Microloans Became Microdeposits

Interesting what the poor actually wanted....

A question from Twitter:

Remember “micro-loans?” I remember there was a time when everyone was very excited about micro-loans. That one guy even won the Nobel peace prize for them. I wonder what’s the verdict on them these days.

The Nobel did go to Yunus and he’s currently running Bangladesh while they prepare to have an election having shifted the wicked witch out of the PM’s house.

But it’s worth reminding ourselves what Yunus really found out. Sure, obviously, giving money to poor people makes them better off. Giving a loan to poor people who want to invest in something will also make them better off. None of this was ever really in doubt.

What Yunus managed to find out was how to get those loans repaid. And the answer was to tie the loan repayment to social standing. He’d organise people in groups - say, 6 ladies. Only one of them could have a loan at any one time. So, there are 5 ladies yelling at the one to hurry up and repay. This works - but it only works in a society close enough that the opinions of your neighbours matter to you.

So, the real Yunus finding was that social standing can be the security, the guarantee, for a loan. Which is interesting, even fascinating. It also means it doesn’t scale - for that Elinor Ostrom reason. Once a human society gets past a couple or three thousand people then social pressure isn’t enough. It’s too large a society for such pressure to operate effectively. A commons managed by a few hundred people can survive for centuries, one managed by tens of thousands won’t.

However, the thing I find most interesting about this whole idea of microfinance is that it wasn’t, in fact, borrowing that was the big hit. This we found out when MPESA (the money on a telephone thing) rolled out across East Africa. It wasn’t long before the folk running the scheme were a bit puzzled - it wasn’t being used just as a payment system, its design. People were keeping substantial (by local income standards) positive balances on their accounts.

It turns out that what poor people really wanted was a safe place to save. Sure, sure, they’re poor. But most of that bottom end of the population know they’re poor and they also know they’re on variable incomes. They also have pretty much no access to a welfare state and all that. So, having some savings is an important part of household management. The reason why gold jewelry is so important in the sub-Continent, a bangle, or a pair of earrings, will be those household savings. But, obviously those can be stolen. Or cash savings can be eaten by rats and all that.

MPESA produced a system of safe savings in small amounts. So, that’s what it was used for by the poor.

Yes, this is very pencil sketch but it is indeed still all true. Turns out that what the poor really want is not access to finance but to the ability to save safely - microloans aren’t quite it, microdeposits are.