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    PovertySocial Exclusionand Microfinancein BritainBEN ROGALY, TH O M A S FISHER,AND ED MAYO

    Oxfamin association with the N ew Economics F oun dation

    ^sOxfam new economics foundation

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    First published by Oxfara GB in association with the New Economics Foundation in 1999

    Oxfam GB and Ne w Economics Foun dation 1999ISBN o 85598 412 o (hardback )ISBNo 85598 413 9 (paperback)A catalogue rec ord for this pub lication is available from the British Library.All rights reserved. Reproduction, copy, transmission, or translation of any part of this publicationmay be made only under the following conditions: W ith the prior written permission of the publisher; or W ith a licence from the Copyrigh t Licensing Agency Ltd., 90 Totten ham C ou rt Ro ad, Lo ndo nW iP 9H E, UK, or from a nother national licensing agency; or For qu ota tion in a review of the w ork ; or Und er the terms set out below.This publication is copyright, but may be reproduced by any method without fee for teachingpurposes, but not for resale. Formal permission is required for all such uses, but normally will begran ted imm ediately. For copying in any other circum stances, or for re-use in other publica tions, orfor translation or adaptation, prior written permission must be obtained from the publisher, and afee may be payab le.Available from the following agents:for the USA: Stylus Publishing LLC, PO Box 60 5, He rnd on, VA 20172 -0605, USA;tel .+1 (0)703 661 i5 8 i; f a x + i (0)703 661 150 1; [email protected] Canada: Fernw ood Books Ltd., PO Box 940 9, Stn. A, Halifax, Nova Scotia B3K 5S3, Canad a;tel .+1 (0)9 024 22 3302; fax +1 (0) 90 24 22 3179 ; email [email protected] Southern Africa: David Philip Publishers, PO Box 2 340 8, Claremont 77 35 , South Africa;tel. +27 (0)21 64 4136; fax+27 (0)21 64 3358; email [email protected] India: May a P ublishers Pvt Ltd, 113-B, Shapur Jat, New Delh i-i 100 49, India;tel. +91 (0)11 6 49 0451; fax+9 1 (0)11 649 1039for Australia: Bush Books, PO Box 1370 , Gosford South, NSW 225 0, Australia;tel . +61 (0)24 323 3274; fax+6 1 (0 )292 12 24685emailbushbook@ozemail .com.auFor the rest of the world, contact Oxfam Publishing, 274 Banbury Road, O xford O X 2 7D Z, UK.tel. +44 (0)1865 311 311; fax+44 (0)1865 313 [email protected] in Sabon by Ga rth Stew art; printed by Inform ation Press, EynshamPublished by Oxfam GB, 274 Banbury Road, Oxford OX 2 7 D Z , UKin association w ith the New Economics Found ation, Cinnamon Hou se, 6-8 Cole Street, London SEi 4YHOxfam GB is a registered charity, no . 202 918 , and is a member of Oxfam Inter natio nal.Front-cov er p icture: Shelter.

    This book converted to digital file in 2010

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    Contents

    Oxfam and the New Economics Foundation ivAcknowledgements v

    1 Introduction iB E N R O G A L Y A N D T H O M A S F I S H E R

    2 Poverty and social exclusion in Britain : whe re finance fits 7B E N R O G A L Y

    3 Responses to poverty and exclusion:the social policy context for microfinance interven tions 3 2B E N R O G A L Y

    4 Microfinance and poverty reduction:the international experience 5 8B E N R O G A L Y

    5 Mic rofina ncial services in Britain 92THOMAS FISHER

    6 Conclusion 131THOMAS FISHER, ED MAYO, AND BEN ROGALY

    Notes 145Suggestions for further reading 174Index 176

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    Oxfam and theNew Economics Foundation

    Oxfam has supported community organisations around the world in their fight againstpoverty since 194 2. In 1995 it launched a progra mm e of research, action, and advocacy in theUnited Kingdom , in recognition of the growing reality that he re as in other countries whereOxfam works - the benefits of economic growth were not reaching all sections of thecomm unity. Oxfam believes tha t poverty is mo re than the absence of material goods or basicservices. It is also a state of powerlessness in which people are m arginalised an d excluded fromsociety, and unable to contro l m any aspects of their own lives.

    Oxfam's anti-poverty programme in the UK is underpinned by the principle ofemp ow erme nt. O xfam suppo rts people living in poverty, and the organisations wo rkingalong side the m , to claim the right to be involved in decisions tha t affect th eir lives, an d towo rk for improvem ents in their own living and working co nditions.Oxfam has identified five major priorities for its work in the UK: strengthening social

    organisa tion and capacity-building with groups and comm unities wo rking on poverty andsocial exclusion; prom oting gen der awaren ess and gender-fair developm ent; challengingnegative attitudes towards people living in poverty; addressing links between race,poverty, and exclusion; and bringing an international perspective to and promotingmu tual learning abo ut anti-pov erty practice and policy in the UK.Oxfam, Oxfam House, 274 Banbury Road, Oxford OX2 yDZThe N ew Economics Foundation (NEF) is an independen t, UK-based thin k-tank that iscommitted to the creation of just and sustainable economies. It was founded by theleaders of The Other Economic Summit (TOES), which has forced issues such asinternational debt on to the agenda of the G7/G 8 summ it meetings.NE F combines research, policy, training , and practical action. It currently c oncen trateson the following strategic areas: the global econom y; the accountability of corp oratio ns;the third sector (such as charities and NGOs); community finance; and participativedemocracy.

    In comm unity finance, NE F has been at the forefront of influencing policy in the UK,with reports such as Small is Bankable, Micro-credit for Micro-enterprise, and RegionalCommunity Investment Partnerships. It is developing a range of innov ative initiatives,such as time money, venture capital for social enterprises, and community finance forLondon. NEF is also engaged in a long-term project of capacity-building with leadingmicro-finance institutions in India.

    NE F has taken a lead in helping to establish new coalitions a nd o rgan isations like theJubilee 2.000 camp aign, the Ethical Trad ing Initiative, the UK Social Investm ent Fo rum ,and Green Gauge. It is a registered charity, funded by individual supporters, charitabletrusts, public finance such as the National Lottery, businesses, and international grant-giving bo dies.New E conom ics Foundation, C innamon House, 6-8 Cole Street, London SEi 4YH

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    Acknowledgements

    My thanks go first to Kirat Randhawa for reading and commenting onearlier versions, for shouldering much of my workload at home duringperiods of intense writing, and for moral support throughout. She andmany of those named below, am ong them practitioners an d practitioner-researchers, are comm itted to and involved in the reduction of poverty andsocial exclusion through careful examination of the evidence andconsideration of all means available, and I thank them for enabling me towo rk on this book in the same spirit. In the mid-198 0s, James Copestake,the late Douglas Thornton, Steve Wiggins, and Madhura Swaminathanbegan my training in understanding the social processes involved inmicrofinance interventions through joint research on credit for ruraldevelopment in south India. I am grateful to them; to Audrey Bronstein,w ho initially involved me in an analysis of whe ther and how microfinancecould contribute to reducing poverty and social exclusion in the UK, andw ho persuaded me to take part in writing this book; and to one of my co-authors, Ed Mayo, for believing that I could do it and giving me theopportu nity, despite lack of experience in UK-based work . Th anks also toAggie Kent, Pat C onaty, and Jim D earlove for setting up my first UK studywith Ladywood Credit Union in Birmingham, to Helen Derbyshire, whodid the study with me, and to Susan Johnson, who co-authored theresulting book focusing on microfinance experience in five countries.Some of the ideas for the present book were initially developed w ith SusanJohn son thro ugh th at work and other long discussions. I have also learnedmuch, especially about savings-based microfinance, through workingwith Alfonso Castillo and Cecilia Lopez of the Tequisquiapan Project inM exico; throug h regular neighbourly and collegiate interaction with Ru thPearson, Chair of the Women's Employment, Education and TrainingUnit, No rwich; and from Chris Roche, my former boss at Oxfam .

    I am deeply indebted to Barbara Harriss-White for teaching me howrigorous research can be an effective tool for well-contextualised pro -po orpolicy change; and to Kevin Watkins for demonstrating the same throu ghhis writings. In the production of this book I am again grateful to SusanJohnson, for taking the trouble to read through several drafts and not

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    vi Poverty, Social Exclusion, and Microfinance in Britainholding back with her comments; as well as to Ruth Pearson forinspiration. Bethan Emmett worked voluntarily for several months in199 8 to provide research assistance for Chap ters z and 3, which would nothave been possible with ou t her. Fran Bennett and Thalia Kidder also wentto great lengths to help, making extensive and detailed comments andrespond ing to continued requests for information. M y thanks to them andto the others who have provided support or advice, including RichardBerthoud, Vanessa Clow es, Ann Cullen, Arjan de H aa n, Ad rian H arvey,Malcolm Hayday, Cecile Jackson, Gian Kaur, Elaine Kempson, RachelM arcu s, Jana M atysov a, Joe Rogaly, Susan Rogaly, Jagir Singh, Sau rabhSinha, Erika Watson, and Claire Whyley. Finally, I would like to thankThomas Fisher, for the considerable amount that I have learned throughour discussions, even (or especially!) when we did not see things the sameway; and Audrey Bronstein, Sarah Totterdell, and Catherine R obinson atOxfam, who someh ow found time in their already impossible schedules tosteer the boo k th rough its final stages.Ben RogalyUniversity of East Anglia, Norw ich

    We thank all those who have con tributed to the ideas that we develop inthis book. They include, first an d foremost, m any prac titioners, bo th in theUK and India, who struggle with the ideals and realities of puttingmicrofinance and community finance into practice, and have given us somuch inspiration and practical advice: in the UK, we thank Roger Bensonand Richard Street (The Prince's Trust), Roger Brocklehurst (LIF), DavidBrown and Anne-Michelle Ketteridge (GRF), Peter Bussy and RalphSwoboda (ABCUL), Nicholas Colloff (World in Need), RosalindCopisarow (Fundusz Mikro and Street UK), Malcolm Hayday (CAF),M artin Hock ly (ICO F), Nao m i Kingsley (KMC Associates), Bob Paterson(University of Salford), Steve Pilling (Hackney Business Venture), GlenSaunders (Triodos Bank), Steve Walker (ART), Erika Watson and JaneBevan (Full Circle Fund); and in India we thank Vijay Mahajan, SankarDatta and Sriram (BASIX), Rama Reddy and Shashi Rajagopolan (Co-operative Development Foundation), Soumen Biswas, Achintya Ghoshand Deep Josh i (PRA DA N), and Jayshree Vyas and Rekha B harve (SEWABank). Thomas is especially grateful to Vijay for all his insigh t, in spiration ,and friendship over many years. We also than k the co-au thors w ho havecontributed so much to our recent reports on community andmicrofinance, on which we draw extensively in this book, especially Pat

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    Acknowledgements viiConaty, John Doling, and Andy Mullineux; and not least Ben Rogaly, whohas given us so many new an d challenging insights. We also warmly thankAudrey Bronstein, Catherine Robinson, and Sarah Totterdell at Oxfamfor their very significant and constructive contributions, which haveallowed this book to come to fruition. Many others have providedvaluable ideas and support, particularly Simon Bale, Nigel Bottomley,Tony Colman, John Ellis, Jan Evers, Sue Gillie, Christophe Guene, PeterHughes, Susan Johnson, Elaine Kempson, Dan Leader, Peter Lloyd,Malcolm Lynch, Theresa McDonagh, Fred Mulder, Sara Murphy, BertNicholson, Peter Ramsden, Susan Rice, Andrew Robinson, CliffRosenthal, Jane Rosser, Philip Rutnam, Dan Sattar, Penny Shepherd, PhilSmith, Stephen Thake, Gareth Thomas, Geron Walker, Andrea Westall,David Wright, and Claire Whyley. Finally, Thomas thanks Julie. (Mostauthors write that without their partners their books would never haveseen the light of day. I can fairly write that without this book we mightnever have been partners!)Thomas Fisher and Ed MayoNew Economics Foundation, London

    Oxfam GB gratefully acknow ledges the sup port of the CalousteGulbenkian Foundation, which contributed generously to the costs ofresearching and writing this book.

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    IntroductionBEN ROGALY AND THOMAS FISHER

    SINCE the late 1970s, inequality in Britain has steadily grown, andpoverty has become increasingly concentrated in certain geographicalareas. Many people live in households lacking secure shelter, diets ofadequate quantity and good quality, relations with friends and family, ora capacity to influence events in their neighbourhood or more widely.The experience of relative poverty is well documented and, as recentresearch has shown, can lead to a higher incidence of illness and earlydeath.1 Analysis of data on trends in absolute poverty between 1979 and1994/95 showed that the poorest ten per cent became eight per centpoorer in terms of real income.2The change to a New Labour regime in May 1997 signalled the startof a high-level government engagement with the challenge of counteringpoverty and social exclusion. At the same time, the anti-poverty lobbyof non-government organisations and other civil-society groups, whohad become used to working with a government which denied theexistence of poverty in Britain, has continued to press the currentgovernment hard to meet commitments made at the 1995 UN SocialSummit in Copenhagen.3One type of policy intervention intended to tackle poverty and socialexclusion, with the support of the government4 as well as local authoritiesand voluntary organisations, is the provision of financial services, such asdeposit facilities, insurance, bill-payment and money-transfer facilities,financial literacy training, personal loans, and loans for micro-enterprises,5 which for the purposes of this book will be collectivelyreferred to as 'microfinance'. The aim of the book is to explore howpoverty and social exclusion might be reduced through the expansion ofsuch microfinancial services.

    T H E C E N T R A L I S S U E SThe book addresses three main questions.First, what are the dimensions of poverty and social exclusion in Britain,and what role can microfinancial services play in combating them?

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    2 Poverty, Social Exclusion, and Microfinance in BritainSecondly, from international experience of using microfinance as anapproach to tackling poverty and social exclusion, which lessons arerelevant in the British context?Thirdly, are microfinancial services able to address the underlying structuralcauses of poverty and social exclusion? Or do they primarily strengthenpeople's ability to manage the effects of structural change on their own lives?In focusing on these questions, we try to avoid a technocratic approach topolicy and practice. Microfinancial services are often seen as a kind oftechnical fix. Yet, like other anti-poverty interventions, introducing andoperating such services is also a process and occurs within a politicalcontext. Clearly politics, formal and informal, will determine, in part atleast, what is intended and what is achieved.

    For this reason, the language of policy is often in dispute. Social exclusionis a contested concept. The meanings of social exclusion used in the book aretherefore carefully specified. There is a significant ideological differencebetween an interpretation which stresses 'inclusion' in order to minimise'deviance' from a particular norm, and one which emphasises socialexclusion as a lack of control over one's own life, including the capacity toinfluence what it means to be a citizen. We take the second view here.

    Our approach is based on a perception of poverty as the product ofstructural factors within society, as opposed to the view that poverty isprimarily the fault of poor people themselves. However, we want to avoidportraying poor and socially excluded people as victims: we believe thatpeople themselves can and do create change.Our analysis of lessons from the provision of microfinancial servicesworldwide is grounded in a review of the contemporary British context.Only by examining what poverty and social exclusion mean and analysingthe ways in which they are being tackled in Britain can we come to any firmconclusions about what microfinancial services may be able to achieve inthis country. The success of any intervention aimed at addressing povertyand social exclusion depends upon a careful weighing of the evidence,both positive and negative, and an awareness of its limitations.Interventions promoted without such grounding in complex realities areunlikely to be effective anti-poverty tools.D E F I N I T I O N SPoverty is defined here in relative terms as the experience of living in ahousehold with a level of income or wealth which is below that necessaryto purchase the range of goods and services considered by the standardsof the majority in a particular reference group to be sufficient for living.

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    Introduction 3This definition focuses on ma terial poverty and encompasses vulnerabilityto a sudden loss of incom e, or indebtedness in cases where such losses areno t und erw ritten by wea lth or job security.Th e terms 'social exclusion' and 'pov erty' are not used interchangeablyin this book . Social exclusion is defined here as the processes which bringabout a lack of citizenship, whether economic, political, or social.(Although we take care in the book to distinguish between poverty andsocial exclusion, it should be noted that many international bodies,including Oxfam, define poverty in a way that is very similar to thedefinition of social exclusion used here.) Economic citizenship includesaccess to good-quality employment and to financial services. Politicalcitizenship refers to the capacity to influence processes of decision-makingthat affect one 's own life: being able to change the ru les. Social citizenshipincludes a sense of belonging, as well as the ability to accumulate andmaintain supportive social networks.6

    Alongside its broad focus on poverty and social exclusion, the book hasparticular relevance to the challenge of countering financial exclusion.Financial exclusion refers to exclusion from particular sources of creditand other financial services (including insurance, bill-payment services,and accessible and a ppro priate deposit accounts).7M icrofinance refers to a range of services: the provision of small loan s,savings facilities with no minimum deposit (or a very low minimumdeposit), and o ther financial services such as insura nce, m oney transfer, o rbill payment designed appropriately for people who are on low incomesor financially excluded for other reasons. These services taken toge ther aretermed here microfinancial services.Chapter 5, which considers the existing record and potential ofmicrofinancial services in Britain, introd uce s a term w hich is specific to theBritish context: community finance. This is the commonly used term forinitiatives which seek to widen the access of disadvantaged people andneighbourhoods to capital and other financial services.8 Such servicesinclude microfinancial services, provided, for example, by credit unions;neighbourhood regeneration initiatives, such as community loan funds;

    and loan funds and social banks targeted at relevant sectors, such as smallbusinesses, community and social enterprises,9 or charities.C O N N E C T I N G F I N A N C E , P O V E R T Y , A N D S O C I A L E X C L U S I O NThe links between finance on the one hand and poverty and socialexclusion on the other are complex. Material poverty, by definition,involves managing on little money, and managing money in particular

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    4 Poverty, Social Exclusion, and Microfinance in Britainways. It may mean reliance on family, friends, and informal providers.Such reliance both depends on and influences the nature of social relations.For people in financial difficulty and with limited access to formal financialservices, such relations may be critical, and the way in which peopleprioritise their uses of money when resources are squeezed may reflect this.For example, despite the often extortionate interest rates charged byprivate unregulated moneylenders, maintaining relations with andrepayments to informal lenders may be given higher priority than payingbills on time or paying off a bank overdraft.

    For many, 'financial exclusion' is part of the experience of poverty andbroader social exclusion. The causes of financial exclusion lie in thechanging market strategies of private commercial banks, which havewithdrawn from areas identified with low income and large numbers ofpeople receiving social-security benefits. Leyshon and Thrift refer to thisas a 'flight to quality', as banks increasingly focus on customised servicesfor high-income fee-paying customers.10

    Microfinancial services may be relevant and useful to people who areexcluded financially or in other ways, but need not necessarily be so.11Much depends on what else is going on in their lives, and on which servicesare being offered, and how. Money where to get it, how to manage it,including how to avoid debt is a critically important dimension of theexperience of poverty and social exclusion in Britain. Finance is thus ofmuch broader relevance than the issue of 'financial exclusion' alone.S T R U C T U R E A N D A R G U M E N T O F T H E B O O K

    Chapter 2, written by Ben Rogaly, placesfinanceand financial exclusion inthe context of the broader dimensions of poverty and social exclusion inBritain. The chapter synthesises some of the currently available evidenceabout the meanings and dimensions of poverty and social exclusion, aswell as about their various causes. This is a process of clarification. If thestated objectives of an intervention are to bring about change, it is essentialto be clear about what it is (in this case poverty and social exclusion) that itis sought to change. The discussion of causes serves to focus on what canand what cannot be achieved through provision of microfinancial services.Microfinancial services are not provided in a vacuum. Chapter 3, byBen Rogaly, places them within the broader environment of policiesdesigned to combat poverty and social exclusion at the national and locallevels. This inevitably cursory review notes the centrality of nationalsocial-security and workplace policies in British anti-poverty strategy. Italso reflects on the potential for local action, commenting on the currentgovernment's position as set out in the report from the government's own

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    Introduction 5Social Exclusion U nit: Bringing Britain Together: A National Strategy forNeighbourhood Renewal. The scope for action by poor peoplethemselves as individuals or acting together is also co nsidered .In the fourth chapter, Ben Rogaly examines some internationalexperiences of using microfinancial services to tackle poverty and socialexclusion. He draws on examples from the USA, Bangladesh, Indonesia,India, and Mexico to d em onstrate the diversity of microfinance initiativesin terms of both scale and orien tation. In recent years such initiatives haveproliferated, and m any m ore people have gained access to certain financialservices. Some initiatives have concentrated on savings, others oninsurance, and still others on loans. It is emphasised that microfinancialservices should no t be confused with credit for m icro-enterprises, which isjust one of the many kinds of financial service that may be involved. Thischapter reports on some detailed studies of the impact of microfinancialservices on poverty and on social relations of gender and class. The auth orrepo rts on the impact which business credit may have had on incomes (its'prom otion al' role) and income equality, as well as on the 'prote ctive ' rolewhich microfinancial services can have, for example through enablingpeople to reduce their vulnerability to d ebt. There is clearly no bluep rint fordelivering microfinancial services to poor peop le.

    In Chapter 5, Thomas Fisher examines the record of the fledglingproviders of microfinancial services in Britain and their potential forexpansion. Such schemes are known in Britain as 'community financeinitiatives'. They include funds devised to attra ct investm ent in to areas ofmultiple disadvantage, as well as to deliver financial services forindividuals. Because of their relatively recent origins, there is littleevidence of their impact. However, it is possible to use the informationavailable on the impact of microfinancial services on poverty and socialexclusion in other countries to draw out inferences about the potential ofcommunity finance initiatives to reduce poverty and social exclusion inBritain. Here to o, it is im po rtan t to set the initiatives in their wider c onte xt:the chapter outlines microfinancial services provided by institutionswhose m otives are no t explicitly social, including mainstream comm ercialbanks, post offices, and private moneylenders, as well as the servicesprovided by com munity finance initiatives.Chap ters 4 and 5 work th roug h the actual and potential im pacts of theincreased availability of microfinancial services to people in variousdegrees of poverty and exclusion. Protective services such as savings,insura nce, and loans for 'getting by' are found to m ake more differenceto the poorest people than credit for micro-enterprise. The latter hasprimarily benefited those who are less poor, though on low incomes, and

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    6 Poverty, Social Exclusion, and Microfinance in Britainw ho are better able to withstan d the inevitable degree of business failure.However, community finance initiatives in Britain have also sought toincrease employment in particular areas, through loans to small andmedium enterprises tha t are unable to ob tain sufficient capital from bank s.In Chapter 5, Th om as Fisher also considers the poten tial for com munityfinance and microfinance to offer an evolutionary way of combiningpractical action with structural chang e.In the concluding chapter, the authors seek to draw out some of theimportant lessons for Britain from the diversity and the innovations ofinternational experience in providing microfinancial services. The evidencepresented in the book suggests tha t there are imp orta nt lessons to be learnedfrom these initiatives for agencies that aim to combat poverty and socialexclusion in Britain. Many of these lessons concern the critical task ofhelping people to manage their money and thus cope better with lack ofearnings, w ith insecure and low-paid em ploym ent, with changes in familystructures and individual circumstances over the life-cycle. Initiatives thatprovide microfinancial services could potentially contribute to a moretransformative app roach on ly if integrated with wider strategies for socialchange and economic imp rovement.

    Microfinancial services in Britain have the potential to widen poorpeople's access to financial services in general and to more appropriateservices in particular. When successfully integrated with other anti-poverty initiatives, such services can enable people to protect themselvesbetter against the impact of structural change, and so give them moreeffective control over their lives.

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    Poverty and social exclusion in Britain:where finance fitsB E N R O G A L Y

    INTRODUCTION AND BACKGROUND

    THIS chapter places finance and financial exclusion in the context of thebroader dimensions of poverty and social exclusion. It concentrates onsynthesising some of the currently available evidence about the meaningsand dimensions of poverty and social exclusion, and their different causes.This is a process of clarification. If the stated objectives of an intervention areto bring about change , it is essential to be clear ab ou t w hat it is (in this casepoverty and social exclusion) that it is sought to change. The discussion ofcauses serves to focus on the question of what it is possible (and no t possible)to achieve at the local level or via the linking of local initiatives.In the following section of this chapter, meanings of poverty and socialexclusion in Britain are discussed, and definitions to be used in this book areset out. The third section explores dimensions of poverty and socialexclusion in Britain. The fourth considers some of the ways in whichchanges in the level and nature of employment have determined currentexperiences of poverty and social exclusion. Some of the underlying causesof structural change in the labour market and other causes of poverty andsocial exclusion are considered here. The fifth section examines wherefinance fits: for example, what are the structural causes of financialexclusion? How do poor and socially excluded people manage theirfinances? W hat part do debt, credit, and savings presently play in people'slives? This section identifies important challenges for the provision ofmicrofinance in Britain, as set out in C hap ter 5. Thefindingsof this chap terare summ arised and conclusions are draw n in the final section.M E A N I N G S O F P O V E R T Y A N D S O C I A L E X C L U S I O N I NB R I T A I NWhile professional commentators have disputed the meaning of povertyand the processes, such as social exclusion, which bring it abou t, Britain hasseen, since the late 1970s, an increase in the geographical concentration ofpoverty,1 and a growing inequality between rich and poor people. Manypeople live in households lacking secure shelter, diets of adequate quantity

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    8 Poverty, Social Exclusion, and Microfinance in Britainand good quality, relations with friends and family, or a capacity toinfluence events in their neighbo urho od or m ore widely. The experience ofrelative poverty is well docum ented and , as recent research has show n, canlead to a higher incidence of illness and early death.2 Absolute poverty ismo re contentious, as it is defined differently by po or peop le themselves, byprofessionals and by various natio nal statistical exercises. Analysis of dataon trends in the real income of the poorest 10 per cent showed that theirincom es fell by 8 per cent between 1979 and 1994/95.3 The present Labo urgovernment has made a comm itment, through policy statemen ts, to reducepoverty and social exclusion.

    As the main task of this book is to examine the ways in which theprovision of microfinancial services may enable poo r and excluded peop lethemselves, together with others working alongside them , to become lesspoor and less excluded, it is necessary to be clear about what is meant bythe terms 'poverty' and 'social exclusion'. The loose usage of theseexpressions and the interchanging of them in other writing have beencriticised. On e prob lem is th at different meanings of social exclusion cancarry diametrically opposed implications for public policy. Evans pointsout, for example, that for some commentators welfare provision itselfbrings on social exclusion, rather than being a way of tackling it.4 Termssuch as 'poverty' and 'social exclusion' are inevitably loaded withnormative or ideological assumptions about the kind of society that theuser would like to see.5 Social exclusion is defined differently at thenational policy level in different countries.6Here, the terms 'poverty' and 'social exclusion' will not be usedinterchangeably. My ideological starting point can be set out on the tableat this stage. I am committed to an equality of opportunity that goesbeyond non-discrimination, imp ortant thoug h that is. This com m itmentinvolves working to change the institutions that create and perpetuateinequalities of outcome, including wealth inequality.7Definitions of poverty and social exclusionPoverty is defined in this book in relative term s as the experience of livingin a household with a level of income or wealth which is below thatnecessary to purchase the range of goods and services considered by thestand ard s of the majority in a particu lar reference group to be sufficient forliving.8 This definition of poverty encompasses vulnerability to a suddenloss of income and therefore to indebtedness thro ugh unexpected shocks orregular strains on finances, in cases where such losses are no t und erw rittenby wealth or job security. Social exclusion, much m ore broadly, is used hereto refer to the processes which bring about a lack of citizenship, whether

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    Poverty and social exclusion in Britain: where finance fits 9economic, political, or social. Economic citizenship refers principally toaccess to work (whether or not through paid employment) which has thepotential to increase an individual's sense of con trol over his or her life, andhis or her capacity to transfer this across generations, partly throughincreased income, wealth, and spending power and reduced vulnerability,but also in terms of self-esteem. Economic citizenship may also refer toaccess to financial services; it encompasses financial literacy.9 Politicalcitizenship means being able to take part in and exert influence on processesof decision-making, both formal and informal, th at affect one's own dailylife. Social citizenship refers to a sense of belonging and , in particular, to thecapacity to accumulate and maintain social assets in the form of helpfulcontacts, relations, and netwo rks.10

    To be poor does not necessarily mean being socially excluded, but itincreases the chances of such an outcome. For example, lack of income,together w ith lack of wealth , reduces one's capacity to parta ke in social lifeand may reduce the quantity of one's social relations.11 In other words,poverty, which is often an aspect of social exclusion in terms of lack ofeconomic citizenship, also makes social non-citizenship more likely.Furthermore, the various processes of social exclusion outlined here areinterrelated each one increasing the likelihood of the othe rs.Exclusion and disadvantageThis book's perspective on social exclusion highlights the disadvantages thatsuch exclusion entails. Unem ployed people seeking work , if they live in areaswith few jobs, are effectively excluded from the labou r m arket. Women areexcluded from certain types of work and employment, from netw orks , andfrom political decision-making. Tho ugh this does not apply to all wom en,as a category of people wom en are disadvantaged in relation to careers inpaid employment by socially constructed notions of what w omen and menshould be or do, as well as by the biologically determined 'reproductivetax'.12 Many black and ethnic-minority people in Britain are excludedthrough discrimination on grounds of colour, religion, or language.13

    Among elderly people, there is an increasing gulf between the wealthywho have significant private incomes from lucrative pension deals orstockm arket investments, and those wh o rely entirely on state pensions.14For many elderly people, particularly those with fewer material resources,retirement means a decline in social as well as economic citizenship,because of their increased isolation . Those of the elderly w ho lack income(and often therefore their own means of transport) suffer most from theclosure of local shops and public services. This gro up are also the least ableto defend themselves from violent crime.15

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    i o Poverty, Social Exclusion, and Microfinance in BritainSocial exclusion as the term is used here refers to processes leading to adecline in economic, political, and social citizenship, and thus to reduced

    equality of opportunity and access to resources, including social andmaterial wealth. More effective citizenship along economic, social, andpolitical lines means more pow er to co ntrol on e's own life, more roo m foreffective action, and the capacity to redefine the rules regarding what itmeans to be a citizen.'Deviance ' and diversity

    This view of social exclusion stands in marked contrast to theassimilationist view, which places the emphasis on inclusion in some k indof culturally defined m ainstream . Demanding assimilation of people w hoare, in some ways at least, self-excluded does not fit with my definition ofpolitical citizenship. Identities can be cultivated on the basis of exclusion .A strong sense of self and of belonging may be gained from apparentlydevian t behaviour. Rom ani gypsies are Britain's most persecuted m inority,according to one com mentator.16 Yet this grou p affirms its identity in pa rtby 'deviance' from societal 'no rm s'. Similarly, on the Cru dda s estate in theWest End of Newcastle-upon-Tyne, where almost all young men arewithout jobs, many would not consider visiting a Job Centre in the citycentre, perhaps placing a higher value on one dimension of citizenship(maintaining relations with friends and neighbours) rather than another(obtaining a job). In the case of women in general, questions have beenraised about the extent to which they want to be included in 'male'netw ork s, and the degree to which some kinds of 'exclusion' enable themto develop forms of identity and action with which they are morecom fortable and which they adop t in preference to conforming to or beingincluded in w ha t they perceive to be a flawed 'ma le n orm '.17Furthermore, it is important to avoid confining ideas of social exclusionto particula r categories or grou ps of people. To represent a particular ethnicgroup, women, elderly people, or young people as excluded is to denydiversity within th at social category and to deny the possibility of change,which is brought about in part by people's own actions. While black and

    ethnic-minority people are discriminated against as a gro up , there is muchdiversity of outcomes am ong different sub-groups. For exam ple, people ofChinese or Indian origin have been found to be less likely than blackCaribbean people and people of Pakistani and B angladeshi origin to live inareas of extreme poverty. Indeed, a larger prop ortio n of Chinese and thosedefining themselves in the 1991 Census as 'O th er ' lived in w ard s with thehighest pro po rtio n of highly qualified peop le and social classes 1 and 2 thanany othe r ethnic group (including whites).18

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    12 Poverty, Social Exclusion, and Microfinance in Britainthan others and fluctuate less tha n oth ers . This lower vulnerability shouldbe an a dd itiona l signal of the relative security of a househ old's livelihood.

    Poverty is more fundamentally a matter of lack of wealth. The possessionof relatively little or no wealth, in the form of owned assets, increasesvulnerability to fluctuations in income. More than this, wea lth has long hadan important role in structuring opp ortun ity in Britain. Inequality in wealthin Britain hardly changed between 1911 and i9 60 .24 Indeed, writing in thelate 1970s, Townsend held that the unequal distribution of wealth was the'single most notable feature of social conditions in the UK'. ... '[AJccess tooccupational class tends to be a function of class origins and familywealth.'25 More recently, a major study of the underlying structuresresponsible for Britain's political, econom ic, and social conditions suggestedtha t there was a direct link between w ealth and class, which 'harde ns subtlyinto caste' via the education system. Those born with little wealth could notafford the private education in which an increasing proportion of childrenwere enrolled during the 1980s.26 Privileged education marked out lifeopportunities bounded by initial wealth or class.27 Indeed, wealth distortsaccess to better-quality state education as well as to the private system, withthe location of many of the highest-performing schools corresponding toconcentrations of wealthier residents.28 House-price differentials p erpetua tethe transm ission of uneven life chances across the generations. This indicatesone of many links between poverty and exclusion in the sense of botheconom ic and social citizenship as experienced by those who are deniedaccess to opportun ity (as opposed to those who can choose).

    The experience of living on low or insecure incomes with little or nowealth was comp ounded by the rapid grow th during the 1980s and early1990s of inequality of incom es.29 The experience of income inequality hasbeen found to con tribute significantly to social disaffection and ill-health.30As the distance between the lowest and highest income deciles increased,the occupational composition of the bottom decile shifted from apreponderanc e of pensioners in the 1960s to dom ination by the registeredunemployed as the largest single group in the 1980s and 199 0s. How ever,there was also an increase in the number of people in work but with verylow incomes,

    31including an independent increase in the proportionclassified as self-employed. The proportion of self-employed people in thelowest income decile increased by 23 per cent between 1984 and 1994.32Other researchers looking at income poverty over time have identifieda process of 'churning'. Using panel data involving interviews with thesame people over several years during the early 1 990 s, Jarvis and Jenk insfound that people move in and out of poverty because of inter-annualfluctuations in income.33 The implication of their research is tha t many of

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    Poverty and social exclusion in Britain: where finance fits 13those w ho w ere in the lowest income group in the early 1980s are in higherincome groups now and vice versa. The explanation for the growing gapbetween rich and po or in terms of income is no t as simple as it had seemed.Moreover, other evidence suggests that, although the real incomes of thelowest incom e decile fell by 18 perc en t (after housing costs) between 1979and 19 92 /93 , their expenditure rose.34 Access to consum er du rab les, suchas televisions, videos, fridges, telephones, and washing machinesincreased for this decile between the late 1970s and the 1990s.35

    Jarvis and Jenkins do no t imply a trend of upward mobility, but ratherreveal the prec arious existence of a group of househo lds wh o move in andou t of income poverty, depending on changes in family size and structu reas well as employment status. Of those people in households whoseincomes declined to below half of average incomes between 1990/91 and1993/94, in just under one-third of cases it resulted from one householdmember losing employment, and in about one in seven cases from oneadult member departing.36 The experience of poverty is no t fixed. Ratherit is dynam ic, and there are many different trajectories. However, while itmay be true tha t for a minority 'low incomes are a life-cycle ph en om en on ',for most people in the lowest income groups, increases in income do nottake them far out of income poverty.37

    A document on poverty and inequality published by HM Treasury in1999 also examines the dynam ics of poverty. One in six families is pushedinto poverty (defined here as the bottom fifth of the income distribution)by the birth of a child. Th e impact of poverty an d inequ ality on children'slife chan ces s tarts early with clear class-related differences in the rate ofeducational development by the time children are 22 m onths old. And thisinequality is passed from generation to generation , with the children of thelow paid much more likely to be low-paid adults in their turn.38

    M any people are 'stuck' in income poverty. More than half of those inthe bo ttom twenty per cent of incomes remain the re for at least three years.Being stuck is associated with an unstable family background, earlypregnancy, past criminal convictions, and illegal drug use. Significantly, itis also connected to a lack of 'the tacit, informal skills of networking,identifying opp ortun ities and using initiative and imagina tion'.39 This is, ofcourse, dangerous terrain, because these same skills are used by somepeople of considerable wealth to distort opp ortunity in their own direction.I do not take the position tha t poverty is caused by behav ioural factors. Onthe contrary , I believe the explanation to be largely struc tural (see below).For example, as access to free and subsidised public services, includingeducational and health facilities, declines, those lacking access for want ofmoney are also more likely than others to remain in income poverty.40

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    Poverty and social exclusion in Britain: where finance fits 15insurance, much of which remains intact at the time of writing, as will beseen in Chapter 3. Elaine Kempson's synthesis of more than thirtyqualitative studies of 'Life on a Low Income' shows the complexity ofwomen's and men's differential experiences of poverty. Despite tensionsassociated with living in restricted spaces with no family member inemploym ent, '[t]hose w ho coped best w ith living in poverty tended to becouples who had very strong relationships to start with'. 45 It was harderto cope alone, although men's 'struggle to come to terms with failing tosucceed as breadwinn er' w ould create problems for w om en to o. Womenou t of (or in and ou t of) employm ent tended to continue to be less cut offthan men from others of their own sex.46 It may be that the networkingand social skills involved in manag ing tight family budgets and in findingchild-care arrangem ents , both of which were often found to be the role ofwomen rather than men, meant that unemployed men, even those inhouseholds with two or more adults, could be more isolated thanunemployed women.

    Large num bers of children live in households experiencing poverty (notsurprisingly, given the over-representation of lone parents and two-pa renthouseh olds in the lowest income decile, com pared with the pro po rtion s ofboth in the population).47 Nevertheless, parents out of work and on lowincomes continue to attempt to protect their children from deprivation.For example, parents on benefits spend almost the same amount as otherparents on their under-elevens at Christmas.48 In seeking to explain therelatively small differences between what different parents spend on theirchildren, Goodman et al. examined a number of possible associations,including living in a one-paren t family, having a pa rent who smokes, beingon income support, having siblings, or having parents who are notwo rking. The last factor wa s found to matter mo st. How ever, much of theadditional amount spent by working parents is spent on child care.49

    It has already been noted th at m any of those who rely on state pensionsexperience income poverty, and that parents with children are over-represented in the lowest income decile. Yet intra-househo ld relations areno t static: they change over a household's life-cycle. Changes in h ouseholdstructure explain some of the dynamics of income poverty alreadydescribed above. A household not classed as income-poor at one stagecould fall into that category later, for example after a birth involving lossof employment income (see discussion of H M Treasury rep ort above), andmove out of it again later, when and if employment income rose.Househo ld dissolution involving the loss of an earner is also a major causeof sudden declines in income.50 However, as noted above, peopleexperiencing income poverty face adverse structures of opportunity and

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    16 Poverty, Social Exclusion, and Microfinance in Britainaccess to resources, including wealth, which means that movements outof, say, the lowest income decile tend not to be long lived or far removed.

    Intra-household relations affect the way in which money is managedand who manages it. Life-cycle changes create particular demands forfinancial services such as insurance and pensions. All these haveimplications for microfinance initiatives, in terms of the way they areorganised and the services they offer. These issues are discussed in moredetail toward s the end of this cha pter ('Where finance fits').Spatial dimensionsMaterial poverty and the multiple processes of social exclusion areconcentrated in particular geographic areas.51 The most acute experiencesof deprivation are in urban areas such as Newcastle-upon-Tyne andLiverpool, where unemployment has hit hardest with the decline of heavymanufacturing industry. Analysis of census data indicates a 'greater spatialconcentration of poverty and wealth over the decade to 1991'.52 But thereis diversity in spatial patterns and hence in the experiences of deprivation .For exam ple, certain housing estates on the outskirts of Newcastle becam ethe focus of very high levels of unemployment, w hile the city centre rem ainsprosp erous and flourishing. Part of the experience of poverty in New castleis the sense of social as well as spatial distance between these tw o worlds .53In Birmingham, by contrast, the most severe deprivation is located in theinner city.54 Green's detailed study, which uses a variety of indicators ofpoverty and wealth, also shows up the situation in Lond on, where many ofBritain's poore st and wea lthiest people live in close proxim ity.Spatial dimensions a re experienced differently in these three exam plesand elsewhere. A sense of economic non-citizenship may be collectivelyshared on an isolated ou ter housing estate. Exclusion from social netw orksmay be felt more acutely by peop le living in poverty in inner Lon do n. In allthese locations, deprivation is multidimensional, characterised by low-quality and crowded housing conditions, food poverty,55 ill health, andlow-achieving schools. Groups of people whose choices are limited,particularly unemployed people and lone parents, end up being clusteredtogether on particular estates.56Others emphasise that the co-existence of rich and poor people in thesame space prevails across different parts of Britain. 'In Britain the bigdivisions are no longer between north and south. They are between oftenquite small areas of the same towns, the same cities and same regions.'57Indeed, there remains widespread rural poverty in Britain. The ruralpopulation of England alone was 13.5 million in 1996, an increase of 2.5million since 1 97 1. It has been estimated tha t one -quarter of those living

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    Poverty and social exclusion in Britain: where finance fits 17in the countryside are 'in or near the margins of pov erty'.58 The experienceof social non-citizenship in the countryside involves the strain ofsuppressing and hiding material poverty from public view a strainbrought on by 'living in a "goldfish bowl"', which can lead to severemental-health problems.59 Inequality of pay and job insecurity for those infarm work are especially marked, as jobs are regularly threatened by theuse of outsiders bussed in, sometimes from inner-city areas. 60An understanding of the spatial dimensions of poverty and socialexclusion is required for the design of policies and programmes aimed attackling them. These include microfinance schemes. For example, theconcentration of people and the extent to which people interact socially andeconomically, as well as the natu re of tha t in teraction, all affect the degree towhich group-based microfinancial services can make a positive impact onsocial exclusion. Furtherm ore, as will be seen in C hapter 3, it is important tomatch an awareness of the mutually reinforcing multiple dimensions ofexclusion in particular places with the need to work simultaneously onmultiple levels, national as well as local. Singling out particular neighbour-hoods as 'problem areas' can itself perpetuate exclusion and distractattention away from the causes of poverty and exclusion, which are thesubject of the next section. The section begins with an assessment of how theways in which the labour market operates (and how this is changing) havecaused poverty and exclusion. It goes on to exam ine some of the underlyingcauses of recent structural changes in the labour m arket and to review someof the other m ajor causes of deprivation in Britain.THE CAUSES OF POVERTY AND SOCIAL EXCLUSIONBecause the provision of microfinancial services is advocated as a meansof tackling poverty and social exclusion, and not merely financialexclusion, it is necessary in this book to consider the major causes ofpoverty and social exclusion in Britain. In Cha pters 4 and 5, wh ich focuson microfinance, it will then be possible to comment on the potential formicrofinancial services to tackle those causes.The changing structure of the labour market and work-related exclusionIn Britain, the most widely cited proximate cause of both poverty and theeconom ic process of social exclusion associated w ith work is the changingstructure of the labour m arke t. Two major trends stand o ut: a rise in thescale of registered unemployment from the 1970s, and a 'casualised' andmo re 'flexible' workforce, with higher prop ortio ns of both short-term andpart-time contracts.61

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    18 Poverty, Social Exclusion, and Microfinance in BritainAs manufacturing industries and coal mines closed down, there weremajor changes in the kinds of worker sought by employers. On the one

    hand, there were jobs requiring relatively little skill but also paying verylittle, such as work in residential care, catering, and cleaning. O n the o therha nd , employers increasingly began to seek work ers with skills suitable tohigh technology, including information technology.At the same time, the demographic structure of the labour forcechanged. The re was a big rise in lone paren thoo d between the early 1970sand the early 1990s. Some studies have suggested that unemployment isthe main cause of the increase in lone paren tho od .62 Over the same period ,

    the proportion of women in part-time work rose from one-fifth to one-third, while the proportion of women in full-time employment hardlyaltered. The 'proportion of working-age men in full-time employment fellby almost a fifth'.63Some men experience stigma unaccep table to them if they enter certaintypes of wo rk and receive very low rem un era tion , because of sets of ideasabout gender and work that are prevalent in society. This may have beenpa rt of the reason for the increasing ratio of wom en to m en in em ploym ent.

    Part-time work ers in Britain can still be paid less per ho ur than full-timersin equivalent jobs. Moreover, many women were employed inoccu pations, whe ther full-time or part-time, paid at rates lower tha n hadbeen the practice in manufacturing industry. Women in full-timeemployment earn on average only three-quarters of men's pay for eachhour worked.64 Disturbingly, 1 99 7-98 was the first year since 1986 whenthe hou rly pay differential between wom en and m en (taking full and pa rt-time workers together) actually widened.6SA further cause of 'casualisation' and 'flexibilisation' was theweakening of workers' rights through employment legislation enactedthroug h the 19 80s. The overall result was the segmentation of the labou rm arket, which 'sculpt[ed] the new and ugly shape of British society'.66 Thecountry was divided between those on the edge of or outside the labourmarket, those inside but in insecure jobs, and the group at the top withboth high incomes and economic security. The changing labour marketwas a major cause of income inequality. Those whose earnings consistedpartly of returns on investments and private pensions saw their incomeincrease rapidly. Inequality of incomes increases the sense of relativedeprivation and thus poverty and also the experience of exclusionfrom economic citizenship. Unemployment is perpetuated by the spatialconcentration of workers, because this reduces the chances of usingnetw orks and contacts to find ou t abou t and be informally recommendedfor job opportunities.

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    Poverty and social exclusion in Britain: where finance fits 19Moreover, 'the impact of economic restructuring on social life inneighbourhoods where place, [people] and work were once closely

    intertwined has been devastating'.67 This decline in local social interac tionis not confined to areas of high unem ploym ent. Am ong employed pe ople,the increase in hours worked has made for less associational life. Britishsociety is 'divided between a well-connected and active grou p of citizenswith generally prosperous lives and another set whose associational lifeand involvement with politics is very limited'.68 Thus, for many peoplepolitical citizenship ha s declined.Identifying processes of social exclusion in this way does not meanstigmatising self-exclusion. Indeed, self-exclusion from certain forms ofemployment may increase an individual's capacity to participate insocial and political citizenship. For example, some types of paid workcan be boring and exhausting and lead to deteriorating health. Morrissuggests that some unskilled manual workers withdrew from theemployed workforce in Britain because of the impact of 'inclusion' ontheir health.69Many workers who have left or been pushed out of employment haveturned to self-employment, often helped by government schemes.How ever, this is an economic status increasingly represented in the bo ttomincome decile. W hereas in 19 61 -6 3, just 8 per cent of the lowest incomedecile were self-employed, by 199 1-93 this prop ort ion had risen to 15 percent.70 Credit for self-employment is one kind of microfinancial service.Self-employment is discussed at greater length in Chapter 3; Chapters 4and 5 analyse the impact and potential impact of credit for self-emp loyment o n poverty and social exclusion.Underlying causes of changes in the labour marketAs will be seen below, poverty and social exclusion in Britain are notcaused by labour-m arket exclusion and restructuring alone. However, inas much as they are caused by these processes, it is important in a booksuch as this, which pu rports to reflect on the possibilities for microfinanceto coun ter poverty and social exclusion, to review some of the underlyingstructural causes of changes in the labour market.

    The types of work er sought by employers and the terms of em ploymentoffered are rooted in calculations about costs and about productmarkets.71 Capital flows, including productive investment, have increasedas barriers to inward investment have been lowered and a trend towardsderegulation has become more marked. Investment and divestment maybe expected to occur more frequently, as producers and providers ofservices seek to reduce their costs. Because of the trend tow ard s 'slicing u p

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    20 Poverty, Social Exclusion, and Microfinance in Britainthe value chain ... employment [has become] more vulnerable to wagech ang es'... and the 'thre at of relocation [of prod uction ] mo re credible'.72

    Econ om ic choices are emphasised in acco unts of 'glob alisatio n' wh ichinterpret the decisions of international corporations as being aboutmoving production to lowest-cost sites of production or finance, to reapthe highest available returns on capital. Such analyses emphasise thetrend away from national-level autonom y in economic managem ent andan increase in the relative power of globally mobile capital.73 Yetnational policy choices are influenced by political economics as much asby m arket econom ics.In the view of one influential commentator, Will Hutton, Britishgovernm ent policy is strongly influenced by nationally privileged gro up s,including ow ners of large-scale capital. H utton suggests that the argum entcontinually invoked by Britain's governments since 1979 that thenation needed to play its part in 'freeing' international trade and financialflows, and that this included legislation to curb union power and'flexibilise' em ployment w as not abo ut technical econom ics, as it waspresented. Rather these argum ents were part of the 'enl ist m en t]' of 'the

    au tho rita rian capab ilities of the state to serve ...[the principle of loyalty tothe market], which neatly chimes with longstanding British values andinstitutional structures'.74There is evidence from other Eu ropean countries that em ployment andrelative wage equality can increase together. National policy matters,because divergent policies produce very different outcomes. Whileunemployment in the UK remained high in the 1980s and 1990s, wageinequality, as already noted, also grew because of anti-uniongovernm ent action an d the lack of a minimum wage. Yet, at the sam e timein the Nethe rlands both em ployment and wage equality grew.75 There arethree competing ex planations for the fall in dem and for unskilled worke rsin rich coun tries in general. On e holds th at changes in the technology ofproduction have required a higher average level of skill per worker.Another suggests that increasingly 'free' trade has led to the relocation ofrelatively unskilled jobs to the lowest-wage economies. Both of theseexp lana tions are true to a degree; bu t because there have been such majordifferences between countries such as the Netherlands and Britain or theUnited States and Canada, in terms of distribution of employment andincome, the third explanation the different policy conditions in thosecountries is especially co nvincing. Policy differences were found to bethe greatest in relation to labour-m arket 'institutio ns', in particular unionsand the minimum wage. In other words, the deliberate weakening oforganised labour in Britain and the previous lack of a minimum wage have

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    Poverty and social exclusion in Britain: where finance fits 21been major causes of the split in the labour market between relativelyhighly paid skilled workers and very low-paid unskilled workers.Other causes of poverty and social exclusionUnemployment is clearly n ot the sole cause of poverty or social exclusion inBritain. Indeed, in 1950s Britain poverty co-existed with full employm ent.76And as has been noted, one of the most dram atic trends in recent years hasbeen inequality of rew ard, job security, and o ther conditions of work amongthose in em ployment.

    Many low-paid workers and most 'workless'77 households rely to agreater or lesser extent on state benefits.78 These will be discussed furtherin Chap ter 3. How ever, it is im po rtan t to note here tha t the level of benefits the cash -in-hand received directly affects poverty, and the cap acityto p articipate in citizenship. It has been show n tha t a major part of incomeinequality is due to differences in incomes between benefit recipients andpeople with incomes from other sources. Earlier cuts in benefits in 1988had the effect of increasing the income poverty of many claimants.79Recent reductions in entitlement to housing benefit have also meant thatrecipients have had to dra w m ore and m ore on income intended for day-to-day needs to cover their housing costs. Between 1983 and 1995, thevalue of the state pension declined from 47 per cent of average income to36 per cent, and u nem ploym ent benefit fell from 36 to 28 per cent.80

    While the current Labour government is right to be restructuring thebenefits system to m ake wo rk pay for those who w ant to work and can findjobs, it should not neglect the level of benefits for those who remain'workless'. For some 'workless' individuals and households, there is nochoice: in m any areas there are no job s. For o thers , particularly disabledpeople and the carers (mostly women) of young children, elderly, or sickpeop le, it is the level of benefits tha t is likely to m ake the m ost differenceto their standard of living, rather than schemes to entice them intoemployment.81 The government has recognised this by raising benefitsavailab le to some of these gro up s. The increase in accessibility of child careand help to pay for it is welcome for parents who otherwise would beunable to w ork . However, it should also be recognised th at some paren tswould like to have the choice of caring for their children themselves, tha tsome have seemingly unavoidable full-time caring workloads, and that inboth these cases the unpaid w ork of paren ts is an imp ortan t contribu tionto social stability. Moreover, increasing the gap in income between thoseliving on benefits and tho se with access to higher em ploym ent incom es hasother effects, which can increase social exclusion. These m ay include thetendency of people with m ore money to go shopp ing by car, and the decline

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    xx Poverty, Social Exclusion, and Microfinance in Britainof local shopp ing facilities for those with less money and less tra nsp ort.82Of course, the distribution of wealth is directly influenced by the types andlevels of taxation, as well as by the benefit system. Taxation of wealth aswell as income is ano ther way in which governments can influence trend sin poverty and inequality.

    A further important cause of poverty is lack of access to education,health care, and other services.83 Unequal access to education and healthservices excludes po or people from a 'reasonab le share in the wealth of theirown society' as well as from full political citizenship.84 Changes in the valueof public services after allowing for the rising relative cost of services, theeffects of demographic change, and potential public-sector productivitygrowth mirror the trend in cash incomes for the poorest between 1979and 1993.8 5 Lack of services is pa rt of the multi-dimensional experience ofpoverty and social exclusion. It is also a major cause of it. Inadequate orinaccessible services can perpetuate or increase ill-health and illiteracy,which are barriers to social, economic, and political citizenship as well asto increased income and accum ulation of wealth. Health and edu cation areof course not the only services on which people rely. Financial services arealso crucial, because they can, among other things, strengthen people'scapacity to manage their finances to avoid periods of extreme financialstress. The section that follows examines where finance fits into theexperience of poverty and social exclusion, and the contribution thatgrowing exclusion from financial services has made to that experience.W H E R E F I N A N C E F I T SThe main aim of this book is to analyse the potential of microfinancialservices for tackling poverty and processes of social exclusion. It is nownecessary, therefore, to look at where finance fits into experiences ofpoverty and into the analysis of its causes. The section is divided in to threepar ts. The first focuses on the ways in which po or people manage money,and shows how lack of money causes social exclusion. The second partdescribes the exclusion of poor people and people living in areas ofmultiple deprivation from access to financial services. Finally, the thirdpart considers some of the structura l causes of financial exclusion.M oney managem ent, poverty, and social exclusionIncome poverty is, by definition, associated withfinancialhardship. Detailedstudies of how people on low incomes manage their finances in Britain alsoshed light on the interaction between financial constraints and processes ofsocial exclusion.86 These studies suggest some general patterns, in addition toindicating much diversity.

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    Poverty and social exclusion in Britain: where finance fits 23Demands on m oney come at different times, some of them predictable. Forexample, fuel bills and clothing bills increase in the winter, school holidays are

    more expensive for parents th an term times, and festivals such as Christmasare often the greatest single strain on the budget during the year.87 Weddingsand the births of children are also times of high expend iture, as are funerals.Faced with intermittent demands for single expensive items and thecontinual need to keep up payments on utilities (despite seasonalvaria tions in some bills), low-incom e hou seho lds with savings may be ableto draw down on these in times of financial stress. But for most low-income households, this is not an option, and the money-management

    choice which does no t come w ithou t a price in terms of social relations,as will be seen is one between 'juggling' bills, often using multiplesources of credit to keep various creditors at bay, and 'going without':cutting spending down to levels which the budget can manage. 88 As isshown in the Policy Studies Institute study, Hard Times?, people changetheir approaches to money management, depending on whether or notthey have a job. When a household moves to full dependence on socialsecurity, money management can become 'a full-time occupation'.89M oney m anagem ent is required from day to day and week to week, andin between receipt of paym ents it may still mean going witho ut. But effortsto 'smooth consumption' and avoid scarcity in times of hardship are onething; access to earnings is more or less cut off at retirement age, and thus theinability to smooth consumption across the life cycle through pensionprovision (because of low pay, unem ployment, or hav ing spent many yearsin unpaid caring work) is ano ther im portan t financial d imension of poverty.Interestingly the studies are not consistent in distinguishing between

    men and w omen as man agers and controllers of money. W hile, accordingto one study, 'men generally contro l and allocate the resources and wo menundertake the day-to-day manag em ent',90 another suggests that, for low-income families with children, women are as likely as men to controlhousehold budgets.91 The studies agree that management tends to bewomen's responsibility.92While the ways in which people manage money depend in part on theirattitude to credit and debt,93 they also vary according to a person's resourcesin terms of financial literacy. Financial literacy includes a knowledge ofsources of credit and rights in relation to specific creditors, budgeting skills,and an understanding of basic financial terminology, such as annualpercentage rates for comparison of borrowing costs.94 It is also aboutknowledge of entitlements to state supp ort. Indeed, adequate know ledge ofbenefits was considered of more importance than access to savings in a studyof mortgage debt among low-income borrowe rs in the late 1 980s.95

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    Poverty and social exclusion in Britain: where finance fits 25Financial exclusionThere has been a rapid withdrawal of private commercial bank branchesfrom areas of multiple deprivation.102 Estimates of the proportion ofadults without a current account vary from 14 to 23 per cent of thepo pu lation . Between 6 and 9 per cent of adults have neither a current n ora savings account. Most are among the poor and socially excluded: theunemployed, the sick, disabled people, pensioners, and lone parents,usually living in rented accommodation, on very low incomes and relianton benefits, are all over-represented among people without an account.Many of these people had not applied for an account because of personaland financial c ircumstances which would have made it difficult to get anaccou nt. Only a minority had actually been refused one . M any of the 'self-excluded' could in fact be said to have been excluded by the kinds ofpro du ct offered by ban ks, which did not m atch their needs.10 3

    Lack of suitable services is also a major reason why one-fifth ofhouseholds do not have insurance cover on the contents of their homes.Insurance companies' standard products involve very high premiums inareas identified as having a high risk of burglary.104 Such areas coincidewith areas of multiple deprivation.105 Often the poorest people face thehighest charges for this financial service. Poor people w ishing to sta rt upmicro-enterprises with relatively small am ou nts of credit also face higherinterest rates and higher arran gem ent fees and o ther charges than existingbusinesses and larger-scale start-up enterprises.106 In both these cases,exclusion is bro ught a bo ut by commercial providers of financial services,w ho have had to cover the costs of exposure to higher risks an d, in the caseof loans, the higher relative costs of providing small loans. As has beenshown in the case of hom e-contents insu rance, however, produ cts such as'insure with rent' have been found viable in partnerships between someinsurance companies and local authorities (and housing associations),because of limited com petition and high levels of custom er loyalty.107

    The extent to which people in income poverty have savings or otherassets or wealth influences the degree to which they can choose betweendifferent types of credit. Savings and credit form important parts of theexperiences of income poverty and social exclusion in Britain. However,the '[ajbility to save was clearly linked to having a job'. 108 The HardTimes? study involved 74 low-income families in England. Most peoplesurveyed in it who had previously been regular savers were now runningdow n their savings. And for those w ho were still saving, it was irregu lar a m atter of 'an ex tra jar or piggy bank into which any spare cash was putat the end of the we ek'.109

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    Poverty and social exclusion in Britain: where finance fits 27by high-street creditors' as to racism and the small number of African-Caribbean staff employed in these institutions.11 4

    Financial exclusion in terms of exclusion from particular sources ofcredit and other financial services (including insurance, bill-paymentservices, and accessible deposit accounts) is a major theme of this boo k. Asthe studies cited in this section make clear, financial exclusion is not asstraightforward as many conv entional assumptions suggest. M any of thelow-income people who do not use a bank account either keep onedorm ant or choose to close dow n an accoun t which they had used while inemployment, and they now use cash instead. 'Loan sharks' are theexception rather than the norm, and many low-income families withoutemployment make use of registered doorstep lenders, who may lend inkind or cash, as pa rt of a portfolio of credit sources.115 Indeed, the w holeidea of 'loan sha rks ' is ambiguo us: on the one ha nd , the term suggests th atall private money-lending for profit is highly exploitative; on the other,'po or borrow ers are reluctant to see any avenue of credit closed to them ,however costly'.11 6 Interventions in microfinance, discussed in detail inlater chapters, need to take account of the actual rather than imaginedna ture of financial exclusion in Britain.Trends in the structure of the financial-services industryThe causes of financial exclusion lie in the changing structure of thefinancial services industry. This is particularly evidenced by the withdrawalof bank branches from areas of multiple deprivation, and many people'sreduced access to personal financial services. The market is highlycompetitive and changes rapidly, driven by deregulation, new technology,and financial globalisation, which have led to extensive rationalisation,mergers, new en trants, and branch closures.

    New com petitors, ranging from telephone banks and insurance providersto sup erm arke ts, utilities, and other service companies like British Airways,often use the extensive growth of custom er da tabases to target the lucrativeparts of financial services markets.11 7 To retain their profits, the large retailbanks have also sought to change the profile of their customers, focusing onmore profitable customers to whom they can cross-sell other financialpro ducts , and reducing , or charging m ore heavily for, their exposure to lessprofitable customers.118 This has meant, for exam ple, a shift from overdraftsand o ther 'debt-related produc ts to the selling of investment services'.'19 Thetraditional cross-subsidisation of less profitable customers is no longerconsidered feasible within these competitive marke ts. In 19 98 , bank share-prices fell sharply, following the global financial crisis. This is likely to haveprom pted further action to protect profits.

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    28 Poverty, Social Exclusion, and Microfinance in BritainTechnological advances are also making branches increasinglyredundant as providers of traditional money-transmission services for

    househo ld a nd business custom ers. In response to increasing com petition,banks have reduced costs throu gh branc h closures, while exploiting newtechnology to raise their productivity. Since 1987 the number of bankbranch es of the four m ain High Street banks has declined by one-third .120This has con tribu ted to the decline of High Streets, creating cash-handlingproblems for retail businesses and making customers with access toadequate transport go elsewhere for their banking, taking their retailspending with them. Branch closures are also distancing banks frompotential borrowers of small amounts. In guiding decisions about loans,there is a limit to which cen tralised da ta can com pensa te for the decline ofrelationship banking12 1 and the loss of detailed local knowledge ofeconomic opportunities.

    It is therefore not surprising that at least three million people borrowmoney from licensed money-lenders.12 2 As the Chief Executive of one ofthe largest money-lending companies puts it: 'The banks are all leavingthis market. Every time they close a branch, every time they cut staff, thereare more people dropping into my m arket. '123Especially in disadvantag ed areas, access to affordable financial servicesis becoming increasingly difficult. Disadvantaged neighbourhoods aremost likely to face credit rationing: they are suffering more from bank-bran ch closures; and the size of loans and othe r financial services requestedis generally well below the average, while perceived risks may be above theaverage. In the insurance industry, risk is now assessed by the full po stco de ,right down to individual streets. In 1995 New burgh Ro ad in Aberdeen wasthe street with the lowest risk, while Cuthbert Road in Birmingham andVilliers Close and M yddleton Ro ad in London w ere those with the highestrisks.124This exclusion in turn accelerates the growth of underlying patterns ofmultidimensional disadvantage, including poor housing, low income,inadequate services, and limited amenities. In such situations, even theperception of high risk can easily becom e a self-fulfilling prophecy , with atfirst the retre at an d then the complete w ithd raw al of financial services. Ascredit-scoring screens against indices of social and economic disadvantage(such as rented accommodation, lack of credit-card ownership, loneparenthood), its increasing use by banks is further excluding individualsin disadvantaged neighbo urhood s.Patterns of disinvestment are leading to no-go investment localities.This poses a massive threat to those with long-term investments in suchpotentially blighted markets, including local homeowners, business

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    30 Poverty, Social Exclusion, and Microfinance in BritainS U M M A R Y A N D C O N C L U S I O N S

    This chapter has attempted to ground the analysis of the remainder of thebook by reviewing the dimensions and causes of poverty and socialexclusion in Britain, and then examining where finance fits into thepicture. Poverty and social exclusion are both multi-dimensional and aredefined here in relative terms. They overlap and contribute to each other,but they are also distinct. Both are dynamic: some people are stuck withlow incomes, but many move into and out of income poverty. Inequalityof income increased dramatically from 1979 to the mid-1990s. Inequalityof wealth leaves those with the least assets with little to pass down tosucceeding generations. Income and wealth give access to networks whichcan enable people to combat social exclusion and poverty. Combatingsocial exclusion is about increasing control over one's life through greatersocial, economic, and political citizenship.

    Women and men, the young, and the elderly experience poverty andsocial exclusion differently. So do different races, nationalities, andreligions. These differences in turn vary across space: between rural andurban areas, for example, and between particular towns and cities.However, the aim of understanding poverty and social exclusion is not todefine a static notion of national citizenship into which everyone shouldfit. This would be to take an assimilationist perspective, akin to the Frenchnotion of social exclusion: one which risks, through misrepresentationand stigmatising difference and 'deviance', increasing the very exclusion itattempts to analyse. Political citizenship does not mean 'inclusion', butrather the capacity and power to change the rules.

    Unemployment causes much income poverty and is also the proximatecause of the exclusion of many from social citizenship. This is self-perpetuating, because chances of returning to employment are greatlyenhanced by networks and contacts.

    As the labour market has become increasingly polarised between skilledand unskilled sectors, so the experience of poverty in work has becomemore prevalent. The inequality associated with this dual labour market isa major contributor to social exclusion. The causes of structural change inthe labour market lie at the national as well as global level and are politicalas well as economic. Poverty and social exclusion are also caused bygovernment action and inaction in spheres other than the labour market.These include the levels of benefits, taxation, and the quality, accessibility,and pricing of health care and education.

    This chapter has shown how part of the experience of poverty in Britainis lack of control over one's finances running into continual debt or

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    Poverty and social exclusion in Britain: where finance fits 31(for others who go to any length to avoid debt) going without food andother basic goods. M oreover, increasing num bers of people are excludedfrom financial services by the changing structure of that industry.Extending access to savings, money advice, bill-payment facilities, andfinancial literacy may thus be critically important. Doing this in waysrelevant to intended users involves understanding the existing ways inwhich people make ends meet, including their use of relational capital(such as netw orks of neighbours and kin).

    Part of the experience of social exclusion is no t being able to pa rticip atein econom ic citizenship. Access to micro-enterprise loans and training m ayenable some people to regain their economic citizenship through self-employm ent, which may serve as a route back to mo re secure em ployment.Over-zealous promotion of self-employment credit could, however, becounterproductive, because it could cause increased indebtedness.Different kinds of microfinance intervention will be discussed in detail inChapters 4 and 5. Chapter 3, which follows, examines a wide range ofpolicies and initiatives to combat poverty and social exclusion at thenational and local levels, including efforts by poor people themselves, inorder to place microfinance initiatives in their prope r con text.

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    Responses to poverty and exclusion:the social policy context formicrofinance interventionsB E N R O G A L Y

    I N T R O D U C T I O NBackgroundTHE purpose of this book is to explore the potential for microfinance tocombat poverty and social exclusion in Britain. Microfinance has beendefined as the local provision of financial services to people with limitedaccess to conventional services. Chapters 4 and 5 discuss in detail thevarious ways in which microfinancial services can make a difference, andexamine the evidence for their international impact. The present chapteranalyses the wider policy and practice environments in which poverty andsocial exclusion are being tackled in Britain.

    The aims of providing a critical analysis of the specific policy context inwhich microfinance is practised are two-fold. Firstly, it is intended that reflections on other work aimed at reducing

    poverty and social exclusion in Britain reveal the extent to which thesegoals are already being achieved by other means. For example, Britain'sstate-provided social-security benefits constitute an effective minimumincome that is not available in countries such as Bangladesh andIndonesia, where microfinance is more widespread. This book seeksways in which microfinance might complement rather than replaceexisting policies and practices.

    Secondly, putting microfinance in its place enables an attempt to give abalanced view neither understating nor overstating its potential when, later in the book, microfinancial services are specifically considered.

    ApproachThis chapter will consider policies and practices that have the actual and/orstated intention of reducing poverty or combating social exclusion. Policiesand practices will be assessed according to their potential for reducingpoverty and inequality (in terms of income or of wealth) and combating

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    Responses to poverty and exclusion 3 5Conservative government of the early 1980s, remains the key source ofsubsistence. For most people of working age in households w ith n o earner,means-tested income support/Jobseeker's Allowance, housing benefit,and council-tax benefit provide an essential subsistence income and meansof access to shelter.3 It thus alleviates material poverty.

    State pensions are not the only benefits th at w ere allowed to fall relativeto earnings during the 1990s. Being on benefits and living in relativepoverty thus go hand-in-han d as inequality w idens. How ever, as was seenin Chap ter 2, although some people are 'stuck ' on low incomes and w ithlittle or no wealth, many others move into and out of poverty as hou seholdmembers enter or leave the labour market, and as families experienceseparation o r divorce of partne rs, births, sickness, and