In an article entitled ‘Debunking Myths About The Poor And Financial Services’ in the Wall Street Journal [1], Mr Suyash Rai, a Senior Manager with IFMR Trust [2], and Ms Sona Varma, Senior Advisor with IFMR Trust, attempt to address what they perceive to be ‘a number of popularly held misconceptions about role of finance in the lives of the poor’. IFMR Trust is a private trust with the mission of ensuring complete access to financial services for individuals and enterprises in India. It does not supply data to the MIX Market portal, an online database that houses financial and other information on MFIs around the world [11].
The first misconception that the authors aimed to ‘debunk’ is that ‘the poor are not creditworthy’. They note that the recent financial crisis has blacklisted ‘sub-prime’ borrowers and observe how ‘often the terms ‘poor’ and ‘sub-prime’ are used interchangeably and equated with ‘lack of creditworthiness”. Recent research however has demonstrated that ‘if suitable mechanisms are used, the poor can be as creditworthy as the rich’ and that the recent ‘problems’ with microfinance probably have more to do with ‘the mechanisms of service provision and inadequate regulation’. The authors point out that many MFIs have consistently reported ‘repayments upwards of 95% in a number of developing countries’.
Another myth that the article sought to discredit is that ‘finance falls lower in the ‘hierarchy’ of needs for the poor, below health, education etc’. According to the authors, empirical research suggests the contrary and ‘that the poor use many financial instruments frequently, but due to absence and unsuitability of formal mechanisms, they have to rely mainly on unreliable informal service providers’. Equally, credit is not the only financial service required by the poor, though there are some microfinance participants who believe this is the case. The issue concerning the provision of other services and financial products to the poor, apart from credit, has been addressed in prior Microcapital.Org stories [3], [4], [5], [6]. Like other commentators, the authors note that the poor need a range of services including ‘risk mitigation mechanisms, for example insurance, to protect against exogenous shocks’ and ‘savings facilities to smooth consumption and get reasonable returns even on small amounts’. In addition, the authors note the value of ‘investment/risk management mechanisms’ for the poor as these measures ‘allow for wealth creation and diversification of risk’. They add that ‘a number of successful initiatives, such as those providing micro insurance or small ticket investments in mutual funds, re-affirm the hypothesis that the poor demand and can benefit from the same wide range of financial services that are routinely provided for the rich’.
A final observation made in the Wall Street Journal report relates to the myth that ‘the poor are not sophisticated in using financial services, so access to finance may end up damaging their livelihoods’. The authors note that it is not the lack of sophistication that hinders the poor but ‘the absence of well-designed formal services’. Many poor people ‘end up creating a complex mesh of informal financial mechanisms’ as this is often ‘the only way they can meet multiple needs using informal instruments’. The authors referred to the sources which show how the poor ‘creatively use a variety of loan sources’ to address ‘the irregularity in their incomes and expenditures’. These sources include the following: (i) a World Bank publication [7] entitled “Moving out of Poverty” which presents results of research on the processes of falling into and coming out of poverty; (ii) the book “Portfolios of the Poor: How the world’s poor live on $2 a day” [8], [9], which analyses the financial behaviour of poor households in three developing countries; and (iii) a recent paper from researchers at MIT [10] on the results of the first ever randomised evaluation of micro credit (based on surveys made in Hyderabad, India). These sources have been discussed in prior Microcapital.Org stories which are referenced in the Bibliography section below. The authors note that failure to overcome poverty has more to do with a lack of access to capital and relevant networks rather than a lack of sophistication. The rich and poor have more in common than many people think and the authors conclude by observing that ‘like the rich, the poor also need to use finance responsibly to ensure that they avoid over-indebtedness and other problematic outcomes’.
By Chinq Yee Chong, Research Assistant
Bibliography
[1] Wall Street Journal article entitled ‘Debunking Myths About The Poor And Financial Services’: http://online.wsj.com/article/SB125203953484285845.html?mod=googlenews_wsj
[2] IFMR Trust: www.ifmrtrust.co.in/
[3] MICROFINANCE PAPER WRAP-UP: Emerging Markets in Microinsurance, by Arthur D. Little
[7] World Bank publication entitled “Moving out of Poverty”: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/EXTMOVOUTPOV/0,,contentMDK:20780967~pagePK:210058~piPK:210062~theSitePK:2104396,00.html
[8] NEWS WIRE: Portfolios of the Poor: How the World’s Poor Live on $2 a Day
[11] The MIX Market portal: www.mixmarket.org/
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