Building Financial Resilience

This chapter provides an introduction to the book by first explaining the general approach that it takes and then, second, by discussing who are the key actors in the credit and finance schemes examined. The approach that is taken is to draw on the theory of everyday financialization and theories of human well-being and, with primary research on payday lending and mobile banking, to examine the impact of finance and credit schemes on vulnerable people. Secondary research on other credit and finance schemes are examined and these include microcredit, asset building, and financial literacy. The question that guides the analysis is do credit and finance schemes help (or harm) vulnerable people in ways that they value (not value)?

This chapter provides a number of building blocks—concepts and theories—required to undertake the assessment of finance and credit schemes in Chaps. 3 through 6. The chapter presents evidence for financialization and theories that explain it, landing on everyday financialization as an effective building block to understand finance and credit schemes for vulnerable people. Everyday financialization argues that financialization is bringing finance to more and more people including vulnerable people and this may, in part, substitute for state-based entitlements and thus presents risks to human well-being. This chapter also examines state-based efforts to foster financial inclusion and examines the similarities and differences it (financial inclusion) has with financialization. Importantly this chapter presents the capabilities approach in order to make assessments about finance and credit schemes. Finally, this chapter presents the reader with a brief history of money, banking, and human development focusing on the period since the 1950s.

Chapter 3 presents an analysis of commercial-based finance and credit schemes most notably payday lending and mobile banking. The chapter begins with an analysis of the motives, politics, and ethical considerations of commercial engagement, via credit and finance schemes, with vulnerable people. Commercial motivations for providing credit and finance are, by definition commercial, to generate profit, revenue, and/or market share. These motivations create challenges, from an ethical perspective, when asymmetric power (of banks as compared with vulnerable people) enables the bank to take advantage of the consumer. The chapter digs deeply, through results from research undertaken by the author and colleagues into payday lending and mobile banking. It finds that payday lending in the Global North, particularly Canada and the United States, can harm vulnerable people if the payday lenders rely on repeat borrowers. Mobile banking, particularly in Kenya and Bangladesh, has focused on money transfers, and the evidence is that, in this limited form, it can marginally assist vulnerable people. If mobile banking is linked with small loan schemes, then the outcome might change.

This chapter examines a number of issues to better understand consumer behavior with respect to credit and finance products. Consumerism is a powerful feature in the Global North and is becoming more commonplace in the Global South. Thus issues such as consumer debt, debt and mental health, and the relationship between consumption and advertising are important topics this chapter considers with respect to consumer behavior. Then the chapter digs into recent research from the behavioral school regarding human behavior and the use of credit and places insights from behavioral research into the context of collective behavior and structural barriers. The chapter then unpacks the concept of rationality in the context of decision-making around finance and examines common behavioral insights such as tunneling and unhelpful heuristics. The discussion of bounded rationality has limitations, and this point is explored. As we will see in Chap. 6, bounded rationality is not limited to vulnerable people but is a universal challenge.

This chapter examines a series of credit and finance schemes that are primarily—but not exclusively—delivered by civil society organizations including microcredit, cash transfers, and asset-building schemes. It also examines financial literacy education and nascent financial empowerment programs. The chapter finds that civil society has been a major player in promoting everyday financialization through involvement in these schemes. This is achieved in a variety of ways, from a more holistic approach to microcredit to delivering educational programs that seek to enhance vulnerable people’s financial literacy. The impact of credit and finance schemes offered by civil society generally has a positive but limited economic impact on its participants. Given the civil society approach leads to modest benefits and seeks to control the risks of financialization, there is evidence that it makes a positive contribution toward participants’ economic position, and in some cases we see evidence that it builds their sense of human well-being. However, more work needs to be done particularly to understand how borrowers value (or not) the economic changes that they experience.

The subprime mortgage crisis in the United States in 2008 demonstrated very clearly why the state’s role in bank regulation is crucial. Moreover since more vulnerable people are being brought into the financial system, the state will need to ensure that their interests are protected. The state has various tools it can use to achieve this protection, and this chapter will examine these, including regulating, “nudging”, and providing services including banking (e.g., postal banking) and education. This chapter finds that working for a financial marketplace that is accessible, simple, and transparent is a good place to start. Products need to be fairly and transparently priced and provided, and, especially with credit products, efforts must be made to minimize creating a debt cycle. However, this is not sufficient. The state is the only actor able to ensure that commercial actors’ asymmetric power (relative to vulnerable people) is controlled. Nudging, delivering services, and educating have their role, but regulation and education on financial literacy are crucial.

This chapter concludes the book by exploring four central questions. First, do credit and finance schemes help or harm vulnerable people? The evidence is that finance and credit schemes can help vulnerable people, but because of people’s vulnerabilities and the need to consider how financial changes affect what people value, evidence must be strengthened to demonstrate these are effective means to improved human well-being. Next we look at the question of is consumer rationality amenable to healthy relations with a creditor or financier? The book concludes that behavioral insights are important, but these insights must be understood within a holistic view of human rationality that considers collective action, structural barriers, and long-term adaptations. However, regardless of participants’ views and knowledge, if they are vulnerable and relative to large financial service firms, an asymmetric relationship will exist. The next question is does the supply side of financialization promote healthy consumer financial behavior? The chapter argues that in the face of imperfectly competitive firms and vulnerable people, commercially delivered finance and credit can sometimes prove harmful to borrowers. Finally, the chapter examines the question of can the state step up to promote more healthy consumer and producer interaction with credit and finance. The state must understand the limited function of finances within the multifaceted needs of its citizens.