Why Do Poor People Co-Hold Debt and Liquid Savings?

Abstract

I examine the use of flexible savings-and-loan accounts offered by SafeSave, a microfinance institution serving poor slum dwellers in Dhaka, Bangladesh. I find that 59% of the clients co-hold, meaning that they borrow at high interest rates and simultaneously hold low-yield liquid savings. Co-holders could immediately pay down, on average, 32 per cent of their debt using liquid savings and thus avoid significant interest payments. The results show that co-holders are more likely to be regular workers subject to little income uncertainty, suggesting that co-holding is not a consequence of liquidity needs. The paper discusses alternative explanations. Keywords Forthcoming in Journal of Development StudiesKey words: Liquidity, uncertainty, precautionary savings, microfinance, Bangladesh.

The Alfredo Namitete Agroecology Credit System: A New Business Model That Supports Small-Scale Lending

“…This small, peasant community now has a sense of extended horizons, with the possibility of planning for the future. The study confirms the findings by authors in the literature that the problem of the unbanked lies in the practices of the lending institutions [50], and that the poor themselves have very active financial lives [48]. It also confirms the need for flexibility, as repeatedly stated by the reviewed authors and the importance of having access to loans for production and for consumption [40].…”

“…The findings are consistent with Laureti [48] in the fact that the poor are financially very active. The association was able to successfully manage its own credit fund independently when it received the initial seed funding and was able to open its own bank account for the first time.…”

“…The literature reveals that the poor have active financial lives, that they co-hold debt and savings and that there is a high, untapped demand for savings opportunities [48]. It demonstrates that there is a high demand for credit and that smallholders resort to different forms of credit such as formal, informal and microfinance, to fulfil their different needs [38].…”

Banks’ unfairness and the vulnerability of low-income unbanked consumers

“…In the case of financial services, consumers typically experience vulnerability in understanding information about financial products because it is often presented in a technical and complex manner (Cartwright, 2011). Nevertheless, low-income consumers, who generally possess low literacy skills (Cartwright, 2011;Laureti, 2017), are more prone to encounter powerlessness in understanding financial product information (Cartwright, 2011). Thus, both internal and external factors can activate consumer experiences of marketplace powerlessness (Baker et al, 2005).…”

“…Approximately five billion people in the world live in different levels of poverty (Fisk et al, 2016), and they often lack access to essential services (Anderson et al, 2013). For example, low-income consumers lack access to conventional financial services (e.g., Koku, 2009) and utilize alternative offerings to manage their routine financial matters (Laureti, 2017). In the context of developing countries, the vast majority of the population remains unbanked (Demirguc-Kunt, Klapper, Singer, & vanOudheusden, 2015), and most of those unbanked people live on a low-income (see Kochhar, 2015).…”