How to write; why big goals are stupid; capital v governments; origins of the IPCC; the end of oil and a vision of President Blair: links I liked

October 13, 2009

Can we say climate change 'causes' extreme weather events?

October 13, 2009

Portfolios of the Poor – a great new book

October 13, 2009
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Portfolios of the PoorPortfolios of the Poor gave me the same feeling of excitement as the World Bank’s epic ‘Voices of the Poor’ study. Both of them are the fruit of intense scrutiny of the real lives of poor people that uncovers insights and destroys stereotypes. Poor people are most definitely not financial illiterates, but often sophisticated managers of complex financial portfolios that are essential to their survival.

Portfolios of the Poor is a financial fly-on-the-wall account of how poor people manage money. To find out, the researchers set up ‘financial diaries’ with 250 households in selected communities in 3 countries (Bangladesh, India and South Africa). For a year, researchers visited every fortnight and picked over people’s financial affairs. The book then assimilates the findings, and intersperses them with unmistakably real-life examples from among the 250 households (‘Pumza is a sheep intestine seller living in the crowded urban hostels of Cape Town……’)

The first and perhaps most striking finding is the sheer complexity, scale and variety of poor people’s financial activity. People living in poverty need financial skills more than the better off. Just to get by from day to day, they borrow, save, and exchange cash with a huge variety of friends, family, neighbours and institutions, both formal and informal. These last include savings clubs, savings-and-loan clubs, insurance clubs, microfinance institutions, and banks. ‘At any one time, the average poor household has a fistful of financial relationships on the go.’ Every one of the 250 households had both savings and debt of some sort, and no household used fewer than four types of financial instrument over the course of the year. Rural households have turnovers (i.e. total cash flows in or out) between 10 and 30 times greater than their asset value at the end of the year.

This constant activity is needed to deal with three broad challenges:
1. Managing the erratic cash flow of poor homes to make sure there is food on the table every day
2. Dealing with the health and other emergencies that can derail families with little in reserve. In South Africa, funerals (frequent because of HIV and AIDS) cost between 5 and 10 months household income – a huge sum for people living on the edge.
3. Raising lump sums to seize opportunities (typically to buy land) or pay for big ticket expenses like weddings (which in India took up over half the yearly income of a typical household).

The authors bring to life the importance of psychology in the financial lives of poor people: something economists have largely ignored until recently. For instance, South African women in the study joined several thembimonthly “savings clubs” in spite of having bank accounts that would have paid them interest on their savings. They found that the extra discipline the clubs provided was valuable in itself, because it compelled them to save, no matter what. For similar reasons, poor people regularly seek out money collectors who pass by daily to pick up small amounts of cash, and then return it, minus a fee (effectively a negative interest rate), at the month’s end. Both make complete sense in human terms, but baffle more orthodox economists.

In what seems a very fair appraisal of the ways poor households meet these challenges, the book assesses the strengths and weaknesses of their current financial arrangements in order to try and spot ‘gaps in the market’ – opportunities where banks and microfinance institutions can design products that genuinely address unmet needs of poor people. This is essentially a financial ‘bottom of the pyramid’ exercise. They identify three weaknesses of existing arrangements:
– unreliability (whether loans will be forthcoming, savings lost or stolen, or informal savings clubs will disintegrate);
– inflexible repayment schedules imposed by microcredit providers who insist on one year repayment periods when poor people often want loans for weeks rather than months
– terms that can be too short: some financial needs (pensions, or saving really big sums, demand years of savings, but informal institutions are too unstable to provide this kind of timespan)

If formal institutions are to remedy these gaps, they need to pay attention to poor households’ needs to save and borrow in very small amounts, on a regular basis, but with flexibility in payment schedules to match their unpredictable cash flow. The authors are big fans of ‘Grameen 2’ which has moved away from the traditional role of the microcredit lender. They identify 3 top tips for the kinds of financial products that could take off in this kind of approach:

1) a cash-flow management facility that allows poor households access to small, irregular payments of both savings and loans to tide them over the day to day variability of their cash flows

2) long term savings products

3) large lump sum general purpose loans (i.e. not just for business start-ups as many microcredit institutions have traditionally demanded) – this is the biggest potential market among the poor

Interestingly, the researchers come down against insurance, because it requires each risk to be separately insured, and ‘low income households are unlikely to want to spend money on multiple policies, knowing that only some of them will bring returns.’ Access to emergency lump sums instead acts as a kind of ‘general purpose insurance.’

Most startling finding? Even people living on $1-$2 a day typically save about 25% of their income. Amazing. For their data, book reviews, etc see the book’s website.

What impact will the book have? It feels a bit like the work of Hernando de Soto, in that it can be read in both a progressive and regressive way: progressive: poor people are active financial agents, and governments and financial institutions need to work to their needs. Regressive: a ‘private not public’ agenda that sees financial institutions piling into slums and villages to lend money to poor people so they can pay for a pile of services like education and healthcare that are often better provided by the state.

14 comments

  1. The point about giving loans for general purposes other than for business start-ups is particularly interesting. I used to sit on the credit committee of my local credit union in Dorset. Most of the requests for loans were for things like new washing machines, wedding expenses, or car repairs, rather than for setting up or investing in companies. It was credit union policy to approve the vast majority of these requests, because the peace of mind such purchases give improves borrowers’ quality of life in a different but no less important way to economic activity. Of course, peace of mind in turn gives people the time and serenity to engage in productive pursuits, so such loans can trigger virtuous spirals and speed economic development too. Another reason for giving general purpose loans is because people know their own needs better than any credit union committee, thus promoting self-reliant development. Thanks for the tip-off re the book – sounds like a must-read.

  2. If poor people are making large numbers of small value transactions, is this something technology should help with to bring down the cost of each transaction compared to pen and paper? I’ve heard stories of mobile phone credits used as a type of electronic banking for the poor. Is there any good evidence out there or is it just western companies looking for new markets however inappropriate ?

  3. I’m still waiting for my personal copy, but from what I’ve read on their website (Chapter One) plus couple reviews, plus a skim read of a colleagues copy on a recent flight, this is a really excellent book on the lives of the poor and where finance comes in. Lots of rich detail I haven’t seen anywhere else. It is to be recommended.

    However, I agree fully with your reservations about the link to policy recommendations. It seems to me that they are coming up with some really great material, but then they feel duty bound to try to shoehorn this material into the current microfinance paradigm, to make it look as though this remains the answer when it clearly doesn’t. This part seems unconvincing to me. Two things mainly:

    1. Praise for Grameen II – Grameen II is a very commercial approach to microloans, and it is very expensive for the poor. Interest rates are high because the people in Grameen need to make enough to cover their costs, including senior manager’s salaries which are approaching those of commercial banks. This financial self-sufficiency imperative adds a significant burden to the poor, rather than relieving them of the burden of high interest rates. Grameen I (the original Grameen Bank model) was effectively abandoned when it could not reach financial self-sustainability, but the poor really liked the lower cost loans they got courtesy of subventions from the Bangladesh government adn some donors. It was a good form of wealth redistribution too, one might say. Yunus gave in to the pressure to abandon his original model because of the self-financing imperative and the need to cut the costs of state support, no matter the impact on the poor.

    Note also that there is also a lot of evidence (see Lamia Karim’s excellent 2009 book ‘The Politics of Shame’) to suggest that the poor in Grameen and in other Bangladesh MFIs are brow-beaten and harassed into repayment, which we need to factor in. Also Karim, and others, have found that interest rates are much higher in practise than advertised in Bangladesh, thanks to lots of hidden charges, fees, etc.

    So Grameen II is a an expensive and risky way to help the poor wanting a little cash to facilitate consumption smoothing. If most microcredit is accessed for consumption spending, which we now realize has been the case for quite some time, then a much better way to support the poor than through high cost microloans thanks to Grameen II would be to support credit unions, which typically provide much lower interest rates because they have a lower cost base (managers are voluntary or are paid much less). Trapping the poor in a web of expensive debt, which is what is happening in many parts of Bangladesh and India thanks to Grameen II, BRAC, ASA SKS, etc, is not a way out of poverty, but seems to me more of a way into it.

    2. I also fully agree that the book will provide real comfort to those currently seeking to do away with state services in the health and education field. Why do you need the state to intervene and directly help the poor (and possibly increase taxes on the middle class and business as a result) when the poor have microfinance, which ‘earns its own keep on the market’, and which can be used by the poor to access (usually more expensive) private services? This preferred trajectory possibly increases the individual entitlement/capabilities of the poor through microfinance, but it comes at the price of destroying the collective entitlements/capabilities that come through the state (ideally a democratically mandated state) and which have historically provided the poor with much better services (reaping economies of scale, for example), all of which leads to the most chance of an escape from poverty.

    Milford

  4. I would like to know the source of Milford’s assertion. Most of what he says about Grameen II is wrong. I should know. I wrote the book on Grameen II not by making things up but by staying in Grameen’s office, studying reams of internal memos, going through the books and talking to the field level staff and senior policy makers. Grameen II was necessary because the flood of 1997-98 revealed the weakness of the Grameen I in particular the rigidity of the old model.

    I have no idea what he means by “Yunus gave in to the pressure to abandon his original model because of the self-financing imperative and the need to cut the costs of state support, no matter the impact on the poor.” How does he know that?

    The problems with blogs is that anyone can make stuff up, it goes viral and becomes an accepted narrative.

    By the way, my book is titled, The Poor Always Pay Back: The Grameen II story. Two of the authors of Portfolio of the poor had advanced access to my manuscript. Stuart Rutherford has spend the last two decades in Bangladesh and is well respected independent researcher. He is nothing to gain by embellishing the record of Grameen II.

    The high interest rate of MFI meme is been spun enough. I have responded to this in response to Duncan’s earlier post on microfinance.

    Lamia Karim’s research suffer from fallacy of composition–what is true for one is not true for everyone. She did not mention her sample size. She found some anecdotes and jumped to conclusion about debt burden, oppression and other canards. In the absence of sample size, we do not know how representative are these anecdotes. Besides she did not make it clear whether she was taking about Grameen borrowers or borrowers of other NGOs. These are the type of questions that a referee should have asked before publishing the paper.

  5. Well I’m not about to try and referee the debate between Asif and Milford, but I do think it is very informative (for those of us reading it, if not for the participants!). One thing I would say is that Portfolios of the Poor changed my mind somewhat on the high interest rates issue. It argues that for short-term repayments and savings, it is much better to see the charge as a fee, and one poor people are often quite happy to pay, rather than working it out as an annualised interest rate that often seems extortionat.

    Ken, on the mobile phone issue, yes they do seem to offer huge potential in this area – I’m just writing a post on a recent Economist special report on mobiles and developing countries. But far from it being the province of northern transnationals, it is developing country phone companies that are showing the way and making the profits.

  6. One of the problems with microfinance is that simply to challenge an accepted narrative evokes shock and horror. Some say, You don’t care about the poor! As one old friend in UNDP told me when I said I was writing something on microfinance, ‘Don’t – you’ll just be portrayed as kicking Mother Theresa’. So you are swimming upstream right away.

    If you read Yunus’s early books you can see that he was very passionate indeed about maintaining low interest rates as a major way of helping the poor. He asserted many times up to the mid-1990s that ‘good loan recovery/repayment rates were far more important than high interest rates.’ However, awkwardly, this meant that Grameen Bank all along had to be quietly supported by Bangladesh government and international donor community subsidies. This was a problem to many in the international development community in the 1990s, which was then fully engaged with pushing its ‘full cost recovery’ mantra. This was why Grameen’s dependence upon subsidies was not a well publicised fact, for fear of undermining the microfinance concept as a whole. On cost-benefit lines this subsidisation issue might present no problem to most of us (if benefits outweighs the costs). But the problem was that ALL microfinance institutions were being aggressively pushed in the direction of financial self-sustainability in the 1990s, including the Grameen Bank. This was the USAID-CGAP led movement to ditch ‘poverty lending’ and to introduce the new supposedly best practise ‘financial systems approach’. So Asif is quite mistaken when he argues that it was just ‘the flood of 1997-98’ that accounts for Grameen Bank falling into line with just about every other high-profile microfinance institution and converting to financial self-sustainability via Grameen II. Yes, it might have speeded up the conversion, but it certainly did not precipitate it. If every microfinance institution is being forced in this same financial self-sustainability direction, you cannot argue (or simply make up the idea) that specific issues in the Grameen case were the cause of its own conversion: it was a system-wide necessity.

    On the issue of Grameen II success, no one doubts that Grameen II has been a fantastic BUSINESS success. As David Hulme recounts in a very interesting recent paper on the Grameen II project, the client base went to 5 million from 2.5 million a couple years before. Savings deposits were massively increased. The portfolio of outstanding loans doubled. And, Grameen finally began to make a healthy profit. But to achieve all this, of course, the interest rates had to rise significantly. It is THIS aspect that cannot be reconciled so easily with ‘helping the poor’, on Yunus’ own (earlier) admission. If you are running a struggling rickshaw or basket making business and the cost of your microloan goes up quite significantly in just a few months, this is a major setback to you. Surely by now we should all know that you cannot simply equate a financial institutions own success with poverty reduction success?

    As to Lamia Kareem’s articles and her recent book, for what it is worth I think you will find her case very well-argued and over her several years of field work in Bangladesh it makes use of very many examples. And given that she was not coming to praise Grameen, which is the norm and opens all sorts of doors in the expectation of good PR, but to independently explore its impact, I am sure she would have found it hard to gather data from the main microfinance institutions. Anyway, given that the microfinance industry has achieved its huge visibility very largely because of the huge positive publicity generated by a handful of quite unrepresentative ‘success stories’ – the ones you find on the websites of most microfinance institutions and their key donor agencies – it is a bit rich to now gainsay someone for using less than a massive sample to develop their argument!

    Milford

  7. Milford:

    You have not answered my question. What is your source of these blanket treatments? My source is extensive field work and careful research. I know the institution from day one. Grameen Bank has not received any donor funding since 1995. As far as Government subsidy is concerned, that stopped at 1998 when Grameen had to borrow at commercial rate of 10 percent from the Central Bank to replenish the liquidity drain after the flood of 1997 (reported in FT). Grameen was profitable before the introduction of Grameen II. You are completely wrong; Grameen’s interest rate has always been 20 percent on a declining basis for loan. The interest rate for housing is 8.5 percent and education loan 5 percent. So, the effective interest rate is less than the reported 20 percent interest rate on loans. It DID NOT increase interest rate with Grameen II. In your erroneous previous post you mentioned Grameen’s salary is same as commercial banks. Wrong again. Grameen’s pays the same salary as nationalized and unionized commercial banks. These salaries are on average 30 percent less than private bank’s salary. Compared to other MFIs in Bangladesh, Grameen has the highest labor cost and lowest interest rate.

    I was at Grameen spending a year on sabbatical when Lamia was collecting data for her dissertation. She did not have any problem about collecting data on Grameen or any other NGOs. For god sake. she has published two articles and a book based on data collected. Actually, she used the same office I was residing in for my sabbatical for some of her work.
    The title of her book “The Politics of Shame.” Other Bangladeshi social scientists (including Naila Kabeer from Sussex) finds that microcrdit empowered women in Bangldesh. Actually the title of one of the article is ‘the politics of Samman (meaning honor in Bangla).

    Microfinance is not God’s edict. It has problems. For example, I would concede it gets too much attention at the expense of other noteworthy and equally successful anti-poverty programs. Despite its success, the movement is still obsessed with being on message and feel insecure to share the failings. I am also not convinced that entrepreneurship alone, funded by microloan will be enough to alleviate poverty. These are all legitimate points of debate. You just do not get to make up things to show that you can question conventional wisdom and can ‘kick Mother Theresa.’

    Actually, Milford has a better research agenda: use secondary and made up sources, rumor and hearsay to ‘kick Mother Theresa.’ Notwithstanding his claim of victim hood, he is more likely to get attention this say, being a contrarian and all that.

    I apologize for the harsh tone of my response. I am afraid, this is the only way to respond when people just make things up for the sake of advocacy research and behave like a teenager who sees a shiny new car and want to scratch it.

  8. Not having a chance to read the book and having some interest on the title of the book, I must say that I feel bias on the examples that they used above to describe poor people. Most of the time, they describe poor people as the ones that are living under $1 a day and this estimation is true for the World Bank and the United Nations. But I believe the consideration should go further- We have people on the planet that spent a day or two without food. What connotation should we use for these people? And we must add that they are numerous.Some of them have husbands/wifes and even kids. Therefore before we even talk about the microfinance issue and the ability to manage themselves financially, we must enter them to a new circle of life giving them the opportunity to eat at least one meal a day.

  9. Duncan,
    Thank you for this interesting post. I think it’s very important for individuals to really “humanize” those who are in impoverished situations. Often, those who live in “third world” countries seem to be so far away, and individuals in industrialized countries often have the impression that there’s no common ground between them and individuals in poor countries. It is very important to break down stereotypes about individuals in poor countries needing “handouts” to survive. As this book seems to address, even those who have a meager salary have the foresight to save their money and plan for their future. With this type of awareness, perhaps people from the Global North will be more likely to support NGOs, knowing that the recipients of the funds DO financially plan for the future. If donors know that their funds are really making a contribution, and that individuals are benefitting in the long-term, they might be willing to donate more funds to developing countries?

  10. I think Asif needs to tone down his intemperate responses to my submissions and grow up. I know his personal and career closeness to the whole Grameen model means that any contrary findings will affect his own professional and personal standing, but this is no excuse for not openly accepting others’ research findings on the subject and for resorting to trying to rubbish their work without any real evidence whatsoever from his side. Asif’s reaction reminds me of all the attacks on journalists by Enron senior staff in the final months prior to Enron’s collapse, ranting on about how little all those outsiders were ‘out of the loop’ and so knew squat about what was really going on inside the company! To some concrete final points:

    1. Interest rates. Asif is quite wrong to quote the official (20%) figures provided by Grameen. He mischievously fails to point out that Grameen II has obligatory savings accounts that quietly inflate the interest rate considerably. Essentially, the poor are obliged to set aside a small (2.5%) portion of their loan when they get it in a Special long term (‘no withdrawals in 3 years, then one withdrawal allowed in 3 years keeping minimum balance above 2,000 Taka or half the amount in the account, whichever is larger’) savings account, and also must contribute weekly to building it up further. The interest paid on this Special Savings Account is 8.5%. However, the individuals are also encouraged to access further loans as soon as they get near to repaying their current one. This allows Grameen to attract the 20% rate on money already saved by the inidividual. After a couple of years of savings, the poor individual is effectively offered her own money back. The new loan is almost completely risk-free, and administratively very simple indeed, all of which helps to make the margin/profit on it that much higher. This increasingly popular technique surely needs to be factored into the interest rate. When you do this, the interest rate goes up quite dramatically. Someone who has worked on precisely this issue in India is Professor Mitra, who finds interest rates can go up to 150-175% using such methods. So I suggest those unconvinced by either Asif’s argument or mine go to Professor Mitra’s work and see for themselves how it is done. The full reference is – Subrata Kumar Mitra. ‘Exploitative microfinance interest rates.’ Asian Social Science, Vol. 5 (5), May 2009, pages 87-93.

    2. Not sure what you meant by your comment about salary costs. Grameen salaries and bonuses are higher than comparable MFIs – you say so yourself “Compared to other MFIs in Bangladesh, Grameen has the highest labor cost and lowest interest rate”. Compared to private banks I understand from my information that the difference is decreasing, but maybe not there yet, as you say. Still, working in an MFI is lucrative and needs to be backed up by a good commercial performance. Lowering interest rates does not help here. Effectively, my point is that Grameen is becoming a commercial bank and since Grameen II has effectively lost all motivation to genuinely see how best to achieve poverty reduction. The interests of the employees and senior managers are now, as everywhere else where microfinance institutions have been commercialized, the paramount concern. This is bad for the poor. If lowering interest rates was good for the poor (I think it is!)then it will be resisted because it will lower staff salaries and bonuses.

    3. Finally, your comments on my ‘research agenda’ are just – I must be honest here – a silly rant from someone who has supported a seemingly positive idea for so long and has greatly benefitted career-wise from it, and now that many are reporting ‘the Emperor has no Clothes’, takes extreme umbrage and vents out in all directions. This is unproductive, not to say impolite. As a researcher and consultant, my aim has always been to explore what works in poverty reduction and development, and report accordingly. When I report ‘something works’, people like to hear this, and, yes, I tend to get follow-on assignments or research contracts. But it is bound to upset people immensely when I report that some poverty reduction method, like microfinance, does not actually work. But if you have the moral backbone I believe that if that is the picture your data is telling you, then you are obliged to report it.

    Milford

  11. Milford:

    You are still wrong about the interest rate even if you take into account compulsory savings. Because the compulsory savings under Grameen I was 5% and under Grameen II is 2.5% and recently Grameen has completely abandoned collecting compulsory savings.

  12. Going back to the original review, I find

    > For instance, South African women in the study joined several bimonthly “savings
    > clubs” … They found that the extra discipline the clubs provided was valuable in
    > itself, because it compelled them to save, no matter what.

    Does anyone know what they would spend the money on if they weren’t under pressure to save it? I wonder if the real point of these saving schemes is that it makes it easier to keep money out of the hands of the rest of the family.

  13. Has there been any further “peer review” on the Asif Dowla/Milford “debate”? An update on this issue would be helpful.

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