SOCIETY by Patrick J. ByrneNews Weekly
Helping lift the 'unbanked' out of poverty
, April 11, 2015
New initiatives are underway to enable the world’s “unbanked” to gain access to financial services and to help lift millions out of poverty.
The unbanked are adults who do not have their own bank accounts. Both the unbanked and the under-banked — people or businesses with little access to retail financial services — generally rely on alternative and often exploitative lenders for their financial needs.
A major study, Half The World Is Unbanked (2009), conducted by the Financial Access Initiative (FAI), a consortium of American university researchers, found that:
• 2.5 billion adults — that is, just over half of the world’s adult population — do not use formal financial services to save or borrow.
• 2.2 billion live in Africa, Asia, Latin America and the Middle East.
• Of the 1.2 billion adults who use formal financial services in Africa, Asia and the Middle East, at least two-thirds — a little more than 800 million — live on less than US$5 per day (purchasing power parity adjusted).
Writing in the Wall Street Journal (March 17, 2015), Tom Wright says that the problem is not new. In the early 1800s, European aristocrats and rich merchants had bank accounts; but the rest put their money under their mattresses, if they saved at all.
Small deposit accounts have relatively high transaction costs. So little interest is show by either commercial banks or poor customers, who also don’t understand financial products.
Yet leaving billions of people out of mainstream finance holds back productivity and slows economic growth.
Princeton University’s Professor Sheldon Garon has been described as “the world’s leading historian on household saving”. In his book, Beyond Our Means: Why America Spends While the World Saves, he asks: “Can a society — or economy — be strong if the majority of households lack adequate savings for emergencies, retirement, and renewed consumption?”
Households need access to bank accounts in order to make larger purchases and to invest in health and education. Small businesses need bank accounts for borrowing and for paying wages.
Tom Wright says that “a recent study found that districts in India with more government bank branches have greater levels of employment in the formal sector, higher wages and better productivity”.
Access to banking also helps channel savings into productive investments.
The issue is now being addressed across Asia, as governments seek novel ways to provide poor people with access to financial services, particularly using mobile phones.
India’s Prime Minister Narendra Modi has ordered government banks to open 125 million new bank accounts for poor people. The banks are taking a new approach. For example, they are linking accident insurance to bank accounts and paying state subsidies through them. A third of the new accounts already have deposits.
The big difference between banking in 19th-century Europe and India and today is that hundreds of millions of Indians can to do their banking using their own mobile phones.
India’s largest mobile-phone companies are applying for special banking licences to handle payments, but not to make loans.
About two-thirds of adults in China have bank accounts, a greater proportion than in other emerging nations. In part, this is due to the government offering no-frills postal savings banks, similar to those that operated in 20th-century Europe and today in Japan and New Zealand.
China is conducting trials using agents to reach new customers to give them access to electronic payments over the Internet or mobile networks.
In Bangladesh, mobile phone-banking technology is booming.
Poor access to banking is also a problem in the United States. Around 106 million Americans are unbanked or under-banked, according to the Federal Deposit Insurance Corporation. According to Forbes magazine (June 14, 2013), one in five U.S. households has zero or negative assets, making such households “invisible to the mainstream U.S. financial system”.
Recently, pioneers such as José Quiñonez , executive director of Mission Asset Fund (MAF) in San Francisco, have been seeking ways to bring the unbanked into the financial mainstream.
Quiñonez says that many low-income people have an aptitude for managing their personal finances.
Many are currently participating in a form of social lending in which low-income communities band together, pool their resources, and distribute loans to one another. This allows people to take out loans and repay them. However, on its own, this doesn’t build credit or provide participants with access to other financial services.
His MAF organises the funds, transfers the loans, requires signed promissory notes, and reports payments to credit agencies. This builds credit for previously informal borrowers, and increases their credit scores.
A study of 600 people in the program found that participants significantly improved their credit ratings and dramatically reduced their outstanding debts.
As of 2012, MAF had facilitated over US$1.3 million worth of loans to more than 1,300 participants. Quiñonez had expected a 10 per cent default on these loans, yet not a single person has defaulted in the past three and a half years.
Globally, such innovative programs are needed to bring the unbanked into the mainstream economy and lift them out of poverty.
Patrick J. Byrne is national vice-president of the National Civic Council.