An executive in financial services at the YouGov London HQ, and a research assistant under Development Economics at King's College London.
Loan sharks and financial illiteracy: Low-income workers and the money lending landscape in Bangladesh
Although low-income workers account for a significant proportion of the Bangladeshi workforce, a staggering number struggle to make their incomes stretch until the next payday. For instance, a recent survey of a large, nationally representative factory conducted by the International Growth Centre at the London School of Economics found that 18% of workers regularly have to cut meals at the end of the month, and 50% report that they have to borrow money at least once per month to meet their living expenses.
Yet even more worrying than these figures is the fact that the ‘salaried poor’ typically borrow money from informal moneylenders or shopkeepers when they find themselves strapped for cash - many of whom are ‘loan sharks’ that provide credit at extremely high interest rates. On the other hand, formal microfinance institutions (MFIs) in Bangladesh - which might indeed provide credit at better rates than on the informal market - predominantly provide loans to the entrepreneurial poor, and include significant barriers to borrowing very small sums of money for personal use on short notice, for instance. Formal finance, then, clearly doesn’t account for the legions of factory workers in Bangladesh who are rather in need of small affordable loans to tide them over until the next payday.
Lack of access to appropriate and affordable financial products for low-income workers is a pressing problem in terms of the country's sustainable development goals, particularly poverty eradication, insofar that borrowing on the informal market often ends up being a cause for poverty, as opposed to a cure. That is, due by large to a lack of financial education, many workers pushed out of the formal market often take up high-interest loans without thinking of - or even understanding - the long-term detrimental consequences. Further still, many borrowers take loans from several sources, making their repayments all the more difficult to keep track of, and there is often little understanding that it might even take decades to repay their loan. Many also borrow simply to repay earlier loans, and essentially become overwhelmed by debt, and as such, the current state of lending in the country is essentially locking many low-income workers in a cycle of poverty.
Indeed, horror stories surrounding microfinance are so commonplace in Bangladesh and elsewhere in the developing world that a negative consensus has built up around the use of microfinance as a poverty eradication practice within progressive international development circles. But all this begs the question - can microfinance be revolutionized in such a way so as to actually empower low-income workers?
AGAM: An empowering model of microfinance?
On the back of the widespread issues in the lending climate in Bangladesh, the founders of AGAM understood that for microfinance to be an empowering tool for low-income workers, a twofold approach would be required. As company CEO Shabnam Wazed sums up: “AGAM was formed with the objective of enhancing access to formal financial services for the salaried poor, whilst simultaneously providing them with financial literacy training to ensure those working at the bottom of the pyramid would not remain locked in the debt cycle”. In other words, financial literacy and financial inclusion must go hand in hand in order for microfinance to prove beneficial to those on the breadline.
AGAM - a mobile application for financial inclusion - essentially works by generating financial IDs for previously unbanked communities such as low-income factory workers, who can then access their 'salary advances' from banks as credit, at fair market rates. Crucially, though, these financial IDs are created by an innovative credit scoring system that has been developed in-house - the Individual Independence Index (iii) - and a clients’ score on the iii will determine his or her eligibility for a loan. That is, in order to be approved for a loan in the first place, customers must prove that they fully understand the terms and conditions of that loan.
Yet AGAM not only increases access to formal finance for the salaried poor through its unique credit scoring system for the unbanked, but so too does it provide digitized training materials - including financial management tools, budgeting tips and advice on consumer banking services - for its customers in order for them to improve their overall level of financial literacy. This service essentially provides those at the bottom of the pyramid the tools appropriate to better manage their expenses in the future, so as to avoid having to turn to credit to smooth consumption on a regular basis.
In this way, AGAM is a new fintech with a noble social purpose: to help build up customers’ financial knowledge and confidence whilst at the same time enhancing their access to formal finance. As it stands, AGAM currently only operates in Bangladesh, yet its impact has already been significant there, as the company has already launched a pioneering financial literacy program for the tea estate workers of Duncan Brothers Ltd, which has impacted 80,000 individuals thus far. Yet as the company grows in scale, its founders plan to apply the same inclusive finance model to other developing markets across Asia and Africa, thereby leading a revolution in making finance empowering for the salaried poor.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2020 KathC