As Muhammed Yunus found when investigating poverty, one of the key reasons that poor people are unable to lift themselves out of destitution is that they do not have access to credit. The banks simply do not trust the poor to be able to repay a loan, no matter how small. It’s assumed that they do not have the necessary money management skills to organise their repayments. If they did, they probably wouldn’t be poor.
Yunus’ conclusion was that if banking could be done in a relational manner, with local reps, borrowing groups, and community meetings, people would hold themselves accountable. It worked, the the success of his Grameen bank speaks for itself.
In fact, the poor have a highly sophisticated relationship with money. Living in poverty is a whole lot harder than living with wealth. You have to be much more careful, you have to plan and budget, and avoid waste wherever possible. If you live on less than $2 dollars a day, you have to be very creative with your money. According to a new book, Portfolios of the Poor, “money management is, for the poor, a fundamental and well-understood part of everyday life.”
2.5 billion people live on less than $2 a day, a fifth of the world’s population. 1.1 billion live on less than $1 a day (59p in in UK money), an almost inconceivably tiny sum to those of us accustomed to more – what we’d pay for a packet of crisps or a pack of gum. If you’re on an average UK salary, you earn approximately 120 times that per day. It’s remarkable that anyone survives on that at all, and the authors of Portfolios of the Poor decided to find out how it’s done.
250 families across Bangladesh, South Africa and India agreed to be interviewed every fortnight for a year. Analysis of their spending habits show networks of savings clubs, micro-loans, and informal borrowing between friends and family. With informal work, flexibility is key, and those informal networks in particular see people through cash flow problems. Despite the daily grind, even the most destitute were able to salt away reserves for emergencies, keep funds for weddings or funeral expenses, and even save up for retirement.
The evidence suggests that the poor are more ready to be trusted than previously thought, and development agencies should be paying attention. There is no reason why banking services should not be rolled out the poor, as a business opportunity as much as a poverty relief measure. It should also challenge the development orthodoxy of providing services or infrastructure rather than just giving poor people money. What would happen if you cut out the middle man and gave grants to individuals rather than organisations? There are trials going on at the moment I believe, and I’ll let you know if I hear anything more.
- You can find out more at portfoliosofthepoor.com, and read case studies from specific households.
- Also see thepoorandtheirmoney.com
- and Chris Blattman’s review here
Jay
November 17, 2009
I don’t want to sound like I’m against providing banking services to the poor, but I think it might be something that has to be done with some thought.
While researching for an essay on the role of ethics in management, I came across the case of an Australian credit union that wanted to run itself in an ethical manner and be a good ‘corporate citizen’ in the community.
However, it operated in a poor community where most people received welfare payments from the government. Essentially the credit union ended up acting as a clearing house for its members, many of whom would withdraw their welfare payments for regular spending. The credit union was eventually opted to be acquired by a bank, as it was not running according to its founding principles and struggled to attract ethical savers in the low-income community.
Jeremy
November 17, 2009
Absolutely, you need to really know your local area and the needs and habits of your potential customers. Grameen worked because it was finely tuned to Bangladeshi culture. If you imported it straight into other places, it might fail – but that’s the model of banking failing. It doesn’t mean the poor can’t be trusted.
I also think that a benefits culture is a real complicating factor. Poverty in developed countries is very different!
Johny Fisher
April 6, 2010
Hey i think (very unusually) that it very important to be in harmony with others to make things works. With anything. Any field of life. Especsially to earn income from home