Nick Bernards looks at financial solutions to poverty and their remarkable durability. 

In 2019, World Bank vice president for equitable growth, finance and institutions, Ceyla Pazarbasioglu, sang the virtues of new financial technology (fintech) in an interview with the Financial Times:

“It reduces costs, it’s much more efficient, it can be scaled up… It does come with risks as well because, you know, you really don’t want to hurt those that are most vulnerable, so we have to be careful. But I think it is really remarkable.”

Pazarbasioglu shared these views with a growing army of consultancies, think tanks, and philanthropic organisations. Fintech remains a major part of post-pandemic development strategy. Indeed, the World Bank in particular has made little secret that: “the crisis may represent an opportunity to fast track changes already in the works in areas such as… mobile money adoption and digital finance services in general”. 

On the move
So-called mobile payment systems, or ‘mobile money’, are systems that enable users to transfer money using cell phones. The highest profile example is M-Pesa in Kenya. Users deposit and withdraw funds in M-Pesa accounts through designated agents, and transfer money between user accounts via mobile phone. It was initially a pilot project funded by the UK Department for International Development, and launched commercially in 2007. Mobile money in Kenya is often seen as a major success story, with one prominent article in Science estimating that it is directly responsible for lifting 2% of Kenyans out of poverty. These claims have been contested.

We get a less rosy picture of fintech if we scratch the surface. In Kenya, for instance, widely-used mobile payment systems (see box On the move) have been touted as a virtual miracle cure for poverty. But they have also facilitated a rising tide of digitally-enabled debt distress. By 2018 things were bad enough that officials at the World Bank’s Consultative Group to Assist the Poor had concluded, “A market slowdown and a greater focus on consumer protection would be prudent”.

The alternative
Alternative credit data refers to a range of different applications that substitute available, or easily collectible, data for conventional credit scores. Alternative data includes “big data” credit scores, which deploy algorithms to parse the thousands or millions of data points produced as a byproduct of mobile phone or internet use, and some more targeted forms of data collection. A prominent example of the latter is the psychometric credit score, where quickly-administered personality tests are used to inform lending decisions. The claim is that alternative data can provide accurate measures of the creditworthiness of people lacking conventional documentation like pay stubs, income tax receipts, property titles, or credit histories. These approaches are controversial. Among other things, they measure borrowers’ willingness to repay, not their capacity to do so. Alternative credit data can’t differentiate between someone with the income to pay off a loan and someone skipping meals to do so.

The pandemic amplified these concerns. The first half of 2020 was turbulent for fintech startups. Many alternative credit data (see box The alternative ) applications ran into difficulty as borrowers’ incomes, and hence repayments, were squeezed. The pandemic amplified concerns that too much money was flooding into fintech startups, encouraging irresponsible lending. In the words of one investor interviewed by the FT: “Everyone had gone out and raised money with insane valuations. There was some fluff in there.”

The pandemic amplified concerns that too much money was flooding into fintech startups, encouraging irresponsible lending.

Post-pandemic fintech for development increasingly highlights different models of financial services. The growing emphasis on digitising “government to person” (G2P) payments (see box Accounting for haste) perhaps exemplifies this shift. Shortly before the outbreak of the pandemic, the World Bank and Gates Foundation launched the G2Px initiative. G2Px aims to encourage wider adoption of digital payment and digital identity systems in administering state transfer payments in the global south.

Accounting for haste
G2P payments refer to efforts to digitise state transfers to individuals and households. This means using a range of technologies to administer social payments including mobile and digital payment systems as well as biometric identity verification. For advocates, the digitisation of G2P payments promises faster, more responsive, and more efficiently targeted social safety nets. It is also seen as a mechanism to compel people to open bank accounts. Critics argue that this entails a very restrictive and distorted vision of social protection, prioritising financial inclusion over universal provision.

There are good reasons to be wary of this shift. The track record of previous efforts to digitise social payments is not promising.  Digitisation has often led to the privatisation by stealth of significant chunks of the welfare state. It is clear, moreover, that the World Bank, the Gates Foundation, and others involved in G2Px view the digitisation of social assistance as a means first and foremost of expanding the use of digital finance. In many instances this has fallen short of expectations. This implies a rather more ambiguous and indirect relationship to poverty reduction than we might want from social protection policies. 

Yet, there is little about this story which is new. There is, as I show in a forthcoming book, a long history of “innovative” financial miracle cures for poverty which have turned out not to work. The repeated failures of these financial solutions have often spurred the kinds of adaptation and re-jigging of ends and means we’re seeing in the aftermath of the pandemic. 

The claim that providing access to finance will be a win-win is surprisingly mutable and durable. Wider access to credit, ostensibly, will benefit the poorest and allow the financial sector new sources of profits. This basic claim persists despite decades worth of evidence of the inability of finance, in and of itself, to deliver actual reductions in poverty. Fintech hype promises new, digitally-enabled means of extending access to finance. But the basic objective is an old one.

Indeed, fintech gained prominence precisely as efforts to promote financial inclusion by other means ran into increasing difficulty. After the 2008 global financial crisis, enhanced access to financial services for the poorest was widely embraced as a policy goal by major development agencies.

After the 2008 global financial crisis, enhanced access to financial services for the poorest was widely embraced as a policy goal by major development agencies.

Yet there has thus far been little clear evidence of benefits for target populations. Supporters of financial inclusion have had to engage in torturous mental gymnastics. One staffer at the World Bank’s Consultative Group to Assist the Poor draws an analogy

“Many rigorous impact evaluations of water and sanitation interventions find little to no impact on diarrheal disease. Does that mean that there are no benefits of clean water or sanitation? Of course not. It does mean that the programs aren’t fully dealing with the myriad sources of water contamination. That’s a problem that needs solving, but it’s not a reason to say that clean water and sanitation doesn’t make a difference to poor households.”

There are some problems with this argument. Among other things, a bank account is no good without money to put in it. It’s even less clear that, say, a loan with usurious interest rates is likely to improve a borrower’s life. 

There is also, at best, limited evidence that efforts under the rubric of financial inclusion have even led to wider access to financial services. The growth of access to formal credit has been slow, uneven, and even prone to reversals in particular cases. Even in Kenya, the much-touted boom in mobile money has reinforced long-standing patterns of uneven development. In particular, it maps closely onto longer-run colonial histories.

What’s more, the rise and fall of financial inclusion itself emerged out of the failures of microfinance in the 2000s and 2010s. Microfinance was at one point seen as a silver bullet for poverty reduction. It reached its apogee in 2006 when Grameen Bank founder and microcredit evangelist, Mohammad Yunus, was awarded the Nobel Peace Prize. Microfinance promised a particularly sharp version of the win-win story. Poor people (primarily women) would get access to credit in order ostensibly to build businesses and lift themselves out of poverty. Meanwhile, group lending structures would make sure that money was repaid and hence ensure profits for lenders. 

But grand claims about the benefits of microcredit were never fulfilled. Claims about the benefits of microfinance were downgraded. Stories about facilitating entrepreneurial growth gave way to claims about “consumption smoothing”. In other words, microfinance was reframed as enabling people to manage fluctuations in income by borrowing. Lofty aspirations of lifting people out of poverty quietly went by the wayside. Even sympathetic authors started highlighting trade-offs implicit in the development of commercial microcredit. This growing skepticism coincided with a series of catastrophic microcredit crises, the most notable of which took place in Andhra Pradesh, India, where dozens of over-indebted farmers committed suicide in 2009-2010.

Lofty aspirations of lifting people out of poverty quietly went by the wayside.

Financial solutions to poverty didn’t originate with microfinance, either. The microcredit fad itself stemmed in no small part from earlier failures of “directed credit” programmes for agriculture across the global south. 

Further back still, colonial officials in the first half of the twentieth century were often concerned about the inability of the small farmers to access credit. In terms that aren’t alien to present-day debates, they worried that limited access to credit undermined agricultural productivity. They also identified many of the same underlying obstacles as in contemporary analyses of financial inclusion. One survey of Nigerian banking operations published in 1952, for instance, noted that “Many Africans wish to operate accounts… on which the average balance is small and the number of transactions high”. Such accounts could only be profitable “under (rare) conditions where returns on assets were sufficiently high to outweigh the cost of making many small transactions”. There is a clear echo here in the reference to fintech as a means of reducing costs with which this article opened. Colonial efforts to promote wider access to finance, likewise, generally ended in failure

The idea that widening access to finance will lead to reductions in poverty and promote economic development, then, has a long pedigree. It is also remarkably resilient to failure. 

The dubious history of financial “solutions” to poverty should give us pause for thought about efforts to capitalise on the pandemic to roll out digital financial services more widely. The convenience of having a bank account won’t substitute for substantive redistribution and structural change. The long litany of failures to expand access to financial services suggests that access to finance on its own terms is something of a pipe dream without wider reforms.

Nick Bernards

Nick is Associate Professor of Global Sustainable Development at the University of Warwick. This article is based on his forthcoming book, A Critical History of Poverty Finance: Colonial Roots and …

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