Abstract
Financially vulnerable, low-income individuals are more likely to experience financial exclusion as they are unable to access financial services that meet their needs. How do they cope with economic instability, and what is the role of social networks in their coping strategies? Using financial diaries, we explore the day-to-day monetary transactions (n = 16,889) of forty-five low-to-moderate income individuals with restricted access to mainstream lending in Glasgow, UK, over a six-month period. Our sample includes users of microcredit and financial advice, as well as nonusers of these services. Findings reveal that informal lending to avoid the pernicious effects of short-term illiquidity was pervasive among these individuals. However, taking informal loans often strains valuable social capital and keeps people from building up a formal credit footprint. Our findings suggest that financially vulnerable populations would benefit from policies that focus on alternative financial mechanisms to help stabilize income-insecure individuals in the short-term.
Highlights
Recent studies have highlighted the importance of short-term income volatility on the lives of the low-to-moderate income groups of the population
Financial exclusion is a dimension of social exclusion (Wilson 2012), and unequal access and use of financial services have been linked to income and socioeconomic inequality and poverty (Affleck and Mellor 2006; Beck and Demirgüç-Kunt 2008)
Diarists were making decisions related to financial services such as buying insurance or taking out or paying back a loan approximately every other day, with most of these transactions being related to credit (72 percent), followed by insurance (12 percent), and savings (8 percent)
Summary
Recent studies have highlighted the importance of (increasing) short-term income volatility on the lives of the low-to-moderate income groups of the population. In 2017, half of the UK adult population showed characteristics of potential financial vulnerability, such as limited financial resilience; low financial capability; suffering a health-related problem that affects a person’s day-to-day activity; or a recent life event, such as redundancy or job loss, unexpected reduction in working hours, bankruptcy, relationship breakdown, serious accident or illness, bereavement, or becoming the main carer of a close family member (Financial Conduct Authority 2018) This vulnerability is more acute for the low-to-moderate income group, aggravated by low income and irregular unreliable pay combined with frequent expenditure peaks (Financial Conduct Authority 2018; Tomlinson 2018). Economic theory and empirical evidence indicate that inclusion in financial systems can enhance individual welfare through: (a) improved risk-management, consumption smoothing, and cushioning against “asset-depleting” strategies after an economic shock; and (b) efficient allocation of capital, partly by allowing access to riskier, potentially highly profitable, investments (Honohan 2008)
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