Why do the poor need
financial services?
Some ideas
Some evidence
 from research
 from informal finance
Some implications
 for microfinance providers
Rutherford, Tokyo November 2008: Introduction

Monowara works in a tea stall and
her husband drives a rickshaw
Their income is small, irregular
and unreliable
Much of it is spent quickly on basics –
food and the means to cook it
Rutherford, Part I: Ideas

As a result, they lack cash to buy
anything else – clothes, medicines,
schooling, household goods, tools, a
home, a business, land…
What can they do? Hope for gifts?
Sell assets (which then need to be
replaced)? Go without?
Or dig, somehow, into past or future
income?
Rutherford, Part I: Ideas

Rutherford, Part I: Ideas
That task – getting access to past income (via
savings) or to future income (via loans) for
expenditure now – is what financial services do.
It is in huge demand by the poor
It is used to cope with life-cycle needs,
emergencies, and opportunities
It is needed to manage money on a day-to-day
basis, and to plan for future expenditure
(whether anticipated or unexpected)
Arguably, the poor need financial
services more than any other group

Rutherford, Part IIa: Evidence from research
Finance is the intersection of time and money.
‘Financial diaries’ study households every few
days for a year to see how they manage their
money
Diaries done in Bangladesh, India and South
Africa show that the poor are intensive money
managers
Far from living ‘from hand to mouth’, they
constantly seek opportunities to save and to
borrow

Hosneara had five
different ways to save
Of 250 poor and near-poor ‘diary’ households:
All saved and borrowed, using not less than 4 and
some as many as 10 kinds of instrument
Some instruments, such as reciprocal borrowing and
lending among friends and neighbours, were
universally used
Households intermediated sums that were often
larger than their total annual income
Poor households regard money management as a
vital everyday task
Rutherford, Part IIa: Evidence from research

Informal finance has developed many elegant
ways of satisfying the primary money
management task – turning savings into usefully
large lump sums
You can ‘save up’ using a mobile deposit
collector
Or ‘save down’ using a moneylender
Or ‘save through’ using a ROSCA
In each case, a series of small savings is
transformed over time into a usefully large lump
sum of money
Rutherford, Part IIb: Evidence from informal finance

Saving up (save now, get the lump sum later)
Mrs K works as a deposit collector
Each day she collects a small deposit from her
many clients
After an agreed number of days she returns
most – but not all – of the money to the saver,
and keeps the rest as her fee
Her clients therefore earn a negative rate of
interest on their savings – and yet they are
delighted with the service
Rutherford, Part IIb: Evidence from informal finance

Saving down (save later, get the lump sum now)
M is a mobile moneylender as well as a
shopkeeper
Each week he collects a small repayment on the
loans he gives to villagers
He takes his fee by cutting a percentage from
the loan at the time he gives it. His fee is
somewhat more than Mrs K fee for deposit
collecting
He offers an alternative way of using the same
savings to form a lump sum
Rutherford, Part IIb: Evidence from informal finance

Rutherford, Part IIb: Evidence from informal finance
Saving through (save for a term, get the lump sum at
some intermediate point)
A ROSCA (Rotating Savings and Credit Association)
is a do-it-yourself way for a group of friends to
turn the same savings into a lump sum
Each time they meet, each member puts
in a small fixed sum, and one member walks
away with the total – her ‘lump sum’.
They go on until everyone has had their
lump sum. Then they may start again.
Salma, Morjina and Ruby are road
maintenance labourers. They are
members of a six-woman ROSCA

So: when poor people devise financial services
for themselves, they emphasise the basic task of
turning savings into a usefully-large lump sum
They do this by saving ‘up’, ‘down’ or ‘through’ (or
all three), depending on what’s available locally
The intermediating function is more important
to them than the way it is done, or what the
sums are used for
Rutherford, Part IIb: Evidence from informal finance

When Grameen Bank started microcredit in
the late 1970s it focussed on women taking
loans for small businesses
The loans were like the moneylender’s:
repaid in small weekly amounts that could
be saved from ordinary household cash flow
Not surprisingly, borrowers used the loans
for all sorts of purposes
Rutherford, Part III: Implications

Microfinance in Bangladesh has gradually
responded to the real needs of its clients
It has quietly accepted that loans are used
for all purposes
It has added savings services, both short-
term and long term
Bangladesh microfinance clients
can now use their MFIs to turn savings
into useful lump sums in the short and
the long term, and through both
savings and loans
Rutherford, Part III: Implications

For more:
The Poor and Their Money, OUP Delhi 2000
(on the financial needs of the poor and how they use informal finance)
Portfolios of the Poor, Princeton, May 2009
(on the financial diaries research)
Grameen II, The First Five Years, at
www.microsave.org
(on the way Grameen has adapted its services to meet the realities of
customer demand)
see also www.thepoorandtheirmoney.com for
more on my views and my experiments