Poor Economics: Rethinking Poverty & the Ways to End it

by Abhijit V. Banerjee

Indeed, if the lack of self-control is sufficiently serious, it would be worth paying someone to force us to save. For example, we might prefer to run the risk that the mortar on our freshly built walls might get washed away by the rain so that we wouldn’t have to keep the cash on hand and risk that we might, on a whim, use it all for a party. And somewhat paradoxically, some MFI clients may borrow in order to save. A woman we met in a slum in Hyderabad told us that she had borrowed 10,000 rupees ($621 USD PPP) from Spandana and had immediately deposited the proceeds of the loan in a savings account. Thus, she was paying a 24 percent annual interest rate to Spandana, while earning about 4 percent on her savings account. When we asked her why this made sense, she explained that her daughter, now sixteen, would need to get married in about two years. That 10,000 rupees was the beginning of her dowry. When we asked her why she had not opted to simply put the money she was paying to Spandana for the loan into her savings account directly every week, she explained that it was simply not possible: Other things kept coming up.