Microfinance: The Fight Against Global Poverty, Part 2: 5 Finance Myths that Must Be Debunked
Source: http://abc.net.au
Click here to read Part 1.
Even amidst our struggling economies, many of us are able to live safely above the poverty line. We cannot imagine having to manage our lives with so little resources, especially in areas where war, corrupt political regimes, disease, and hunger are a fact of life. Perhaps then, the best way for us to help is first by developing a basic understanding of how an average household in the lowest income bracket might manage their money.
This is not something that can be accomplished through one simple broadsheet article, so for now, let’s focus on debunking a few common misconceptions.
1) In 2005, The World Bank identified 2.6 billion people (that’s nearly 40% of the world’s population) as living with an income of under two dollars per person, per day.
TRUE (but only sort of…)
This statistic is slightly misleading, only in the fact that it refers to an average over a period time, rather than an actual sum per day. The household incomes of people in this category vary largely from day to day; sometimes making more than two dollars, and, at other times earning nothing at all. In other words, in most cases, the only certainty when it comes to daily wages is uncertainty; income is what leading economists and researchers have identified as small, irregular, and unreliable.
2) Poor people can’t and don’t save money
FALSE!
A study conducted by Stuart Rutherford at the Institute of Development Policy and Management (IDPM) at the University of Manchester revealed that a sample of both slum dwellers and poor villagers in Bangladesh actively used at least 33 different money management systems in use, which enabled people to save money in three ways:
- Saving up (accumulating a large sum over time)
- Saving “down” (borrowing and repaying loans)
- Saving “through” ( a blend of saving up and saving down, for example how one might put aside monthly insurance premiums and then collect a lump sum after an accident)
Furthermore, the same study revealed that approximately two thirds of the average total household income was either saved, used to repay loans, or some other involvement in money management.
3) Poor people’s assets are material (physical) rather than financial
TRUE (kind of…)
There’s no denying that for many families, particularly in rural areas, physical assets such as livestock make up the larger proportion of net worth. However, researchers in a 2004 study* based in South Africa found that over several months, the major movements were in financial assets, whilst the physical assets remained virtually unchanged.
4) The UK and US spend a huge amount on foreign aid and most of it is wasted.
FALSE!
Actually, the UK spends less than 1% of its Gross National Income on foreign aid — about £10 billion.
In November 2010, nearly 900 Americans surveyed believed (on average) that 27% of the federal budget went to foreign aid. When asked what percentage of the budget should go to foreign aid, the average response was 13%. The truth is that less than 1% of the US federal budget goes to foreign aid.
David Cameron has pledged to spend approximately £9.1 billion on foreign aid (0.7% of the UK’s gross national income), but, at present 69% of the population oppose the idea and 43% believe that foreign aid should be cut entirely.
Because the effectiveness of foreign aid is difficult, and often dangerous to measure and monitor, there are many who believe the money is wasted or stolen. A number of studies have found that foreign aid does not stimulate economic growth. This can be the case, particularly in countries with corrupt governments and ineffective policies.
The focus on foreign aid should be on immediate intervention where populations are affected by disease, high mortality rates, lack of educational resources, and many more other vital needs we take for granted. In these areas, foreign aid works. Hundreds of millions of people around the world are better off because wealthy countries pay to vaccinate children, dig wells, build roads and buy schoolbooks.
5) Microfinance alone is the answer to getting and keeping people out of poverty
SOMETIMES
Many poor people only need access to capital to bootstrap themselves out of poverty. This was easier to accomplish when microfinance was young, capital was still scarce, and the lucky few who had access to it could often earn sky high returns on microloans because they faced little competition in the markets where they worked. Today, thanks to the huge success of the microfinance industry in improving access to credit, millions more microentrepreneurs are in markets, competing with each other and driving their net margins down.
The single most important thing microfinance has to offer which other non-financial services seldom do is reliability. Therefore, microfinance is more effective if practitioners partner with other NGOs and agencies to provide social and economic non-financial services like health care, education, and opportunities to engage in more high margin productive activities like small-scale agriculture.
Next week we will look further into how financial services have become instrumental in improving the lives of the world’s poor…
*additional material provided by Portfolios of the Poor: How the World’s Poor Live on $2 a Day (Collins, Morduch, Rutherford, Ruthven. Princeton University Press, 2011)
A Chart displaying GDP against Life Expectancy of the world's nations from philanthropist Hans Rosling's data pools. Source: http://gapminder.org/
This is an incredibly clear and well researched article.
Very Interesting look at solving poverty issues from the grassroots level: creating wealth instead of simply ''helping'' it (by throwing aid money blindly).
[...] it has purportedly brought the store to the people and turned waiting time into shopping time, making people’s lives easier and more efficient. It has also turned walls normally filled with flashy ad campaigns, such as the [...]
[...] gainful employment and have less time for education and training, self-care, and social and political activities. In many developing countries, it is in these areas in particular that female empowerment becomes [...]
[...] interest rates are a necessary cost of making small loans in isolated and impoverished areas. Microlending websites that administer “crowd-funded” loans through local intermediaries assume that [...]