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Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014

Chapter 2. How the Other Half Finances

If I had m !a I !o"#d !rite the !ord $In%"re& o'er the door of e'er cotta(e) and "pon the b#ottin(*book of e'er p"b#ic man) beca"%e I am con'inced that b %acrifice% !hich are inconcei'ab# %ma##)!hich are a## !ithin the po!er of the 'er poore%t man in re("#ar !ork) fami#ie% can be %ec"red a(ain%tcata%trophe% !hich other!i%e !o"#d %ma%h them "p for e'er. + ,in%ton Ch"rchi##) 1-0-1

In'ented a% a !a to record %peech) the !ritten !ord became the medi"m of contract%) (o'ernment)

re#i(ion) and %cience. A hand too# t"rned into a force for re'o#"tion in a## %phere% of h"man eperience.

imi#ar#) if mone ori(inated a% a portab#e %tore of 'a#"e) it% f"## import took mi##ennia to "nf"r# and

toda to"che% the #i'e% of near# e'erone on the p#anet. one% f"nction in %ociet ha% m"ch to do

!ithfinancial services, !hich are !a% of he#pin( peop#e and b"%ine%%e% mana(e ca%h f#o!) a%%et%) and

ri%k. For indi'id"a#%) the abi#it to borro!) %a'e) in%"re) and tran%act add% po%%ibi#itie% to #ife a co"p#e

b"% a home !ith on# 10 percent do!n3 an immi(rant %end% earnin(% to fami# in the o#d co"ntr. For

economie%) financia# %er'ice% are the pipe% and "nction% of an e%%entia# infra%tr"ct"re.

Not %"rpri%in(#) peop#e !ho ha'e #e%% mone ha'e #e%% acce%% to mone*re#ated %er'ice%3 and

co"ntrie% !ith #e%% !ea#th ha'e !eaker financia# infra%tr"ct"re. icrofinance promi%e% to red"ce thi%

(#oba# financia# ine5"it. 6eca"%e there are man kind% of financia# %er'ice and peop#e "%e them in

di'er%e !a%) there are man concept"a# %torie% abo"t ho! microfinance can he#p poor peop#e and poor

economie%. The %tor that dominate% the p"b#ic ima(ination in rich co"ntrie% re'o#'e% aro"nd creditand

entrepreneurship. erhap% o" remember !hen o" fir%t #earned abo"t microcredit. Did it %"rpri%e o"

that one co"#d he#p poor peop#e b p"ttin( them in debt8 The root of that %"rpri%e i% the microfinance

mo'ement% propa(ation of a hopef"# %tor#ine of %e#f*re#iance. No #on(er are the poor %o trapped b

financia# circ"m%tance that credit !i## on# %ta'e off h"n(er for a fe! !eek%) then #ea'e a re%id"e of

hope#e%% debt. In%tead) the poor are ma%ter% of their o!n fate) !ho #ack on# for credit to empo!er them.

$I be#ie'e that a## h"man bein(% are potentia# entreprene"r%) $9rameen 6ank fo"nder "hammad :"n"%

1Ch"rchi## ;2007 ) 14?@47.

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ha% !ritten. $ome of "% (et the opport"nit to epre%% thi% ta#ent) b"t man of "% ne'er (et the chance

beca"%e !e !ere made to ima(ine that an entreprene"r i% %omeone enormo"%# (ifted and different from

o"r%e#'e%.&2

:"n"%% idea#i%tic %tatement no do"bt contain% tr"th) b"t it %tretche% the tr"th too. ther %torie%

can be to#d of ho! the poor mi(ht "%e financia# %er'ice%. A fami# mi(ht "%e a %a'in(% acco"nt to

prepare for a !eddin() take o"t in%"rance to dampen the financia# %hock of a father% death) or borro! to

b" antibiotic% for a %erio"%# i## da"(hter. icrofinance i% animated b a be#ief that the poor are no #e%%

creati'e or ambitio"% for bein( poor. To #i'e "p to that %pirit of re%pect) attempt% to approach the

5"e%tion of ho! poor peop#e "%e financia# %er'ice% !ith a minim"m of preconception%. It t"rn% o"t that

the poor peop#e in (enera#) #ike e'erone e#%e) !ant financia# %er'ice% for man p"rpo%e% in addition to

%tartin( a b"%ine%%. reci%e# beca"%e the #i'e c#o%e to the ed(e materia##) the) more than the rich)

need !a% to mana(e #ife% (reat ri%k%. And !hi#e the better*off can "%"a## find %er'ice% tai#ored to

%pecific need%) from #ife in%"rance to retirement acco"nt%) the poor m"%t choo%e from fe!er option%)

often coar%e# matched to the need at hand+for eamp#e) borro!in( to pa the mid!ife.

A## that %aid) a broad "nder%tandin( of ho! financia# %er'ice% %"pport economic de'e#opment

#ead% to an important reminder. In the #on( r"n) the mo%t important #ink from financia# %er'ice% to

po'ert red"ction ma be indirect) 'ia forma# b"%ine%%e% that "%e finance to create ob%.

How the rich use financial services

The (#oba# rich+b !hom I mean a## tho%e !ho #i'e materia## comfortab#e and %ec"re #i'e%+ha'e

acce%% to a %pectac"#ar 'ariet of financia# %er'ice% checkin( and %a'in(% acco"nt%) home mort(a(e%)

car #oan%) credit card%) m"t"a# f"nd%) in%"rance for ha#f a doBen kind% of ri%k) and more. "%t a% it i% hard

for a Ne! :orker !ho %amp#e% a ne! re%ta"rant e'er !eek to comprehend the #i'e% of 9"atema#an

hi(h#ander% %"b%i%tin( on torti##a%) it i% diffic"#t for tho%e of "% !ho eno %"ch a !ea#th of financia#

2:"n"% ;2004>) 207.

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%er'ice% to empathiBe !ith a !oman for !hom %a'in(% mean% hidin( mone "nder the mattre%% in the

hope that her h"%band !i## not find it) and borro!in( mean% (oin( to a mone#ender !ho char(e a%

m"ch per month a% credit card companie% char(e per ear.

De%pite the ("#f in eperience) a rich per%on can (ain in%i(ht into the poor% "%e of financia#

%er'ice% b contemp#atin( her o!n. Tr thi% eerci%e. i%t a## the financia# %er'ice% o" ha'e "%ed. For

each) determine !hat the %er'ice he#p% o" do. Tran%act8 In'e%t8 pend mone o" ha'e not earned et8

Then confront thi% 5"e%tion if o" had to (i'e "p a## the%e %er'ice% b"t one) !hich !o"#d o" keep8

Eere i% m #i%t) !hich i% fair# repre%entati'e for midd#e*c#a%% American fami#ie%

Table 1. Authors financial service inventoryer'ice "rpo%e

a'in(% acco"nt repare for emer(encie% %"ch a% ob #o%%Checkin( acco"nt Tran%act o'er #on( di%tance% or in #ar(e amo"nt% !itho"t ca%h,ire tran%fer end and recei'e mone internationa## ;rare>aa# acco"nt end mone to friend%3 b" thin(% on#ineCredit card% Tran%act !itho"t ca%h3 b" thin(% I !ant before I ha'e the moneEome mort(a(e i'e in a home I o!n before I can pa for itEome e5"it #ine of credit Ditto3 and cheap ;co##atera#iBed> credit to reno'ate ho"%eCar #oan 9et a ne! car before I can f"## pa for itt"dent #oan In'e%t in m o!n %ki##%) for hi(her pa after (rad"ation

Retirement %a'in(% repare to %"pport m%e#f !hen I no #on(er !orkCo##e(e %a'in(% repare to in'e%t in chi#dren% ed"cationEomeo!ner% in%"rance rotect fami# a(ain%t financia# cata%trophe in e'ent of %erio"%

harm to ho"%eA"tomobi#e in%"rance rotect fami# a(ain%t financia# cata%trophe in e'ent of %erio"%

harm to car) or #iabi#it for accidentmbre##a #iabi#it in%"rance rotect fami# from #iabi#it %"it% in (enera#Eea#th in%"rance rotect fami# a(ain%t financia# cata%trophe in e'ent of %erio"%

hea#th prob#em%3 a%%"re acce%% to careDi%abi#it in%"rance rotect fami# a(ain%t financia# cata%trophe if I am "nab#e to !orkife in%"rance rotect fami# a(ain%t financia# cata%trophe if I die

If o" %ho! o"r #i%t to a microfinance c#ient ;a%%"min( it re%emb#e% mine>) the #""r !ithin it

!i## become apparent+in the breadth of the %er'ice%) in the co##e(e ed"cation% fore%een and the home

!ith a %i*fi("re rep#acement 'a#"e. 6"t if o" artic"#ate the need% that "nder#ie o"r "%e of the%e

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%er'ice%) o" t!o mi(ht "nder%tand each other !e##. In %cannin( the #i%t) I di%cern fo"r maor rea%on% I

"%e of financia# %er'ice%) a## "ni'er%a#.

Fir%t i% the need to tran%act. The credit card% and checkin( acco"nt) amon( other%) he#p me mo'e

%"m% too #ar(e to be %afe in m !a##et) and %end %"m% #ar(e and %ma## o'er #on( di%tance%. pacheck

(oe% into the checkin( acco"nt a"tomatica##3 the mort(a(e pament come% o"t. A %!ipe of a card pa%

for (a% at the p"mp.

The %econd p"rpo%e I di%cern i% in'e%tment %ettin( a%ide toda in order to ha'e more tomorro!.

I borro!ed to he#p pa m co##e(e t"ition) and in'e%t in a f"nd to do the %ame for m %on%. Notab#)

#ike mo%t peop#e in rich co"ntrie%) I ha'e not "%ed financia# %er'ice% to in'e%t in m o!n b"%ine%%) for I

ha'e none. I prefer the %tabi#it of a ob.

an peop#e !o"#d #i%t a home mort(a(e "nder $in'e%tment& too. 6"t thi% mi%%e% the f"##

%i(nificance of homeo!ner%hip. In fact) on (enera# princip#e%) and a% no%e*di'in( rea# e%tate price% ha'e

made c#ear) a mort(a(e*financed home i% a terrib#e in'e%tment. er%ona# finance ("r"% teach the 'irt"e%

of di'er%ification. 6"in( a home p"t% a #ot of e((% in one ba%ket. ,hen the #oca# econom no%edi'e%) a

bread!inner can #o%e a ob and fa## behind on the mort(a(e "%t a% the home d!ind#e% in 'a#"e. %in(

credit to b" the home+in'e%tin( !ith leverage+h"(e# m"#tip#ie% the ri%k beca"%e a #ot of the e((%

are the bank% and the homeo!ner ha% to rep#ace them if the are cr"%hed.

I bo"(ht m ho"%e for a rea%on that ha% #itt#e to do !ith in'e%tment a% that !ord i% "%"a## meant)

and !hich brin(% "% to the third p"rpo%e of per%ona# financia# %er'ice%. !nin( a home) a car) a bicc#e)

or a co! he#p% a fami# in man !a%. ,ith o!ner%hip come% %ec"rit. omeone !ho ho#d% tit#e to her

home need not !orr abo"t bein( forced o"t b a #and#ord !ho doe% 'ie! the b"i#din( a% an in'e%tment.

And %ec"re peop#e think #on(*term a farmer i% more apt to take care of #and he o!n% than #and he

#ea%e%. Eome o!ner%hip a#%o %tren(then% comm"nitie% b increa%in( the interdependence of nei(hbor%.

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A more #on(*term) co##ecti'e 'ie! enco"ra(e% peop#e to !ork to(ether on #oca# in%tit"tion% %"ch a%

%choo#%. In addition) a% er"'ian economi%t Eernando de oto ha% famo"%# ar("ed) tit#e to a maor a%%et

can a#%o %er'e a% co##atera# for credit.GI once borro!ed a(ain%t m ho"%e to fi the roof and mi(ht do the

%ame to he#p p"t m %on% thro"(h co##e(e.

I !a% %tr"ck to di%co'er that mo%t of the 17 %er'ice% on m #i%t are there beca"%e the %er'e for a

fo"rth p"rpo%e a%%"rin( m fami#% abi#it to obtain con%tant nece%%itie% %"ch a% food and c#othin() a

p"r%"it economi%t% ca## $con%"mption %moothin(.& The %a'in(% acco"nt i% a %afet net if I #o%e m ob.

a'in( for retirement maintain% m abi#it to b" !hat I need after I %top !orkin(. Credit card% and the

home #oan% #et me make maor p"rcha%e% !itho"t c"rtai#in( %pendin( on e'erthin( e#%e. The in%"rance

po#icie% take the financia# bite o"t of #ife% tra"ma%.4Indeed) if I had to #i'e !ith "%t one financia#

%er'ice) I !o"#d be( for t!o and choo%e #ife and hea#th in%"rance) %ince the protect m fami# from

bankr"ptc in the face of #ife% (reate%t tra(edie%.

,e can #earn a fe! more #e%%on% from thi% eerci%e. Fir%t) riski% intimate# intert!ined !ith

mone. In%"rance po#icie% embrace ri%k head*on. 6"t the are not "ni5"e in in'o#'in( it) for !hene'er

one part to an a(reement to pro'ide financia# %er'ice% commit% to de#i'erin( mone "nder certain

circ"m%tance% at %ome f"t"re date) there i% ri%k. erhap% a borro!er !i## not repa) or a bank ho#din(

depo%it% !i## (o "nder. Re#ated to thi%) and %econd) man financia# %er'ice% binde'en a% theserve. The

mort(a(e and other #oan% force me to %et a%ide eno"(h mone each month to make the pament% rather

than %pendin( it a## on more fri'o#o"% thin(%. The retirement acco"nt% add inertia to m financia# re(ime

%ince m emp#oer a"tomatica## make% the contrib"tion% o"t of m pacheck%. Thi% do"b#e*ed(ed

nat"re) of credit e%pecia##) i% the (erm of the ancient debate% o'er !hat con%tit"te% "%t #endin(.

Gde oto ;2000>.4erhap% I %ho"#d a#%o ha'e #i%ted the (o'ernment in%"rance pro(ram% m emp#oer pa% into on m beha#f) to aid me !henI retire) or before then if I #o%e m ob.

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econd) !hat financia# %er'ice% o" can "%e depend% on !ho o" are. If I !ere a poor American)

m financia# %er'ice in'entor !o"#d #ook different. I mi(ht not ha'e the %ort of %tead ob that inc#"de%

hea#th in%"rance and !o"#d make me an attracti'e ri%k to #ender%. I mi(ht ha'e tro"b#e maintainin( in a

minim"m ba#ance in a checkin( or %a'in(% acco"nt%) or other!i%e bankin( on a %ca#e that !o"#d make

me profitab#e for a bank. o the $concier(e %er'ice%& of (o'ernment*%"b%idiBed retirement and co##e(e

%a'in(% acco"nt% ;%o*named b the Commi%%ion on Thrift) a coa#ition of .. non*profit%> !o"#d

probab# di%appear from m #i%t.Ho mi(ht a## the in%"rance) and e'en the checkin( acco"nt. In their

p#ace mi(ht appear check ca%her% and pada #ender% etendin( credit at rate% e5"i'a#ent to o'er 100

percent per ann"m. mort(a(e) if an) mi(ht ha'e %tarted !ith a tea%er rate) on# to be acked "p after

a ear or %o. "%t a% there are more c"re% for ma#e impotence than ma#aria) financia# %er'ice% a'ai#ab#e to

the rich o"t%hine tho%e !ithin reach of the poor+in 5"a#it) di'er%it) and co%t.

A#%o !orth notin( m !ife% in'entor i% near# identica# to mine. In man co"ntrie% #a! and

c"#t"re %top !omen from en(a(in( f"## in finance and commerce o"t%ide the home.

erhap% the mo%t important #e%%on i% abo"t ho! financia# %er'ice%) #ike road% and piped !ater)

"nder(ird the comfortab#e #ife. Their intan(ibi#it be#ie% their importance. Their chief direct benefit #ie%

in makin( peop#e more %ec"re b he#pin( them mana(e and maintain con%"mption) mo%t cr"cia##

d"rin( cata%trophe%. In the 'ocab"#ar of Amarta en) financia# %er'ice% (i'e peop#e more a(enc)

more contro# o'er their #i'e%. Eo!e'er) a% en empha%iBe%) freedom be(et% freedom tho%e !ho a#read

ha'e more a(enc) thank% to bein( rich or ma#e) %a) are ab#e to afford and free to b" more and better

%er'ice%.?eop#e !ho brin( fe!er ad'anta(e% to the financia# %er'ice marketp#ace #ea'e !ith fe!er.

HCommi%%ion on Thrift ;200>.?en ;1--->.

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The financial challenges of the poor

I in'entoried m financia# %er'ice% to %ho! ho! 'ita# %"ch %er'ice% are for fami#ie% !antin( to rai%e their

%tandard of #i'in( and protect !hat the ha'e. The rich ho#d no monopo# on the%e prioritie%. oor

peop#e a#%o need to tran%act) in'e%t) b"i#d a%%et%) and %mooth con%"mption. 6"t the #iterar critic o##

Co#"m !a% !ron( !hen %he to#d Jrne%t Eemin(!a in a Ne! :ork re%ta"rant that $the on# difference

bet!een the rich and other peop#e i% that the rich ha'e more mone.&7oor peop#e are not "%t rich

peop#e !itho"t mone. The financia# circ"m%tance% of poor and rich differ 5"a#itati'e# a% !hen a%

5"antitati'e#. Eere I brief# point o"t at %imi#aritie%) then ep#ore the important difference%.

ne %er'ice mi##ion% of poor peop#e "%e more than the rich i% internationa# !ire tran%fer. ,hen a

(rad"ate %t"dent named anae Ito #i'ed d"rin( 1--H@-? in a 'i##a(e in %o"thern 6an(#ade%h %er'ed b

the 9rameen 6ank) %he di%co'ered that the %"re%t !a to (et o"t of po'ert in the 'i##a(e !a% to (et o"t

of the 'i##a(e+more preci%e#) to %end a %on or h"%band to the capita# Dhaka) !here he !o"#d !ork a% a

da #aborer) or e'en (et a ob) and %end home mone.Toda) 6an(#ade%hi 'i##a(e% are eportin(

!orker% e'en farther afie#d) thank% to re#i(io"% affinit !ith the idd#e Ja%t. 6an(#ade%hi men !orkin(

on K"!aiti con%tr"ction %ite% ;amon( other%> are %endin( f#o!% of mone home!ard %o amp#e a% to

mea%"rab# rai%e 6an(#ade%h% economic (ro!th rate.-Th"% the (#oba# financia# %%tem i% h"(e#

'a#"ab#e for #inkin( di%per%ed fami#ie%+if the can hook into it. 6RAC 6ank) a %pin*off from the (iant

6an(#ade%hi non*profit from !hich it (et% it% name) (i'e% it% #o!*income c#ient% "%t that acce%% thro"(h

an arran(ement !ith ,e%tern nion. ;ee Fi("re 1.>

76er( ;1-7>) G0H. Thi% 5"ote i% the %o"rce of the apocrpha# b"t more fami#iar echan(e bet!een Eemin(!a and F. cottFitB(era#d FitB(era#d ob%er'e%) $The rich are different from "%.& Eemin(!a rep#ie%) $:e%) the ha'e more mone.&Ito ;1--->.-

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Figure 1. Poster for wire transfer service through !AC an" an# $estern %nion& angla#esh

(Photo by author)

The poor) #ike the rich) a#%o benefit from o!nin( a%%et% %"ch a% their o!n home%. A $nat"ra#

eperiment& in Ar(entina 'i'id# demon%trate%. In 1-4) the 6"eno% Aire% (o'ernment mo'ed to (i'e

1)00 %5"atter fami#ie% tit#e to #and on the o"t%kirt% of the cit that the had occ"pied for three ear%.

Ji(ht of the 1G #e(a# o!ner% of the #and accepted the cit% b"o"t) !hi#e the re%t fo"(ht the

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epropriation in t!ent*ear co"rt proceedin(%. Th"% %ome %5"atter% !ere #"cked o"t in 5"ick# (ainin(

tit#e !hi#e other% did not.10The Wall Street Journal%ketched the con%e5"ence%

ercede% A#mada and La#entMn re##ana both #i'e in an Franci%co o#ano) a barrio %ett#ed b %5"atter%a#mo%t 2H ear% a(o on the frin(e% of the Ar(entine capita#. The e%tab#i%hed ho"%eho#d% on identica##%iBed #ot% and !orked %imi#ar b#"e*co##ar ob% for comparab#e !a(e%+%he in %e!in() he in a factor. Theend"red the %ame hard%hip%) inc#"din( an effort b Ar(entina% 1-0% mi#itar (o'ernment to b"##doBe the%ett#ement.

Then) r%. A#mada (ained tit#e !hi#e r. re##ana did not.

Toda) r%. A#mada #i'e% in a neat co#onia#*%t#e home !ith a %#ab roof %"pported b pi##ar% a% %o#id a%oak%. The %i member% of the A#mada ho"%eho#d ha'e room% of their o!n. A da"(hter fini%hed hi(h%choo# and one %on fini%hed technica# %choo#.

r. re##ana% ho"%e i% made of ro"(h #ookin( cinder b#ock% and concrete) !ith thin po%t% %"pportin( a

corr"(ated Binc roof. It i% %o cramped that %ome of the ei(ht fami# member% ha'e to %#eep in the dinin(room and kitchen. None of the chi#dren

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the income #adder ha'in( a %tead ob. eop#e !ith ob% are not on# richer. The a#%o ha'e fe!er

chi#dren and in'e%t more in ed"catin( the chi#dren the do ha'e.1

The tr"# poor) mean!hi#e) %"r'i'e on 'ariab#e income% %o"rce% %"ch a% farmin( and %treet

ha!kin(. ,hen I #i'ed in centra# Eo Chi inh Cit in 1--@--) a Lietname%e fami# had %taked a c#aim

on the ri(ht to do commerce at the entrance of the a##e !here !e #i'ed. Anh e co"#d "%"a## be fo"nd

there) %nooBin( on hi% Eonda motorcc#e !hi#e !aitin( to %e## ride% for a do##ar. ome da% !ere b"%ier

than other%. ,hen ferrin( m !ife) he !o"#d %top !e## %hort of a red #i(ht if it kept her in the %hade) %o

a% to keep the %"n from darkenin( her %kin. Dark %kin #ike hi% !a% a %i(n of the poor #aborer epo%ed to

the e#ement%. Ee %aid he once #i'ed in the nei(hborhood) b"t the 'ictorio"% Comm"ni%t% ha'e e'icted

him after the !ar) %endin( him to a #e%%*centra# di%trict. At mid*da) hi% %i%ter !o"#d appear !ith a %ma##

p"%hcart) from !hich %he %o#d di%he% of %a"ted 'e(etab#e% and meat amp# %ea%oned !ith mono%odi"m

(#"tamate. Eer h"%band !o"#d oin Anh e in the motorcc#e tai b"%ine%%. ne da) !e !ere %hocked

to emer(e from the a##e and find a ne! and "nfami#iar (ro"p of Lietname%e en(a(ed in the %ame

acti'itie%. A% if in a T!i#i(ht Pone epi%ode) Anh e and hi% fami# !ere (one. Then) a !eek or %o #ater)

the di%po%%e%%ed repo%%e%%ed Anh e and compan came back. ,e ne'er did etract a f"## ep#anation

for the t"rnabo"t. It appeared to in'o#'e ri'a# b"t informa# c#aim% to the conce%%ion on that %pot) and a

bribe to a #o!*#e'e# officia#. The epi%ode i##"%trated ho! a #ife in po'ert can mean a ten"o"% ho#d on a

'ariab#e income.

It a#%o i##"%trated a re%pon%e di'er%ification. 6 practicin( di%tinct trade%) Anh e and hi% %i%ter

%moothed their income the !a a portfo#io red"ce% ri%k b in'e%tin( in man %ec"ritie%. A %"r'e of 27

'i##a(e% in

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than Q2 a da per per%on earn from more than one %o"rce) a% do a 5"arter in eico) a third in aki%tan)

and ha#f in CSte dI'oire.20oor peop#e can di'er%if acro%% three broad tpe% of !ork+farmin() other

%e#f*emp#oment) and da #abor+and di'er%if !ithin the%e cate(orie%. In 'i##a(e% of the etreme# poor

daip"r di%trict in the Indian %tate of Raa%than) a#mo%t e'erone o!n% and farm% %ome #and) b"t 74

percent of tho%e #i'in( on #e%% than a do##ar a da earn mo%t of that do##ar in da #abor+!orkin( for

other% !itho"t the %ec"rit of #on(*term emp#oment.21e#f*emp#oment) !hat i% a#%o ca##ed

entreprene"r%hip) i% common too) fo"nd amon( a 5"arter percent of %imi#ar# poor and r"ra# ho"%eho#d%

in 9"atema#a and a third in Indone%ia and aki%tan.226aneree and D"f#o ep#ain the attraction of

!orkin( for one%e#f

If o" ha'e fe! %ki##% and #itt#e capita#) and e%pecia## if o" are a !oman) bein( an entreprene"r i% oftenea%ier than findin( an emp#oer !ith a ob to offer. :o" b" %ome fr"it% and 'e(etab#e% or %ome p#a%ticto% at the !ho#e%a#er% and %tart %e##in( them on the %treet3 o" make %ome etra dosa

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Jperiment% in eico and ri anka %"((e%t that inectin( mode%t additiona# capita# into the%e

informa# b"%ine%%e% can earn a'era(e ret"rn% eceedin(

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%"rpri%in(# diffic"#t) for t!o rea%on%. Fir%t) !hen a%ked ho! the "%e a %er'ice) microfinance c#ient%

often (i'e the an%!er the be#ie'e+correct# a% often a% not+the 5"e%tioner !ant% to hear. ome

microcredit #ender%) for eamp#e) 'a#oriBe in'e%tment o'er other "%e%. econd) !hat a per%on think% %he

i% "%in( a #oan or %a'in(% dra!do!n for often differ% !hat it enab#e% her to do. 6eatrice) the fema#e ha#f

of an entreprene"ria# co"p#e in Pambia% Copperbe#t) ep#ained to 6riti%h re%earcher ame% Cope%take

that) in Cope%take% !ord%) $the main difference the #oan% had made o'er the #a%t ear !a% in freein(

their o!n capita# for con%tr"ction of their ho"%e.& icrocredit #oan% forma## !ent into the b"%ine%%) b"t

on# b %"pp#antin( the co"p#e% o!n capita# into per%ona# "%e%.2In 6an(#ade%h) a borro!er% h"%band

to#d anthropo#o(i%t amia Karim !ith a %mi#e that $,e took a co! #oan. Fift percent !i## be %pent to

pa off o#d debt%) and another fift percent !i## be in'e%ted in mone#endin(. If the mana(er come% to

%ee o"r co!) !e can ea%i# borro! one from the nei(hbor%.&2-The f"n(ibi#it of mone mean% that !e

can ne'er be %"re ho! the borro!er !o"#d ha'e channe#ed her mone !itho"t the #oan.

The a#a%ian o"rna#i%t Ee#en Todd ha% made one of the be%t attempt% to dea# !ith the fir%t

prob#em at #ea%t) (i'in( "% a rare %tati%tica# 'ie! of ho! the poor "%e financia# %er'ice%. Thro"(ho"t

1--2) %he and her h"%band Da'id 9ibbon%) !ho !a% a#%o %t"din( microfinance) #i'ed amid t!o 'i##a(e%

in the Tan(ai# di%trict of 6an(#ade%h) one of the fir%t re(ion% in !hich the 9rameen credit pro(ram

operated on a #ar(e %ca#e. ,ith f"ndin( from the 9rameen 6ank and a re%earch team inc#"din( %e'era#

6an(#ade%hi%) the tracked the financia# and per%ona# #i'e% of ?2 !omen) 40 of !hom borro!ed from

9rameen) recordin( e'er #oan pament) e'er %a#e of rice padd) e'er #ea%e of #and. The depth and

detai# of their perception into ho! partic"#ar !omen "%e microcredit ha% rare# been e5"a#ed. Tab#e 2

%ho!% their tab"#ation of ho! the 40 borro!er% %aid the !o"#d "%e the credit) in order to obtain #oan

2Cope%take ;2002>) 74?.2-Karim ;200>) 1?.

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appro'a#) and ho! the !omen act"a## "%ed it. A## the %tated p"rpo%e% !ere in'e%tment%. $Accordin( to

the

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,e %ee here %ome ba%ic difference% and %imi#aritie% bet!een rich and poor in ho! the mana(e

mone. A% for the difference%) the poor more than the rich p"r%"e %trate(ie% that incrementa## di'er%if

and impro'e their contro# o'er their %o"rce% of income. A% for the %imi#aritie%) the poor) #ike the rich)

"((#e %e'era# fair# "ni'er%a# prioritie% %"ch a% con%"mption %moothin( and in'e%tment. And the do %o

!ith re%o"rcef"#ne%% and di'er%it that %ometime% e#"de e'en the mana(er% of microfinance

or(aniBation%.

Table 2. Approve# an# actual use of 'ra(een an" loans to )* wo(en& 1++2

Approved Actual1 Approved ActualRice paddy husking 20 73,500Rice husking/cow 8 !,000

"ow 7 2,500 1#,300$ustard oil grinding 2 23,000 5,7!0%rocery trade 1 5,000$ustard oil/sweets 1 5,500&and transactions 20 70,320&oan repay'ent 1! 2,720(tocking rice 12 27,13&ending 7 !,8#Rickshaw 3 !,137)owry/wedding 2 5,075*ousing 'aterials 1 ,!80+ther/unknown 25,0251

&oans put to 'ore than one use listed 'ore than once2

-1 . 0 taka (ource odd 1##!, 2

u'4er o loans A'ount o loans taka 2

How the poor use financial services

Introd"ced a% a %ma## !indo! onto the financia# (oa#% and %trate(ie% of the poor) Todd% data a#%o rai%e

the 5"e%tion of ho! poor peop#e incorporatefinancial servicesinto their %"r'i'a# %trate(ie%. erhap% no

one i% a better interpreter of ho! poor peop#e "%e financia# %er'ice% than t"art R"therford. Trained a% an

architect) he became intere%ted in ho! the poor mana(e their finance% after in'e%ti(atin( the effect% of

the earth5"ake in ana("a "%t before Chri%tma% in 1-723 man %#"m d!e##er% #o%t their home%) b"t

reb"i#t 5"ite rapid#. A trim man !ith thin*rimmed (#a%%e% and a d"%tin( of !hite hair) he #o'e% a#mo%t

nothin( more than inter'ie!in( peop#e abo"t the hand#e their finance%. In hi% book) he Poor and

heir !oney) R"therford foc"%e% #e%% than !e ha'e on the purposesfor !hich the poor "%e financia#

1?

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Notice that othi doe% not pa intere%t on depo%it% a% rich*!or#d %a'er% epect of their bank%3 %he

chargesat a rate that !ork% o"t to G0 percent a ear.G?R"therford a%ked othi% c#ient% !h the pa %o

m"ch to %a'e !hen %ta%hin( ca%h in a bo i% free

The fir%t c#ient I ta#ked toOkne! %he !o"#d need abo"t R% 00 in ear# "#) or mi%% o"t on admittin( herchi#dren to %choo#. Eer h"%band) a da #abo"rer) co"#d not be re#ied on to come "p !ith %o m"ch mone atone time) and in an ca%e he fe#t that #ookin( after the chi#dren% ed"cation !a% herd"t) not hi%. hekne! %he !o"#d not be ab#e to %a'e %o #ar(e an amo"nt at home+!ith %o man more immediate demand%on the %carce ca%h. I a%ked her if %he "nder%tood that %he !a% pain( G0 per cent a earO.he %aid that%he did) and %ti## tho"(ht it a (ood bar(ainO.

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The %imi#aritie% to othi% commitment %a'in(% %er'ice are %trikin(. The mone#ender too "%e% (rid%

printed on card% to track pament%. 6oth the %a'in(% and credit %er'ice% operate cc#ica##) prod"cin( the

%ame predictab#e rhthm of fre5"ent) %ma## pa*in% and infre5"ent) #ar(e pa*o"t%.

erhap% mo%t important#) both pro'ide di%cip#ine. A(ain) !e %ee financia# %er'ice% meetin( a

need that the rich eperience) b"t that the poor (enera## fee# more inten%e#. Di%cip#ine i% more diffic"#t

!here mone i% ti(hter and #ife i% #e%% predictab#e. In the %#"m% of Nairobi) re%earcher% i!an Ander%on

and ean*arie 6a#and fo"nd that 4 percent of participant% in #oca# %a'in(% (ro"p% kno!n a% RCA%

!ere !omen.40And amon( !omen) the one% mo%t# #ike# to oin !ere neither tho%e earnin( a## the

ho"%eho#d% income nor none of it) b"t tho%e in bet!een. Ro"(h# %peakin() %o#e bread!inner% did not

need the #e'era(e of a commitment %a'in(% arran(ement3 non*bread!inner% had no po!er to #e'era(e3

and !omen needed more #e'era(e than men. In their paper) $Tin( d%%e"% to the a%t)& economi%t%

Na'a A%hraf) Dean Kar#an) and ,e%#e :in di%co'ered the %ame need in the %o"thern hi#ippine i%#and

of indanao. ,orkin( thro"(h a r"ra# bank) the offered a ne! commitment %a'in(% acco"nt to a

random# %e#ected (ro"p of the bank% c"%tomer%. Intere%tin(#) the commitment acco"nt did not pa a

hi(her intere%t rate than the bank% ordinar %a'in(% acco"nt to compen%ate c#ient% for #ockin( "p their

mone. :et 2 percent of c"%tomer% !ho (ot the offer took it. After one ear) tho%e offered had %a'ed 1

percent more than tho%e not. ,omen in !hom p%cho#o(ica# te%t% re'ea#ed a %tron( ten%ion bet!een

ho! the mana(e mone in the moment and ho! the !i%h the co"#d o'er the #on( term !ere more

#ike# to oin than other !omen) and than men in (enera#.41

40Ander%on and 6a#and ;2002>. The rotatin( %a'in(% and credit a%%ociation% ;RCA> i% the mo%t pre'a#ent form of informa#financia# %er'ice. It i% de%cribed in chapter G.41The a'era(e effect reported here i% for tho%e recei'in( the offer) not tho%e takingit. The (ro"p recei'in( the offer i%random# defined) and i% the ba%i% for meanin(f"# compari%on%. eop#e in the %"b(ro"p takin( the offer are %e#f*%e#ected andmi(ht ha'e %a'ed more an!a. $Ten%ion& refer% to the time con%i%tenc) or hperbo#ic di%co"ntin() the re%earcher% fo"nd.A%ked to choo%e bet!een hpothetica## recei'in( 200 pe%o% toda or G00 a month #ater) and then bet!een 200 in ? month%or G00 %e'en month% from no!) tho%e !omen offerin( conf#ictin( an%!er%+200 !hen the choice !a% toda) G00 !hen it !a%deferred+!ere more #ike# to oin than other !omen) and than men (enera##.

1-

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To the etent that financia# %er'ice% re%emb#e one another) the can %"b%tit"te for one another.

ne !oman mi(ht %a'e to b"ffer her fami# a(ain%t the po%%ibi#it of a h"%band takin( %ick. Another

mi(ht a'ai# her%e#f of r"dimentar hea#th in%"rance %"ch a% that offered b the 9rameen 6ank. Another

mi(ht borro! to pa c#inic fee% !hen needed. f co"r%e) fe! poor peop#e are in a po%ition to choo%e

from a## the%e option%. In a . Ret"rnin( to Liaa!ada) the 1H percent "p*front char(e that Rama#" pa% the mone#ender for a

10*!eek #oan i% decepti'e# mode%t. After %"btractin( the R% 1H0 fee) hi% initia# ba#ance i% R% H0. Ee

%tart% repain( immediate# %o that hi% averageba#ance o'er the 10 !eek% i% ha#f the R% H0) or R% 42H)

of !hich the R% 1H0 i% GH percent. A rate of GH percent for 10 !eek% compo"nd% to a %t"nnin( G2

percent on an ann"a# ba%i%) more than ten time% !hat othi the depo%it co##ector char(e%.4Gean!hi#e)

the "npredictabi#it of the borro!er% financia# traector make% takin( on debt more ri%k and %tre%%f"#.

42D"f#o et a#. ;200>. $Jpen%i'e& mean% co%tin( more than G00 r"pee%. The a'era(e reported co%t for %"ch epi%ode% !a% R%1)-00) !hich i% more than t!ice the a'era(e per*capita con%"mption in the %amp#e) R% 70.4GR"therford ca#c"#ate% the rate at 10 beca"%e he doe% not compo"nd.

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That 'ario"% financia# %er'ice% can%"b%tit"te for one another) b"t at a co%t) mean% that poor

peop#e often "%e financia# %er'ice% in !a% that are not idea#. That a #oan i% taken) for in%tance) doe% not

mean that a #oan i% the be%t option in the idea#.

Conclusion

Thi% chapter% re'ie! of the ro#e of financia# %er'ice% in dai# #ife and economic de'e#opment (enerate%

a %erie% of ca"tion% for tho%e !ho %ee microfinance+microcredit in partic"#ar+a% an e#iminator of

po'ert. The poor need financia# %er'ice% for man "%e% in addition to enterpri%e. Credit can %er'e man

need%) b"t %a'in(% and in%"rance %er'e man need% more effecti'e# !hen a'ai#ab#e. Thoma% Dichter) a

#on(*time practitioner and e'a#"ator of microfinance) ob%er'e% that no co"ntr that i% rich toda (ot that

!a thro"(h tin #oan% for tin enterpri%e%.44Indeed) e'er compari%on bet!een rich and poor co"ntrie%)

a% bet!een poor and midd#e*c#a%% peop#e !ithin poor co"ntrie%) dri'e% "% to conc#"%ion that in the broad)

economic de'e#opment i% %nonmo"% !ith reductionin microenterpri%e and (ro!th in emp#oment d"e

#ar(e# to the epan%ion of forma# enterpri%e% backed b more con'entiona# finance.

A## thi% %"((e%t% that net to the etraordinar po'ert*red"cin( po!er of the ind"%tria#

re'o#"tion) microfinance i% a pa##iati'e. Doe% that mean that the 'a#"e of microfinance i% %ometime%

ea((erated8 robab#. Doe% it make microfinance !a%ted charit8 Not nece%%ari#. The poor need

financia# %er'ice% at #ea%t a% m"ch a% the rich. For peop#e na'i(atin( the "npredictab#e and "nfor(i'in(

terrain that characteriBe% the #i'e% of mo%t poor peop#e) an additiona# room for mane"'er) an

additiona# contro#) can be etreme# 'a#"ab#e. A% onathan ord"ch) a Ne! :ork ni'er%it economi%t

and tho"(htf"# ob%er'er of microfinance) to#d a !riter for the"e# $orker) $That i% a 'a#id criti5"e) to a

point. 6"t (et rea#. Eo! #on( are o" !i##in( to !ait for the re'o#"tion8 I cant %ee an mora# fo"ndation

44Dichter ;2007>.

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for not trin( to addre%% the c"rrent depri'ation% of the !or#d% poore%t bi##ion%. If microfinance can he#p

pro'ide option% in co%t*effecti'e !a%) !e %ho"#d ce#ebrate it.&4H

ther o"rce

Presentation Transcript6inancial (ervices $anage'ent6inancial (ervices $anage'ent 7nit 1 "hapter 1 6inancial (ervices 8 9ndian 6inancial (yste'

6inancial (ervices6inancial (ervices 0he 5inancial (ervices 'o4ili:ing and allocating savings and all activities in the trans5or'ation o5 savingsinto invest'ent 9t is otherwise called as 5inancial inter'ediation 6inancial (ervices re5ers to those services rendered 4y4anks, 6inancial 9nstitutions, 9nsurance "o'panies, ;anks and other inter'ediaries in the 5inancial 'arket inter'ediaries

6inancial (ervices6inancial (ervices 6inancial (ervices include, $oney $anage'ent ue 5eature o5 service *eterogeneity ?6inancial (ervices cant 4e uni5or' 5or all Bary 5ro' one custo'er to the other .

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&easing &easing A &ease is a contractual agree'ent 9n which a party is owning an asset lessor 2 uest o5 the lender

6unctions o5 6inancial (yste'6unctions o5 6inancial (yste' $echanis' 5or 'o4ili:ing savings $echanis' 5or storing wealth &i>uidity "redit 'echanis'

F1-Chap 2 7dr

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Transcript of F1-Chap 2 7dr