> Posted by Anne Gachoka, Research Supervisor, Digital Divide Data

Thanks to mobile and agent channels, formal financial services in Kenya now reach millions of previously unbanked customers with new and innovative products. Just look at M-Shwari, the new banking product offered to M-Pesa customers enabling them to move beyond money transfer and epay to small, short-term loans with eligibility based on data about their savings, mobile usage, and debt repayment history. Globally, this is all very exciting and represents an important breakthrough in providing financial services to the poor.

But, after studying the interactions between the poor and the financial sector through the Kenya Financial Diaries, a joint-research initiative between Digital Divide Data and Bankable Frontier Associates, I have come to the conclusion that banking will fail to deliver on the promise of improving the lives of the poor unless providers do more to improve pricing transparency and communication on terms and conditions. The Diaries study tracked the cash flows of 300 Kenyan households over the period of one year.

One of our respondents, Collins, an early adopter of all kinds of financial products, continuously reminded us of the frustrations and implications of unclear pricing. Collins runs a business in Nairobi selling soup, locally-stuffed sausages, and firewood. Over the years, he has joined many informal savings and lending groups and joint liability groups linked to MFIs and banks as a means to access lump sum loans to boost his businesses and pay for school fees for his children upcountry. He used 18 separate financial devices throughout the course of the Diaries study, including accounts in multiple banks. Collins tries out new products, like M-Shwari, as soon as they emerge.

He wants to make good financial decisions, and understanding pricing of his financial product options is a key part of that. Nearly every time we visited him, he asked questions on why and how financial institutions structure fees. “Why,” he asked, “does [Bank A] charge different withdrawal fees depending on which branch I visit?” And, “Why does [Bank B] charge just to get my own statement?” To him, the denial of free statements is a “violation of rights” since it is the only way to truly know what you have been charged for various services. Few banks are as upfront as M-Pesa when it comes to fees and interest, and the statement provides critical feedback to help him respond to the incentives that fee structures intend to create.

Collins is not alone. Another respondent, James, felt the bank was intentionally withholding information about interest they pay on savings: “I stopped contributing towards my restricted account. I wanted the bank to give my money back because I have been asking about interest and am being tossed around by the bank staff.”

Several other clients were like James. They did not realize how small the interest paid on commitment savings would be until their deposits matured. They had entrusted their money for periods of six months to a year and felt misled upon finding the “interest” they had been sold on was so small, often less than even the costs of withdrawing their matured funds from their accounts. It drove them away from the financial institution to other alternatives.

John was frustrated by opaque loan qualifications: “I wanted a loan and I went to my banks to find how much they could give me. They said the most they could give me was KSh100,000 (US$1176). What is KSh100,000 to me? They already have more than that in my account!”

John demonstrates that low-income consumers want to know not just what the prices are, but in some ways, how banks’ decisions are made. Banks’ failure to communicate a rationale makes clients feel cheated. A great example of this is loan insurance, for which borrowers often pay with no understanding of what is covered. Collins is in a joint liability group in which a member took a loan to start a business that was later robbed of nearly all its working capital. “Since we’ve paid insurance, will the bank cover this loss? Will the debt be cleared?”

Clients who feel cheated, often feel justified in “cheating back.” Collins, for example, gets angry that when he takes a loan from M-Pesa he pays not only interest, but also a fee to withdraw his borrowed funds in cash. He feels they’re taking deductions at every corner. In retaliation, he tries to get around Safaricom fees in other ways. When he’s sending money to his wife upcountry, he has the agent deposit the money directly into his wife’s account, avoiding transfer fees.

Transparency is not just about adhering to regulations and “doing the right thing.” It is also a commercial imperative. Consider Collins once more. Despite all of his frustrations with banks and Safaricom, he’s recently found an institution he trusts, a SACCO. With clear rates and no hidden fees, he can calculate his outstanding debt on his own. His statement and his own calculations match. He considers his interest rate—12 percent per annum—fair, not necessarily because it is lower than his other sources, but because it is clearer. He now trusts this institution and is moving more and more of his nearly KSh200,000 (about US$2,350) in savings there.

Like Collins, our respondents were eager to use banking and eager to learn how to use new services best to meet their financial needs. Regulatory intervention could speed a resolution to what I believe is already a commercial opportunity. Honesty pays, but for now, few institutions seem committed to proving it so.

Results from the Kenya Financial Diaries will launch on August 12th, with findings highlighted on this blog.

Anne Gachoka, Research Supervisor at Digital Divide Data Kenya, supervised the field research for the Kenya Financial Diaries project. The Kenya Financial Diaries project was funded by FSD Kenya and the Bill & Melinda Gates Foundation through the GAFIS Project.

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