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10.24.2013

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Why poverty persists?

From 28th to 30th October 2013 will be held in London the Global Forum for Financial Inclusion in 2020 . The Forum will provide an opportunity to develop an action plan to achieve financial inclusion by 2020 and will bring together many industry actors in a collaborative environment such as Sendhil Mullainathan .

Sendhil Mullainathan, economist from Harvard, accompanied by Eldar Shafir psychology teacher at Princeton, conducted research to find out what influence scarcity has on our lives, our society and our culture.

In their recent book “Scarcity : why having too little means so much”, they try to answer, among others, the following question : Why poverty persists?

These show that once people begin to think in terms of scarcity and the strategies it requires, daily problems of life become harder. Accordingly, scarcity hypothesis tell us about the reflection on our own habits but also on financial inclusion.

According Sendhil Mullainathan , scarcity in the financial resources as well as in time and social relations lead to a strong focus on the missing resource that would have negative effects on the way we think and act in our lives. If this is true, then the financial inclusion appears as an change-maker which would reduce the scarcity and its effects.

For those who live in poverty, this may have serious consequences, pushing them in a scarcity mentality that accentuate their poverty. For the authors, this would explain many behaviors that we see at the base of the pyramid .
Moreover, in the wake of this mindset, small economic contingencies such as illness, change in incomes, unexpected expenses...perpetuate the mentality of scarcity.

How financial services can alleviate this scarcity?

Financial services may both prevent and help people to fall into such a state of mind guiding them to not make bad decisions caused by a scarcity mentality which could be unfavorable.

People living in poverty need financial services to help them build savings. Thus, loans to generate savings and savings accounts could solve this problem.

On the other hand, people living in poverty need financial products that prevent or mitigate crises from unexpected financial shocks.
For example, a product for farmers that helps to smooth income between harvests or loans, savings or insurance for special events (weddings, funerals ...) that allow to allocate funds to the most opportune moments.

This is why the financial inclusion has a much more important role than we think in providing financial services that could have psychological effects and contribute to help people make good decisions for themselves and their families.
This hypothesis then recognizes the role of understanding behavior in the creation of financial products and promotes financial capacity; principles that are part of the roadmap for financial inclusion by 2020.

Know more about financial inclusion in Peru and in India !

Know more about the Global Forum for financial inclusion by 2020

Sources : CFI – Blog

Tags : financial inclusion, scarcity, global Forum for financial inclusion, Sendhil Mullainathan, Eldar Shafir, financial products, MicroWorld