Roodman microfinance book. Chapter 2. DRAFT. Not for citation.

7/17/2014
Chapter 2. How the Other Half Finances
If I had m !a I !o"#d !rite the !ord $In%"re& o'er the door of e'er cotta(e) and "pon the b#ottin(*
book of e'er p"b#ic man) beca"%e I am con'inced that b %acrifice% !hich are inconcei'ab# %ma##)
!hich are a## !ithin the po!er of the 'er poore%t man in re("#ar !ork) fami#ie% can be %ec"red a(ain%t
cata%trophe% !hich other!i%e !o"#d %ma%h them "p for e'er. + ,in%ton Ch"rchi##) 1-0-
1
In'ented a% a !a to record %peech) the !ritten !ord became the medi"m of contract%) (o'ernment)
re#i(ion) and %cience. A hand too# t"rned into a force for re'o#"tion in a## %phere% of h"man e.perience.
/imi#ar#) if mone ori(inated a% a portab#e %tore of 'a#"e) it% f"## import took mi##ennia to "nf"r# and
toda to"che% the #i'e% of near# e'erone on the p#anet. 0one1% f"nction in %ociet ha% m"ch to do
!ith financial services, !hich are !a% of he#pin( peop#e and b"%ine%%e% mana(e ca%h f#o!) a%%et%) and
ri%k. For indi'id"a#%) the abi#it to borro!) %a'e) in%"re) and tran%act add% po%%ibi#itie% to #ife2 a co"p#e
b"% a home !ith on# 10 percent do!n3 an immi(rant %end% earnin(% to fami# in the o#d co"ntr. For
economie%) financia# %er'ice% are the pipe% and 4"nction% of an e%%entia# infra%tr"ct"re.
Not %"rpri%in(#) peop#e !ho ha'e #e%% mone ha'e #e%% acce%% to mone*re#ated %er'ice%3 and
co"ntrie% !ith #e%% !ea#th ha'e !eaker financia# infra%tr"ct"re. 0icrofinance promi%e% to red"ce thi%
(#oba# financia# ine5"it. 6eca"%e there are man kind% of financia# %er'ice and peop#e "%e them in
di'er%e !a%) there are man concept"a# %torie% abo"t ho! microfinance can he#p poor peop#e and poor
economie%. The %tor that dominate% the p"b#ic ima(ination in rich co"ntrie% re'o#'e% aro"nd credit and
entrepreneurship. 7erhap% o" remember !hen o" fir%t #earned abo"t microcredit. Did it %"rpri%e o"
that one co"#d he#p poor peop#e b p"ttin( them in debt8 The root of that %"rpri%e i% the microfinance
mo'ement1% propa(ation of a hopef"# %tor#ine of %e#f*re#iance. No #on(er are the poor %o trapped b
financia# circ"m%tance that credit !i## on# %ta'e off h"n(er for a fe! !eek%) then #ea'e a re%id"e of
hope#e%% debt. In%tead) the poor are ma%ter% of their o!n fate) !ho #ack on# for credit to empo!er them.
$I be#ie'e that a## h"man bein(% are potentia# entreprene"r%) $9rameen 6ank fo"nder 0"hammad :"n"%
1
Ch"rchi## ;2007 <1-0- =>) 14?@47.
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Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
ha% !ritten. $/ome of "% (et the opport"nit to e.pre%% thi% ta#ent) b"t man of "% ne'er (et the chance
beca"%e !e !ere made to ima(ine that an entreprene"r i% %omeone enormo"%# (ifted and different from
o"r%e#'e%.&
2

:"n"%1% idea#i%tic %tatement no do"bt contain% tr"th) b"t it %tretche% the tr"th too. Ather %torie%
can be to#d of ho! the poor mi(ht "%e financia# %er'ice%. A fami# mi(ht "%e a %a'in(% acco"nt to
prepare for a !eddin() take o"t in%"rance to dampen the financia# %hock of a father1% death) or borro! to
b" antibiotic% for a %erio"%# i## da"(hter. 0icrofinance i% animated b a be#ief that the poor are no #e%%
creati'e or ambitio"% for bein( poor. To #i'e "p to that %pirit of re%pect) attempt% to approach the
5"e%tion of ho! poor peop#e "%e financia# %er'ice% !ith a minim"m of preconception%. It t"rn% o"t that
the poor peop#e in (enera#) #ike e'erone e#%e) !ant financia# %er'ice% for man p"rpo%e% in addition to
%tartin( a b"%ine%%. 7reci%e# beca"%e the #i'e c#o%e to the ed(e materia##) the) more than the rich)
need !a% to mana(e #ife1% (reat ri%k%. And !hi#e the better*off can "%"a## find %er'ice% tai#ored to
%pecific need%) from #ife in%"rance to retirement acco"nt%) the poor m"%t choo%e from fe!er option%)
often coar%e# matched to the need at hand+for e.amp#e) borro!in( to pa the mid!ife.
A## that %aid) a broad "nder%tandin( of ho! financia# %er'ice% %"pport economic de'e#opment
#ead% to an important reminder. In the #on( r"n) the mo%t important #ink from financia# %er'ice% to
po'ert red"ction ma be indirect) 'ia forma# b"%ine%%e% that "%e finance to create 4ob%.
How the rich use financial services
The (#oba# rich+b !hom I mean a## tho%e !ho #i'e materia## comfortab#e and %ec"re #i'e%+ha'e
acce%% to a %pectac"#ar 'ariet of financia# %er'ice%2 checkin( and %a'in(% acco"nt%) home mort(a(e%)
car #oan%) credit card%) m"t"a# f"nd%) in%"rance for ha#f a doBen kind% of ri%k) and more. C"%t a% it i% hard
for a Ne! :orker !ho %amp#e% a ne! re%ta"rant e'er !eek to comprehend the #i'e% of 9"atema#an
hi(h#ander% %"b%i%tin( on torti##a%) it i% diffic"#t for tho%e of "% !ho en4o %"ch a !ea#th of financia#
2
:"n"% ;2004>) 207.
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Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
%er'ice% to empathiBe !ith a !oman for !hom %a'in(% mean% hidin( mone "nder the mattre%% in the
hope that her h"%band !i## not find it) and borro!in( mean% (oin( to a mone#ender !ho char(e a%
m"ch per month a% credit card companie% char(e per ear.
De%pite the ("#f in e.perience) a rich per%on can (ain in%i(ht into the poor1% "%e of financia#
%er'ice% b contemp#atin( her o!n. Tr thi% e.erci%e. Di%t a## the financia# %er'ice% o" ha'e "%ed. For
each) determine !hat the %er'ice he#p% o" do. Tran%act8 In'e%t8 /pend mone o" ha'e not earned et8
Then confront thi% 5"e%tion2 if o" had to (i'e "p a## the%e %er'ice% b"t one) !hich !o"#d o" keep8
Eere i% m #i%t) !hich i% fair# repre%entati'e for midd#e*c#a%% American fami#ie%2
Table 1. Authors financial service inventory
/er'ice 7"rpo%e
/a'in(% acco"nt 7repare for emer(encie% %"ch a% 4ob #o%%
Checkin( acco"nt Tran%act o'er #on( di%tance% or in #ar(e amo"nt% !itho"t ca%h
,ire tran%fer /end and recei'e mone internationa## ;rare>
7a7a# acco"nt /end mone to friend%3 b" thin(% on#ine
Credit card% Tran%act !itho"t ca%h3 b" thin(% I !ant before I ha'e the mone
Eome mort(a(e Di'e in a home I o!n before I can pa for it
Eome e5"it #ine of credit Ditto3 and cheap ;co##atera#iBed> credit to reno'ate ho"%e
Car #oan 9et a ne! car before I can f"## pa for it
/t"dent #oan In'e%t in m o!n %ki##%) for hi(her pa after (rad"ation
Retirement %a'in(% 7repare to %"pport m%e#f !hen I no #on(er !ork
Co##e(e %a'in(% 7repare to in'e%t in chi#dren1% ed"cation
Eomeo!ner1% in%"rance 7rotect fami# a(ain%t financia# cata%trophe in e'ent of %erio"%
harm to ho"%e
A"tomobi#e in%"rance 7rotect fami# a(ain%t financia# cata%trophe in e'ent of %erio"%
harm to car) or #iabi#it for accident
Fmbre##a #iabi#it in%"rance 7rotect fami# from #iabi#it %"it% in (enera#
Eea#th in%"rance 7rotect fami# a(ain%t financia# cata%trophe in e'ent of %erio"%
hea#th prob#em%3 a%%"re acce%% to care
Di%abi#it in%"rance 7rotect fami# a(ain%t financia# cata%trophe if I am "nab#e to !ork
Dife in%"rance 7rotect fami# a(ain%t financia# cata%trophe if I die
If o" %ho! o"r #i%t to a microfinance c#ient ;a%%"min( it re%emb#e% mine>) the #"."r !ithin it
!i## become apparent+in the breadth of the %er'ice%) in the co##e(e ed"cation% fore%een and the home
!ith a %i.*fi("re rep#acement 'a#"e. 6"t if o" artic"#ate the need% that "nder#ie o"r "%e of the%e
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Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
%er'ice%) o" t!o mi(ht "nder%tand each other !e##. In %cannin( the #i%t) I di%cern fo"r ma4or rea%on% I
"%e of financia# %er'ice%) a## "ni'er%a#.
Fir%t i% the need to tran%act. The credit card% and checkin( acco"nt) amon( other%) he#p me mo'e
%"m% too #ar(e to be %afe in m !a##et) and %end %"m% #ar(e and %ma## o'er #on( di%tance%. 0 pacheck
(oe% into the checkin( acco"nt a"tomatica##3 the mort(a(e pament come% o"t. A %!ipe of a card pa%
for (a% at the p"mp.
The %econd p"rpo%e I di%cern i% in'e%tment2 %ettin( a%ide toda in order to ha'e more tomorro!.
I borro!ed to he#p pa m co##e(e t"ition) and in'e%t in a f"nd to do the %ame for m %on%1. Notab#)
#ike mo%t peop#e in rich co"ntrie%) I ha'e not "%ed financia# %er'ice% to in'e%t in m o!n b"%ine%%) for I
ha'e none. I prefer the %tabi#it of a 4ob.
0an peop#e !o"#d #i%t a home mort(a(e "nder $in'e%tment& too. 6"t thi% mi%%e% the f"##
%i(nificance of homeo!ner%hip. In fact) on (enera# princip#e%) and a% no%e*di'in( rea# e%tate price% ha'e
made c#ear) a mort(a(e*financed home i% a terrib#e in'e%tment. 7er%ona# finance ("r"% teach the 'irt"e%
of di'er%ification. 6"in( a home p"t% a #ot of e((% in one ba%ket. ,hen the #oca# econom no%edi'e%) a
bread!inner can #o%e a 4ob and fa## behind on the mort(a(e 4"%t a% the home d!ind#e% in 'a#"e. F%in(
credit to b" the home+in'e%tin( !ith leverage+h"(e# m"#tip#ie% the ri%k beca"%e a #ot of the e((%
are the bank1% and the homeo!ner ha% to rep#ace them if the are cr"%hed.
I bo"(ht m ho"%e for a rea%on that ha% #itt#e to do !ith in'e%tment a% that !ord i% "%"a## meant)
and !hich brin(% "% to the third p"rpo%e of per%ona# financia# %er'ice%. A!nin( a home) a car) a bicc#e)
or a co! he#p% a fami# in man !a%. ,ith o!ner%hip come% %ec"rit. /omeone !ho ho#d% tit#e to her
home need not !orr abo"t bein( forced o"t b a #and#ord !ho doe% 'ie! the b"i#din( a% an in'e%tment.
And %ec"re peop#e think #on(*term2 a farmer i% more apt to take care of #and he o!n% than #and he
#ea%e%. Eome o!ner%hip a#%o %tren(then% comm"nitie% b increa%in( the interdependence of nei(hbor%.
4
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
A more #on(*term) co##ecti'e 'ie! enco"ra(e% peop#e to !ork to(ether on #oca# in%tit"tion% %"ch a%
%choo#%. In addition) a% 7er"'ian economi%t Eernando de /oto ha% famo"%# ar("ed) tit#e to a ma4or a%%et
can a#%o %er'e a% co##atera# for credit.
G
I once borro!ed a(ain%t m ho"%e to fi. the roof and mi(ht do the
%ame to he#p p"t m %on% thro"(h co##e(e.
I !a% %tr"ck to di%co'er that mo%t of the 17 %er'ice% on m #i%t are there beca"%e the %er'e for a
fo"rth p"rpo%e2 a%%"rin( m fami#1% abi#it to obtain con%tant nece%%itie% %"ch a% food and c#othin() a
p"r%"it economi%t% ca## $con%"mption %moothin(.& The %a'in(% acco"nt i% a %afet net if I #o%e m 4ob.
/a'in( for retirement maintain% m abi#it to b" !hat I need after I %top !orkin(. Credit card% and the
home #oan% #et me make ma4or p"rcha%e% !itho"t c"rtai#in( %pendin( on e'erthin( e#%e. The in%"rance
po#icie% take the financia# bite o"t of #ife1% tra"ma%.
4
Indeed) if I had to #i'e !ith 4"%t one financia#
%er'ice) I !o"#d be( for t!o and choo%e #ife and hea#th in%"rance) %ince the protect m fami# from
bankr"ptc in the face of #ife1% (reate%t tra(edie%.
,e can #earn a fe! more #e%%on% from thi% e.erci%e. Fir%t) risk i% intimate# intert!ined !ith
mone. In%"rance po#icie% embrace ri%k head*on. 6"t the are not "ni5"e in in'o#'in( it) for !hene'er
one part to an a(reement to pro'ide financia# %er'ice% commit% to de#i'erin( mone "nder certain
circ"m%tance% at %ome f"t"re date) there i% ri%k. 7erhap% a borro!er !i## not repa) or a bank ho#din(
depo%it% !i## (o "nder. Re#ated to thi%) and %econd) man financia# %er'ice% bind e'en a% the serve. The
mort(a(e and other #oan% force me to %et a%ide eno"(h mone each month to make the pament% rather
than %pendin( it a## on more fri'o#o"% thin(%. The retirement acco"nt% add inertia to m financia# re(ime
%ince m emp#oer a"tomatica## make% the contrib"tion% o"t of m pacheck%. Thi% do"b#e*ed(ed
nat"re) of credit e%pecia##) i% the (erm of the ancient debate% o'er !hat con%tit"te% 4"%t #endin(.
G
de /oto ;2000>.
4
7erhap% I %ho"#d a#%o ha'e #i%ted the (o'ernment in%"rance pro(ram% m emp#oer pa% into on m beha#f) to aid me !hen
I retire) or before then if I #o%e m 4ob.
H
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
/econd) !hat financia# %er'ice% o" can "%e depend% on !ho o" are. If I !ere a poor American)
m financia# %er'ice in'entor !o"#d #ook different. I mi(ht not ha'e the %ort of %tead 4ob that inc#"de%
hea#th in%"rance and !o"#d make me an attracti'e ri%k to #ender%. I mi(ht ha'e tro"b#e maintainin( in a
minim"m ba#ance in a checkin( or %a'in(% acco"nt%) or other!i%e bankin( on a %ca#e that !o"#d make
me profitab#e for a bank. /o the $concier(e %er'ice%& of (o'ernment*%"b%idiBed retirement and co##e(e
%a'in(% acco"nt% ;%o*named b the Commi%%ion on Thrift) a coa#ition of F./. non*profit%> !o"#d
probab# di%appear from m #i%t.
H
/o mi(ht a## the in%"rance) and e'en the checkin( acco"nt. In their
p#ace mi(ht appear check ca%her% and pada #ender% e.tendin( credit at rate% e5"i'a#ent to o'er 100
percent per ann"m. 0 mort(a(e) if an) mi(ht ha'e %tarted !ith a tea%er rate) on# to be 4acked "p after
a ear or %o. C"%t a% there are more c"re% for ma#e impotence than ma#aria) financia# %er'ice% a'ai#ab#e to
the rich o"t%hine tho%e !ithin reach of the poor+in 5"a#it) di'er%it) and co%t.
A#%o !orth notin(2 m !ife1% in'entor i% near# identica# to mine. In man co"ntrie% #a! and
c"#t"re %top !omen from en(a(in( f"## in finance and commerce o"t%ide the home.
7erhap% the mo%t important #e%%on i% abo"t ho! financia# %er'ice%) #ike road% and piped !ater)
"nder(ird the comfortab#e #ife. Their intan(ibi#it be#ie% their importance. Their chief direct benefit #ie%
in makin( peop#e more %ec"re b he#pin( them mana(e and maintain con%"mption) mo%t cr"cia##
d"rin( cata%trophe%. In the 'ocab"#ar of Amarta /en) financia# %er'ice% (i'e peop#e more a(enc)
more contro# o'er their #i'e%. Eo!e'er) a% /en empha%iBe%) freedom be(et% freedom2 tho%e !ho a#read
ha'e more a(enc) thank% to bein( rich or ma#e) %a) are ab#e to afford and free to b" more and better
%er'ice%.
?
7eop#e !ho brin( fe!er ad'anta(e% to the financia# %er'ice marketp#ace #ea'e !ith fe!er.
H
Commi%%ion on Thrift ;200I>.
?
/en ;1--->.
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Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
The financial challenges of the poor
I in'entoried m financia# %er'ice% to %ho! ho! 'ita# %"ch %er'ice% are for fami#ie% !antin( to rai%e their
%tandard of #i'in( and protect !hat the ha'e. The rich ho#d no monopo# on the%e prioritie%. 7oor
peop#e a#%o need to tran%act) in'e%t) b"i#d a%%et%) and %mooth con%"mption. 6"t the #iterar critic 0o##
Co#"m !a% !ron( !hen %he to#d Jrne%t Eemin(!a in a Ne! :ork re%ta"rant that $the on# difference
bet!een the rich and other peop#e i% that the rich ha'e more mone.&
7
7oor peop#e are not 4"%t rich
peop#e !itho"t mone. The financia# circ"m%tance% of poor and rich differ 5"a#itati'e# a% !hen a%
5"antitati'e#. Eere I brief# point o"t at %imi#aritie%) then e.p#ore the important difference%.
Ane %er'ice mi##ion% of poor peop#e "%e more than the rich i% internationa# !ire tran%fer. ,hen a
(rad"ate %t"dent named /anae Ito #i'ed d"rin( 1--H@-? in a 'i##a(e in %o"thern 6an(#ade%h %er'ed b
the 9rameen 6ank) %he di%co'ered that the %"re%t !a to (et o"t of po'ert in the 'i##a(e !a% to (et o"t
of the 'i##a(e+more preci%e#) to %end a %on or h"%band to the capita# Dhaka) !here he !o"#d !ork a% a
da #aborer) or e'en (et a 4ob) and %end home mone.
I
Toda) 6an(#ade%hi 'i##a(e% are e.portin(
!orker% e'en farther afie#d) thank% to re#i(io"% affinit !ith the 0idd#e Ja%t. 6an(#ade%hi men !orkin(
on K"!aiti con%tr"ction %ite% ;amon( other%> are %endin( f#o!% of mone home!ard %o amp#e a% to
mea%"rab# rai%e 6an(#ade%h1% economic (ro!th rate.
-
Th"% the (#oba# financia# %%tem i% h"(e#
'a#"ab#e for #inkin( di%per%ed fami#ie%+if the can hook into it. 6RAC 6ank) a %pin*off from the (iant
6an(#ade%hi non*profit from !hich it (et% it% name) (i'e% it% #o!*income c#ient% 4"%t that acce%% thro"(h
an arran(ement !ith ,e%tern Fnion. ;/ee Fi("re 1.>
7
6er( ;1-7I>) G0H. Thi% 5"ote i% the %o"rce of the apocrpha# b"t more fami#iar e.chan(e bet!een Eemin(!a and F. /cott
FitB(era#d2 FitB(era#d ob%er'e%) $The rich are different from "%.& Eemin(!a rep#ie%) $:e%) the ha'e more mone.&
I
Ito ;1--->.
-
<cite+a%k Ceren=
7
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
Figure 1. Poster for wire transfer service through !AC an" an# $estern %nion& angla#esh
(Photo by author)
The poor) #ike the rich) a#%o benefit from o!nin( a%%et% %"ch a% their o!n home%. A $nat"ra#
e.periment& in Ar(entina 'i'id# demon%trate%. In 1-I4) the 6"eno% Aire% (o'ernment mo'ed to (i'e
1)I00 %5"atter fami#ie% tit#e to #and on the o"t%kirt% of the cit that the had occ"pied for three ear%.
Ji(ht of the 1G #e(a# o!ner% of the #and accepted the cit1% b"o"t) !hi#e the re%t fo"(ht the
I
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
e.propriation in t!ent*ear co"rt proceedin(%. Th"% %ome %5"atter% !ere #"cked o"t in 5"ick# (ainin(
tit#e !hi#e other% did not.
10
The Wall Street Journal %ketched the con%e5"ence%2
0ercede% A#mada and La#entMn Are##ana both #i'e in /an Franci%co /o#ano) a barrio %ett#ed b %5"atter%
a#mo%t 2H ear% a(o on the frin(e% of the Ar(entine capita#. The e%tab#i%hed ho"%eho#d% on identica##
%iBed #ot% and !orked %imi#ar b#"e*co##ar 4ob% for comparab#e !a(e%+%he in %e!in() he in a factor. The
end"red the %ame hard%hip%) inc#"din( an effort b Ar(entinaN% 1-I0% mi#itar (o'ernment to b"##doBe the
%ett#ement.
Then) 0r%. A#mada (ained tit#e !hi#e 0r. Are##ana did not.
Toda) 0r%. A#mada #i'e% in a neat co#onia#*%t#e home !ith a %#ab roof %"pported b pi##ar% a% %o#id a%
oak%. The %i. member% of the A#mada ho"%eho#d ha'e room% of their o!n. A da"(hter fini%hed hi(h
%choo# and one %on fini%hed technica# %choo#.
0r. Are##ana1% ho"%e i% made of ro"(h #ookin( cinder b#ock% and concrete) !ith thin po%t% %"pportin( a
corr"(ated Binc roof. It i% %o cramped that %ome of the ei(ht fami# member% ha'e to %#eep in the dinin(
room and kitchen. None of the chi#dren <ha%= made it pa%t %e'enth (rade.
11
The reporter ma ha'e cho%en e.treme e.amp#e% of a %"cce%%f"# tit#e*ho#der and %tr"((#in( non*ho#der.
6"t %tati%tic% back "p the 'i(nette. Ar(entine re%earcher% /eba%tian 9a#iani and Jrne%to /char(rod%k
confirmed that tit#e*ho#der% indeed ha'e in'e%ted more in their home% and in the ed"cation of their
chi#dren.
12
,e co"#d make %imi#ar compari%on% !ith re%pect to the other p"rpo%e% I identified in
in'entorin( m financia# %er'ice%. The poor) #ike the rich) !ant to in'e%t for the f"t"re) perhap% in
farm#and or ed"cation. And abo'e a## the %tri'e to a%%"re %tead acce%% to nece%%itie% de%pite #ife1%
'ici%%it"de%. 6"t here the difference% bet!een the poor and rich %"rface to %"ch an e.tent that it become%
a mi%take to 'ie! poor peop#e a% rich peop#e !ith #e%% mone. The poor are %hort of mone) e%) b"t a#%o
of contro# o'er their financia# circ"m%tance%. Their income% and %pendin( need% are more 'ariab#e and
"npredictab#e) their #i'e% more dan(ero"%.
10
9a#iani and /char(rod%k ;200H>.
11
0offett ;200H>.
12
9a#iani and /char(rod%k ;200H>.
-
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
Di%abi#it and death are more fre5"ent 'i%itor% to poor ho"%eho#d%.
1G
App#in( a do##ar*a*da
po'ert #ine to data from ho"%eho#d %"r'e% of ho"%eho#d% in 1G poor co"ntrie%) Abhi4it 6aner4ee and
J%ther D"f#o of the 0a%%ach"%ett% In%tit"te of Techno#o( fo"nd that 11@4? percent of poor ho"%eho#d%
had %omeone !ho had been bedridden or had needed a doctor !ithin the #a%t month) the percenta(e
'arin( b co"ntr.
14
0edicine and doctor% are e.pen%i'e3 e5"a## har%h i% the #o%% of income !hen a
bread!inner take% %ick. Ane ca"%e of i## hea#th i% the %ea%ona#it of farmin(. $<T=he #ean %ea%on !hen
food i% %carce%t)& !rote Fni'er%it of 7enn%#'ania economi%t Cere 6ehrman in a %t"d of chi#dren1%
hea#th in r"ra# India) $ma #ea'e tho%e chi#dren !ho are #e%% !e##*endo!ed)Oe%pecia## if the are #o!*
ca%te fema#e%) c#o%e to or e'en be#o! the mar(in for %"r'i'a#.&
1H
And %"r'i'or% ma face permanent#
dimini%hed pro%pect%. $In Pimbab!e)& accordin( to Earo#d A#derman and Cohn Eoddinott of the
Internationa# Food 7o#ic Re%earch In%tit"te) $In Pimbab!e) chi#dren e.po%ed to the ci'i# !ar precedin(
independence and the dro"(ht% that occ"rred in the ear# 1-I0% !ere more #ike# to be %t"nted a%
pre%choo#er%) had red"ced %tat"re b #ate ado#e%cence) and comp#eted #e%% forma# %choo#in(.&
1?
7erhap% the mo%t important financia# di%tinction bet!een the (#oba# poor and the (#oba# rich+
#ea'in( a%ide the capita#i%t %"perrich+i% that b and #ar(e the rich ha'e %a#arie%. 0 %tead pacheck
ri'a#% a## the in%"rance I b" a% a %o"rce of financia# %ec"rit. It a##o!% me to think #on(*term) he#pin(
me in'e%t in m chi#dren) and make% me more credit*!orth) !hich he#p% me borro! to b"i#d "p a%%et%.
6aner4ee and D"f#o compared peop#e #i'in( on more than Q2 a da !ith tho%e #i'in( on #e%% on doBen%
of indicator% of !ea#th) ed"cation) and hea#th.
17
Ane factor con%i%tent# di%tin("i%hed tho%e a %tep "p on
1G
An income 'o#ati#it) %ee 0ord"ch ;1--H>.
14
D"f#o and 6aner4ee ;2007>) 14-. The po'ert #ine i% Q1 of ho"%eho#d %pendin( per member per da) con'erted to #oca#
c"rrenc "%in( p"rcha%in( po!er paritie%.
1H
6ehrman ;1-II>) H2.
1?
A#derman and Eoddinott ;2007>) 2. <chan(e to A.ford economic% paper8=
17
6aner4ee and D"f#o "%e p"rcha%in( po!er paritie% to con'ert to F./. do##ar%.
10
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
the income #adder2 ha'in( a %tead 4ob. 7eop#e !ith 4ob% are not on# richer. The a#%o ha'e fe!er
chi#dren and in'e%t more in ed"catin( the chi#dren the do ha'e.
1I
The tr"# poor) mean!hi#e) %"r'i'e on 'ariab#e income% %o"rce% %"ch a% farmin( and %treet
ha!kin(. ,hen I #i'ed in centra# Eo Chi 0inh Cit in 1--I@--) a Lietname%e fami# had %taked a c#aim
on the ri(ht to do commerce at the entrance of the a##e !here !e #i'ed. Anh De co"#d "%"a## be fo"nd
there) %nooBin( on hi% Eonda motorcc#e !hi#e !aitin( to %e## ride% for a do##ar. /ome da% !ere b"%ier
than other%. ,hen ferrin( m !ife) he !o"#d %top !e## %hort of a red #i(ht if it kept her in the %hade) %o
a% to keep the %"n from darkenin( her %kin. Dark %kin #ike hi% !a% a %i(n of the poor #aborer e.po%ed to
the e#ement%. Ee %aid he once #i'ed in the nei(hborhood) b"t the 'ictorio"% Comm"ni%t% ha'e e'icted
him after the !ar) %endin( him to a #e%%*centra# di%trict. At mid*da) hi% %i%ter !o"#d appear !ith a %ma##
p"%hcart) from !hich %he %o#d di%he% of %a"tRed 'e(etab#e% and meat amp# %ea%oned !ith mono%odi"m
(#"tamate. Eer h"%band !o"#d 4oin Anh De in the motorcc#e ta.i b"%ine%%. Ane da) !e !ere %hocked
to emer(e from the a##e and find a ne! and "nfami#iar (ro"p of Lietname%e en(a(ed in the %ame
acti'itie%. A% if in a T!i#i(ht Pone epi%ode) Anh De and hi% fami# !ere (one. Then) a !eek or %o #ater)
the di%po%%e%%ed repo%%e%%ed2 Anh De and compan came back. ,e ne'er did e.tract a f"## e.p#anation
for the t"rnabo"t. It appeared to in'o#'e ri'a# b"t informa# c#aim% to the conce%%ion on that %pot) and a
bribe to a #o!*#e'e# officia#. The epi%ode i##"%trated ho! a #ife in po'ert can mean a ten"o"% ho#d on a
'ariab#e income.
It a#%o i##"%trated a re%pon%e2 di'er%ification. 6 practicin( di%tinct trade%) Anh De and hi% %i%ter
%moothed their income the !a a portfo#io red"ce% ri%k b in'e%tin( in man %ec"ritie%. A %"r'e of 27
'i##a(e% in <,e%t 6en(a#= fo"nd that ho"%eho#d% tpica## had three !orker% !ho amon( them practiced
%e'en occ"pation%.
1-
6aner4ee and D"f#o fo"nd that a fifth of "rban ho"%eho#d% in 7er" #i'in( on #e%%
1I
6aner4ee and D"f#o ;<forthcomin(=>.
1-
Ibid.) p.1H2. $Tpica#& fi("re% are median%.
11
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
than Q2 a da per per%on earn from more than one %o"rce) a% do a 5"arter in 0e.ico) a third in 7aki%tan)
and ha#f in CSte d1I'oire.
20
7oor peop#e can di'er%if acro%% three broad tpe% of !ork+farmin() other
%e#f*emp#oment) and da #abor+and di'er%if !ithin the%e cate(orie%. In 'i##a(e% of the e.treme# poor
Fdaip"r di%trict in the Indian %tate of Ra4a%than) a#mo%t e'erone o!n% and farm% %ome #and) b"t 74
percent of tho%e #i'in( on #e%% than a do##ar a da earn mo%t of that do##ar in da #abor+!orkin( for
other% !itho"t the %ec"rit of #on(*term emp#oment.
21
/e#f*emp#oment) !hat i% a#%o ca##ed
entreprene"r%hip) i% common too) fo"nd amon( a 5"arter percent of %imi#ar# poor and r"ra# ho"%eho#d%
in 9"atema#a and a third in Indone%ia and 7aki%tan.
22
6aner4ee and D"f#o e.p#ain the attraction of
!orkin( for one%e#f2
If o" ha'e fe! %ki##% and #itt#e capita#) and e%pecia## if o" are a !oman) bein( an entreprene"r i% often
ea%ier than findin( an emp#oer !ith a 4ob to offer. :o" b" %ome fr"it% and 'e(etab#e% or %ome p#a%tic
to% at the !ho#e%a#er% and %tart %e##in( them on the %treet3 o" make %ome e.tra dosa <rice and bean
pancake= mi. and %e## the dosas in front of o"r ho"%e3 o" co##ect co! d"n( and dr it to %e## it a% a f"e#3
o" attend to one co! and co##ect the mi#k. The%e tpe% of acti'itie% are e.act# tho%e in !hich the poor
are in'o#'ed.
2G
It i% !orth ponderin( ho! !e #abe# peop#e !ho !ork for them%e#'e% a% a matter of %"r'i'a#. In
the 1I
th
and 1-
th
cent"rie% in the 6riti%h I%#e%) the !ere $ind"%trio"% trade%men.&
24
0an ob%er'er% on
the Continent in the 1-
th
cent"r %ome %a! them thro"(h the #en% of the capita#*#abor di'i%ion+a%
#aborer% !ho co"#d become %ma## capita#i%t%.
2H
A pop"#ar term toda i% $microentreprene"r.& The !ord i%
apt in important re%pect%) for the%e peop#e ri%k their o!n capita#) !ork for them%e#'e%) and reap the
profit% and #o%% of their operation%. 6"t "n#ike the idea# entreprene"r) fe! poor $microentreprene"r%&
dra! in ne! in'e%tor%) inno'ate) e.pand) or create 4ob%. The do not #a"nch them%e#'e% into bo#d
'ent"re% in the hope of a pa*off m"ch (reater than the co"#d (et from a 4ob. Rather) the are 5"ite
con%er'ati'e in in'e%tin( in them%e#'e%. J'ident#) #i'in( on the ed(e c"rtai#% one1% appetite for ri%k.
20
Idem ;2007>) 1H2.
21
Ibid.) 1H1.
22
Ibid.) 1H2.
2G
Ibid.) 1?2.
24
J.(.) 7ie%%e ;1I41>) -.
2H
J.(.) ,o#ff ;1--?>) 2) 10) 1?) 1-.
12
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
J.periment% in 0e.ico and /ri Danka %"((e%t that in4ectin( mode%t additiona# capita# into the%e
informa# b"%ine%%e% can earn a'era(e ret"rn% e.ceedin( <HT per month=) far hi(her than con'entiona#
fir%t*!or#d in'e%tment%.
2?
:et poor entreprene"r% rare# do %o. The are not the a(ent% of creati'e
de%tr"ction !hom economi%t Co%eph /ch"mpeter %a! a% the heroe% of economic de'e#opment. The
undertake+to re'ert to the root meanin( of $entreprene"r&+beca"%e the m"%t. To thi% e.tent) #abe#in(
them $microentreprene"r%& romanticiBe% their p#i(ht and imp#ie% too m"ch hope for their e%cape. A
%ome!hat o#der and no! #e%% fa%hionab#e 'ie! of poor entreprene"r%) hi%torica## a%%ociated !ith the
Fnited Nation%1% Internationa# Dabor Ar(aniBation) i% a% 'ictim% of economic %%tem% that fai# to pro'ide
eno"(h 4ob%. To p"t thi% more con%tr"cti'e#) %ince the Ind"%tria# Re'o#"tion) e.p#o%i'e 4ob creation ha%
po!ered a## nationa# economic de'e#opment %"cce%%e%. Comprehen%i'e economic de'e#opment i% hard
to ima(ine !itho"t 4ob%. In thi% 'ie!) the peop#e of !hom !e %peak are $peop#e !itho"t 4ob%& or $%e#f*
emp#oed& or $o!n*acco"nt !orker%& !ho heroica##) b"t ten"o"%#) %"r'i'e their circ"m%tance%.
27
,e do not need to choo%e bet!een %eein( the poor a% 'ictim% or ma%ter% of their o!n fate%) for
there i% tr"th in both 'ie!%) and both ha'e imp#ication% for !hat the poor need from financia# %er'ice%. If
the financia# %er'ice% I priBe mo%t are tho%e that ("arantee m acce%% to the nece%%itie% of #ife) come
!hat ma) poor peop#e fee# that need more inten%e#. For the poor) !hat economi%t% c#inica## ca##
con%"mption %moothin( i% a matter of ho! often chi#dren (o to bed h"n(r) e'en of #ife and death. At
ba%e#ine) man bare# con%"me !hat i% nece%%ar to #i'e. /ma## #oan% or %a'in(% acco"nt can he#p poor
peop#e %pend #e%% than the earn in (ood time%) %o that the can %pend more than the earn in hard time%.
Th"% a tra(ic iron in the a'ai#abi#it of financia# %er'ice%2 tho%e !ho ha'e them #ea%t need them mo%t.
6"t ca%tin( poor peop#e a% entreprene"r% of nece%%it he#p% "% appreciate !h the) more than
the (#oba# rich) "%e financia# %er'ice% for in'e%tin( in their o!n b"%ine%%e%. Documenting that the do i%
2?
<de 0e#) 0acKenBie) and ,oodr"ff paper%=. Ather %t"die% ha'e fo"nd %imi#ar con%er'ati%m amon( poor farmer% in
decidin() for e.amp#e) !hether to app# commercia# ferti#iBer. /ee 0ord"ch ;1--H>) 10H.
27
IDA ;1--G>) UU7) 10.G.
1G
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
%"rpri%in(# diffic"#t) for t!o rea%on%. Fir%t) !hen a%ked ho! the "%e a %er'ice) microfinance c#ient%
often (i'e the an%!er the be#ie'e+correct# a% often a% not+the 5"e%tioner !ant% to hear. /ome
microcredit #ender%) for e.amp#e) 'a#oriBe in'e%tment o'er other "%e%. /econd) !hat a per%on think% %he
i% "%in( a #oan or %a'in(% dra!do!n for often differ% !hat it enab#e% her to do. 6eatrice) the fema#e ha#f
of an entreprene"ria# co"p#e in Pambia1% Copperbe#t) e.p#ained to 6riti%h re%earcher Came% Cope%take
that) in Cope%take1% !ord%) $the main difference the #oan% had made o'er the #a%t ear !a% in freein(
their o!n capita# for con%tr"ction of their ho"%e.& 0icrocredit #oan% forma## !ent into the b"%ine%%) b"t
on# b %"pp#antin( the co"p#e1% o!n capita# into per%ona# "%e%.
2I
In 6an(#ade%h) a borro!er1% h"%band
to#d anthropo#o(i%t Damia Karim !ith a %mi#e that $,e took a co! #oan. Fift percent !i## be %pent to
pa off o#d debt%) and another fift percent !i## be in'e%ted in mone#endin(. If the mana(er come% to
%ee o"r co!) !e can ea%i# borro! one from the nei(hbor%.&
2-
The f"n(ibi#it of mone mean% that !e
can ne'er be %"re ho! the borro!er !o"#d ha'e channe#ed her mone !itho"t the #oan.
The 0a#a%ian 4o"rna#i%t Ee#en Todd ha% made one of the be%t attempt% to dea# !ith the fir%t
prob#em at #ea%t) (i'in( "% a rare %tati%tica# 'ie! of ho! the poor "%e financia# %er'ice%. Thro"(ho"t
1--2) %he and her h"%band Da'id 9ibbon%) !ho !a% a#%o %t"din( microfinance) #i'ed amid t!o 'i##a(e%
in the Tan(ai# di%trict of 6an(#ade%h) one of the fir%t re(ion% in !hich the 9rameen credit pro(ram
operated on a #ar(e %ca#e. ,ith f"ndin( from the 9rameen 6ank and a re%earch team inc#"din( %e'era#
6an(#ade%hi%) the tracked the financia# and per%ona# #i'e% of ?2 !omen) 40 of !hom borro!ed from
9rameen) recordin( e'er #oan pament) e'er %a#e of rice padd) e'er #ea%e of #and. The depth and
detai# of their perception into ho! partic"#ar !omen "%e microcredit ha% rare# been e5"a#ed. Tab#e 2
%ho!% their tab"#ation of ho! the 40 borro!er% %aid the !o"#d "%e the credit) in order to obtain #oan
2I
Cope%take ;2002>) 74?.
2-
Karim ;200I>) 1?.
14
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
appro'a#) and ho! the !omen act"a## "%ed it. A## the %tated p"rpo%e% !ere in'e%tment%. $Accordin( to
the <9rameen= 6ank record%)& Todd !rite%)
GH of o"r 40 member %amp#e took #oan% in 1--1/-2 for either $<rice= padd h"%kin(& a#one or $padd
h"%kin(/co! fattenin(.& A% far a% !e co"#d te##) on# fo"r !omen did an padd h"%kin( for %a#e d"rin(
the ear and that on# for #imited period%. T!o o"n( !omen !ho #i'ed in the %ame bari <or home%tead
#ot= had taken their #a%t fe! #oan% for $co! fattenin(.& A#tho"(h I !a% in and o"t of their bari for %e'en
month% of the ear) I ne'er %a! hide nor hair of an co!%.
G0
Todd1% data in Tab#e 2 do not deb"nk the ima(e of poor !omen "%in( financia# %er'ice% to in'e%t
in %ma##*%ca#e economic acti'itie%) b"t the do paint a pict"re richer than that the %tandard microcredit
%tereotpe. /ome !omen "%ed the #oan% to pa do!r) breakin( a 'o! the took a% 9rameen member%.
G1
Ather% bo"(ht rice. /ome impro'ed the roof or !a##% of their %ma## home%. The ma4orit did "%e the
credit for enterpri%e) b"t not in !a% en'i%ioned b the 6ank2 #endin( to other% and #ea%in( padd #and.
6ank po#ic pro%cribed #and #ea%in( in partic"#ar) 'ie!in( the rent% a% "%"r e.tracted b #and#ord%) a
per%pecti'e !hich ref#ect% the #on( and bitter hi%tor of the intert!inin( of mone#endin( and #and
monopo# in /o"th A%ia. 6"t for man fami#ie%) #ea%in( #and !a% a %tep "p in %ec"rit and freedom2
in%tead of !orkin( %omeone e#%e1% #and for an "npredictab#e da !a(e) the h"%band co"#d p#ant and
mana(e the fami#1% $o!n& fie#d. Ance d"rin( the re%earch pro4ect) 0"hammad :"n"% 'i%ited Todd and
9ibbon%) !ho briefed him on their findin(%. The "r(ed him to a##o! #and #ea%in(2
Dr :"n"% #i%tened b"t did not commit him%e#f.
$Det1% (o to the 'i##a(e)& he %aid.
O
7rofe%%or :"n"% 5"e%tioned Kia <a borro!er= abo"t <a ne!= #oan. $Do o" !ant one8&
$:e%) %irV&
$,hat !i## o" "%e it for8&
I %a! Kia he%itate for a moment. Then %he #ooked the 0ana(in( Director in the ee.
$I !on1t #ie to o")& %he %aid. $I am (oin( to #ea%e in %ome #and.&
G2
G0
Todd ;1--?>) 2H.
G1
The c"%tom of pain( do!r make% (ir#% economica## b"rden%ome and bo% #"crati'e) reinforcin( di%crimination a(ain%t
(ir#% !ithin fami#ie%.
G2
Ibid.) 1?@17.
1H
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
,e %ee here %ome ba%ic difference% and %imi#aritie% bet!een rich and poor in ho! the mana(e
mone. A% for the difference%) the poor more than the rich p"r%"e %trate(ie% that incrementa## di'er%if
and impro'e their contro# o'er their %o"rce% of income. A% for the %imi#aritie%) the poor) #ike the rich)
4"((#e %e'era# fair# "ni'er%a# prioritie% %"ch a% con%"mption %moothin( and in'e%tment. And the do %o
!ith re%o"rcef"#ne%% and di'er%it that %ometime% e#"de e'en the mana(er% of microfinance
or(aniBation%.
Table 2. Approve# an# actual use of 'ra(een an" loans to )* wo(en& 1++2
Approved Actual
1
Approved Actual
Rice paddy husking 20 73,500
Rice husking/cow 8 !,000
"ow 7 2,500 1#,300
$ustard oil grinding 2 23,000 5,7!0
%rocery trade 1 5,000
$ustard oil/sweets 1 5,500
&and transactions 20 70,320
&oan repay'ent 1! 2,720
(tocking rice 12 27,13
&ending 7 !,8#
Rickshaw 3 !,137
)owry/wedding 2 5,075
*ousing 'aterials 1 ,!80
+ther/unknown 25,025
1
&oans put to 'ore than one use listed 'ore than once,
2
-1 . 0 taka,
(ource/ 0odd 11##!2, 2,
3u'4er o5 loans A'ount o5 loans 1taka2
2
How the poor use financial services
Introd"ced a% a %ma## !indo! onto the financia# (oa#% and %trate(ie% of the poor) Todd1% data a#%o rai%e
the 5"e%tion of ho! poor peop#e incorporate financial services into their %"r'i'a# %trate(ie%. 7erhap% no
one i% a better interpreter of ho! poor peop#e "%e financia# %er'ice% than /t"art R"therford. Trained a% an
architect) he became intere%ted in ho! the poor mana(e their finance% after in'e%ti(atin( the effect% of
the earth5"ake in 0ana("a 4"%t before Chri%tma% in 1-723 man %#"m d!e##er% #o%t their home%) b"t
reb"i#t 5"ite rapid#. A trim man !ith thin*rimmed (#a%%e% and a d"%tin( of !hite hair) he #o'e% a#mo%t
nothin( more than inter'ie!in( peop#e abo"t the hand#e their finance%. In hi% book) he Poor and
heir !oney) R"therford foc"%e% #e%% than !e ha'e on the purposes for !hich the poor "%e financia#
1?
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
%er'ice%) and more on the transactions in'o#'ed. At ba%e) he ar("e%) mo%t poor peop#e need financia#
%er'ice% in order to t"rn %ma##) re("#ar %a'in(% into $"%ef"## #ar(e %"m%& that can (o to!ard mo%t of the
p"rpo%e% I di%co'ered in m in'entor2 in'e%tment) (ainin( o!ner%hip of a%%et%) and mana(in(
con%"mption.
GG
The #a%t p"rpo%e i% e%pecia## important beca"%e of the mi%match bet!een 'o#ati#e
income% and con%tant %pendin( need% for food and %he#ter. The #a%t p"rpo%e i% e%pecia## important
beca"%e of the mi%match bet!een 'o#ati#e income% and con%tant %pendin( need% for food and %he#ter. A%
one poor 6an(#ade%hi to#d R"therford) $I don1t rea## #ike ha'in( to dea# !ith other peop#e o'er mone)
b"t if o"1re poor) there1% no a#ternati'e. ,e ha'e to do it to %"r'i'e.&
G4
R"therford empha%iBe% ho!
credit) %a'in(%) and in%"rance are a## a% too#% for acc"m"#atin( "%ef"## #ar(e %"m%. 7ro'ider% of an of
the%e %er'ice% can take %ma##) re("#ar pament% from the c#ient+#oan pament%) %a'in(% depo%it%) or
in%"rance premi"m%+and occa%iona## make #ar(e pa*o"t%. A% a matter of mone f#o!) the %er'ice%
differ on# in !hen the #ar(e %"m% are paid o"t.
6orro!in( and %a'in() in partic"#ar) are not near# %o oppo%ite a% the appear. R"therford
i##"%trate% the kin%hip !ith t!o e.amp#e% he and hi% re%earch partner /"kh!inder /in(h Arora fo"nd in
the %#"m% of Li4aa!ada) a cit in %o"thea%tern India. The fir%t e.amp#e i% of %a'in(%2
Cothi i% a midd#e*a(ed %emi*ed"cated !oman !ho make% her #i'in( a% a peripatetic ;!anderin(> depo%it
co##ector. Eer c#ient% are %#"m d!e##er%) mo%t# !omen. Cothi ha%) o'er the ear%) b"i#t a (ood rep"tation
a% a %afe pair of hand% that can be tr"%ted to take care of the %a'in(% of her c#ient%.
Thi% i% ho! %he !ork%. /he (i'e% each of her c#ient% a %imp#e card) di'ided into 220 ce##%O.In
each ce##) c#ient% commit them%e#'e% to %a'in( a certain amo"nt in a certain period. For e.amp#e) one
c#ient ma a(ree to %a'e fi'e Indian r"pee% ;R% H> <abo"t 10W= per ce## at the rate of one ce## a
daO.Ea'in( made thi% a(reement it i% no! Cothi1% d"t to 'i%it thi% c#ient each da to co##ect the fi'e
r"pee%O
,hen the contract i% f"#fi##ed+that i% !hen the c#ient ha% %a'ed R% H) 220 time%Othe c#ient take%
her %a'in(% back. Eo!e'er) %he doe% not (et it a## back) %ince Cothi ha% to be paid for the %er'ice %he
pro'ide%. The%e fee% 'ar) b"t in Cothi1% ca%e it i% 20 o"t of the 220 ce##%+or R% 100 o"t of the R% 1)100
%a'ed b the c#ient in o"r e.amp#e.
GH
GG
R"therford ;2000>) 1.
G4
Co##in% et a#. ;200->) 1G.
GH
Ibid.) 1G@14.
17
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
Notice that Cothi doe% not pa intere%t on depo%it% a% rich*!or#d %a'er% e.pect of their bank%3 %he
charges at a rate that !ork% o"t to G0 percent a ear.
G?
R"therford a%ked Cothi1% c#ient% !h the pa %o
m"ch to %a'e !hen %ta%hin( ca%h in a bo. i% free2
The fir%t c#ient I ta#ked toOkne! %he !o"#d need abo"t R% I00 in ear# C"#) or mi%% o"t on admittin( her
chi#dren to %choo#. Eer h"%band) a da #abo"rer) co"#d not be re#ied on to come "p !ith %o m"ch mone at
one time) and in an ca%e he fe#t that #ookin( after the chi#dren1% ed"cation !a% her d"t) not hi%. /he
kne! %he !o"#d not be ab#e to %a'e %o #ar(e an amo"nt at home+!ith %o man more immediate demand%
on the %carce ca%h. I a%ked her if %he "nder%tood that %he !a% pain( G0 per cent a earO./he %aid that
%he did) and %ti## tho"(ht it a (ood bar(ainO.<D=!e##er% in a nei(hbo"rin( %#"m !here there i% no Cothi
at !ork act"a## en'ied Cothi1% c#ient%.
G7
6anker% !o"#d ca## Cothi1% %er'ice a commitment %a'in(% prod"ct. 6 remo'in( a bit of mone
from the ho"%e each toda) Cothi protect% her c#ient% from them%e#'e%+from temptation to %pend
e'erthin( on the need% of the moment+and from chi#dren) h"%band%) and parent% pre%%in( for ca%h.
Cothi faci#itate% thrift. /"bt# and parado.ica##) commitment %a'in(% tie% the c#ient1% hand% in a !a
that %tren(then% her contro# o'er mone and her po!er in the fami#. 7oor peop#e do ha'e other !a% to
%a'e) %"ch a% in 4e!e#r and #i'e%tock. 6"t (o#d rin(% can be %to#en and pi(% can die. And %"ch a%%et% are
incon'enient2 a% one Indone%ian pointed o"t) $!hen o" ha'e to pa the %choo# fee%) o" cannot %e## the
co!1% #e(.&
GI
In India) R"therford a#%o ta#ked to c#ient% of a mone#ender) !ho%e
O!orkin( method i% %imp#e. Ee (i'e% #oan% to poor peop#e !itho"t an %ec"rit ;or $co##atera#&>) and
then take% back hi% mone in re("#ar in%ta#ment% o'er the ne.t fe! !eek% or month%. Ee char(e% for the
%er'ice b ded"ctin( a percenta(e ;in hi% ca%e 1H per cent> of the 'a#"e of the #oan at the time of di%b"r%a#.
Ane of hi% c#ient% reported the dea# to me a% fo##o!%.
$I r"n a 'er %ma## %hop& ;it1% a %ma## timber bo. on %ti#t% on the %ide!a#k in%ide !hich he %5"at%
and %e##% a fe! ba%ic ho"%eho#d (ood%> $and I need the mone#ender to he#p me maintain m %tock of
(ood%. I borro! R% 1)000 from him from !hich he ded"ct% R% 1H0 a% intere%t. Ee then 'i%it% me !eek#
and I repa the R% 1)000 o'er ten !eek%O.A% %oon a% I ha'e paid him off he norma## #et% me ha'e
another #oan.&
Thi% c#ient ;Rama#"> %ho!ed me the %cr"ff bit of card that the mone#ender had (i'en him and
one !hich hi% !eek# repament% are recorded. It !a% 5"ite #ike the card% Cothi hand% o"t.
G-
G?
A% di%c"%%ed be#o!) %tead repament% o'er the #oan period make the average ba#ance ha#f the %tartin( ba#ance
andappro.imate# do"b#e the effecti'e intere%t rate.
G7
Ibid.) 1H@1?.
GI
Robin%on ;2002>) 2?4.
G-
R"therford ;2000>) 17@1I.
1I
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
The %imi#aritie% to Cothi1% commitment %a'in(% %er'ice are %trikin(. The mone#ender too "%e% (rid%
printed on card% to track pament%. 6oth the %a'in(% and credit %er'ice% operate cc#ica##) prod"cin( the
%ame predictab#e rhthm of fre5"ent) %ma## pa*in% and infre5"ent) #ar(e pa*o"t%.
7erhap% mo%t important#) both pro'ide di%cip#ine. A(ain) !e %ee financia# %er'ice% meetin( a
need that the rich e.perience) b"t that the poor (enera## fee# more inten%e#. Di%cip#ine i% more diffic"#t
!here mone i% ti(hter and #ife i% #e%% predictab#e. In the %#"m% of Nairobi) re%earcher% /i!an Ander%on
and Cean*0arie 6a#and fo"nd that I4 percent of participant% in #oca# %a'in(% (ro"p% kno!n a% RA/CA%
!ere !omen.
40
And amon( !omen) the one% mo%t# #ike# to 4oin !ere neither tho%e earnin( a## the
ho"%eho#d1% income nor none of it) b"t tho%e in bet!een. Ro"(h# %peakin() %o#e bread!inner% did not
need the #e'era(e of a commitment %a'in(% arran(ement3 non*bread!inner% had no po!er to #e'era(e3
and !omen needed more #e'era(e than men. In their paper) $Tin( Ad%%e"% to the 0a%t)& economi%t%
Na'a A%hraf) Dean Kar#an) and ,e%#e :in di%co'ered the %ame need in the %o"thern 7hi#ippine i%#and
of 0indanao. ,orkin( thro"(h a r"ra# bank) the offered a ne! commitment %a'in(% acco"nt to a
random# %e#ected (ro"p of the bank1% c"%tomer%. Intere%tin(#) the commitment acco"nt did not pa a
hi(her intere%t rate than the bank1% ordinar %a'in(% acco"nt to compen%ate c#ient% for #ockin( "p their
mone. :et 2I percent of c"%tomer% !ho (ot the offer took it. After one ear) tho%e offered had %a'ed I1
percent more than tho%e not. ,omen in !hom p%cho#o(ica# te%t% re'ea#ed a %tron( ten%ion bet!een
ho! the mana(e mone in the moment and ho! the !i%h the co"#d o'er the #on( term !ere more
#ike# to 4oin than other !omen) and than men in (enera#.
41
40
Ander%on and 6a#and ;2002>. The rotatin( %a'in(% and credit a%%ociation% ;RA/CA> i% the mo%t pre'a#ent form of informa#
financia# %er'ice. It i% de%cribed in chapter G.
41
The a'era(e effect reported here i% for tho%e recei'in( the offer) not tho%e taking it. The (ro"p recei'in( the offer i%
random# defined) and i% the ba%i% for meanin(f"# compari%on%. 7eop#e in the %"b(ro"p takin( the offer are %e#f*%e#ected and
mi(ht ha'e %a'ed more an!a. $Ten%ion& refer% to the time con%i%tenc) or hperbo#ic di%co"ntin() the re%earcher% fo"nd.
A%ked to choo%e bet!een hpothetica## recei'in( 200 pe%o% toda or G00 a month #ater) and then bet!een 200 in ? month%
or G00 %e'en month% from no!) tho%e !omen offerin( conf#ictin( an%!er%+200 !hen the choice !a% toda) G00 !hen it !a%
deferred+!ere more #ike# to 4oin than other !omen) and than men (enera##.
1-
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
To the e.tent that financia# %er'ice% re%emb#e one another) the can %"b%tit"te for one another.
Ane !oman mi(ht %a'e to b"ffer her fami# a(ain%t the po%%ibi#it of a h"%band takin( %ick. Another
mi(ht a'ai# her%e#f of r"dimentar hea#th in%"rance %"ch a% that offered b the 9rameen 6ank. Another
mi(ht borro! to pa c#inic fee% !hen needed. Af co"r%e) fe! poor peop#e are in a po%ition to choo%e
from a## the%e option%. In a <200.= %"r'e in the Indian %tate of Karnataka) 40 percent of ho"%eho#d%
inc#"ded %omeone !ho had %"ffered an e.pen%i'e hea#th prob#em in the #a%t ear. ?7 percent of the%e
tapped %a'in(% to he#p pa the bi##% and 44 percent borro!ed.
42
6"t financia# %er'ice% are not comp#ete# interchan(eab#e. In Karnataka) on# 0.G percent of the
ho"%eho#d% !ith hea#th tro"b#e% dre! on hea#th in%"rance) !hich i% not %"rpri%in( %ince a#mo%t none
co"#d find an to b". For mo%t) thi% %"perior %er'ice co"#d not be %!apped in to rep#ace %a'in(% or
credit. 6 and #ar(e) the poor m"%t %e#f*in%"re. And the int"ition that credit and %a'in(% are oppo%ite
doe% contain tr"th. F%"a## financia# %er'ice pro'ider% are ea%ier to ho#d to acco"nt than their c#ient%)
%ome of !hom can di%appear o'erni(ht. That mean% that a c#ient m"%t pa more to compen%ate creditor%
for tr"%tin( her ;a% %he m"%t if %he borro!%> than %he m"%t pa if %he i% to tr"%t them ;a% %he m"%t if %he
%a'e%>. Ret"rnin( to Li4aa!ada) the 1H percent "p*front char(e that Rama#" pa% the mone#ender for a
10*!eek #oan i% decepti'e# mode%t. After %"btractin( the R% 1H0 fee) hi% initia# ba#ance i% R% IH0. Ee
%tart% repain( immediate# %o that hi% average ba#ance o'er the 10 !eek% i% ha#f the R% IH0) or R% 42H)
of !hich the R% 1H0 i% GH percent. A rate of GH percent for 10 !eek% compo"nd% to a %t"nnin( GI2
percent on an ann"a# ba%i%) more than ten time% !hat Cothi the depo%it co##ector char(e%.
4G
0ean!hi#e)
the "npredictabi#it of the borro!er1% financia# tra4ector make% takin( on debt more ri%k and %tre%%f"#.
42
D"f#o et a#. ;200I>. $J.pen%i'e& mean% co%tin( more than G00 r"pee%. The a'era(e reported co%t for %"ch epi%ode% !a% R%
1)-00) !hich i% more than t!ice the a'era(e per*capita con%"mption in the %amp#e) R% 70I.
4G
R"therford ca#c"#ate% the rate at 1I0T beca"%e he doe% not compo"nd.
20
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
That 'ario"% financia# %er'ice% can %"b%tit"te for one another) b"t at a co%t) mean% that poor
peop#e often "%e financia# %er'ice% in !a% that are not idea#. That a #oan i% taken) for in%tance) doe% not
mean that a #oan i% the be%t option in the idea#.
Conclusion
Thi% chapter1% re'ie! of the ro#e of financia# %er'ice% in dai# #ife and economic de'e#opment (enerate%
a %erie% of ca"tion% for tho%e !ho %ee microfinance+microcredit in partic"#ar+a% an e#iminator of
po'ert. The poor need financia# %er'ice% for man "%e% in addition to enterpri%e. Credit can %er'e man
need%) b"t %a'in(% and in%"rance %er'e man need% more effecti'e# !hen a'ai#ab#e. Thoma% Dichter) a
#on(*time practitioner and e'a#"ator of microfinance) ob%er'e% that no co"ntr that i% rich toda (ot that
!a thro"(h tin #oan% for tin enterpri%e%.
44
Indeed) e'er compari%on bet!een rich and poor co"ntrie%)
a% bet!een poor and midd#e*c#a%% peop#e !ithin poor co"ntrie%) dri'e% "% to conc#"%ion that in the broad)
economic de'e#opment i% %nonmo"% !ith reduction in microenterpri%e and (ro!th in emp#oment d"e
#ar(e# to the e.pan%ion of forma# enterpri%e% backed b more con'entiona# finance.
A## thi% %"((e%t% that ne.t to the e.traordinar po'ert*red"cin( po!er of the ind"%tria#
re'o#"tion) microfinance i% a pa##iati'e. Doe% that mean that the 'a#"e of microfinance i% %ometime%
e.a((erated8 7robab#. Doe% it make microfinance !a%ted charit8 Not nece%%ari#. The poor need
financia# %er'ice% at #ea%t a% m"ch a% the rich. For peop#e na'i(atin( the "npredictab#e and "nfor(i'in(
terrain that characteriBe% the #i'e% of mo%t poor peop#e) an additiona# room for mane"'er) an
additiona# contro#) can be e.treme# 'a#"ab#e. A% Conathan 0ord"ch) a Ne! :ork Fni'er%it economi%t
and tho"(htf"# ob%er'er of microfinance) to#d a !riter for the "e# $orker) $That i% a 'a#id criti5"e) to a
point. 6"t (et rea#. Eo! #on( are o" !i##in( to !ait for the re'o#"tion8 I can1t %ee an mora# fo"ndation
44
Dichter ;2007>.
21
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
for not trin( to addre%% the c"rrent depri'ation% of the !or#d1% poore%t bi##ion%. If microfinance can he#p
pro'ide option% in co%t*effecti'e !a%) !e %ho"#d ce#ebrate it.&
4H
Ather /o"rce
Presentation Transcript
6inancial (ervices $anage'ent/
6inancial (ervices $anage'ent 7nit 1 "hapter 1 6inancial (ervices 8 9ndian 6inancial (yste'
6inancial (ervices/
6inancial (ervices 0he 5inancial (ervices 'o4ili:ing and allocating savings and all activities in the trans5or'ation o5 savings
into invest'ent, 9t is otherwise called as 5inancial inter'ediation, 6inancial (ervices re5ers to those services rendered 4y
4anks, 6inancial 9nstitutions, 9nsurance "o'panies, ;anks and other inter'ediaries in the 5inancial 'arket inter'ediaries,
6inancial (ervices/
6inancial (ervices 6inancial (ervices include, $oney $anage'ent <ort5olio 'anage'ent (tock 4roking "ustodial (ervices
=>uip'ent leasing Retail 5inancing "redit "ard services "redit rating services 6actoring services
6inancial (ervices "ategories/
6inancial (ervices "ategories
3ature o5 6inancial (ervice/
3ature o5 6inancial (ervice 9ntangi4ility ? 3ot visi4le in nature 9nsepara4ility @ 7ni>ue 5eature o5 service *eterogeneity ?
6inancial (ervices canAt 4e uni5or' 5or all, Bary 5ro' one custo'er to the other, <erisha4ility ? "annot 4e (tored, Advisory
$arketing o5 5inancial services ? )i55erent "hannels, 0echno (avy ? $9"R, R0%(, 3=60,
Advantages to the <u4lic/
Advantages to the <u4lic <ro'oting the overall savings o5 the econo'y )istri4ute the savings e55iciently to and cater to the
social@econo'ic needs and 0o 5acilitate trade transactions and credit 5acilities,
<layers o5 6inancial (ervices/
<layers o5 6inancial (ervices
9ndian 6inancial (yste'/
9ndian 6inancial (yste' 9ndian 6inancial (yste' co'prises the 4anking sector, insurance sector, 69s, the 3on@4anking
5inancial "o'panies 13;6"s2 and the *ousing 6inance "o'panies 1*6"s2, 0he ter' C6inancial (yste'A enco'passes the
institutions, the 5inancial 'arkets, 5inancial instru'ents and a host o5 5inancial services,
(tructure o5 9ndian 6inancial (yste'/
(tructure o5 9ndian 6inancial (yste'
6inancial (ervices/
6inancial (ervices
4H
6r"ck ;200?>.
22
Roodman microfinance book. Chapter 2. DRAFT. Not for citation. 7/17/2014
&easing /
&easing A &ease is a contractual agree'ent 9n which a party is owning an asset1 lessor 2 <rovide the asset 5or use to the
another party1lessee2 6or an agreed period o5 ti'e
*ire <urchase/
*ire <urchase A 'ethod o5 4uying goods through 'aking install'ent pay'ents over ti'e, 7nder a hire purchase contract, the
4uyer is leasing the goods and does not o4tain ownership until the 5ull a'ount o5 the contract is paid,
;ills )iscounting/
;ills )iscounting ;ank takes the 4ill drawn 4y 4orrower on his 14orrowerDs2 custo'er and pays hi' i''ediately deducting
so'e a'ount as discount/co''ission, 0he ;ank then presents the ;ill to the 4orrowerDs custo'er on the due date o5 the ;ill
and collects the total a'ount,
Benture "apital/
Benture "apital $oney provided 4y investors to startup 5ir's and s'all 4usinesses with perceived long@ter' growth potential,
0his is a very i'portant source o5 5unding 5or startups that do not have access to capital 'arkets, 9t typically entails high risk
5or the investor, 4ut it has the potential 5or a4ove@average returns,
*ousing 6inance/
*ousing 6inance 6inancial (upport provided 4y the 4anks and housing 5inancial institutions 5or the purchase or construction or
renovation o5 the house to the ulti'ate 4orrower, 3ational housing ;oard 13*;2 will 4e the regulating authority 5or housing
5inance under 'onitoring 4y R;9
9nsurance/
9nsurance 9nsurance is a 5or' o5 contract or agree'ent under one party agrees in return o5 a consideration to pay an agreed
a'ount o5 'oney to another party to 'ake goods 5or a loss, da'age, inEury to so'ething o5 value
6actoring/
6actoring 6actoring is a 5inancial transaction where4y a 4usiness Eo4 sells its accounts receiva4le 1i,e,, invoices2 to a third
party 1called a 5actor2 at a discount in eFchange 5or i''ediate 'oney with which to 5inance continued 4usiness, 673"09+3(
+6 6A"0+R93% AR=/ Ad'inistration o5 sellers sales &Gger "ollection o5 receivers purchased <rovision o5 purchased
<rotection against risk o5 4ad de4ts Rendering advisory services
$utual 6unds/
$utual 6unds A 'utual 5und is a pro5essionally 'anaged type o5 collective invest'ent that pools 'oney 5ro' 'any investors
to 4uy stocks, 4onds, short@ter' 'oney 'arket instru'ents, and/or other securities
$erchant ;anking/
$erchant ;anking A 'erchant 4ank is a 5inancial institution which provides capital to co'panies in the 5or' o5 share
ownership instead o5 loans, A 'erchant 4ank also provides advisory on corporate 'atters to the 5ir's they lend to, ;oth
co''ercial 4anks and invest'ent 4anks 'ay engage in 'erchant 4anking activities, $erchant 4anksD original purpose was to
5acilitate and/or 5inance production and trade o5 co''odities,
"redit Rating/
"redit Rating A credit rating esti'ates the credit worthiness o5 an individual, corporation, or even a country, 9t is an evaluation
'ade 4y credit 4ureaus o5 a 4orrowerAs overall credit history, A credit rating is also known as an evaluation o5 a potential
4orrowerDs a4ility to repay de4t, prepared 4y a credit 4ureau at the re>uest o5 the lender
6unctions o5 6inancial (yste'/
6unctions o5 6inancial (yste' $echanis' 5or 'o4ili:ing savings $echanis' 5or storing wealth &i>uidity "redit 'echanis'
<ay'ent syste' Risk $anage'ent <olicy i'ple'entation 9n5or'ation provider
2G