This essay is about how poor people in developing countries manage their money. It describes how they handle their savings, from keeping bank notes under the floorboards to running very sophisticated savings and loan clubs. It illustrates the great variety of moneylenders and deposit collectors who serve the poor, including the new breed of ‘microfinance institutions’ - semi-formal or formal banks that specialise in working with poor clients.
The essay brings out the set of principles that underlies these phenomena, and in so doing offers guidance to those who would like to improve the quality of financial services that are offered to the poor.
In short, the essay is about how a better understanding of financial services for the poor can lead to better provision of such services.
Reprise: towards better financial services for the poor
This essay has a purpose - to improve financial services, in both quality and in quantity, for poor people in developing countries,.
Writing an essay may seem an odd way of going about this purpose. But though most of my time is spent running banks for poor people and helping others to do the same, I have seen in the course of this work that the subject of financial services for poor people is not well understood. This may be because not many people have written about financial services for the poor for their own sake, as opposed to writing about their role in achieving major objectives such as poverty eradication, women’s empowerment, or economic growth. Perhaps as a result, the ordinary understanding of financial services that you would find in any text book on economics or banking can get distorted or forgotten when the poor are the subject of the discussion. The outcome is that the fundamental reasons why poor people need financial services, and the kinds of services they most value, are not as widely understood as I would like them to be.
This is a pity, because these ‘fundamental reasons’ are really rather straight-forward (and consistent with well-established economic principles). I hope to show this in chapter one. Indeed, busy readers who want to get the main message of the essay need read no more than chapter one, since the other chapters provide examples and add detail without changing the basic ideas set out in that first chapter. Those who want to follow up their reading with action are advised to read the whole essay. It isn't very long.
My audience is those who work, directly or indirectly, in the field of financial services for poor people. The essay aims at clarity. I try to avoid jargon. Wherever possible I illustrate facts rather than contribute to theory. Academic machinery such as footnotes and references is used as sparingly as possible, though there is a bibliography which has been annotated to help practitioners. Most of the cases that I use to illustrate my points are ones that I have personally investigated during more than twenty years of research and practice in the subject on three continents (though there is a strong bias towards Asia, where I have lived and worked for fourteen years). Judging by some things I have read, much of what I say probably applies to poor people in rich as well as in poor countries, but I can’t vouch for that, so I have limited my scope to the developing countries of the world.
Dhaka, Bangladesh, 1998
Chapter One: Why the poor need financial services
Three facts and a conclusion. Fact one: poor people can and do save, even if the amounts are often small and irregular. Facttwo: poor people need usefully large lump sums of money from time to time, for many different purposes. Factthree: for most poor people, those ‘usefully large lump sums’ have to be built, somehow or other, out of their savings - because short of charity or selling or mortgaging assets there is no other reliable way to get hold of them. Conclusion: financial services for poor people are largely a matter of mechanisms that allow them to convert a series of savings into usefully large lump sums.
The poor want to save, and do save… but it’s not easy
A popular and useful definition of a poor person is someone who doesn't have much money. Among academics, and in the aid industry, this definition has gone out of fashion. But it suits our present purposes well, so we shall stick to it. In this essay, when I talk about ‘the poor’, I mean people who, compared to their fellow citizens, don't have much money.
If you don't have much money it is especially important that you manage well what money you have. Not every poor person doesmanage their money well, of course, just as not every better-off person manages their money well. There are poor people who are poor precisely because they don't - or can’t - manage their money. But in every developing country that I have visited, I find that most poor people seek and often find ways of managing their money, as some of the examples in this essay will show. And among those poor people who don't manage their money well are many who could do so if they had access to better financial services.
Choosing to save…
Managing money well begins with hanging on to what you have. This means avoiding unnecessary expenditure and then finding a safe place to store whatever money is left over. Making that choice - the choice to save rather than to consume - is the foundation of money management.
…but finding it hard to do so
Poor people run into problems with money management at this very first hurdle. If you live in an urban slum or in straw hut in a village, finding a safe place to store savings is not easy. Bank notes tucked into rafters, buried in the earth, rolled inside hollowed-out bamboo, or thrust into clay piggy banks, can be lost or stolen or blown away or may just rot. Certainly their value will decline, because of inflation. But the physical risks are the least of the problem. Much tougher is keeping the cash safe from the many claims on it - claims by relatives who have fallen on hard times, by importunate neighbours, by hungry or sick children or alcoholic husbands, and by landlords, creditors and beggars. Finally, even when you do a have a little cash left over at the day’s end, if you don't have somewhere safe to put it you’ll most probably spend it in some trivial way or other. I have lost count of the number of women who have told me how hard it is to save at home, and how much they would value a safe, simple way to save.
Nevertheless, the poor can save, do save, and want to save money. Only those so poor that they have left the cash economy altogether - the elderly disabled, for example, who live by begging food from neighbours - cannot save money. This essay is not about them.
But can the poor really save?
The fact that the poor want to save and have some capacity to save is not self-evident. If you don't know much about how the poor actually organise their lives you may assume that the poor ‘are too poor to save’. The poor spend all their income and still don't get enough to eat, so how can they save? The poor may need loans, but the last thing they need, you may think, is a savings service.
Ins and outs
By the time you have finished this essay you should see that this is a misconception. But for the time being, notice that people (and not just the poor) may save money as it goes out (keeping a few coins back from the housekeeping money) as well as when it comes in (deducting savings at source from your wage or other income). Even the poorest have to spend money to buy basic items like food and clothing, and each time they do so there is the opportunity to save something, however tiny. Many poor housewives try to save in this way, even if their working husbands fail to save anything from their income.
That they sometimes succeed is shown by their habit of lending each other small amounts of money (as well as small amounts of rice or kerosene or salt). This ‘reciprocal lending’ in which I lend you a few cents today on the understanding that you’ll do the same for me some other time is so common that such loans make up the bulk of financial transactions that poor people get involved in, even if they amount to only a small proportion of the total value involved in financial services for the poor. The arrangement depends entirely on the poor’s capacity and willingness to save.
This essay is about saving money. People save in other ways, of course, and we shall take that into account, briefly, at the end of this chapter. Another matter we shall take up later is the differences between the living conditions in the town and in the country. But for the time being I want to pursue my basic message in the simplest way, and that means concentrating on money savings. The poor, we have claimed, can and do save. But why do they do so?