver, and keeps the rest as her fee

Her clients therefore earn a negative rate of interest on their savings – and yet they are delighted with the service

Rutherford, Part IIb: Evidence from informal finance

Saving down (save later, get the lump sum now)

M is a mobile moneylender as well as a shopkeeper

Each week he collects a small repayment on the loans he gives to villagers

He takes his fee by cutting a percentage from the loan at the time he gives it. His fee is somewhat more than Mrs K fee for deposit collecting

He offers an alternative way of using the same savings to form a lump sum

Rutherford, Part IIb: Evidence from informal finance

Saving through (save for a term, get the lump sum at some intermediate point)

A ROSCA (Rotating Savings and Credit Association)is a do-it-yourself way for a group of friends to turn the same savings into a lump sum

Each time they meet, each member putsin a small fixed sum, and one member walks away with the total – her ‘lump sum’.They go on until everyone has had theirlump sum. Then they may start again.

Rutherford, Part IIb: Evidence from informal finance

Salma, Morjina and Ruby are road maintenance labourers. They are members of a six-woman ROSCA

So: when poor people devise financial services for themselves, they emphasise the basic task of turning savings into a usefully-large lump sum

They do this by saving ‘up’, ‘down’ or ‘through’ (or all three), depending on what’s available locally

The intermediating function is more important to them than the way it is done, or what the sums are used for

Rutherford, Part IIb: Evidence from informal finance

When Grameen Bank started microcredit in the late 1970s it focussed on women taking loans for small businesses

The loans were like the moneylender’s: repaid in small weekly amounts that could be saved from ordinary household cash flow

Not surprisingly, borrowers used the loans for all sorts of purposes

Rutherford, Part III: Implications

Microfinance in Bangladesh has gradually responded to the real needs of its clients

It has quietly accepted that loans are used for all purposes

It has added savings services, both short-term and long term

Bangladesh microfinance clients can now use their MFIs to turn savings into useful lump sums in the short and the long term, and through both savings and loans

Rutherford, Part III: Implications

For more:

The Poor and Their Money, OUP Delhi 2000 (on the financial needs of the poor and how they use informal finance)

Portfolios of the Poor, Princeton, May 2009(on the financial diaries research)

Grameen II, The First Five Years, at www.microsave.org(on the way Grameen has adapted its services to meet the realities of customer demand)

see also www.thepoorandtheirmoney.com for more on my views and my experiments