To Build Financial Capital For The Poor

Development agencies are not in the business of handing out money to poor people (direct support to financial capital). Access to financial capital is instead supported through indirect means. These may be:

• Organisational – increasing the productivity of existing savings and financial flows by helping to develop effective, tailored financial services organisations for the poor. So long as they are welltrusted, accessible and widely-known they may encourage people to save. Another option might be to help develop organisations that transit remittance income more efficiently to final recipients.

• Institutional – increasing access to financial services, including overcoming barriers associated with poor people’s lack of collateral (either by providing some sort of umbrella guarantee or by identifying mechanisms that enable people’s existing assets to act as collateral).

• Legislative/regulatory – working to reform the environment in which financial services operate or to help governments provide better safety nets for the poor (including pensions).

The issue of institutional sustainability is of particularly importance in the area of micro-finance.

Unless people believe that financial service organisations will persist over time, and will continue to charge reasonable rates of interest, they will not entrust their savings to them, or be reliable in making their loan repayments.

Although financial capital tends to be quite versatile, it cannot alone solve all the problems of poverty. People may not be able to put their financial resources to good use because:

•They lack knowledge (and cannot purchase this knowledge with small amounts of money); or

•They are constrained by inappropriate Transforming Structures and Processes (e.g. underdeveloped markets, a policy environment that hinders micro-enterprise, etc.).

It is important to take these factors into consideration when planning support. On the positive side, it is also important to be aware of the way in which existing social structures and relations (forms of social capital) can help facilitate group-based lending approaches.

When savings are held in unconventional forms, particular to the needs and culture of owners, different modes of support may be appropriate. For example, pastoralists may be more likely to benefit from improved animal health or marketing systems that reduce the risks associated with their savings (held in the form of livestock) than the establishment of a local bank.