Richer and Poorer
The above chart divides our 50 diarists into 5 groups of ten households each ranked by their income levels (quintiles). The graph shows the spending categories for each quintile. As you might expect, it seems the poorer you are the bigger the share of spending that goes for survival, and the richer you are the bigger the share for investment. The richest quintile devotes about half their spending (48%) to investment, while the lowest income quintile devotes 70% of their spending on survival.
The above chart plots each individual household, arranged left-to-right from higher to lower per-person per day expenditure, showing that not everybody has spent to invest (the green bars) and those who devoted a higher share of spending towards investment are mainly located in the higher income categories.
Investment by whom, and in what?
Clearly, it is investment that differentiates the quintiles, and the individuals within the quintiles. The remainder of this article will focus on the investment category.
The chart below looks at investment expenses per quintile of Figure 2, and breaks them down into their main sectors.
By far, the largest share of investment – fully two-thirds of it – goes into home improvements. The top income quintile also spends heavily on migration – sending family members overseas to work. Migration and home-improvement were found to go hand in hand: the investment in migration leads to remittances that fund the investments in improved homes.
Tertiary level education is also featured and takes up a relatively large share of the spending in the lowest-income quintile.
Business investment however is not well represented. To understand why, we will zoom in on the individual stories and data of our diarist (see the below figure, which disaggregates investment spending for each individual).
Starting at the left of the above figure, we tracked the diarists at serial #1 and #6 as they spent large sums to get children sent overseas to work. Both have now succeeded, and #1 has already bought some bricks in anticipation of rebuilding her old-style mud house. #2 through #5 all sent children overseas before the study was conducted: in their case we now see heavy spending on constructing brand new homes in reinforced concrete. This group of diarists all enjoy large remittance-based incomes but are originally from poor farm-based local families. All six of them feel that the new houses are there for the next generation, rather than for themselves, and enjoy the sense that they have achieved this inter-generational investment.
Several diarists invested in businesses, but only two of them committed more than a quarter of their net expenditure to business investment. The diarist at #10 is a young man, recently married with a small child, who has some training as a mason. He saw an opportunity to buy a used battery-assisted rickshaw as a second line of business for days when there’s no masonry work available. At #31 we have a farmer who suddenly decided, late in life, and to our surprise, to go back to a business he had tried as a youngster and open a restaurant.
But why don’t we include shop inventory purchases as business investment? It is because the shopkeepers (and other retailers) in our sample finance their inventory from turnover, not from investment. We can see this in the below figure, which shows the daily shop sales and stock purchases for shopkeeper Karim for a recent two-month period (in that time his sales exceeded his purchases by $509). The pattern has been the same since we started tracking him in autumn 2015. Each day, he takes his takings from the previous day to the market and buys fresh goods to sell. We have not seen him make changes to his shop, nor to his range or goods, nor to his manpower. He has not made any fresh investment in his business. Even though Karim did receive a microfinance loan for his business, this loan was used mainly to finance turnover, and has not generated actual long term investments.
Financing the investments: the role of MFIs
We have seen that the big investments in home improvement are financed mainly from overseas remittances. What about other investments? Bangladesh is famous as the original home of microcredit, so we might expect microfinance providers (MFIs) to feature prominently in our diarists’ spending, especially business investments. As the table at the top of this article suggests, almost all the 50-strong sample have one or more accounts at MFIs (or at their rivals, the Co-operatives). 42 hold savings in MFIs, 41 have borrowed from MFIs at some time, and a majority have MFI loans outstanding right now. 11 of the diarist receive income from remittances
Our daily data allow us to estimate with some accuracy how MFI loans are spent, and several other articles on the diaries have explored this. Here, we will look specifically at the range of investments shown in Figure 5. We find that there is no simple pattern such as “MFI loans go to business, and other investments are funded from other sources”, even though some MFIs still claim that their loans go only into business investment. Reality is much more complicated than that.
For example, although large-scale home building was funded largely by remittances, MFI loans can be used to ‘bridge’ the period between remittances inflows. Indeed several MFI loans were used as ‘bridging loans’ and in fact repaid through remittances inflows. Second, loans are often taken by migrants to cover the costs of cross-border migration. In Bangladesh some MFIs have recognised that overseas employment is a powerful anti-poverty phenomenon and are trying to help more people go abroad by offering loans specifically tailored to pay the up-front costs of migration, repayable once the remittances start to flow. This scheme is too recent to affect most of our sample, but we have one diarist who is negotiating for such a loan right now.
Business investment is mostly funded privately, from savings and from informal loans from relatives. But again, MFI loans do have a role, sometimes as ‘bridging loans’, but more often as ‘refinancing’ loans. Business investors who borrow informally face the problem that their creditors prefer to be repaid in whole or in large part, rather than bit by bit. It makes sense to borrow from an MFI, use the MFI loan to make a big repayment to their informal creditor, and then repay the MFI loan in small weekly amounts from turnover. It can be hard to persuade an MFI to finance a business that is not yet set up, so borrowing privately to start a business makes it easier to get a subsequent MFI ‘refinancing’ loan.
Shopkeepers are among the most frequent MFI borrowers, and are much loved by MFIs because they have regular turnover from which the weekly repayments can be made, are not likely to ‘flee away’ from their repayment obligations and may be sited on roads that can be reached easily by the MFI officer’s bicycle or motorbike. Moreover, lending to shopkeepers can be represented as an obvious example of ‘lending for business investment’. However, this is not always the case. As we saw with Karim, shopkeepers buy stock out of takings. MFI loans are not convenient for stock purchases, since the loans are too big, too infrequent, and expensive. Successful shopkeepers like Karim borrow rarely from MFIs, and when they do, they spend the loans in other ways: Karim for example bought a cow for his aging parents to rear and helped a sister through school. Karim repays these loans weekly, out of earnings.
Less successful shopkeepers can equally be the victims, rather than the beneficiaries, of MFI lending. In Dec 2015, Jharna ran a small shop like Karim’s, but on a main road near several MFI offices. MFI officers persuaded her to take many loans. Repaying them swamped her business and it finally collapsed in 2016/2017, (see the below figure)
On 19th December she took an MFI loan of $940. That day and the next she used big chunks of that loan to repay two other MFI loans. On 9th December she made a big repayment (funded by a private loan) to the MFI from whom she reborrowed on the 19th. These MFI dealings sit on top of her everyday shop transactions which, fundamentally, are similar to Karim’s. She made a small surplus on her shop sales and purchases, but lost too much of it to interest payments on MFI debt.
Some of her MFI loan money went into shop stock (especially on 20th and 21st December), but most of it didn’t. Much went to repaying the previously taken MFI loans (9th, 19th and 20th December), but a good amount went to other uses and in these, counterintuitively, is where the good side of Jharna’s MFI story can be found. She has two daughters, both of whom were ambitious for higher education. Their schooling and other costs were met mostly from gifts and private loans, but also from MFI loans. Jharna, who has now shut her shop, held on to it partly to ensure that she could attract MFI loans when she needed them for her daughters. Now that both daughters have finished college and one has been offered an apprenticeship in a hospital in Malaysia, she is enjoying a respite from her stressful financial entanglements.
- the 50 financial diaries revealed that the household spending on ‘survival’ goods and services absorbs around half of all net expenditure, ranging from 70% for the poorest down to 40% for the least poor
- for the diarists who live in an area where overseas work migration is well established, sending a family member overseas is the favourite strategy to improve life. The subsequent inbound remittances from migrant relatives are overwhelmingly invested in real estate, in particular in reinforced concrete homes
- by comparison with home construction, the proportion of investment that went into businesses was small, perhaps surprisingly so, but even the poorest households are prepared to invest in tertiary education and training
- the financing of investments is not a simple matter of ‘MFI loans for business’. The study shows that other sources of funds not only complement MFI loans, but that that MFI loans often play a secondary role in business investment as ‘bridging’ and ‘refinancing’ loans. Additionally, MFI loans are often used for non-business investments.
- the shopkeepers in our sample rarely invest in the expansion or reform of their businesses, and they finance their stocks from turnover. As a result the loans that MFI workers thrust upon them are more likely to harm than help their businesses, though they may help finance other needs such as education and healthcare .
The United Nations Capital Development Fund (UNCDF) has supported a variety of financial diaries studies. This includes: