One of my favourite movie scenes is from “It’s a wonderful life”. The hero, George Bailey, is a reluctant banker. On his wedding night he has to deal with a bank run. In trying to stop the bank run, he tries to explain the concept of illiquidity to his depositors. " "You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can." George's vision of banking is infectious: it is not about pieces of paper or ledgers. It is about helping people build houses and dreams. This vision drives me. Along with my awesome team at IFMR Trust (where I am the president), am obsessed with seeing that all of India has access to high quality financial services; be it a daily wage labourer seeking to protect her Rs. 100 wage from inflation or a municipality issuing its bonds to build sanitation for its residents. I believe that finance, when done well, can be a tremendous force for good. I live and blog from Chennai (and planes) but most of my stories are from Thanjavur, Ganjam and Uttrakhand.
A new paper by Anandi Mani et al in the August issue of Science has a stunning finding – that the cognitive impact of being poor may be equivalent to as much as 13 IQ points. The authors study shoppers in a New Jersey mall and sugarcane farmers in Tamil Nadu using an experimental design and are able to show that the poor perform consistently worse on standard non-verbal tests of intelligence when “stressed” than the rich. Very interestingly, in the case of the sugarcane farmers, the comparison is not between rich farmers and poor farmers but the same farmer pre-harvest and post-harvest. Before harvest, the farmer is a poorer version of himself (compared to after harvest) because of the liquidity crunch associated with the time before harvest. Think of it as the equivalent of the last few days of the month for the salaried class.
I think this study has very important implications for thinking about how good financial access will look like for the poor and what it will achieve. Too often, as practitioners, we emphasize the “big factors” such as branches, financial literacy, products, regulation and so on and when we think about the impact we have on our customers, we think about mega metrics like income and empowerment. This study tells us that if done well, perhaps the most important impact we will have is to allow customers to free up their “bandwidth” to focus well on the big decisions in their life – their childrens’ education or choosing where to sell their next crop.
Take for example, our well-meaning desire to sell pension products to the poor. The decision to buy pension is a tough one, it has implications on what you would need to give up today and for several years in the near future to have a comfortable life many years into the distant future. Too often, we think the way to get people to invest more in pensions is to endlessly “educate” them about the value of pensions. We rarely consider factors like what is a good time to talk to the customer about pension – is it before or after harvest? Is it at the branch when she is on her way to a demanding day at the farm or at the home during a quieter time? Is the application form for the pension several pages long and in English to boot? The paper reminds us that these could potentially be very big factors in her decision to buy pension.
The paper was also a reminder for me of the value of “consumption loans”. A fundamental function of finance is to help the user manage liquidity – moving money back and forth across time. In the banker and development finance community however, financing consumption by providing small-value loans for a short period of time for no specified purpose is viewed as a no-no, spoken of in hushed tones as immiserating the poor. Entire regulatory guidelines have been written in its honour. But it seems to me that this consumption finance can provide the “bandwidth” that the poor need at crucial moments of their life. Micro-lenders will tell you that their disbursement peak is in June – school fee season time. This does not coincide with a cash-flush time for agricultural families, so they often borrow small amounts (Rs. 500 – Rs. 5000) to tide over this time. This study would suggest that this small amount has an impact on the parent that goes far beyond meeting the immediate goal of having enough to keep the kid in school. It makes the parent “richer” than what the small loan suggests.
What else might we do to ease the cognitive penalty of being poor? I am certainly persuaded to be a lot more sensitive about this while designing products and processes for our customers.
PS: Two of the co-authors of this paper also have a book coming out this week that explores these ideas further, “Scarcity: Why Having Too Little Means So Much”.