Ask farmers from low-income countries why they don’t purchase critical inputs, such as improved seeds and fertilizer, and they will most likely tell you that they “lack the funds” to do so. While this may be a catch-all excuse, the answer is all the more surprising given the high marginal returns that these investments usually entail.
One solution to this liquidity problem is to encourage formal savings. Low-income households do save informally in more expensive and risky ways (holding cash at home, purchasing livestock, etc.) but they find it hard to save at a financial institution. There are many reasons for this behavior. Absent the more recent technology-based solutions, such as mobile banking or banking correspondents, transaction costs can be high given the sometimes substantial distances to branches and the costly and unreliable transport. In addition, individuals may lack knowledge about the benefits of formal savings and may not be familiar with account-opening procedures. Banks don’t typically make much money with savings products targeted to low-income products unless they are loaded with hidden fees and commissions, in which case potential customers may be better off not saving at all. (One of these days I’ll blog about an audit study we are doing in Mexico to understand the quality of information and financial products offered to low-income households.)