Stuart Rutherford

1
1

• Stuart Rutherford
• Global Symposium on Savings Assets and Financial
  Inclusion
• Singapore 27-29 June 2007

Wednesday 27 June Second Plenary Financial
Pillars of Asset Creation Savings, Credit,
Insurance and Remittances
Savings, credit and insurance among the poor and
very poor in poor developing countries Main
points covered by the speaker, plus a few notes
2
2

• Financial services for the poor have tended to be
  equated with microcredit, and microcredit has
  been almost synonymous with finance for
  micro-enterprises
• The key words associated with microcredit have
  been

• micro-enterprise finance
• groups
• women
• joint liability
• escaping from poverty via micro-enterprise

However, most poor and very poor people have
financial lives that are more about managing
money - making small incomes work as hard as
possible - than about financing
micro-enterprises This money management view of
the financial lives of the poor is what is dealt
with in this presentation
3
3
Notes this presentation 1 Deals only with people
who use money (or would if they had better ways
to manage it) not with the minority outside the
cash economy 2 Deals with generalities, ignoring
the many regional, local and personal
differences. Diversity of financial behaviour is
as common among the poor as among any other
group 3 Doesnt back up its general statements
with evidence, because time is short. You are
welcome to contact me at stuart_at_safesave.org, or
go to thepoorandtheirmoney.com for references to
the evidence

• If youre poor, your income is not only very
  small but probably irregular and unreliable as
  well
• Most of the income is spent quickly on the
  basics food and the means to prepare it
• Most of the time, therefore, you dont have money
  ready to hand for all the other expenditure that
  life requires

4
4

• If you are placed in this situation of having so
  many expenditure needs but such constrained
  current income, your options (aside from charity)
  are

• go without
• sell off assets
• find some way of using past income or future
  income

• The first two options being undesirable, most
  poor people struggle to find a way of using the
  third
• The third, of course, is how financial services
  come to the aid of money management
• using past income now means having savings
• using future income now means borrowing
• Note Both of these options involve saving, since
  loans are nothing more than advances against
  future saving. We can think of the savings route
  as saving up and the borrowing route as saving
  down

5
5

• Money management for the poor and very poor is
  essentially the same as for the non-poor. The
  poor are not another species to whom different
  psychological, financial and economic rules
  apply.
• Its just that their circumstances push them to
  one end of the spectrum of money-management
  behaviours
• A constant and often frenetic search to find
  ways to build sums for expenditure through
  saving and borrowing
• Using a multiplicity of instruments with
  idiosyncratic features and a seemingly unrelated
  range of prices
• Few opportunities for risk-management
  (insurance) nor pension services, nor to build
  and hold productive financial assets long-term

6
6

• These consequences of very small incomes are
  exacerbated by their also being irregular and
  unreliable.
• Irregularity and unreliability
• make it harder to plan ahead
• increase the need to hold reserves (thus
  creating a vicious circle)
• push their victims into further rounds of
  short-term borrowing and dissaving
• Moreover, when incomes are irregular and
  unreliable there is little scope to have them
  paid into transaction accounts most are paid in
  cash. This compounds the money-management problem
  because small sums left over may get spent
  trivially rather than stored.

7
7

• Understanding these circumstances helps explain
  why poor and even very poor people tend to be
  active money-managers, managing portfolios of
• loans from a variety of sources at a variety of
  prices (interest free from neighbours and
  relatives, interest-bearing from moneylenders,
  employers and, increasingly, from MFIs or even
  banks)
• memberships in savings and in savings-and-loan
  clubs
• saving at home, or with moneyguards, or with
  MFIs
• Even with these complex portfolios, most poor and
  very poor people report themselves underserved,
  and seek more and better opportunities to turn
  savings into usefully large sums. What might
  these be like?

8
8

• The implications for the market in savings for
  the poor are
• expect demand for both liquid and illiquid
  accounts (poor people, like everyone else, want
  to have their savings cake and eat it)
• expect liquid savings accounts to show many
  transactions (aggregating to quite high values)
  but low average balances, as withdrawals are made
  to cope with everyday life
• expect illiquid accounts to show an unusually
  high incidence of withdrawal immediately on
  maturity or even prematurely, as spending needs
  hit
• If savings accounts do not exhibit these
  features, theyre probably not correctly designed
  see later

9
9

• The implications for the market in loans for the
  poor are
• expect demand for loans for the widest range of
  uses, as loans are often the default strategy for
  dealing with consumption shortfalls, emergencies,
  and opportunities do not expect demand for
  micro-enterprise finance to dominate
• expect demand for a variety of terms, and for
  multiple borrowing sudden calls for money do not
  arrive at neat regular annual intervals
• expect to offer variable repayment terms (either
  flexible repayment or a wide range of optional
  schedules) poor and very poor people simply
  cant manage rigidly inflexible regimes
  year-round
• This last point explains why so many of the
  poorest get spat out of conventional MFI
  microcredit schemes

10
10

• The implications for the market in insurance for
  the poor are
• (here we are talking about modern pooled
  insurance)
• expect narrow demand, concentrated in products
  that can double as long-term savings devices
  life endowment policies are an example
• do not expect the poor, with their highly
  constrained cashflows, to want to buy a wide
  range of policies for specific risks
• until incomes grow, and savings services
  improve, loans rather than insurance will remain
  the default strategy for risk management for the
  poor

11
11

• So, how do we do it?
• Happily, we already know what kind of services
  work best
• where opportunities to transact are frequent,
  close at hand, and can handle very small and
  variable sums
• where savings (liquid and illiquid) and loans
  are offered simultaneously because liquid
  savings help repay loans, or pay illiquid savings
  instalments, in hard times, loans can be used for
  sudden expenditure needs and so protect the
  capacity to make long-term savings, and illiquid
  balances offer security of mind to both client
  and institution
• Services that are not like this may not exhibit
  the features outlined in the previous slides

12
12
Who has the technology? Some MFIs do. My current
favourite is Grameen II, Grameens Bank
reinvention of itself for the 21st century.
Never mind it still has groups and still
believes that loans should be uniquely for
micro-enterprise it now offers frequent,
near-at-hand, affordable services including
liquid and illiquid savings and loans with
variable terms and repayment schedules. For more
on Grameen II, see Rutherford et al Grameen II
the First Five Years, 2001-2006 on the MicroSave
website at http//www.microsave.org/SearchResults
.asp?cboKeyword72ID20cmdSubmitSubmitNumPerPa
ge10 And does better money-management for the
poor help fight poverty? Yes. Faced with a (maybe
life-threatening) need to spend, if you can
expand your options from go without or sell your
roofsheets to include take this loan or
withdraw these savings, your toolkit for
survival and development is hugely improved.