Tuesday, September 10, 2013

Breaking The Poverty Trap: Financial Services Edition

The Governor is on Project Syndicate, talking about financial inclusion (excerpt):

Financial Inclusion Now

KUALA LUMPUR – Making the financial system accessible to the world’s poorest people can unlock their economic potential, improve their lives, and benefit the wider economy. So it is no surprise that financial inclusion of the poor has become an important component of public policymaking. Central banks and regulators worldwide are taking the lead in making financial inclusion a priority, in addition to their traditional mandates of maintaining monetary and financial stability.

Financial inclusion is about providing an opportunity for the world’s 2.5 billion unbanked and financially underserved to participate in the formal financial system, thereby helping to lift them out of poverty and enter the economic mainstream. Greater financial inclusiveness promises a more cohesive society and more balanced growth and development…

…In countries with high levels of financial exclusion, consumers are left to rely on unregulated informal services. These inferior substitutes often imply exorbitant costs for borrowers – and financing that is usually too short term for productive investment activity. Moreover, the lack of consumer protection and regulatory and supervisory frameworks exposes informal activities to vulnerabilities that can harm borrowers and jeopardize financial stability.

The article is a little high-brow, but there’s an important point to make here. One of the key underlying factors behind poverty and the persistence of inequality of income and wealth is lack of access to finance and financial assets.

The modern banking system (here and elsewhere) grew up on a diet of collateral-based lending, where access to finance depended on the availability of collateral or the ability to pay. In other words, the richer you are, the easier it is to get a loan or to invest your savings, and the cheaper it would be to do either. But the ability to engage in productive investment or to access higher-risk, higher-return investment assets in itself produces an acceleration in wealth accumulation.

Or to put it more vulgarly, “The rich get richer, the poor get poorer.”

Such considerations motivated the establishment of Grameen and other microfinance institutions (such as AIM in Malaysia), dedicated towards financing the poor, and institutions like PNB with its low threshold for investment in its funds. Cooperatives are another branch of these types of interventions, allowing members to pool their financial resources. Efforts towards promoting financial literacy (such as Bank Negara’s Duit Saku program) takes another tack, by educating kids and consumers about how to manage their finances.

It’s all of a piece. Any effective program towards reducing poverty and raise incomes in the lower half of the income distribution, needs to take financial inclusion into consideration.


  1. How successful was the microloans pioneered by Grameen bank in Bangladesh for the poor and women.Current reviews and articles shows mix results, some start businesses and became successful while some fell into deeper debt as some claim the microcredit lenders took advantage of the poors lack of education in managing their money and even business

    If im not mistaken Malaysia adopted the same microcredit scheme, was it successful?

    1. @anon 10.33

      Grameen itself has been pretty successful - it is now owned by its depositors and has been self-financing for a couple of decades now IIRC. Others have seen less success, largely due to failure to completely adhere to the Grameen model, which has some special features; overcharging; or outright fraud. Some microcredit schemes appear to have been set up mainly as a way to siphon foreign aid funds.

      Malaysia's microcredit institution is Amanah Ikhtiar (link). While it appears to be mostly successful, it continues to be part-financed by the government, and the schemes IMHO appear to be aimed more at small enterprises than the poor or hardcore poor.