The poor always pay more: financial access to address marginalisation.

Attempts to increase financial access for the poor have tended to create bifurcated banking systems, which systematically disadvantage those they are designed to include, and can exacerbate inequality. Institutional reforms are needed to make financial access more equal.

To date, much of the discussion about financial access and its role in creating more equal societies has been centred on the problem of financial exclusion and how to overcome it. This discussion is undoubtedly important. But many initiatives that have sought to overcome financial exclusion have created a parallel or bifurcated banking system in which practices such as a sub-prime mortgages, payday lending, and microfinance are offered to those to who are poor and/or marginalised, whereas other standard banking services such as deposits and regularly priced mortgages are for the non-poor; the experience of the poor is, therefore, substantially different from that of the non-poor. And instead of helping communities overcome marginalisation, products that are more expensive and have stricter repayment terms often contribute to worsening inequality: for this reason they are often described as 'predatory'. Because contemporary financial institutions are known for positioning themselves as essential for households and individuals to meet their housing, education, health and transport requirements, they possess a unique extractive capacity. Poor households and individuals are more prone to dependence on financial institutions: this is a symptom as well as a cause of uneven accumulation patterns.

At the core of uneven access is the emergence of the category known as 'subprime'. This term is used almost exclusively in a Western context and refers to clients, potential and present, who have an impaired credit history, either because of repayment problems in the past or because of missing information: they are thus ineligible for 'prime' lending rates. Outside of advanced capitalist countries, the term is less common because clients who are unable to access mainstream banking products may be described through the straightforward classification of 'poor'; this categorisation implies that their access is limited to that part of the financial system which is geared towards providing inclusive finance.

Regardless of geographical setting, uneven access to retail financial services is largely based on credit scoring practices, often digital, that separate prime from sub-prime customers for financial institutions. Prime customers are mainly middle and/or high income individuals, and are keenly pursued by retail financial services firms; they benefit from intense competition between institutions for their business and thus enjoy attractive rates and terms on services. On the other hand, sub-prime customers have low to moderate incomes and/or financial assets; they are either excluded from mainstream financial marketing campaigns for new products or, often, rejected when they apply to access services and products. (1) In this article I examine why these bifurcated markets exist, how they disadvantage the poor, and what institutional reforms governments could put in place to create a more equal financial system.

Adding responsibility, removing politics

Historically, the concept of a bifurcated financial market is not novel: for example, informal financial systems thrived alongside formal banking systems in South Asia under British rule. Colonial rulers were largely unconcerned with this alternative system and even after the countries of the subcontinent became independent, informal finance was seen as a temporary phenomenon that would cease when the formal economy became strong enough to absorb informality. (2) When, by the early 1970s, it became clear that this absorption was not occurring, the resilience of the informal economy was given special attention by organisations such as the United Nations Development Programme (UNDP), and valorised for its job creation and safety net functions. (3)

But the work of Dr Muhammad Yunus in 1970s Bangladesh illuminated how exploitative the informal financial system could be. His initiatives to free rural Bangladeshi women entrepreneurs from the usurious grip of the moneylender gained traction and eventually resulted in the inception of the now iconic Grameen Bank. The two founding principles of the Grameen Bank were that credit is a human right, and that the poor know best how to manage their own situation. The success of the Grameen Bank came to be celebrated by international organisations and donor agencies, including the World Bank. As a result, it led to the birth of a global microfinance movement, which celebrates self-help and assumes that poverty drives a demand for financial services. But because poverty also impedes access to mainstream finance, it creates a need for specialised --and segregated--financial institutions to serve the poor and marginalised.

The persuasive nature of this narrative is reflected in the tendency of governments, development agencies and international organisations to vociferously back the financial inclusion paradigm. In doing so, these institutions responsibilise the poor by compelling them to be both entrepreneurs and efficient borrowers. Additionally, other issues are depoliticised and attention is drawn away from the unequal structures--including lack of political representation, access to education, healthcare, transport infrastructure, etc--that cause poverty and marginalisation and also allow regular...