Access to Finance - issues in development

• Income is often very irregular
• Expenditures come out of nowhere - funeral, health etc
• Manage their money even more actively than a wealthy household, usually across a lot of different instruments
• Even if you have low incomes, you still have a need to save and manage your money - you just might not have the right tools available to you

• Poor people have very irregular incomes
• Not a lot of it
• Unexpected costs
• Financial devices are not really set up for them kind of cash flows

Usually through a household data collection and survey

World Bank Global Financial database

• In 2014, only 64% adults gave have an account
• (Global Findex Database based on 140 countries, 150,000 adults)

• 51% in 2011 and 64% in 2014
• Global Findex Database based on 140 countries and 150,000 people

Huge variation across countries and by income groups, living areas (rural or urban), and age

The share of women with an account is also lower than the share of men

• 90-100%
• Global Findex Database 2014

• Democratic Republic of the Congo
• Chad
• Sudan

91% in Europe (of the poorest 40%)

25% in SS Africa (of the poorest 40%)

• Not enough money - 60%
• Do not need an account - 30%
• Family has an account - 27%
• Accounts are too expensive - 23%
• Too far away
• Lack of necessary documentation
• Cannot get an account
• Lack of trust
• Religious reasons

Sometimes you have to pay fees to save/take out/pay money and this would be a large share of what they would be saving

Sometimes you need a form of identification and in developing countries, people dont tend to have them, especially if they are migrants from rural to urban areas

If you are a Muslim in a non-Muslim country - then in Islamic banking, you are not supposed to pay interest

• 3/4 formally
• 25% other methods

• 1/3 semi formally
• 1/2 other methods
• Rest formally

Shows that its not that people arent saving, its that people are saving through other channels, and not through banks

20-100%

0-4%

• Many of the loans wanted are small loans which leads to high transaction costs
• Individuals may lack collateral and dont have extra income or assets to sell to pay it back - housing rights are poor 
• No security
• No information or credit history
• Risky
• What do they need the income for?

• SS Africa - 18% health (dont often have free health services like the UK for instance)
• 12% education
• 13% for business

• OECD countries
• 5% health
• 6% education
• 3% business

• Low incomes tend to be self employed
• Finance for farming
• Livelihood - may not have saved enough or income is not enough to expand or operate their business

• In most countries, these are present (why people might take out a loan)
• childbirth - more people in the family
• Education - school fees and see it as an investment
• Home building
• Widowhood
• Dowry for marrying daughter

Rutherford 1999

• Drought - 49%
• Death of household - 43%
• Illness - 28%
• Inability to sell output - 15%
• Pests - 14%
• Crime 13%

• Economic activity/opportunities - run their own business
• Rent land but want to buy land
• Purchasing inputs such as fertiliser
• Working capital such as machines and tools
• Maybe their income is not enough to invest
• Sales revenue of farming is obtained after the crop has been planted

• Goal 8 has a specific target on access to finance
• Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all
• Access to finance is recognised as a goal in itself but links to everything

• Credit:
• Informal moneylenders
• Family/friends
• Traders/employers
• Microcredit

• Savings:
• Deposit collector - someone in the area who collects savings (not regulated)
• Rotating savings and credit association within a community

Rutherford 1999

Someone who comes to your house - you pay a fee upfront for them to collect your money like a bank

The only other way is to hide in in your house but this is not very secure, so people are willing to pay to put money in the bank

• Source: Rutherford 1999
• No fees or interest payments
• Where a community pays a certain amount in each week and take it in turns to receive the full amount
• Inflexibility - everyone has to save the same amount in the same period

• High interest rates
• No formal contracts
• No interest of negative interest (for savings)
• inflexible arrangements
• Not suitable for long term
• Not necessarily large loans because they dont have that much money
• (in some places, is as much as 80-100% year annum interest rate)

The critiques of informal finance

• Movement started with Muhammad Yunus and the Grameen Bank in the 1970s (now has 8 million customers)
• Yunus was a strong believer in the power of small microloans to transform businesses of the poor - started off small scale

They have ideas but simply dont have the money to put them in place

Innovative contracts can be used to lend to low income people and still make a profit

• Group lending
• No collateral - dont have to give any security
• Progressive lending - starts off as small loans and gets bigger
• Majority of customers are women (Women tend to have higher repayment rates and are more likely to soend money on childrens education and health - social motif and poverty reduction)

• Group lending is a reason why banks can lend on low interest rates on low incomes when formal banks dont
• Individuals interests in borrowing will get a loan for their own project, but they must be part of a group
• Strict requirement of group features - give out loans and repayments in meetings
• Group members are liable for each other
• Group meets with a loan officer frequently
• Grameen bank loans have much lower interest rates than loans from informal moneylenders for instance - so they are willing to use it

• Joint liability means that even if one customer defaults, others will repay
• Group members are likely to choose other member who they trust to repay - banks have less risk
• Group members also have an incentive to monitor how others use the loan
• It essentially outsources the risk to the group, not to the bank

Since the 1970s

• Rosenberg (2010) - Despite many positive anecdotes, rigorous quantitative students finds mixed evidence on poverty reduction
• Household incomes or consumption have not necessarily risen as a result of microcredit 
• yet it is still more reliable than other options and allows individuals to manage their financial lives

The lending of small amounts of money at low interest to new businesses in the developing world (Oxford, 2016)

• No clear evidence of reductions in poverty or clear improvements in social indicators (education, health)
• Evidence that businesses expand at least to some extent
• Microcredit may increase freedom of choice – consumption patterns may change, some evidence of female empowerment, and people may be more able to manage risks
• No clear evidence on harmful effects either

• Microcredit often not used to generate new income, but to consume
• New loans needed to pay back old ones
• Businesses of low income people often fail and microcredit leads to cycle of over indebtedness
• Some MFIs charge higher interest rates in search for profit
• Cash transfers better for poverty reduction than credit?

• People have diversified needs for finance and financial services
• Low income people often lack access to formal sources, and may borrow informally at high rates or save at high cost
• Microcredit emerged as a possible win-win solution – to provide loans to low income people with reasonable rates and be profitable
• Evidence suggests that microcredit can help poor to manage risks and their financial lives.
• Whether it has led to a reduction in poverty is not clear
• In recent years, mobile banking has made financial services more accessible for many, especially in Sub-Saharan Africa. But focused on certain countries and not without challenges
• Whether it is a poverty reduction tool, still a big question mark
• If business who want to invest, still unseen ideas on investing in microcredit