This book examines if credit and finance schemes that span the globe such as microcredit, payday lending, and financial literacy education build financial resilience of vulnerable people. By building financial resilience is meant improving and making more durable an individualâs and communityâs income and assets. By vulnerable people is meant people who struggle with material and/or psycho-social poverty so that a temporary or permanent decline in their income and/or assets would have disastrous consequences.
Microcredit is a product (and possibly a movement) associated with development and non-profit agents largely based in the Global South. It has been highly praised in much of the literature and is popular among practitioners and in society more broadly. There are detractors among those who have carefully examined its impact, but they are in the minority. Payday lending, on the other hand, is a commercial product that is common in Anglo-American nations and increasingly in other parts of the world such as Eastern Europe and South Africa. It has been widely criticized, and yet where it operates it attracts a strong and loyal (some say this is based on creating a dependency) following. Financial literacy education, also more common in the Global North, comes in many forms and through many organizations and is premised on the idea that increasing consumersâ knowledge will protect and empower them.
The stories associated with microcredit tend to play up the borrowers who use the loan in a way that boosts their resilience through higher and more durable income which then enables them to repay the loan, a kind of virtuous cycle. Muhammad Yunusâs story of his first loan is an exemplar of this. As he was investigating the micro-economy of poor people in Chittagong District in Bangladesh , he met a basket weaver who had to take out a loan from a money lender at a very high interest rate, perhaps over 100%, in order to purchase the inputs to weave the baskets. He found that by providing her a lower interest rate loan she was able to increase her profits and improve her livelihood. But there are also the âbad newsâ microcredit stories in which borrowers are unable to make a good investment and end up being unable to repay their loan, sometimes needing to sell off assets to repay it.
However the bad news stories tend to be more commonly associated with payday lending. One payday loan client I recently met in a focus group discussion about payday lending noted that he regularly got into a debt cycle with payday loans. In his most extreme case he reported that he had ten payday loans simultaneously and was unable to pay them off. He eventually required his spouse to take out loans in order to pay his off. This familyâs finances are becoming less resilient and payday loans seem to be part of the reason why. Less commonly do we hear the âgood storiesâ about payday loans. In the same focus group discussion another person used payday loans, just occasionally, and to pay for unexpected expenses, in order to not draw down her savings. The payday loan created the external discipline to pay it off without requiring her to reduce her savings. The other types of financial programs that will be discussed in this bookâasset building, cash transfers, financial literacyâall have similar âgoodâ and âbadâ news stories but they tend to get less media interest. But these stories give a sense of the types of challenges and opportunities that financial products present people.
The book focuses its analysis on a set of common credit and finance schemes. Microfinance, mobile phone-based banking, and financial inclusion are examples of these in the Global South , and asset-building and financial literacy programs are examples from the Global North. It is assumed that underlying the expansion of these schemes is the process of financialization, often defined as the rising influence of financial motives and growth of financial services in society. Financialization is a deep and challenging process that affects many aspects of modern life and is closely tied to neoliberal policies that promote markets and new technologies to foster change that affects us all at a deep socio-cultural level. Financialization has become intertwined in complex ways with development actions. This book considers how these credit and finance schemes affect the poor and vulnerableâpeople who experience poverty in one or more of its complex manifestations, including material poverty (a gap between material needs and their being met) and psycho-social poverty (gaps in esteem and control).
A note on terminology: financialization refers to the increase of finances in daily life, through the expanding availability of financial products and the growing demand for them. Financial exclusion refers to the situation faced by persons who have insufficient access to mainstreamâthat is, banksâfinancial services. Sometimes this is broken down into categories of complete financial exclusion, being unbanked or being under-banked, having insufficient bank financial services. In either caseâwhether un- or under-bankedâthe consequence is that the person is reliant on alternative sources for financial services, such as informal providers or fringe banks. Informal providers include corner stores that might cash oneâs cheque or a family member who might loan one some cash. Fringe banks are semi-formal operations set up to provide financial services such as pawnshops and payday lenders. Financial inclusion is the process whereby financially excluded people become integrated into the mainstream banking system for all of their financial service needs.
General Approach
This book draws on and extends â popular financeâ theory (Aitken 2007; van der Zwam 2014) and examines the literature, discussed below, and in the cases of payday lending and mobile banking draws on primary research, on a variety of credit and finance schemes from around the world to learn how they affect the financial resilience of vulnerable people. Since we rely heavily on academic and policy literature, rather than primary data, we depend on the indicators (e.g., of financial resilience) used in these studies. An ideal indicator, but one that is not always available, is whether and to what extent vulnerable people themselves value the change. Everyday financialization is an important lens to assess credit and finance schemes because it focuses on the vulnerabilities of ordinary people, people who only recently have been brought into the financial world. But this lens is inadequate to assess finance and credit schemes of vulnerable people because it does not provide a framework to assess the impact on human well-being. What is needed for this is a theory of human well-being, and for this purpose we draw on the work by Goulet (1995) and human capabilities of Sen (1999) and Nussbaum (2006). Financialization proponents might argue that more (money, credit, income, etc.) is better, but scholars of human well-being understand that financialization is only a means but that the end is human improvement. Credit and finance schemes need to be assessed within that lens.
This book argues that finance and credit schemes can help vulnerable people in a limited capacity if they are carefully constructed, but they can also not help and sometimes harm people. This is because, by definition, vulnerable people have limitations and weaknesses that finance and credit providers may be ignorant and/or disinterested in. Moreover, without a clear understanding of the relationship between finances and human well-being, these schemes may not achieve valued outcomes.
Primary research has been completed by the author and colleagues on microcredit, payday lending, and mobile banking over the past several years, and results are published elsewhere. The relevant literatures on credit and finance schemes are dispersed across different disciplines and approaches, including economics, geography, and sociology. This book brings together elements of these literatures, as each contains insights that are useful to understand the others, and by looking at the âforestâ, one can better understand the individual âtreesâ.
The ethical approach taken in this book is that poverty and excessive inequality harm people who are poor and relatively marginalized and this harms wider society. Credit and finance schemes that reduce poverty and inequality add to the common good, while those that increase poverty and inequality undermine it. A critical assumption that guides this analysis is that finances need to be constructed to build financial resilience, not the other way around. Financial services and technologies do not necessarily foster financial resilience, and in fact they can counteract it. That is why the services and technologies need to be designed with the end user in mind, which includes poor people and communities.
This book presents a critical and constructive perspective regarding these credit and finance schemes. It critiques the changes associated with this process while at the same time not idealizing past development practices or socio-economic realities. As a critical analysis, it endeavors to cast particular light on the problematic consequences for poor and marginalized people. In addition, where possible, the analysis identifies and explores constructive responses to these problems.
In terms of political-economic theory, the book is rooted in a reform market approach. That is to say, given that markets are currently the most prominent way to organize the economy but often fail to deliver on important human outcomes, a strong state and civil society response is needed. State and social actorsâ roles are critical to ensure that adequate market regulations are in place and enforced and that community needs are identified and planned for.
Because credit and finance schemes directed at vulnerable people are now a global phenomenon, this book examines them from a global perspective. This process has become intertwined in complex ways with development actions in what is known as the Global Southâa rich and varied grouping of relatively poorer and geographically more southern nations of Africa, Asia, Latin America, and the Middle East. Here these schemes are manifested through activities such as microfinance, mobile phone-based banking, and financial l...