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Chapter 4 Banking Low-Income Populations: Perspectives from South Africa Daryl Collins and Jonathan Morduch W hen Muhammad Yunus was starting Grameen Bank in Bangladesh in the late 1970s, Mary Houghton and Ron Grzywinski, founders of Shorebank, the leading community development bank in the United States, made repeated trips to Bangladesh to assist the novice banker and his funders. The international exchange went two ways. In the mid-1980s, Muhammad Yunus met Bill and Hillary Clinton in Washington, and Yunus inspired the Clintons to help launch a replication of the Grameen Bank in Arkansas (Taub 2004; Yunus 1999). Since then, exchanges have proliferated as the Grameen model has been replicated elsewhere in the United States, including Project Enterprise in New York City and Count-Me-In, a nationwide replication (Jurik 2005). The fundamental argument— that low-income households can be reliable bank customers and that access to finance can be a catalyst to help reduce poverty—has taken wider hold. This chapter provides evidence on the soundness of this argument by providing a better understanding of the financial lives of poor households: their constraints, objectives, and aspirations. We draw on a study of “Financial Diaries” that details the financial lives of poor households in three low-income communities in South Africa.1 The study includes households in low-income urban township and rural areas, drawing a sample from the (relatively) wealthiest households in the areas to the poorest.2 We argue that poor households have surprisingly active financial lives and use a variety of tools to manage their money. These tools are often informal , devised between families and neighbors, but hold potential keys to innovation in the formal banking sector. For the most part, conversations about poverty and finance in the United States and conversations in developing countries run along different lines. The assetbuilding framework—focusing on helping households build long-term assets to support investments in businesses, housing, and education—has been particularly influential in the United States. Policy initiatives like individual development accounts (IDAs, a subsidized long-term saving mechanism for low-income households ) and children’s savings accounts have captured the imaginations of policy- / 97 makers and activists, in part because they promise to reorient social welfare systems to foster greater autonomy for recipients (Sherraden 1991, this volume). The push to build long-term assets, however, has not been a top focus in poorer countries. Instead, policymakers in low-income countries focus on more immediate and instrumental concerns, especially on raising incomes through business loans (so-called micro-credit) and, to an increasing extent, expanding access to generalpurpose savings accounts and insurance. Microfinance advocates argue that reliable financial access can have strong positive social and economic impacts even when households, in the end, build few lasting assets.3 A second push away from the asset-building framework comes from a strong emphasis on commercially viable interventions. Rather than finding ways to redirect systems of public grants and subsidies (as with IDAs in the United States), policymakers in low-income countries have, of necessity, focused on delivering affordable, basic retail financial services to poor households—and doing so with limited subsidies. Our research on global microfinance leads us to argue that a strong focus on expanding reliable access to banks, credit unions, and other basic finance providers makes strategic sense in the United States as well. In principle, the vision entered legislation as the Community Reinvestment Act (CRA) of 1977 (Barr 2005), but while the CRA has spurred an expansion of banking in poor communities, there is still far to go. A recent study of bank branches in New York City, for example, finds that neighborhoods where half of households have incomes above $60,000 have one bank branch for every 2,165 people and that neighborhoods with a median income under $19,000 have just one bank for every 14,153 people (Office of Anthony Weiner 2007). Where banks are absent, residents turn to friends and relatives or the pawnshops, payday lenders, and check-cashers that serve as “fringe” banks (Caskey 1996), often with high costs. Deploying subsidies for long-term asset-building can complement expanding access to reliable banks but will not substitute for such access. Even where bank or credit union branches are located nearby, and despite the fact that a customer stands to save as much as $40,000 over time by replacing high-cost check-cashing services with a checking account, many individuals still find that the high-cost services deliver features missing...


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