Real banks can prosper serving urban poor

It is probably a rare book that quotes both Stephen Leacock and Adam Smith. This useful work of economic and social analysis begins with a quotation from Leacock's 1910 comic sketch My Financial Career, in which the protagonist is excluded from relationships with banks because of perceived mockery by bank staff:

"I caught the echo of a roar of laughter that went up to the ceiling of the bank."

However, for many of the modern urban poor, ill treatment by mainstream banks is no joke. Author Jerry Buckland, who teaches in the international development department of Winnipeg's Menno Simons College, shows how this is indicative of an institutional culture and branch-location strategy oriented to serving middle- and upper-class customers.

This ill treatment is one of the factors that leads to exclusion from mainstream bank services and reliance on fringe banks (cheque-cashing outlets, payday lenders and pawn shops).

The problem with being unbanked or under-banked is that much higher fees are paid for transactional services by those who are least able to afford them. In addition, developmental services (savings and credit for major investments) are unavailable.

Hard Choices ends with a quotation from Smith's 1759 book The Theory of Moral Sentiments. Many will be surprised that the poster boy for capitalism urged the restraint of self-interested action in favour of the public good.

"The wise and virtuous man," Adams wrote, "is at all times willing that his own private interest should be sacrificed to the public interest."

Indeed, Buckland argues that recognizing financial exclusion and providing relevant accessible services to the urban poor can be profitable for mainstream banks and good for the economy through decreasing the rate and depth of poverty.

In the approximately 200 pages between the two quotations, Buckland presents a balanced, evidence-based and accessible analysis of the causes, context and consequences of financial exclusion.

But the book is about more than financial exclusion. It includes a lucid description of the financial-services industry and the social and economic theories that explain its operation. It provides an analysis of income distribution, poverty and income inequality in Canada. It also includes useful insights into the everyday lives of the urban poor. Many of these are from Winnipeg.

Buckland argues that financial exclusion is caused by three factors:

-- The abandonment of poor customers by mainstream banks and the filling of the vacuum by fringe banks.

-- Inadequate public policy, especially in the areas of banking regulations and consumer protection.

-- The constrained choices of the poor to use more accessible and friendly fringe bank services, despite higher cost.

Therefore, solutions must influence mainstream banks, public policy and the financial literacy and behaviour of the poor. Buckland examines the full range of possible responses, from radical restructuring and practical reform to maintaining the status quo.

One of the most interesting responses involves community banking projects. They are based on partnerships among community non-profit organizations, banks or credit unions and governments.

Lower profits for banks are justified on the basis of the competitive advantage flowing from their protected market niche, and for credit unions because of their community benefit mandate. Public funding is justified based on the economic benefits of the projects beyond their customers.

Buckland has performed the role of the activist intellectual very well in writing an intelligent, accessible book about an important social problem.

It will be of interest to general readers who want to know more about social and economic issues and to specialists in public policy, poverty and community development.

Sid Frankel is an associate professor in the faculty of social work at the University of Manitoba.

Hard Choices

Financial Exclusion, Fringe Banks

and Poverty in Urban Canada

By Jerry Buckland

University of Toronto Press, 270 pages, $33

Republished from the Winnipeg Free Press print edition July 7, 2012 J7