Microfinance 1.0: Bootstrapping from the Bottom

            As we are all aware, hundreds of millions of people are living in poverty all over the world.  While many societies have been able to build their way to modernity since the Industrial Revolution, there have been many others that have not.  Sometimes this is due to lack of natural resources.  Other times it is due to ongoing regional conflict, and still other times cultural or religious norms inhibit growth.  The state of the world’s poorest is a tragedy of the human condition but much progress has been done to alleviate it in our lifetimes.  Globally, poverty is at an all-time low and its rate, according to the World Bank, has dropped from 43.1% in 1900 to 20.6% in 2010.  This is a testament to the “rising tide lifts all boats” adage, but it also often due to the sheer ingenuity of the poor themselves.

            Such evidence of the poor building themselves out of poverty can be seen in the innovation of informal savings groups.  This is the idea that a community of individuals get together periodically (daily, weekly, monthly, etc) and pool savings to distribute to a member of the group.  The recipient of that meeting’s proceeds gets to take advantage of a big inflow of money to make a relatively large purchase or some kind: tools, seeds, and the like.  Ultimately each member pays as much into the system as they receive but the arrangement works well because it allows each individual to have that access to a large cash flow all at once rather than having to try to save for n number of periods.  Other features include enforceability because members of the groups can visibly check to see that the other participants are contributing as their arrangement requires.  Anyone who shirks the responsibilities is visibly noted.  It might seem like one could forego the group and just save the same amount that they pay every period until the needed amount for some given purchase has been saved.  That does happen most of the time, but the reason that people sometimes chose to forego pure savings and opt for this system instead is the reality that frequent small cash outflows and a large inflow periodically is more palatable than trying to keep cash on hand, for security or any other given reason.

What we witness in this primitive capital market is a simple and yet unquestionably effective way of facilitating access to money.  The particulars of each group, pay-in rates, payout periods, and other factors vary from group to group.  But the general concept stands at the base level.  You can read a more thorough explanation of savings groups here (starting on page 7) if you’d like.  Though it is a limited solution, it is particularly beautiful because it can be implemented with no more than willing participants and the infrastructure of a record keeping pen and paper.  For want of a pen and paper, good memory can suffice. 

This is the first of a three part series. Part 2 can be found here and part 3 can be found here.