A strangely socialist fetish for finance

Yesterday was July 7th, which according to Malawi’s somewhat mysterious accounting rules marked the end of the month. That means one thing: payday, and therefore lines of dozens to hundreds of people at the bank. Once a month basically every Malawian employed in the formal sector lines up at their bank’s ATM to withdraw all the money they’ve been paid. These are not people who are particularly infatuated with the wonders of modern finance. Word on the street is nobody trusts the banks, since sometimes you can’t get your money out.

So why on earth are they using them? I don’t have solid evidence on this, but I do have plenty of hearsay and conjecture, which are kinds of evidence. Apparently the government requires its own employees, and many other people with business-type jobs, to be paid through direct deposit against their will. They prefer cash, so they line up to get it.

Put this way, the idea is obviously a silly one. Malawi is a cash economy, and it would make more sense to pay people in something they can use. This approach does have the upside of reducing logistics and overhead on the part of the employer, but I doubt that’s the reason. My development spider-sense tells me the real reason is that various white people who control grant and aid money think financial development is awesome and want everyone doing it, so the local government has complied.

Indeed there’s a whole branch of development work that’s dedicated to the use of finance to help people out of poverty. The fact that economists are so big on this approach (Dean Karlan’s new book is almost entirely about various microfinancial interventions) is especially odd. Left to their own intentions, markets in developing countries would have little or no formal finance. In order to believe that financial interventions are worthwhile we have to be convinced that markets in these places aren’t sufficiently free or competitive. This is entirely possible, and, I’d say, likely – but I think we’re about 50 yards ahead of the ball with all this promotion of banking and so forth. Even with outside support finance in a place like Southern Africa is expensive, inconvenient, and basically unwanted. We have to figure out why markets aren’t working right, and how, before we jump to the step of making every person in Zomba spend an hour in line at the ATM once a month.


About Jason Kerwin

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2 Responses to A strangely socialist fetish for finance

  1. Jessica says:

    What’s the alternative payment system, though? Paying in cash is most likely, and it sounds to me like what you are recommending. But there are disadvantages there, too. People would still have to wait in line, though there would be different lines at different employers. Managing a cash payroll is a big cost to employers and carries real security risks, but banks specialize in cash transactions and can perform them more efficiently. I know of at least one industry (the tea industry) where employers WANT to get out of the business of making payments, and are partnering with banks to move to direct deposits of their own volition and for business reasons, not because of outside interference from development agencies. In this case, the business is willing to pay the bank to take over payroll!

    Moreover, many individuals in Malawi opt for direct deposit when it’s offered to them on a voluntary basis. Your claim that that banking services in Malawi are “basically unwanted” is certainly overstated, and can be refuted with evidence from research that I and others at U of M have been involved in! I’ll concede that banking is expensive, but it’s only inconvenient if you fail to consider the alternative. (Note: paying with checks is not a better option. First, Malawi is trying to phase out checks because of fraud. Second, checks still have to be deposited or cashed. Third, they carry higher transaction costs.)

    Also, it’s not necessarily because they don’t like banks that people withdraw money as soon as they are paid. People tend to be cash constrained and have bills to pay immediately. They withdraw cash because they plan to spend it quickly, not because they inherently dislike or distrust banks. Now, one institutional improvement might be to reduce the withdrawal fees — since people pay a flat fee per ATM transaction in Malawi, they can save money by making fewer large transactions rather than more smaller transactions. That alone wouldn’t reduce the lines immediately after payday, though.

    Finally, there are other reasons that payments via direct deposit may be welfare-improving. One is that having money in the bank removes the immediate, visceral utility of consumption, and may therefore lead to more savings and less temptation to spend on small luxury purchases that are regretted later. Having money in the bank can also function as an excuse for denying a friend or family member who asks for money — “sorry, I don’t have any right now.” Transaction costs can be your friend. Again, we have evidence for some of this in our research with tobacco farmers, and we’re looking into it in other populations. But I’d say that Malawi needs more financial services, not fewer. The system isn’t perfect, but a well-developed financial services sector can help people smooth consumption, invest in profitable businesses, and manage their household affairs.

  2. Pingback: Why don’t Malawians (typically) use financial services? | MethodLogical

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