The Financial Needs Of The Poor

Imagine your life without financial services: no insurance, no bank account, no credit cards—all business done with cash. Clearly they are a necessary part of a modern, relatively affluent life. But in fact, the global poor need financial services more than the rich precisely because they are poor. As the seminal book Portfolios of the Poor has shown, the incomes of the poor are more volatile and unpredictable than for the world’s salaried minority. Meanwhile, the livelihoods of the poor depend more on their physical health, which tends to be more fragile and is rarely insured.

The intense uncertainty of poverty leaves an intense need for ways to set aside money in good times for use in bad times (and to discipline oneself into doing so). Loans, savings accounts, insurance, even money transfers can all meet that need, however imperfectly, so poor people devise and use such services as they can. The services available are often far from ideal—for lack of insurance, people may borrow or deplete savings to pay a hospital bill—but that is part of being poor. In the financial lives of the poor, microfinance is one more option, typically characterized by high reliability, if also rigidity, and useful in the spirit of diversification.

Organized efforts to meet the financial needs of the poor began centuries ago. In 15th-century Italy, some towns instituted pawn shops, monti di pieta, to undermine Jewish bankers seen as usurious. The monti were themselves accused of usury, but the pope ruled in their favor in 1515. Around the same time, bequests for charitable loan funds began appearing of well-to-do Englishman. In the 1720s, famed author Jonathan Swift began lending £5–10 at a time to “industrious tradesman” in Dublin. Rather like microcredit clients today who must take loans through groups, shouldering responsibility for each other’s loans, each of Swift’s borrowers needed to two cosigners, who would be liable in the event of default. By the mid-19th century loan funds on Swift’s model reached a fifth of Irish households. Today’s microfinance traces to Germany’s credit cooperative movement, which began in response to famine in the 1850s. In 1903, for instance, the British introduced cooperative credit groups into colonial India, including what is today Bangladesh.

History demonstrates the abiding demand among poor people for additional financial tools; yet it provides no evidence that meeting the demand systematically lifts people out of poverty. And today’s microfinance echoes the past in many ways. As in previous eras, the movement has developed as do-gooders and profit-seekers discovered, invented, borrowed, and tinkered with ideas. The rarest of these figures are those who found ways to scale up, reaching thousands or millions. Muhammad Yunus and his students did not invent microcredit, but they were the first in the modern wave to go to scale in founding what is now the Grameen Bank.