Savings is about change – changes in people’s attitudes about the small change in their pockets. And, in some cultures, change is about chance.  Take Brazil, for instance. Commercial and state banks as well as lottery houses offer savings products, called titles, where customers are guaranteed to earn no interest at all at best or, lose up to 50% of their investment at worst, all for the chance at a prize.

While to many Brazilians interest is of no interest, a winning number is in fact rather interesting: it can bring about a transformational change in the life of the saver – a car, a trip, a mass of cash. 

It works like this: Pay a visit to your nearest bank or lottery house. (Incidentally, a lottery house is a legit storefront where you can gamble and also pay your utility bills.) Sign a contract for a term of up to three years, or even longer.  Then every month make a payment – it can be as small as $5 – for the length of the term, during which time you are eligible to win cash prizes. Or, if you prefer, pay for your product in a single lump sum at the beginning of the term.  However you choose to pay for what you wish to stash away, you face a blend of risks: it is uncertain that you will win a prize, but quite certain that you will forfeit any interest that a “normal” deposit would give you.

Ironically, this product is named “capitalization” (capitalização), which seems, to quote my President, “like putting lipstick on a pig. It’s still a pig.” Maybe this pig is only half as ugly as the pure lottery pig, but that doesn’t make it pretty.

Capitalization is part of the formal, regulated financial system in Brazil.  With its lottery-like features, it can be sliced and diced to fit any market niche. Are you Japanese-Brazilian? Good, there is a capitalization product just for you.  Will you support a particular soccer team for the next World Cup? Even better, designate whatever “principal” remains - after your purveyor has munched it away - to the team you favor.  Do you work for a big company? Chances are your employer has bought you a capitalization contract as part of your annual bonus. The company purchases the title (and loses a lot of money) while you get a chance at a prize.  Win-win? Thanks, you say, but you’d prefer a raise.

All this does make one question the idea of financial inclusion. Is including people, poor people, in a formal, regulated financial system always desirable? Is it by default a good thing? The regulators - in this case a supervisory agency not the central bank - seem under the spell of an aging movie star who promotes a very popular saving-whilst-gambling product. Weirdly, regulators have decided that if a customer wishes to have 100% of her money returned at the end of a capitalization contract, she completes more paperwork than if she settles for only 50%. “A lacuna, indeed,” one banker remarked. Indeed.

Reader Comments (3) 

I was looking back over some notes from one of our recent studies on how young people manage money and kept bumping back into lots of young men talking about why they gamble in card games. They never talked about losing, only how much it helped their families on the days they won big. They said this was actually a pretty smart way to manage your money. It occurred to me that if the same boys play every afternoon--and it appears this is the case--and the game is mostly a game of chance (here I don't know), gambling on card games may be little different from a ROSCA.

Sun, July 10, 2011 | Julie

Julie - as long as their is not a house that takes part of the wagers, it can be a good deal. After all the same players are playing and will eventually win back what they played. As you say, not unlike a ROSCA. But Capitalization has a "house", it's called a formal bank and they also take part of bets. Even Jogo do Bicho does. The aggregate pay-outs are always less than the aggregate pay-ins. But the adventure as one man put it seems to make up for the certain loss.

Sun, July 10, 2011 | Kim Wilson (Orientrow@yahoo.com)

Interesting, interesting. Isn't this all about lump sums? As Portfolios of the Poor made clear, there are these opposing completely contradictory desires in finance for the poor, which manage to co-exist. One is of course income smoothing, or moving resources from richer times to poorer times. But the other is the exact opposite, the desire to acquire lump sums, to invest, to take advantage of an opportunity, to pay off debts, to fix the roof, to pay school fees, or to have a party. Gambling seems to fall in the latter camp - it's about the hope of getting lump sums. All sorts of behaviors in many countries show that people will pay to have lump sums even if they have to pay out more than what they can expect to get. That's true of the susu collectors in Ghana, lotteries in convenience stores in the US, card players everywhere, and your Brazilian friends. Gambling is one addiction I don't have (he says, sipping his cappuccino). I'm more aligned with the other thing our president recently said, "It's time to eat your peas".

Mon, July 11, 2011 | Paul Rippey