> Posted by Jacqueline Urquizo, Independent Consultant
Microfinance institutions (MFIs) have many questions to consider when developing new products. What are the future clients doing now? What are their motives? What characteristics can help segment clients into appropriate groups? How large is the clientele? Are there enough potential clients to warrant introducing a new product? How likely are clients to change specific behaviors? Are there key relationships between savings, credit and insurance needs?
We need answers to these questions to design products that respond to the market’s needs and are economically viable for institutions to provide. My research into how clients interact with financial services, The Financial Behavior of Rural Residents: Findings from Five Latin American Countries, looks at exactly these questions.
Many of the findings are intriguing. I was excited, for instance, to find that for many clients, the amount they save is more closely related to the objective for which they are saving than with their socioeconomic level.
I have no doubt that some of the findings described in the report are known to those who work close to the rural market; other findings perhaps are new. The purpose of the report was to aggregate the findings on consumer behaviors in one place that can serve as a resource to help the MFIs forecast demand, build a map of consumer beliefs for marketing purposes, and set up baselines to measure product performance.
Certainly the study reveals the need to develop better credit offerings for the rural market. It also showed how often the potential clients combine credit and savings to reach their objectives. Also, the study shows different ways of savings that we need to keep in mind when developing a product, especially the fact that saving is not always done little by little as, on average, 25 percent of the sample save from extra income received in one large lump sum, for example from a crop sale.
I’m inclined toward the idea of having a metric of the level of commitment to savings in specific markets. The study found that 13 percent of consumers set aside savings before spending newly acquired income. However, 60 percent of the target market saves after spending. They set aside what is left over after paying their expenses. “Saving before spending” indicates that the individual is prioritizing savings before all else. As a market gets more accustomed to saving we should expect to see more people “save before they spend”. From what I know about other regions, I suspect that this style of saving is higher in Asia and Africa.
There is still more to research and learn about rural households. I recently spent time visiting a livestock trade market in rural Colombia. I found many interesting similarities between this market and stock exchange markets; but instead of stocks and bonds there are cows and pigs. I would love to investigate and develop ways to increase liquidity in rural markets. Two examples of low liquidity in the financial lives of the rural poor: livestock is used as an investment and currency at the same time, and the present consumption of households typically relies on their future income after harvest. Developing financial tools to facilitate greater liquidity would address an important financial need. I was thinking of forms of factoring (microfactoring?) or mechanisms using the concept of warehouse receipts. Could technology help to make these ideas work?
In a similar vein, it is noticeable that insurance services underlie the success of other financial products, especially for farmers because of the inherent risks in agriculture. Insurance makes it easier to take on credit and supports long-term planning— both of which are essential for rural households. With accident insurance, for example, households might use part of their backup savings for investment rather than as a form of insurance.
I hope others are able to build on these findings and deepen our understanding of how financial service providers can better address client needs.
Image Credit: Accion
Jacqueline Urquizo is an independent consultant working on Market and Consumer Intelligence, Strategic Marketing and Product Development for low income markets. Formerly, she was the Product Development Team Leader and Market Intelligence Senior Director at Accion.
Have you read?
The Financial Behavior of Rural Residents in Latin America
Understanding Savings Behavior: A Comment on “The Financial Behavior of Rural Residents”
What Do We Really Know About Financial Behavior in Rural Areas?
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May 30, 2012 at 5:32 am
John Gitau
I have picked three things from your contribution Jacqueline: 1.The save before you spend paradigm lagging behind the save after spending and the need to expand the paradigm. I am wondering, what motivates some people to save first and stick to that model? Is there something they know that the others can learn. The reason is that empowerment can only come from that model. The alternative is just too risky. I would be curious to know the reaction of the ‘save after sending people’ to what the save before you spend’ say about why they practise their model. That can bring out a way of thinking as a resource to expand the save before you spend paradigm band. 2. I guess insurance is not such a favored option because farmers are ordinarily optimistic people going by the vagaries of nature that they have to deal with. That challenge it seems motivates them rather than making them cower under the umbrella of insurance. Insurance makes a lot of sense in unpredictable circumstances and it is difficult to understand why the uptake is still low. I don’t think it has to do with awareness or cost. Again, it would be interesting to hear from farmers why they don’t consider insurance as a must consideration. Could be they have a perspective worth studying. 3. On technology as a way of increasing market liquidity, the answer is in the question. Yes, it can be done and by you asking the question, someone in IT would pick that up and there comes a solution. We cannot all know everything but knowing how to ask appropriate questions resulting from challenges we encounter is good enough as others will pick the questions and convert them into solutions that further empower people. When that happens, Jacqueline, you will have contributed in a big way to the solution. So, let us keep asking without feeling obliged to come up with solutions ourselves as others among ourselves will pick them up. All paradigm shift s originate from questions.
Your perspectives are great Jacqueline!
June 4, 2012 at 4:14 pm
Jacqueline Urquizo
John, thank you for your comments. At your first point: Saving before spending often means a person is prioritizing savings over consumption, for example, when shop owners set aside part of their daily sales before to use the remaining income. This is not a new savings model, salaried workers that are directly paid through a bank often have an option that makes saving easier with a monthly automatic debit from their transactional account to a savings account. However it is not as easy for unbanked independent workers, commitment savings accounts aim to do this. I don’t think this is a risky alternative since the savings would always be available for use. (As I mentioned in my report, “no matter what is the initial motivation for savings, when an emergency arises, cash savings are the first to be used”). As far as the motivation, from what I have observed in my experience, the savings before spending model is mostly used when a clear objective wants to reached.
I agree with your opinion that insurance is not a favored option because the “farmers are optimist…” My post, above, refers to the optimal combination of financial products despite the fact that the insurance in our target market is not well developed yet (it should be but it is not). I’m sure you know how much effort diverse stakeholders are putting to make insurance for farmers and poor people work. My report mentions some reasons affecting the demand for insurance, however I think when developing new markets, the push does not come from the demand but from the supply side. Certainly, to create a primary market requires a different product strategy.
About a solution to increase the liquidity in rural areas, I don’t think it is about just talking with someone in an IT area. I was referring to building a new category of product that can virtualize the farmers’ assets to make it liquid. Developing a concept and business model based on technology should involve not only experts in microfinance but also in commodities, warehouse receipts, regulation, agricultural and IT too. Indeed, technology can be solution for diverse problems in rural areas, I should have asked “how”.
You are right, we cannot all know everything. It is necessary to bring on board a team of experts in each field or product to provide good hypotheses (the questions) of possible solutions to be tested in the market research. In this way, we can have actionable results to design competitive product strategies, functionalities that responses to the client’s need and help design emotional approaches that engage the consumer’s will (the marketing part).
June 6, 2012 at 9:42 am
John Gitau
Thank you Jacqueline for clarifying some issues I may have gotten wrong. What I meant by ‘saving after spending’ being risky is that there is a risk of not saving at all since needs and wants always overtake income.
I like your thought that objective based saving is easier. From a financial literacy point of view, what I internalize from your point is the need to teach goal setting skills. It is easy to assume that our client know how to set goals that are actionable without conflict or confusion.
I appreciate your clarification on It and now see it better and broader.
Thank you.
July 28, 2012 at 1:28 pm
Ruth otima
Interesting discussion; I worked with rural credit clients and lived among them. You are both right; they save for a specific purpose targeting a specific amount. Once that need is accomplished, another need is created. Group “go round” saving is the best models that have worked miracles for those who invest in productive item such a purchasing a dairy cow or paying tuition. The savings cannot be reached given that one has to wait for her or his turn while paying installments to group member whose lump sum is due. It is an intricate and complex arrangement of origination when it comes to “trust” Again it does not involve elaborate paperwork which tech to intimidate rural forks. In developing a saving model, it has to capture short term financial needs with built in intermediate and long term needs while remaining within the affordability of such savings. That way, the client will feel more comfortable and perhaps develop the motivation.
Thank you.
July 31, 2012 at 9:01 am
John Gitau
Ruth,
I appreciate your contribution. The near perfection with which ‘go rounds’ ( I hear it being called ‘merry go round’ in my country Kenya, perhaps merry suggesting fun!) operate deserves a serious study to get the underlying motivation-social/economic. Except for normal delays and fall outs due to some group members’ inability to honour obligation, success is narrated with a lot of passion. The patience, the trust, the commitment are just too intriguing( bigger groups take even a year before the last member gets her turn). If the motive is the goal to get lumpsum to invest, then these women(rarely men) should be teachers of goals setting and goals achieving. I recently got involved in working with 450 rural groups in rural Kenya and discovered that every group member is part of a merry go round with some participating in several of them. On asking some why they like the system, they wondered what type of question I was posing. I remember one lady responding ‘ hey, if one is not a member of a merry go round, what would she be doing?” She made it sound as if it is a way of life.
Ruth, I think the time horizon for timed cashflow are addressed by joining many groups. One lady with four dairy cows confessed being a group member of four merry go rounds, each with a target. She uses milk proceeds to keep contributing to all the four and that was how she had increased her herd.
Merry go round is a system a consultant doesn’t want to touch or even recommend anything on. I was really touched by the story told with sadness how a member of a group fell out from a merry go round when her husband passed on. There was nothing her group members could do for her however much they sympathized with her predicament. The system is so contribution driven to almost an insensitive level. I was touched because for the lady, left with four kids to take care of, that was the time she needed the merry go round more. And that is not all. The merry go round is a social mechanism and when one is out, you almost wonder whether it isn’t equivalent to ostracism.
From my own observation with the groups and using the example of the lady with four cows, with well timed investment that bring constant income( milk from cows, eggs from chicken, revenue from rabbits, manure sale, short season agricultural produce) it is possible to grow and reduce poverty levels. There seems to be a critical size, structure and diversity of investments that create critical comfort level of contribution that can create investment lumpsums leading to better incomes and wealth creation.
As part of my contribution to this perfect mechanism, I am thinking of setting up a small fund in each village run and managed by the local shop keeper. Group members can borrow small amounts for merry go round contributions when stuck and pay later at an agreed structure. For a group member to borrow, she would get a note from her group’s chairlady. This intervention, in my thinking is like grease that lubricates a wheel. Members will not have any reason to default on their turns. The amounts for the common weekly contribution range between Ksh 100 and Ksh 500. Once the systems are working smoothly, then we can go to the next level of supporting individual members’ projects that generate income. I was shocked to learn that one lady member lost her cow because she did not have Ksh 800 to call and pay a veterinary officer. She narrated with pain how she tried borrowing from neighbors and fellow group members but by coincidence, they didn’t have money. With what I am working on, if the village shopkeeper had this second level of small loans, the lady would have borrowed short term on quick notice( with endorsement from her group chairlady). and that would have saved the Ksh 30,000 worth cow with huge potential for future income.
With funding, why wouldn’t anyone want to entrust money with these ladies who work so committedly to their cashflow goals? My take is that little money can go far for these merry go rounds. My current figures show that with $65,000 as a revolving fund, the entire 450 groups ( 11,205 members) spread over a district with a population of 157,000, can smoothen the first and second level financial needs for all the groups. The revolving fund will ensure no group member goes without contribution or investment based money need. Repayment can be structured around the individuals cashflow pattern. The point of access of the cash for the two uses can be a moment to teach financial literacy-look at the budget and cashflow pattern.
Jacqueline, you are the expert in this area and I will appreciate your perspective.
August 1, 2012 at 4:14 pm
Ruth otima
Thank you John; your point of view is intriguing, well thought out and expressed. The Mary Go Round is a life saver to millions of women who never had a chance to count large sums of cash they call their own. The anxiety experienced just a few days to receipt of the cash is overwhelming. What makes the cash more exciting is the fact that it was your sweat to get it; no government, only your trusted friends are around who are all waiting for their turn.
The fall out is real and always come with pain and agony, it always has to do with unplanned expenses that insurance or emergency fund, if was being set aside, could take care of. Appointing a shopkeeper as a custodian may work if he/she is part of the Mary Go Round. The next set of things to set up is what qualifies, repayment of the emergency fund if borrowed, without causing undue stress on the existing Mary Go Round activities. And don’t forget, most of the cash meeting the installments are short cuts in the kitchen after the husband gives out money to meet family dietary needs. That is why losing a husband can almost guarantee a member falling out.
It is indeed a noble suggestion if it can be introduced by the women involved so that they take ownership.
Ruth
August 2, 2012 at 7:05 am
John Gitau
Ruth
I appreciate your observation and tips. You have actually made me think that indeed, if all the groups contribute a specific amount towards the emergency fund rather than me providing it, it would motivate ownership with my role being oversight and ensuring not hitch in its operation. I was not anticipating an interest element on the emergency fund and that is why a grant would have been a good start and with it, no interest would be charged. I am looking at the benefits to the groups if instalments from all members are timely. Such a fund would be revolving hence repayment can be structured as per borrowers cashflow patterns. In any case, we are talking of small amounts. The challenge I anticipate if groups contribute to the fund is that groups members would be concerned about the security of their money if held outside their orbit ( Village shopkeeper may not hold cash as such for security reasons meaning my organization would have to keep it and avail it on need- safe for a reasonable float). When the funding is from me, I can manage it as i have visualized. I am now thinking how to marry your idea with what I have in mind. Your idea of ownership is strong and needs to be considered. Any thought on this?
If shopkeeper is managing the emmergency fund as the organizations custodian, perhaps that would introduce discipline. Since the village shopkeeper is pivotal, he most likely would be a member of one or two groups and in a village we are talking of an average of 25 groups. So, in this context, he is the village money link for all those who belong to groups.
The “shortcuts to in the kitchen” is emotional. That commitment to a goal is awesome. Ruth, you must know so much underlying the entire system that I would want to learn. The overwhelming anxiety preceeding the ‘turn’ talks so much about them that should be captured to enhance study in savings behaviour. With such knowledge, the system can be leveraged for better results. Like I mentioned, it’s a system that one feels shy to tamper with. For sure, I wouldn’t want the emergency fund to be a source of indebtedness and anxiety. Thats why a grant or my own injection would work better because time indulgence to the borrowers capability can be extended. My concept is empowerment of rural population working in groups using the village as the last frontier.
There is a lot I can learn from you Ruth going by your practical knowledge and experience. Thank you for your help already.
August 14, 2012 at 11:23 am
Dr.George Kinyanjui
John and Ruth,
Carry on the discussion. I am ridding on both your backs. Kind of nice!