Corporate Governance, Scale, and Financial Inclusion
Corporate Governance, Scale, and Financial Inclusion
After having their first child together, Hamid and Khadeja had to move away from their coastal village to find work. Settling in the Bangladeshi capital of Dhaka, Hamid eventually found work as a backup driver for a motorized rickshaw and Khadeja did occasional sewing work from home. Although they earned about $70 a month, money never flowed steadily. The couple had to find ways to bridge the good weeks and the bad.
Portfolios of the Poor: How the World’s Poor Live on $2 a Day, released in April 2009, offers a detailed portrait of households like Hamid and Khadeja’s. Working in South Africa, India, and Bangladesh, teams of trained researchers interviewed over 250 households at 15-day intervals for about a year each. They attempted to record every financial transaction that each household was willing to disclose – not many at first, but after enough visits the authors found they could gain enough trust to obtain a more complete account of the household cash flow.
In Hamid and Khadeja’s case, they earned about $840 in a year, put $451 into savings or insurance and took $514 from savings, loans, and other instruments, for a cash transaction turnover of $965. Hamid and Khadeja handled more money in a year than they earned, just like many other poor households. At the end of the year, their balance sheet contained assets and liabilities across six different financial instruments – nearly all of them outside of the formal financial sector.
Hamid and Khadeja are just two of the estimated three billion people who have limited or no access to formal financial services. Theirs is the life shared by almost half of humanity, with no savings accounts, checking accounts, bank loans, debit cards, credit cards, formal insurance, or other basic financial services taken for granted in developed economies.
Portfolios of the Poor is just one recent illustration that even though many countries’ formal financial sectors ignore the poor, the poor do not ignore finance. While there are personal and cultural reasons why the poor may retain some of their informal financial instruments, there is also demand for the safety and reliability of formal financial services.
A growing variety of organizations, tools, and business models have emerged to provide access to formal finance for the poor. New models like correspondent or branchless banking that take advantage of mobile technology are reducing transactions costs for banks and bank customers. Such models typically involve contracting or franchising existing small retailers as agents to collect deposits or disburse withdrawals from bank accounts processed via cell phone.Yet success remains an exception to the rule; in most low-income and many middle-income countries, formal financial sectors remain reluctant to seek new markets.
Such financial alienation leads to social and political alienation, which undermines the growth of democratic values and institutions. Even the most liberal democratic governments can be held hostage by an oligarchic financial sector that serves only a powerful elite.
Oscar Abello is the Program Coordinator for Global Programs at the Center for International Private Enterprise, where he coordinates social media for CIPE and works on projects strengthening economic journalism, business associations, corporate citizenship, and entrepreneurship. On a volunteer basis, he is also an ad hoc writer for Nextbillion.net, a leading blog and clearinghouse for development through enterprise. He holds a B.A. in Economics from Villanova University.
The views expressed by the author are his own and do not necessarily represent the views of the Center for International Private Enterprise (CIPE). CIPE grants permission to reprint, translate, and/or publish original articles from its Economic Reform Feature Service provided that (1) proper attribution is given to the original author and to CIPE and (2) CIPE is notified where the article is placed and a copy is provided to CIPE’s Washington office.
