Half of the adults in the world (about 2.5 billion people) are “unbanked”—meaning their money is not housed in a secure institution. That’s the central concern of a new book, Banking the World: Empirical Foundations of Financial Inclusion, co-edited by Jonathan Morduch, a professor in the Robert F. Wagner Graduate School of Public Service.
To reach those billions of people, Morduch argues that we need to think about banking in radically different ways. Promising solutions involve using new technologies like mobile phones, as well as re-imagining ideas such as self-governing, village-based saving groups. Understanding those possibilities is a focus of the Financial Access Initiative (FAI), the NYU center that Morduch, an expert in public policy and economics, founded with colleagues at Yale and Harvard.
NYU Research Digest recently sat down with him to discuss old perspectives and new ideas.
How does your research connect two typically incongruent issues like banking and poverty?
Let’s start with poverty, rather than banking. If you’re reading this, you’re probably not poor, but you may have ideas about what it’s like to be poor. Over the past decade, I’ve come to see that my own ideas about poverty were wrong. Elements that I had thought were very important, I now believe are much less important. I had been locked into a logic that was shaped by the available data—large surveys designed to test formal hypotheses, but that turn out to give a very blurry sense of how people actually live their lives.
Rather than surveying thousands of households, a group of researchers started with just a few dozen. Rather than collecting data only once, the researchers visited and revisited the same households many times over a year. Everything bought and sold was noted—all financial transactions, whether at a bank or with family and friends. The intensity of the engagement allowed us to see and understand activities that had been out of view.
This is the data from India, Bangladesh, and South Africa described in your previous book, Portfolios of the Poor: How the World’s Poor Live on $2 a Day. What did it tell you?
The evidence showed that a vast problem for many poor families is not low incomes per se, but the fact that incomes are unreliable and often unpredictable. We often talk about the 40 percent of the world living on under $2 a day per person, but we lose sight of the fact that people don’t literally earn $2 a day. They earn $10 one day, for example, and then very little for a few weeks. Those ups and downs mean that families spend a lot of time figuring out how to borrow and save and deal with risk. We also see people often borrowing to pay for health emergencies, school fees, and simply getting food on the table. But their financial tools are often expensive and unreliable—if they even exist.
You’ve written a lot about microfinance over the years. Is that the solution to “banking the world”?
Microfinance centers on small loans for small-scale entrepreneurs, mostly poor women, who seek capital to grow their businesses. The idea is associated with Grameen Bank of Bangladesh, but the sector has grown quickly, now serving 200 million customers globally, including some here in New York.
Microfinance is an inspiration, but it can also box us in. The starting point of Banking the World is that we need to go beyond the kind of entrepreneurial finance celebrated by microfinance. More fundamental is access to basic money management tools. A huge group of the 2.5 billion unbanked adults are not entrepreneurs. They have jobs, but they still need financial tools—a safe place to save, a convenient way to make payments, short-term loans for general purposes. Entrepreneurs too have needs beyond business. In these ways, the poor are not so different from the rich. It’s been a hard message for some people to hear, but conversations are shifting.
Banking the World collects empirical studies that point to viable solutions, and push us to take a critical look at popular ideas like financial literacy. The chapters also draw new links, like those between finance and under-nutrition. All that, I hope, takes us another step toward solving a problem that is huge—but solvable.