Republication, copying or redistribution by any means is expressly prohibited without the prior written permission of The Economist The Economist November 5th 2005 A survey of micronance 1 The hidden wealth of the poor Also in this section What do you know? A beginner’s guide to micronance. Page 3 From charity to business In its short history, the micronance industry has undergone profound changes. Page 4 Giants and minnows Big banks are discovering the market for poor customers. Page 6 Critical acceptance The emergence of rating agencies attests to the industry’s growing maturity. Page 7 Bankable banks Are the poor a good investment? Page 8 Financial services are at last spreading from the rich to the developing worldand even making money, writes Tom Easton Micro no more N RICH countries, nancial services on such as foreign direct investment and mul- Financial services for the poor and the rich Ithe whole work remarkably well, de- tilateral aid. But if the money is being sent, are becoming increasingly alike. Page 9 spite the exotic salaries, the crackpot deals say, from America to Venezuela, charges and the occasional bust. The vast majority can amount to as much as 34% of the sum of people have access to interest-bearing involved, according to Dilip Ratha of the savings accounts, mortgages at reasonable World Bank. rates, abundant consumer credit, insur- Why are the poor so badly served? The ance at premiums that reect the risk of easy answer, that people who have little losses, cheap ways of transferring money, money do not make suitable clients for so- and innumerable sources of capital for phisticated nancial services, is at most a funding a business. half-truth. A better explanation, this sur- By contrast, nancial services for poor vey will argue, is that the poor have been people in developing countriesa busi- hurt by massive market and regulatory ness known as micronancehave failure. Fortunately that failure can be, and mostly been awful or absent. With no safe increasingly is being, remedied. place to store whatever money they have, In most developing countries, the barri- the poor bury it, or buy livestock that may ers to providing nancial services for the die, or invest in jewellery that may be sto- masses are all too clear. Ination tends to len and can be hard to sell. Basic life and be high and volatile; government is often property insurance is rarely available. incompetent; and the necessary legal Home loans are costly, if indeed they can framework for nancial services is often be found at all. For many people, the only missing. Property laws can make it impos- Acknowledgments source of credit is a pawnshop or a money- sible for poor borrowers to use assets such Writing this survey would have been overwhelming with- out the help of Jonathan Morduch of New York University, lender who may charge staggeringly high as their home as collateral for loans. co-author of The Economics of Micronance, and Stuart interest and beat up clients who fail to pay In the past, many countries have out- Rutherford, author of The Poor and Their Money. Special on time. In the Philippines, lenders who lawed usury, and today many Islamic thanks are also due to Jonathan Conning of Hunter Col- lege, Raghuram Rajan of the IMF and Luigi Zingales of the zip from town to town on motorcycles ex- countries prohibit the charging of interest. University of Chicago, co-authors of Saving Capitalism pect six pesos back for every ve they lend. Governments in developing countries of- from the Capitalists; Vanessa Ward, editor of Micronance That translates into an annual interest rate ten impose caps on the interest rates Matters; Christina Barrineau, chief technical ocer for the United Nation’s Year of Microcredit, and the UN’s adviser of over 1,000% on a loan for a month. charged on loans for the poor. Despite on that project, Princess Maxima of the Netherlands. For workers from poor countries who their popular appeal, such caps under- venture abroad to earn a better living, mine the protability of lending and thus A list of sources can be found online sending money home to relatives can be reduce the supply of loans. www.economist.com/surveys hugely expensive. Such remittances have Incomplete and erratic regulation of - become an important source of income in nancial institutions has also undermined An audio interview with the author is at many developing countries, dwarng the condence of the poor in the nancial www.economist.com/audio other inows of capital from overseas services that are available. When they can1 2 A survey of micronance The Economist November 5th 2005 2 nd an institution that will accept their vices are available to them, the poor, just tiny deposits, it often lacks the sort of gov- You don’t have to be rich, but it helps 1 like the rich, snap them up. ernment deposit insurance that is routine Prevalence of bank accounts at different income levels In one sense, micronance has been in rich countries, so when a bank goes un- 100 around for a long time. What is now gener- der, savers suer. For example, Indonesia’s Singapore ating so much hope and excitement is less PT Bank Dagang Bali, once known for its the discovery of some entirely new way to work with poor clients, was closed by reg- Spain deliver nancial services to the poor than ulators last year after it was discovered to 80 the eect of the rapid innovation that has be insolvent and riddled with fraud. Many Greece taken place in the past three decades. Regression line savers did not get their money back. Czech Republic based on 54 countries Corruption is also commonplace in Malaysia Saudi Arabia From pawnshop to Citigroup many developing countries. A recent 60 The oldest nancial institution in the study by the World Bank found that in two Thailand Americas is a pawnshop on Mexico City’s poor states in India where the nancial Turkey central square. Set up in 1775 under an Chile system is largely controlled by the govern- 40 edict by the Spanish crown to assist people ment, borrowers paid bribes to ocials in nancial trouble, it is called Monte de Romania Mexico amounting to between 8% and 42% of the Piedad, variously translated as the moun- Argentina value of their loans. Corruption raises the Brazil tain of mercy or the mountain of pity. Pity Philippines cost of every nancial transaction, allows 20 or mercy come in the form of cash in return Colombia undesirable transactions to take place and Russia for valuables. Unclaimed items end up for Estimated share of households with bank accounts, % Pakistan undermines consumer condence in the Kenya sale in a series of glittering rooms near the Iran nancial system. This, and the related Bangladesh main banking hall. curse of cronyism, explains why access to 0 By transforming trinkets into capital, nancial services in countries where the 0 5 10 15 20 25 pawnshops perform an important (if un- GDP per person, 2003 PPP $'000 state has control over the nancial sector is der-appreciated) service, but they have poorer than where it does not. Source: World Bank three limitations. They advance cash only Inadequate basic public services add to to people with assets. Their loans are the burden on nancial rms. SKS, a fast- can end poverty. A World Bank report by based on the value of collateral, not of a growing micronance institution in India, Thorsten Beck, Asli Demirguc-Kunt and business venture. And the valuables held has had to build back-oce systems that Soledad Martinez published last month as collateral cannot be used to fund busi- can work on two hours of power a day; it shows a strong correlation between lack of nesses, as banks’ cash deposits can. closely monitors voltage when its comput- nancial access and low incomes (see There have been two notable attempts ers are running and keeps a diesel genera- chart 1). Earlier research by the rst two au- to nd alternatives. One has been the cre- tor on hand. Many others simply give up thors and Ross Levine concluded that a ation by developing-country governments on the idea of modern technology and sound nancial system boosts economic of state banks, particularly to nance the continue to use paper instead. This makes growth and particularly benets people at rural poor. These have mostly been a dis- them vulnerable. The tsunami in Decem- the bottom end of the income league. A aster. The other, much more successful one ber 2004 wiped out nancial records at long-term study in Thailand by Robert involved a number of organisations ex- many small Indonesian banks. Townsend of the University of Chicago tending uncollateralised loans to very But not all the blame goes to poor-coun- and Joe Kaboski of Ohio State University poor borrowers. In 1971, Opportunity In- try governments. Financial-services rms showed that families with access to credit ternational, a not-for-prot organisation too have failed to do enough to deal with invested more, consumed more and saved with Christian roots, began lending in Co- the lack of the sort of data (for example, less than those without such access. lombia. ACCION International, also not- about a client’s nancial history) that are What makes micronance such an ap- for-prot, made the rst of what it called taken for granted in rich-country nancial pealing idea is that it oers hope to many micro loans in 1973. Grameen Bank systems, and to nd ways of reaping econ- poor people of improving their own situa- started in 1976 and soon became extraordi- omies of scale.