The poor need, surprisingly often, to spend large sums of money
You may not yet be fully convinced that the poor can and do (and want to) save. So we shall move on to the spending needs of the poor, which are less controversial.
The need to spend
Just because you’re poor doesn't mean that all your expenditure will be in small sums. Much of it may be - you may buy only a little food or clothing at a time. But from time to time you need to spend large sums. We can list these times in three main categories, ‘life-cycle’ events, emergency needs, and investment opportunities.
In Bangladesh and India, the dowry system makes marrying daughters an expensive business. In parts of Africa, burying deceased parents can be very costly. These are just two examples of ‘life-cycle’ events for which the poor need to amass large lump sums. Other such events include childbirth, education, home-building, widowhood and old-age generally, and the desire to bequeath a lump sum to heirs. There are others, such as recurrent festivals like Eid, Christmas, or Diwali. In each case the poor need to be able to get their hands on sums of money which are much bigger than the amounts of cash which are normally found in the household. Many of these needs can be anticipated, even if their exact date is unknown. The awareness that such outlays are looming on the horizon is a source of great anxiety for many poor people.
Emergencies that create a sudden and unanticipated need for a large sum of money come in two forms - personal and impersonal. Personal emergencies include sickness or injury, the death of a bread-winner or the loss of employment, and theft or harassment. Impersonal ones include events such as war, floods, fires and cyclones, and - for slum dwellers - the bulldozing of their homes by the authorities. Again, you will be able to think of other examples. Each creates a sudden need for more cash than can normally be found at home. Finding a way to insure themselves against such troubles would help millions of poor people.
As well as needs for spending large sums of cash, there are opportunities to do so. These may be opportunities to invest in an existing or new business, or to buy land or other productive assets. The lives of some poor people can be transformed if they can afford to pay the bribe to get a permanent job (often in government service). The poor, like all of us, also like to invest in costly items that make life more comfortable - better roofing, better furniture, a fan, a TV. One of these investment opportunities - setting up a new business or expanding an existing one - has recently attracted a lot of attention from the aid industry and from the new generation of banks that work with the poor. But as we have seen, business investment is in fact just one of many needs and opportunities that require the poor to become occasional ‘big spenders’.
3 Financial services for poor people
Defining financial services for poor people
In this essay we shall be concentrating on how the poor obtain the large lump sums they need from time to time. We shall be reviewing the financial services - formal and informal - that have evolved to serve this need. These are the services that are most urgent and frequent for the vast majority of poor people, for the reasons set out in the previous section. They are the ones discussed in this essay.
Of course, there are other services that poor people use that are ‘financial’ in the wider sense, such as those that ease the transmission or conversion of currency. Examples are sending money home from town or abroad. Apart from this brief mention, these services (important though they are to many poor people) are not dealt with in this essay.
So, how are the poor to get hold of the usefully large lump sums? They might be lucky and have cash gifted to them, or be in some other way the beneficiary of charity - but this can hardly be relied on. It is not a sustainable way of getting access to large sums.
There are only three common methods:
The first is to sell assets they already hold (or expect to hold).
The second is take a loan by mortgaging (or ‘pawning’) those assets.
The third is to turn their many small savings into large lump sums.
The first method listed above - the sale of assets - is usually a straightforward matter that doesn't ordinarily require any ‘financial services’. However, poor people sometimes sell, in advance, assets that they don't hold now but expect to hold in the future. The most common example is the advance sale of crops. These ‘advances’ are a form of financing, since the buyer provides, in effect, a loan secured against the yet-to-be harvested crop. The advance may be spent on financing the farming costs required to provide that crop. But they may equally be used on any of the other needs and opportunities we reviewed in the previous section.
The second method - mortgage and pawn - enables poor people to convert assets into cash and back again. It is the chance (not always realised) to regain the asset that distinguishes this second method from the first. As in the straightforward sale of assets, such services require the user to have a stock of wealth in the form of an asset of some sort. They allow the user to exploit their ownership of this stock of wealth by transforming it temporarily into cash. The most common examples are the pawn shop in town and mortgaging land in the countryside.
Whereas these first two methods require that the users have assets - which they may have to a limited extent only - the third method enables poor people to convert their small savings into lump sums. This requires the users to have a flow of savings, however small or irregular. It allows them to exploit their capacity to make savings by offering a variety of mechanisms by which these savings can be transformed into lump sums. The main mechanisms are
savings deposit, which allow a lump sum to be enjoyed in future in exchange for a series of savings made now
loans, which allow a lump sum to be enjoyed now in exchange for a series of savings to be made in the future (in the form of repayment instalments), and
insurance, which allows a lump sum to be enjoyed at some unspecified future time in exchange for a series of savings made both now and in the future
The set of mechanisms associated with this third method needs a name that is less clumsy than ‘services which enable poor people to convert their small savings into usefully large lump sums’. I suggest the term ‘basic personal financial intermediation’. I admit this is still a mouthful, but it does describe the process at work here.
The process is one of ‘financial intermediation’ in the sense that a regular banker would recognise1, because many small savings are ‘intermediated’ (‘carried across’) into lump sums. But the process is ‘personal’ because we are talking about how one poor person can turn her savings into a lump sum for her own use (whereas bankers normally talk about intermediating the savings of many into loans for a few - who may be entirely different people). Finally I call the process ‘basic’ because it is a basic requirement of everyday life for most poor people.
Summary: financial services for poor people
Financial services for poor people are there to help them get hold of usefully large sums of cash when they need the cash or have an opportunity to invest it
Apart from selling assets, there are two main ways to get hold of such sums:
taking an advance against a future sale of an asset, and
mortgaging or pawning assets
Class 2: basic personal financial intermediation (finding a way to convert a flow of savings into a lump sum)
savings services do this by allowing you to accumulate savings and taking the lump sum at the end
loans do this by allowing you take a lump sum first as an advance against future savings
insurance does this by allowing you to take a lump sum at the time it is needed in exchange for a continuous stream of savings
Of all the propositions that I have put forward so far, the ones that people usually find most strange are:
the idea (on page 5) that most poor people want to save, can save, and do save
the idea (on the previous page) that loans are often nothing more than one way of turning savings into lump sums
The remainder of this first chapter is devoted to a small number of examples of ‘basic personal financial intermediation’ that will, I hope, make these ideas feel less odd. Each example is a real one that I have personally investigated by observing and talking to the people involved. Each example, except the last, is typical of phenomena that are widespread among the poor all over the developing world - though of course the detail will vary from place to place.