Background and Objectives 

Over the last 15 years knowledge about the ways in which microfinancial services can be delivered to poor people in developing countries has increased greatly and a ‘microfinance industry’ has evolved to meet the needs of such groups. However, it was evident by the mid-1990s  that the contribution that microfinance institutions (MFIs) make to improving the lives of poor people had considerable limitations. In particular:

 1  MFIs rarely provide services to very poor people;

 2 Most services are aimed at supporting microenterprise, but poor people have many other needs for financial services;

 3 Relatively little is known of the service needs of poor people in urban areas;

 4 There is a very limited understanding of the ways in which poor people combine different forms of financial service provision to meet their needs. Most MFIs, and most researchers, appear to assume that a poor household’s financial service needs can be met by a single service provider.

Building on earlier research by Hulme and Mosley and by Rutherford this project sought to deepen understanding  about the actual financial behaviours of poor households and examine the implications of such knowledge for MFIs and agencies that support them. It looks beyond microcredit to examine the use of microsavings, insurance, emergency loans and money transfer devices. In addition, it examines the financial behaviour and preferences of poor people in urban areas as well as rural areas. This research looks at financial services from the point of view of the user, whereas because of the way in which much microfinancial research is commissioned most other studies are from an agency perspective. 

Primary fieldwork focused on cities and rural areas in Bangladesh and India to build on the research team’s considerable experience in those countries. Related research was also done in East Africa through a separate research contract with MicroSave-Africa, a DFID/UNDP/CGAP initiative. However, the contents of this report are confined to the work done in South Asia.  

The original research objectives were expressed as follows: To deepen the understanding of the ways in which poor and very poor people use financial services. By deepening knowledge in this way it seeks to help those who design microfinancial services for the poor to develop products that will meet their needs at lower costs.

 Methods

There were four main components of the research: 

1.      The preparation of a literature review (Matin, Hulme and Rutherford 1999) which sought to summarise ‘the state of the art’ in microfinance for the poor and very poor. 

2.      The creation of two sets of highly detailed ‘financial diaries’ which chronicled the money management behaviour of 42 households in rural and urban Bangladesh and 48 in India. Each household was visited twice monthly for a full year by skilled local researchers, and diaries were constructed which recorded each money management transaction along with its value, the type of financial service or device that was used, and the reasons for the transaction. The quality of data was carefully checked throughout the period of data collection. We believe that this is the first time that such diaries have been constructed and that it has proved to be a very effective tool through its power to generate an understanding of poor peoples’ behaviour and preferences. 

3.        Concurrently, four ‘snapshot studies’ were conducted, three of them at ‘financial diary’ field sites. This work used village mapping, household questionnaires, wealth-ranking, focus-groups and interviews and triangulation with key informants. The snapshot studies complemented the financial diaries by rendering a comprehensive account of all the microfinancial activities of all the households in a neighbourhood at one point in time. This provided the researchers with additional primary data and allowed the insights from the individual diaries to be seen in the broader context of a community.