Not having enough money is bad enough, but what can be worse is not being able to manage whatever money you have. This is the hidden bind of poverty, say Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven in ‘ Portfolios of the Poor: How the world’s poor live on $2 a day ’ (www.landmarkonthenet.com).
“For lack of a tool to marshal money into the right sums at the right times, a missed doctor’s visit tips into a full-blown family health crisis. A lack of ready cash deprives a child of a place at school, or prevents an adult from seizing an opportunity to increase income and gain greater economic stability.”
In this context, they see three opportunities before microfinance providers: helping poor households manage money on a day-to-day basis, build savings over the long-term, and borrow for all uses.
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This is essentially cash-flow management, involving the manipulation of small and irregular or unreliable incomes to ensure that cash is available when needed, so that there is food on the table every day, the authors explain. Since money management can absorb a very large share of the time that poor households give to financial affairs, there is a big opportunity in offering them access to a convenient cash-flow management facility.
Such a facility should provide ‘the chance to make small-scale savings of any value at any time with the right to withdraw on demand; and at the same time it would offer loans of a modest value that can be taken quickly, on demand, at any time, and repaid in small (and, if necessary, irregular) instalments.’
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Building long-term savings
Poor households have room in their budgets for savings, and understand the need to save, reveals a study of the use of ‘savings clubs,’ as reported in the book. But because most savings clubs have limited life spans, poor people have very few opportunities to build up savings into large sums over the long term, the authors rue. “This is a serious limitation, since building long-term cushions of savings is a vitally important way of dealing with expensive life-cycle evens, with purchases of big assets, and with emergencies.”
So, the second big opportunity they see is the offering of long-term contractual savings products, which mimic savings clubs by making it possible to save small sums on a regular basis but adding the opportunity of doing so safely over the long term. A major obstacle to this, in many countries, can be the lack of legislation that permit reliable microbankers to mobilise savings.
General-purpose loans
These are required because of the many demands for large sums that cannot be met by savings alone, the authors reason. They add that despite the development of uncollateralised lending – which has been the single biggest and most widespread achievement of the microfinance movement – many microfinance providers still prefer their borrowers to use their loans for just one purpose, i.e. microenterprise. “Where this is enforced, clients cannot borrow for other vital uses even when they have the cash flow to service the loans.”
On the other side, studies documented in the book show that many loans ostensibly taken for microenterprises are used for other purposes. It is time, therefore, that microfinance not merely faces up to this reality, but also embraces the opportunity that it presents, urge the authors.
“By offering general-purpose loans, matched in value and structure to the cash flows of poor households, microfinance would open up to the biggest single market it is likely to find among the poor, especially in the urban poor who tend to be waged rather than self-employed…”
Educative study.
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