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Why can't poor people just go to a bank for financial services?
There are many reasons why poor people find it difficult to deal with banks. These include:
- They may live too far from the nearest bank branch and it may take too long or be too expensive for them to travel each time they wish to apply for a loan, make a repayment or access their savings.
- They may not have enough money to open a savings account or the minimum balance that the bank requires them to maintain may be too high.
- They may not have sufficient traditional collateral (such as the deeds to the house where they live or the land they farm) to secure their loan.
- They may be self-employed without regular or verifiable sources of income.
- They may have no existing history of receiving loans with the bank.
- They may be illiterate and be unable to complete all the necessary paperwork required for applying for a loan or opening a savings account.
- They may feel intimidated by a bank’s premises and staff who are used to dealing with well dressed wealthy customers in salaried jobs rather than poor microentrepreneurs who work in agriculture or markets.
- Some banks think it will be uneconomic for them to deal with poor people and they deliberately exclude poor people from their services. They may consider that it is too costly for them to analyse and process the large number of loan applications made for the relatively small amounts of money required by poor people and instead prefer to make a few large loans to richer borrowers.
As a consequence poor people frequently rely on friends or family or private moneylenders as their principal sources of credit. Private moneylenders can offer several advantages that make their service convenient. They are often personally familiar with the borrower and therefore offer credit without collateral; they are generally located locally and can both disburse loans immediately with minimal paperwork as well as receive repayment without the need to travel great distances. Nevertheless, it is almost always the case that private moneylenders charge relatively high rates of interest and they may not be able to provide more than limited short-term capital.
However, the successful provision of microfinance by institutions such as Grameen Bank in Bangladesh and BancoSol in Bolivia who specifically target microentrepreneurs and the realisation that lending to poor people can be profitable and that poor people in fact also make very good clients has meant that, in addition to the increasing number of MFIs, more and more banks are promoting microfinance.
