Is Financing Mobility a Solution to Poverty?
By Shawn Cole, Rema Hanna, and Petia Topalova | Shawn Cole is a professor at Harvard Business School interested in corporate finance and banking in developing countries. Rema Hanna is a professor at New York University. Her work focuses on the provision and the impact of public services to the poor in South East Asia (mostly focusing on India). Petia Topalova is an economist in the research department at the IMF. Her research interests include trade and development, financial services, and development in South Asia.

Poverty and unemployment persist in many parts of rural India. Income derived from agriculture is often not enough to sustain a family, and underdeveloped agrarian regions offer few other employment opportunities during the months between harvest and sowing. Additionally, agricultural crops are particularly vulnerable to natural calamities—droughts, floods, and fire—that can have a large impact on household income. To supplement their livelihoods, individuals often engage in seasonal migration. The true extent of internal migration within India is unknown. Official estimates of migration seem deceptively low. The 2001 Indian Census suggests that less than 17% of men live in a location different from their place of birth ¹. However, these surveys often fail to capture the short migrant spells that are typical for households engaged in agriculture. Moreover, many migrants still consider their village of birth their home, even if they spend most of the year in another location. More detailed village case studies hint that migration is much more prevalent than the official statistics show. To better understand the extent of migration and the particular challenges faced by migrant workers, the Centre for Micro Finance conducted two case studies in Jkarahand/Bihar and Orissa in July 2006. The case study in Jharkhand and Bihar was conducted with the support of Ajivika Bureau, a MFI operating in these states.

Working with Ajivika staff, CMF interviewed 21 households with at least one migrant member in Deoghar district. CMF also interviewed 16 men who had recently returned from working in another location and 11 families which did not yet engage in migration. The case study in Orissa was conducted with the support of Adhikar, a registered society headquartered in Bhubaneshwar that has been working in the areas of legal literacy, workers' rights, microfinance, and the social sector for the last 10 years. CMF conducted 10 in-depth qualitative surveys across 10 villages where Adhikar is active. All families in the survey were chosen because they sent migrants to Gujarat and used Adhikar's financial services. Three families who had not yet engaged in migration were also interviewed. In addition to compiling demographic profiles of migrant families, the survey team asked detailed questions about the reasons why members of their family did or did not engage in migration. Finally, the surveys discussed with households what financial services were available to them, and what additional financial services they required. The Migrant Situation: In the areas covered by the case study, seasonal migration was high. Take, for example, Deoghar district of Jharkhand. With few irrigation facilities, agricultural output is weak. As no major industries operate in the area, families have to rely on local tourism for employment. However, the tourist season lasts only a month, and can employ a few members of the family. As a result, survey respondents claimed that about 95% of the men in the villages had migrated for work at one point. Exact reasons for migration varied. One household described how a drought left crops destroyed; they were forced to sell an asset and a family member undertook a four-month migration spell to Mumbai. Another household's house was destroyed in the monsoon, and they needed money to rebuild it. Migrants typically traveled to a wide range of locations, including Mumbai, Durgapur, Kolkata, and Delhi. They were employed in welding, carpentry, and shoe factories.

Payments were often irregular, with daily payments around Rs. 60–120 per day. Migrants working in agricultural jobs earned around Rs. 30 per day. A similar situation exists in rural Orissa. The average landholding is less than one acre, and few have access to irrigation. While the central and state governments have introduced employment schemes, wages tend to be much lower than what an individual can earn in other states like Gujarat. Common occupations for migrants include weaving in textile mills, welding, and porters in railway stations. Many chose a location to migrate based on information from relatives who had migrated before. Similar to the migrants from Deoghar, they were paid irregularly and salaries depended on the type of work done. For many families, remittances were the principal source of income. Migration and Banking: A lack of access to financial services remains a key difficulty for migration in India. Formal banking channels are largely inaccessible to the migrant population. Some lack the official identification required by formal banking institutions. Others are unable to maintain account minimums. As such, migrants often have no access to credit and to secure and affordable remittances services. Access to Credit: Access to credit is essential to migrate. There are large up-front costs of migration, such as train tickets and set-up costs in the new location. In Jharkhand, the up-front costs of migration varied by location: roughly Rs. 1,100 for Mumbai, Rs. 500 for Kolkata, and Rs. 50 for in-state cities. From Orissa, all migrants went to Gujarat, and paid Rs. 500-800. Seven out of nine families stated that they took loans from moneylenders, shopkeepers, or relatives to finance the trip; the remaining two financed it from savings. Without access to credit, those who could profitably find employment in other regions do not migrate, or do not migrate to locations that, while further away, would give the highest returns. Even though poverty is a major push factor for migration, the substantial up-front costs and lack of credit (or credit at excessively high interest rates) may immobilize those who would benefit the most from migration—the poor and landless.

Remittances: Cheap and fast remittance services are often unavailable in rural areas. In Jharkhand, one household used informal systems (the hawala system), which only took one day, and cost about 5% of the transfer. Most other households used the post office. One household claimed that a money order from Kolkata took between 15 and 20 days, and that the postman typically took a cut of Rs. 15-20. From Delhi, others claimed that it took 8 days to 1 month, and that the postman took Rs. 10-20 for every Rs. 1,000. Both the hawala and the postal system are not necessarily safe. Informal systems may, for example, be vulnerable to crime. One household sent money back with a relative, who ended up getting pick-pocketed. A substantial amount of money, Rs. 4,000, was lost. It is hard to find money that gets lost in the post office system as well. One household described how a money order never reached the family. After a complaint was filed, it took almost four months and Rs. 300 to track down the money. The lack of remittance services may have important consequences for migration. First, families may choose shorter migration spells, thus limiting their choice of jobs. Second, households are at the whim of the post office, which has a virtual monopoly of the market and has been known for delays and corruption. The delays are especially problematic in case of emergencies, for example when illness strikes and money is needed for the doctor. Innovative Financial Services for Migrants: Due to the growing need for financial services for migrants, Adhikar set up an innovative remittance system between Orissa and Gujarat, the most common destination of migrants from Orissa. As part of its case study, CMF conducted a process evaluation of their program. Adhikar's program, "Shramik Sahajog," started in Gandhidham, Gujarat in September 2002, and was expanded to Surat in January 2004. Remittances are collected at the destination office. Details of remittances made are emailed to the Orissa office every Monday, Wednesday, and Friday. Money is then delivered to the door of the migrant's family within three days. The service costs 3% of the amount transferred plus an additional Rs.10 for doorstep delivery.

The program also encourages savings. Clients are required to deposit a minimum of Rs.100 per month, against which they earn 6% monthly interest and are issued a passbook with their photograph for the said savings account. They are eligible to get a loan against the balance in the savings account (at a 2% interest rate) and can withdraw money when needed (for example, for the up-front costs of a new migration spell). Every client has a unique code. The clients who do not deposit under the program are eligible to remit money, but they can not get loans and they do not have a code number. Service charges are the same for both clients. The families studied in the Orissa case study used this service and reported a high degree of satisfaction. Next Steps: The case studies illustrated a need to understand and systematically document the banking needs of seasonal migrants. Moreover, we still have very little understanding of the impacts of the remittances programs on the lives of the rural poor: How does access to a cheap remittances program affect migration spells and employment choices? How does it aid families when an emergency (crop failure, illness) strikes? As such, CMF plans to work on better understanding the basic needs of migrants, and the impact of improving financial services on the livelihoods of the rural poor.