Inexplicable Acts of Trust
Try explaining our financial system to a group of villagers. Like most farmers, they are very practical people, and their questions may lead to the following explanation. “We convert our life’s labours into little bits of coloured paper we call ‘cash.’ We store this ‘wealth’ in financial institutions. Most of us never meet the people reponsible for our pensions, our savings (our lives). Yes, they could be alcoholics or lunatics. And yes, our governments could, at any time, print enough coloured bits of paper to leave us destitute. Basically we’re all OK with that.”
You must be crazy, the villagers are thinking (they are too polite to say so).
Generations ago, our ancestors saw value much as the modern villager does: as something to be kept close by, and to be entrusted to others with the great caution, if at all.
And villagers see value in tangibles: in cows, in gold jewelry, in bags of rice and land. All these things can be traded, and all have a practical ‘non-cash’ use. Printed currency, (like the text that begot it) is often doubted, with reason. In moments of national crisis hyperinflation wipes out its value.
Ms. Him Chanrithy (When Broken Glass Floats) tells the searing story of her adolescence in a Khmer Rouge work camp. Her parents and 5 siblings died. When she finally escaped to Thailand with one surviving brother and sister, she led them to a new life by cashing in gold left to her by wise parents. It was the only asset they could save — and hide — through the chaos.
Delivering the Right Information
It is often thought that loans are the most important intervention in microfinance. However, in the villages, both savings and information are at least as important. Learning to trust little bits of coloured paper is one example — and it takes time. There are at least three other good reasons why village finance is very different from its urban cousin.
1. Numeracy and literacy are far lower in the villages than in the cities.
Retail financial services, as delivered today, require far higher literacy and numeracy skills than most villagers possess. J. A. Paulos, (A Mathematician Plays the Stock Market) reminds us that “an old adage has it that those who understand compound interest are more likely to collect it, those who don’t more likely to pay it.” That is, numeracy has a large and very visible impact on poverty. Most of us pay interest to some people while collecting it from others. The oral villager is far more likely to pay it than to collect it.
Delivering free adult literacy classes is laudable, but their impact is limited. Many women will never sign up. They face intense workloads as mothers and as providers. Oral culture also offers a thousand traditional solutions to their daily problems that don’t require literacy. Oral tools offer better prospects for success, because they integrate learning directly into the process of transacting, in financial and other services. This creates strong incentives not just to learn, but to retain new knowledge.
2. Trust in villages is earned in the oral – not the literate — domain.
The retailing and governance systems we create do not respect oral culture.
Villagers will continue saving at home and in-kind until we begin respecting the ways of our marketplace.
3. Cash flows in rural areas are acutely seasonal, and cash turnover is very slow.
The primary cash flows into the villages take place after the principle crops are harvested; typically once or twice a year. Between these harvests secondary products are sold, like eggs, milk, livestock or vegetables. Much of what is produced is for family consumption, so there is little cash flow. Many months can pass, especially before the principle harvests, with virtually no cash coming in at all. Still there are essential expenses: seeds, fertilizers, school fees, weddings, funerals and festivals.
Most modern microfinance institutions require fixed monthly repayments of principal and interest. Villagers fear they can’t make the fixed payments in the lean months before the harvest, so they drop out or simply don’t sign up. And modern microcredit rarely lends for longer than one year. Capitalizing a farm — installing an irrigation system, purchasing heavy machinery, building a well — requires longer term loans.