Thoughts on Poor Economics II
In this second part, I put up three loosely connected themes from Poor Economics. Find the first part here
Microcredit, Communities and Social Shame
This week while editing this piece, I learned about LAPO, a Nigerian microfinance bank. I had been hearing about it since I moved to Benin two years ago and met people who used it, but had never really given it a second thought. I got some deep insights this week while discussing with Philip, a poultry farmer in Sapele, Delta state. LAPO loans had helped him roof his house and stock his farm. As he spoke with me, his face lit up anytime he mentioned the name, crediting them for being the bulwark behind he and his friends’ struggle to lift their families out of poverty. My curiosity was piqued. So I looked them up.
A pro-poor institution, (originally named Lift Above Poverty Organization) LAPO was established in response to the effects of the Structural Adjustment Program in 1986. They eventually got a microfinance bank license ten years ago and offer a range of financial services to the poor. In the last 10 years, as Nigeria’s leading microfinance bank, they have served over 2 million clients, with over 90% of them being women. This is commendable as diverse data-driven studies agree that more money in women’s hands leads to better family outcomes than when in men’s pockets.
Reading Poor Economics made me understand the importance and limits of microcredit institutions such as LAPO. Nigerian commercial banks generally do not lend to the poor even though they need credit facilities if they are ever going to rise out of poverty. This is not due to any untoward malice or bias. The lender decides it is simply not worth it because the unit cost of enforcing repayment and reducing default rates is more for poorer people who do not have credible collateral. Banks would actually lend out more money if they had more data to identify, categorize, and build credit/risk scoring models.
The poor are not as financially illiterate as I previously thought. They have financial instruments they have used for decades, chief of which is the esusu/onidara/alajeseku communal banking system in which people contribute money to a pot on a regular basis and ‘take the pot home’ in turns. If banks want to lend more money to poor people, then they need to study how loans in communities work. These systems have worked effectively for decades. This way, it is easier to track the loan and reduce default rates through social shaming techniques. Lending could also be to communities which then disburse to the individuals. The individual credit score is then weighted by the collective and obligates everyone to make sure every other member pays.
Hope as a Currency: Why the poor spend the way they do
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An explanation for how/why poor people spend the way they do is they believe their future self would be a lot more patient/frugal/prosperous than their present self. Consequently, they spend more profligately today, expecting that their income and behaviour tomorrow would be different. Because their income comes in piecemeals, they find it difficult to address big goals, and may focus on their immediate needs, and thus move from day to day focusing on only food, clothing, and shelter.
This means some poor people are looking for finance options that impose discipline on them and help them save/invest their way out of poverty. This is simplistic, but you get the point. We need to automate savings for the poor to circumvent the self-control issues they face which the rich have already automated through fixed deductions, pension saving plans, etc. The reality is that levelling up takes a lot of discipline and determination. It also takes time. It cannot be rushed. So whatever support structures we build should be those that help the poor with external discipline, consistency, and hope over time in order to help them break out of vicious cycles and poverty traps and get them into virtuous cycles. Hope is important to keep sustained efforts over a long period of time.
I now see the role of social security in helping to stop people from falling into poverty. It keeps them above the poverty line and tides them over until they can get a job. This lowers the stress level and helps their decision-making abilities. Hope is powerful, and cannot be easily quantified. Give it to people and you can keep them calm for years. Is this why religion is so popular among the poor? Are pastors merchants of hope? I now see how the poor are not universally lazy, slothful, or economically irrational. Their realities are just different and worthy of being understood. When we do this we can tailor financial services that help lift them out of poverty.
The Future of Banking?
We see then it is not enough to offer the poor wallets and accounts. We must find ways to make UI/UX seamless and better integrated into their daily lives. By integrating offline mechanisms, this means we reduce the unit cost of managing these accounts since these people have no need to ever walk into a bank branch? I like what FirstMonie’s ubiquitous agent system does with the way they have made it easy to move offline cash into online wallets seamlessly in rural areas. This way, you can stroll to a POS merchant on the street corner and for a fee of 100 Naira, deposit between 1,000 to 10,000 Naira into any account without having to go to the bank. I don’t know what plans First Bank has for this initiative, but it seems to have a lot of potential to me.
If companies like PiggyVest and Carbon/Paylater could partner with FirstBank and their First Monie initiative, it could help in getting the poor to save daily directly from the agent. Anyway, if they can hack like FirstMonie has done, the way to move offline cash into online wallets effectively and seamlessly, it might be a gamechanger for them. Before this, the only way to move money was from debit cards or bank transfer. In other words, the money had to be already online before it could be saved or invested. However now, you can potentially move money from the cash in your pocket straight into your online wallet.
These developments mean that there is a possibility to digitalize the esusu system. Communities could have wallets where members pool funds and reinvest in one another’s businesses. Banks might eventually become software companies with distributed agents, and this could hasten financial inclusion for the poor. Banking services would be offered on street corners and apps and fewer branches would exist to support IT and customer care staff.
As a parting shot, I leave with you with two fine sentences from the book that helped me better understand the poor:
1. We are often inclined to see the world of the poor as a land of missed opportunities and to wonder why they don’t put these purchases on hold and invest in what would really make their lives better. The poor, on the other hand, may well be more skeptical about supposed opportunities and the possibility of any radical change in their lives. They often behave as if they think that any change that is significant enough to be worth sacrificing for will simply take too long. This could explain why they focus on the here and now, on living their lives as pleasantly as possible, celebrating when occasion demands it.
2. There are ways to get around self-control problems, but to make use of them usually requires an initial act of self-control. Awareness of our problems thus does not necessarily mean that they get solved. It may just mean that we are able to perfectly anticipate where we will fail.
