Banking low-income populations: Perspectives from South Africa

Daryl Collins, Jonathan Morduch

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

When Muhammad Yunus was starting Grameen Bank in Bangladesh in the late 1970s, Mary Houghton and Ron Grzywinski, founders of Shorebank, the leading community development bank in the United States, made repeated trips to Bangladesh to assist the novice banker and his funders. The international exchange went two ways. In the mid-1980s, Muhammad Yunus met Bill and Hillary Clinton in Washington, and Yunus inspired the Clintons to help launch a replication of the Grameen Bank in Arkansas (Taub 2004; Yunus 1999). Since then, exchanges have proliferated as the Grameen model has been replicated elsewhere in the United States, including Project Enterprise in New York City and Count-Me-In, a nationwide replication (Jurik 2005). The fundamental argument-that low-income households can be reliable bank customers and that access to finance can be a catalyst to help reduce poverty-has taken wider hold. This chapter provides evidence on the soundness of this argument by providing a better understanding of the financial lives of poor households: their constraints, objectives, and aspirations. We draw on a study of "Financial Diaries" that details the financial lives of poor households in three low-income communities in South Africa.1 The study includes households in low-income urban township and rural areas, drawing a sample from the (relatively) wealthiest households in the areas to the poorest.2 We argue that poor households have surprisingly active financial lives and use a variety of tools to manage their money. These tools are often informal, devised between families and neighbors, but hold potential keys to innovation in the formal banking sector. For the most part, conversations about poverty and finance in the United States and conversations in developing countries run along different lines. The assetbuilding framework-focusing on helping households build long-term assets to support investments in businesses, housing, and education-has been particularly influential in the United States. Policy initiatives like individual development accounts (IDAs, a subsidized long-term saving mechanism for low-income households) and children's savings accounts have captured the imaginations of policy-makers and activists, in part because they promise to reorient social welfare systems to foster greater autonomy for recipients (Sherraden 1991, this volume). The push to build long-term assets, however, has not been a top focus in poorer countries. Instead, policymakers in low-income countries focus on more immediate and instrumental concerns, especially on raising incomes through business loans (so-called micro-credit) and, to an increasing extent, expanding access to generalpurpose savings accounts and insurance. Microfinance advocates argue that reliable financial access can have strong positive social and economic impacts even when households, in the end, build few lasting assets.3 A second push away from the asset-building framework comes from a strong emphasis on commercially viable interventions. Rather than finding ways to redirect systems of public grants and subsidies (as with IDAs in the United States), policymakers in low-income countries have, of necessity, focused on delivering affordable, basic retail financial services to poor households-and doing so with limited subsidies. Our research on global microfinance leads us to argue that a strong focus on expanding reliable access to banks, credit unions, and other basic finance providers makes strategic sense in the United States as well. In principle, the vision entered legislation as the Community Reinvestment Act (CRA) of 1977 (Barr 2005), but while the CRA has spurred an expansion of banking in poor communities, there is still far to go. A recent study of bank branches in New York City, for example, finds that neighborhoods where half of households have incomes above $60,000 have one bank branch for every 2,165 people and that neighborhoods with a median income under $19,000 have just one bank for every 14,153 people (Office of Anthony Weiner 2007). Where banks are absent, residents turn to friends and relatives or the pawnshops, payday lenders, and check-cashers that serve as "fringe" banks (Caskey 1996), often with high costs. Deploying subsidies for long-term asset-building can complement expanding access to reliable banks but will not substitute for such access. Even where bank or credit union branches are located nearby, and despite the fact that a customer stands to save as much as $40,000 over time by replacing high-cost check-cashing services with a checking account, many individuals still find that the high-cost services deliver features missing elsewhere (Fellowes and Mabanta 2008). If there is growing international convergence around the need for a wider distribution of banks, the priorities in providing services remain ambiguous. Muhammad Yunus's stress on the importance of loans for productive purposes (to seed and expand small businesses) has proved popular with a wide audience from both the left and right. It strikes particular chords with people worried that entrepreneurship and self-reliance are values missing in traditional government transfer programs. We argue that business investment is important but only one of the needs for finance in low-income communities, and it is not particularly helpful for employed people who work for others. In the United States, many would-be small-scale entrepreneurs are hobbled by regulation and a lack of management and marketing skills, in addition to a lack of capital (Schreiner and Morduch 2002). Even without those limits, the need for credit extends beyond business needs. U.S. households that use pawnshops, for example, spend the funds to buy groceries, travel to work, pay utility bills, and keep up on rent payments (Fernandez 2007). The evidence presented in this chapter shows that the pattern is also broadly true in South Africa. The poor households we have studied face substantial ups and downs of income, both month to month and week to week, and cash flow management is a priority. Not surprisingly, a growing consumer finance industry is aggressively filling the voids left by banks (Porteous and Hazelhurst 2004). We argue that household financial needs begin with the need for basic, reliable ways to manage cash flows and short-term expenses. When households lack ways to do that easily, they are often forced in emergencies to rely on the mercy of predatory lenders or the kindness of friends and relatives with little of their own to spare. Both paths can be expensive in their own ways, and when neither path is sufficient, we too often see emergencies triggering downward spirals toward destitution. In less extreme cases, we see ongoing instability that hinders future-looking investment. Facilitating basic cash flow management is thus an often-neglected foundation for other initiatives. With that in place, the next steps will necessitate going beyond Yunus's focus on "micro-enterprise" loans - a process that has already started at the Grameen Bank itself and that holds lessons for U.S. finance as well.

Original languageEnglish (US)
Title of host publicationInsufficient Funds: Savings, Assets, Credit, and Banking Among Low-Income Households
PublisherRussell Sage Foundation
Pages97-120
Number of pages24
ISBN (Print)9780871540782
StatePublished - 2009

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banking
bank
low income
finance
credit
assets
loan
subsidy
reinvestment
microfinance
community
income
Bangladesh
savings
lack
conversation
customer
costs
act
management

ASJC Scopus subject areas

  • Social Sciences(all)

Cite this

Collins, D., & Morduch, J. (2009). Banking low-income populations: Perspectives from South Africa. In Insufficient Funds: Savings, Assets, Credit, and Banking Among Low-Income Households (pp. 97-120). Russell Sage Foundation.

Banking low-income populations : Perspectives from South Africa. / Collins, Daryl; Morduch, Jonathan.

Insufficient Funds: Savings, Assets, Credit, and Banking Among Low-Income Households. Russell Sage Foundation, 2009. p. 97-120.

Research output: Chapter in Book/Report/Conference proceedingChapter

Collins, D & Morduch, J 2009, Banking low-income populations: Perspectives from South Africa. in Insufficient Funds: Savings, Assets, Credit, and Banking Among Low-Income Households. Russell Sage Foundation, pp. 97-120.
Collins D, Morduch J. Banking low-income populations: Perspectives from South Africa. In Insufficient Funds: Savings, Assets, Credit, and Banking Among Low-Income Households. Russell Sage Foundation. 2009. p. 97-120
Collins, Daryl ; Morduch, Jonathan. / Banking low-income populations : Perspectives from South Africa. Insufficient Funds: Savings, Assets, Credit, and Banking Among Low-Income Households. Russell Sage Foundation, 2009. pp. 97-120
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abstract = "When Muhammad Yunus was starting Grameen Bank in Bangladesh in the late 1970s, Mary Houghton and Ron Grzywinski, founders of Shorebank, the leading community development bank in the United States, made repeated trips to Bangladesh to assist the novice banker and his funders. The international exchange went two ways. In the mid-1980s, Muhammad Yunus met Bill and Hillary Clinton in Washington, and Yunus inspired the Clintons to help launch a replication of the Grameen Bank in Arkansas (Taub 2004; Yunus 1999). Since then, exchanges have proliferated as the Grameen model has been replicated elsewhere in the United States, including Project Enterprise in New York City and Count-Me-In, a nationwide replication (Jurik 2005). The fundamental argument-that low-income households can be reliable bank customers and that access to finance can be a catalyst to help reduce poverty-has taken wider hold. This chapter provides evidence on the soundness of this argument by providing a better understanding of the financial lives of poor households: their constraints, objectives, and aspirations. We draw on a study of {"}Financial Diaries{"} that details the financial lives of poor households in three low-income communities in South Africa.1 The study includes households in low-income urban township and rural areas, drawing a sample from the (relatively) wealthiest households in the areas to the poorest.2 We argue that poor households have surprisingly active financial lives and use a variety of tools to manage their money. These tools are often informal, devised between families and neighbors, but hold potential keys to innovation in the formal banking sector. For the most part, conversations about poverty and finance in the United States and conversations in developing countries run along different lines. The assetbuilding framework-focusing on helping households build long-term assets to support investments in businesses, housing, and education-has been particularly influential in the United States. Policy initiatives like individual development accounts (IDAs, a subsidized long-term saving mechanism for low-income households) and children's savings accounts have captured the imaginations of policy-makers and activists, in part because they promise to reorient social welfare systems to foster greater autonomy for recipients (Sherraden 1991, this volume). The push to build long-term assets, however, has not been a top focus in poorer countries. Instead, policymakers in low-income countries focus on more immediate and instrumental concerns, especially on raising incomes through business loans (so-called micro-credit) and, to an increasing extent, expanding access to generalpurpose savings accounts and insurance. Microfinance advocates argue that reliable financial access can have strong positive social and economic impacts even when households, in the end, build few lasting assets.3 A second push away from the asset-building framework comes from a strong emphasis on commercially viable interventions. Rather than finding ways to redirect systems of public grants and subsidies (as with IDAs in the United States), policymakers in low-income countries have, of necessity, focused on delivering affordable, basic retail financial services to poor households-and doing so with limited subsidies. Our research on global microfinance leads us to argue that a strong focus on expanding reliable access to banks, credit unions, and other basic finance providers makes strategic sense in the United States as well. In principle, the vision entered legislation as the Community Reinvestment Act (CRA) of 1977 (Barr 2005), but while the CRA has spurred an expansion of banking in poor communities, there is still far to go. A recent study of bank branches in New York City, for example, finds that neighborhoods where half of households have incomes above $60,000 have one bank branch for every 2,165 people and that neighborhoods with a median income under $19,000 have just one bank for every 14,153 people (Office of Anthony Weiner 2007). Where banks are absent, residents turn to friends and relatives or the pawnshops, payday lenders, and check-cashers that serve as {"}fringe{"} banks (Caskey 1996), often with high costs. Deploying subsidies for long-term asset-building can complement expanding access to reliable banks but will not substitute for such access. Even where bank or credit union branches are located nearby, and despite the fact that a customer stands to save as much as $40,000 over time by replacing high-cost check-cashing services with a checking account, many individuals still find that the high-cost services deliver features missing elsewhere (Fellowes and Mabanta 2008). If there is growing international convergence around the need for a wider distribution of banks, the priorities in providing services remain ambiguous. Muhammad Yunus's stress on the importance of loans for productive purposes (to seed and expand small businesses) has proved popular with a wide audience from both the left and right. It strikes particular chords with people worried that entrepreneurship and self-reliance are values missing in traditional government transfer programs. We argue that business investment is important but only one of the needs for finance in low-income communities, and it is not particularly helpful for employed people who work for others. In the United States, many would-be small-scale entrepreneurs are hobbled by regulation and a lack of management and marketing skills, in addition to a lack of capital (Schreiner and Morduch 2002). Even without those limits, the need for credit extends beyond business needs. U.S. households that use pawnshops, for example, spend the funds to buy groceries, travel to work, pay utility bills, and keep up on rent payments (Fernandez 2007). The evidence presented in this chapter shows that the pattern is also broadly true in South Africa. The poor households we have studied face substantial ups and downs of income, both month to month and week to week, and cash flow management is a priority. Not surprisingly, a growing consumer finance industry is aggressively filling the voids left by banks (Porteous and Hazelhurst 2004). We argue that household financial needs begin with the need for basic, reliable ways to manage cash flows and short-term expenses. When households lack ways to do that easily, they are often forced in emergencies to rely on the mercy of predatory lenders or the kindness of friends and relatives with little of their own to spare. Both paths can be expensive in their own ways, and when neither path is sufficient, we too often see emergencies triggering downward spirals toward destitution. In less extreme cases, we see ongoing instability that hinders future-looking investment. Facilitating basic cash flow management is thus an often-neglected foundation for other initiatives. With that in place, the next steps will necessitate going beyond Yunus's focus on {"}micro-enterprise{"} loans - a process that has already started at the Grameen Bank itself and that holds lessons for U.S. finance as well.",
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N2 - When Muhammad Yunus was starting Grameen Bank in Bangladesh in the late 1970s, Mary Houghton and Ron Grzywinski, founders of Shorebank, the leading community development bank in the United States, made repeated trips to Bangladesh to assist the novice banker and his funders. The international exchange went two ways. In the mid-1980s, Muhammad Yunus met Bill and Hillary Clinton in Washington, and Yunus inspired the Clintons to help launch a replication of the Grameen Bank in Arkansas (Taub 2004; Yunus 1999). Since then, exchanges have proliferated as the Grameen model has been replicated elsewhere in the United States, including Project Enterprise in New York City and Count-Me-In, a nationwide replication (Jurik 2005). The fundamental argument-that low-income households can be reliable bank customers and that access to finance can be a catalyst to help reduce poverty-has taken wider hold. This chapter provides evidence on the soundness of this argument by providing a better understanding of the financial lives of poor households: their constraints, objectives, and aspirations. We draw on a study of "Financial Diaries" that details the financial lives of poor households in three low-income communities in South Africa.1 The study includes households in low-income urban township and rural areas, drawing a sample from the (relatively) wealthiest households in the areas to the poorest.2 We argue that poor households have surprisingly active financial lives and use a variety of tools to manage their money. These tools are often informal, devised between families and neighbors, but hold potential keys to innovation in the formal banking sector. For the most part, conversations about poverty and finance in the United States and conversations in developing countries run along different lines. The assetbuilding framework-focusing on helping households build long-term assets to support investments in businesses, housing, and education-has been particularly influential in the United States. Policy initiatives like individual development accounts (IDAs, a subsidized long-term saving mechanism for low-income households) and children's savings accounts have captured the imaginations of policy-makers and activists, in part because they promise to reorient social welfare systems to foster greater autonomy for recipients (Sherraden 1991, this volume). The push to build long-term assets, however, has not been a top focus in poorer countries. Instead, policymakers in low-income countries focus on more immediate and instrumental concerns, especially on raising incomes through business loans (so-called micro-credit) and, to an increasing extent, expanding access to generalpurpose savings accounts and insurance. Microfinance advocates argue that reliable financial access can have strong positive social and economic impacts even when households, in the end, build few lasting assets.3 A second push away from the asset-building framework comes from a strong emphasis on commercially viable interventions. Rather than finding ways to redirect systems of public grants and subsidies (as with IDAs in the United States), policymakers in low-income countries have, of necessity, focused on delivering affordable, basic retail financial services to poor households-and doing so with limited subsidies. Our research on global microfinance leads us to argue that a strong focus on expanding reliable access to banks, credit unions, and other basic finance providers makes strategic sense in the United States as well. In principle, the vision entered legislation as the Community Reinvestment Act (CRA) of 1977 (Barr 2005), but while the CRA has spurred an expansion of banking in poor communities, there is still far to go. A recent study of bank branches in New York City, for example, finds that neighborhoods where half of households have incomes above $60,000 have one bank branch for every 2,165 people and that neighborhoods with a median income under $19,000 have just one bank for every 14,153 people (Office of Anthony Weiner 2007). Where banks are absent, residents turn to friends and relatives or the pawnshops, payday lenders, and check-cashers that serve as "fringe" banks (Caskey 1996), often with high costs. Deploying subsidies for long-term asset-building can complement expanding access to reliable banks but will not substitute for such access. Even where bank or credit union branches are located nearby, and despite the fact that a customer stands to save as much as $40,000 over time by replacing high-cost check-cashing services with a checking account, many individuals still find that the high-cost services deliver features missing elsewhere (Fellowes and Mabanta 2008). If there is growing international convergence around the need for a wider distribution of banks, the priorities in providing services remain ambiguous. Muhammad Yunus's stress on the importance of loans for productive purposes (to seed and expand small businesses) has proved popular with a wide audience from both the left and right. It strikes particular chords with people worried that entrepreneurship and self-reliance are values missing in traditional government transfer programs. We argue that business investment is important but only one of the needs for finance in low-income communities, and it is not particularly helpful for employed people who work for others. In the United States, many would-be small-scale entrepreneurs are hobbled by regulation and a lack of management and marketing skills, in addition to a lack of capital (Schreiner and Morduch 2002). Even without those limits, the need for credit extends beyond business needs. U.S. households that use pawnshops, for example, spend the funds to buy groceries, travel to work, pay utility bills, and keep up on rent payments (Fernandez 2007). The evidence presented in this chapter shows that the pattern is also broadly true in South Africa. The poor households we have studied face substantial ups and downs of income, both month to month and week to week, and cash flow management is a priority. Not surprisingly, a growing consumer finance industry is aggressively filling the voids left by banks (Porteous and Hazelhurst 2004). We argue that household financial needs begin with the need for basic, reliable ways to manage cash flows and short-term expenses. When households lack ways to do that easily, they are often forced in emergencies to rely on the mercy of predatory lenders or the kindness of friends and relatives with little of their own to spare. Both paths can be expensive in their own ways, and when neither path is sufficient, we too often see emergencies triggering downward spirals toward destitution. In less extreme cases, we see ongoing instability that hinders future-looking investment. Facilitating basic cash flow management is thus an often-neglected foundation for other initiatives. With that in place, the next steps will necessitate going beyond Yunus's focus on "micro-enterprise" loans - a process that has already started at the Grameen Bank itself and that holds lessons for U.S. finance as well.

AB - When Muhammad Yunus was starting Grameen Bank in Bangladesh in the late 1970s, Mary Houghton and Ron Grzywinski, founders of Shorebank, the leading community development bank in the United States, made repeated trips to Bangladesh to assist the novice banker and his funders. The international exchange went two ways. In the mid-1980s, Muhammad Yunus met Bill and Hillary Clinton in Washington, and Yunus inspired the Clintons to help launch a replication of the Grameen Bank in Arkansas (Taub 2004; Yunus 1999). Since then, exchanges have proliferated as the Grameen model has been replicated elsewhere in the United States, including Project Enterprise in New York City and Count-Me-In, a nationwide replication (Jurik 2005). The fundamental argument-that low-income households can be reliable bank customers and that access to finance can be a catalyst to help reduce poverty-has taken wider hold. This chapter provides evidence on the soundness of this argument by providing a better understanding of the financial lives of poor households: their constraints, objectives, and aspirations. We draw on a study of "Financial Diaries" that details the financial lives of poor households in three low-income communities in South Africa.1 The study includes households in low-income urban township and rural areas, drawing a sample from the (relatively) wealthiest households in the areas to the poorest.2 We argue that poor households have surprisingly active financial lives and use a variety of tools to manage their money. These tools are often informal, devised between families and neighbors, but hold potential keys to innovation in the formal banking sector. For the most part, conversations about poverty and finance in the United States and conversations in developing countries run along different lines. The assetbuilding framework-focusing on helping households build long-term assets to support investments in businesses, housing, and education-has been particularly influential in the United States. Policy initiatives like individual development accounts (IDAs, a subsidized long-term saving mechanism for low-income households) and children's savings accounts have captured the imaginations of policy-makers and activists, in part because they promise to reorient social welfare systems to foster greater autonomy for recipients (Sherraden 1991, this volume). The push to build long-term assets, however, has not been a top focus in poorer countries. Instead, policymakers in low-income countries focus on more immediate and instrumental concerns, especially on raising incomes through business loans (so-called micro-credit) and, to an increasing extent, expanding access to generalpurpose savings accounts and insurance. Microfinance advocates argue that reliable financial access can have strong positive social and economic impacts even when households, in the end, build few lasting assets.3 A second push away from the asset-building framework comes from a strong emphasis on commercially viable interventions. Rather than finding ways to redirect systems of public grants and subsidies (as with IDAs in the United States), policymakers in low-income countries have, of necessity, focused on delivering affordable, basic retail financial services to poor households-and doing so with limited subsidies. Our research on global microfinance leads us to argue that a strong focus on expanding reliable access to banks, credit unions, and other basic finance providers makes strategic sense in the United States as well. In principle, the vision entered legislation as the Community Reinvestment Act (CRA) of 1977 (Barr 2005), but while the CRA has spurred an expansion of banking in poor communities, there is still far to go. A recent study of bank branches in New York City, for example, finds that neighborhoods where half of households have incomes above $60,000 have one bank branch for every 2,165 people and that neighborhoods with a median income under $19,000 have just one bank for every 14,153 people (Office of Anthony Weiner 2007). Where banks are absent, residents turn to friends and relatives or the pawnshops, payday lenders, and check-cashers that serve as "fringe" banks (Caskey 1996), often with high costs. Deploying subsidies for long-term asset-building can complement expanding access to reliable banks but will not substitute for such access. Even where bank or credit union branches are located nearby, and despite the fact that a customer stands to save as much as $40,000 over time by replacing high-cost check-cashing services with a checking account, many individuals still find that the high-cost services deliver features missing elsewhere (Fellowes and Mabanta 2008). If there is growing international convergence around the need for a wider distribution of banks, the priorities in providing services remain ambiguous. Muhammad Yunus's stress on the importance of loans for productive purposes (to seed and expand small businesses) has proved popular with a wide audience from both the left and right. It strikes particular chords with people worried that entrepreneurship and self-reliance are values missing in traditional government transfer programs. We argue that business investment is important but only one of the needs for finance in low-income communities, and it is not particularly helpful for employed people who work for others. In the United States, many would-be small-scale entrepreneurs are hobbled by regulation and a lack of management and marketing skills, in addition to a lack of capital (Schreiner and Morduch 2002). Even without those limits, the need for credit extends beyond business needs. U.S. households that use pawnshops, for example, spend the funds to buy groceries, travel to work, pay utility bills, and keep up on rent payments (Fernandez 2007). The evidence presented in this chapter shows that the pattern is also broadly true in South Africa. The poor households we have studied face substantial ups and downs of income, both month to month and week to week, and cash flow management is a priority. Not surprisingly, a growing consumer finance industry is aggressively filling the voids left by banks (Porteous and Hazelhurst 2004). We argue that household financial needs begin with the need for basic, reliable ways to manage cash flows and short-term expenses. When households lack ways to do that easily, they are often forced in emergencies to rely on the mercy of predatory lenders or the kindness of friends and relatives with little of their own to spare. Both paths can be expensive in their own ways, and when neither path is sufficient, we too often see emergencies triggering downward spirals toward destitution. In less extreme cases, we see ongoing instability that hinders future-looking investment. Facilitating basic cash flow management is thus an often-neglected foundation for other initiatives. With that in place, the next steps will necessitate going beyond Yunus's focus on "micro-enterprise" loans - a process that has already started at the Grameen Bank itself and that holds lessons for U.S. finance as well.

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