> Posted by Elisabeth Rhyne, Managing Director, CFI
The following post was originally published on the Ashoka Changemakers’ blog.
People in the developed and developing worlds manage their money differently. Although they conduct complex financial lives, they do not have bank accounts as money management hubs.
To deal with their low and uneven income streams, poor people, “keep savings at home; join savings clubs and savings-and-loan clubs; transact with family, friends, neighbors, and employers; and, where doing so is feasible and attractive, sign on with formal licensed providers.” They keep track of their finances in their heads, often assisted by what behavioral economists call heuristics or rules of thumb, such as keeping business and personal money in different pockets, or setting aside a handful of rice every day.
By contrast, most people in developed economies center their economic lives on bank accounts. With apologies, I draw on my own experience.
All my significant routine transactions pass through my account, including salary, debit card purchases, major payments (taxes, insurance, mortgage), and monthly bills. Credit card purchases are incorporated into the account via a monthly bill.
Even cash transactions are consolidated in the form of ATM withdrawals. As a personal cashflow statement, my bank account is nearly perfect, although for my personal balance sheet, I have to consult a few additional documents, like mortgage, pension, and investment records.
When a person with a low income in the informal sector opens a bank account, the rest of their financial life may not change. It will take a more complex transition for an informal money manager to move to an account-centered financial life.
This observation suggests that we need a better measure of financial inclusion than bank accounts. I have one alternative to suggest.
When the Global Findex was released in April, it marked the first time that financial inclusion statistics from clients were available on a globally consistent basis. The Findex headline was about the number of people with bank accounts (41 percent of all adults in developing countries and 89 percent in the developed countries – see chart).
It is no surprise that policy makers use bank accounts as the top indicator of financial inclusion: most of them use bank accounts like I do. And although the bank account is perhaps the easiest financial inclusion number to track, at times, it seems that increasing the number of people with accounts – “banking the unbanked” – becomes a policy goal in itself.
The Findex data shows that many bank accounts in the developing world are relatively inactive. In high income countries, the vast majority of account holders (72 percent) use their accounts actively (that is, they make more than two withdrawals per month, a useful definition, though somewhat arbitrary).
Not only do fewer people have bank accounts in low- and middle-income countries, those that have accounts do not use them much. In fact, only 16 to 17 percent of those with accounts use them actively.
Many people appear to use their accounts simply as a way to get paid or receive government benefits. Use of an account for such purposes is a decided improvement over counting out cash – it costs less and is more secure.
While possession of a bank account may be a step toward financial inclusion, it should not be confused with genuine inclusion. While a bank account puts people on a path toward financial inclusion, we cannot be at all certain that they are proceeding down the path.
A village of coffee farmers I once interviewed in Uganda traveled most of a day to town where a marketing company clerk handed them their coffee proceeds in envelopes filled with cash. On the way home they were prey to highway robbers.
Later, they were given bank accounts, but the only change was that they now stood in the bank’s withdrawal queue instead of the coffee company’s queue. They still traveled to town, still took their cash home, and were still prey to robbers.
Their financial lives did not change in any significant way. However, they would now show up in national statistics as “banked.”
To read the rest of this post, visit the Ashoka Changemakers’ blog.
Today Elisabeth Rhyne and CFI participated in the Twitter-based #SocEntChat about Global Financial Inclusion, hosted by Ashoka Changemakers. During the week of October 9, Changemakers will highlight Rhyne as its Speak Up thought leader on financial inclusion.
Image Credit: Global Findex
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October 10, 2012 at 10:26 am
Javier Tenorio
The correct financial inclusion model shouldn’t be worrying about getting people to open bank accounts, the focus must be about getting them the solutions they need.
If what people need is a life insurance, or a health insurance, or a student loan, or getting their house improved, then they should be able to receive only a tailored solution that fits to their need.
Additionally, the best financial inclusion solution does not contemplate that people receive their paychecks through the banks directly to an account, since that seems highly unfeasible due to communities circumstances. On the contrary, people needs to manage cash. Due to the average education level in some communities, it is best for them to manage only cash in order to have the sensibility of the transaction and the benefits of the solutions.
The cashless world is still very far away. The first step for many low-income excluded communities still involves cash.
October 10, 2012 at 1:03 pm
erhyne
Thanks for your comment, Javier. I agree that getting people to open bank accounts should not be the only or primary focal point of financial inclusion work. What is clear is that financial services are not isolated from each other. They are tied together in many ways, because money is fungible and people use services in different ways to fulfill different needs. We have to pay attention both to specific needs like student loans and to related needs, like a place to save up for school fees to avoid loans and a convenient and safe way to get the school fee payment to the school.
October 17, 2012 at 8:49 pm
Jim Wells
Giving a poor person a bank account is about as helpful as giving a hungry person a refrigerator.
The continuing fixation on driving consumers, long-ignored by banks, “into the formal sector” is mind-boggling. The financial needs, wants and pressures on low-income consumers are vastly different from more affluent consumers – for whom bank accounts have been the right solution for generations. So it should surprise no one that the unique financial needs of these non-traditional consumers are better served by non-traditional products, tailored specifically to those needs by non-traditional providers in the same local towns and villages as the targeted consumers.
It is gratifying to see many thought leaders in the developing world forsaking the concept of “Financial Inclusion” when it is used as code for forcing bank accounts on people who do not want them . Instead, these more evolved thinkers are embracing the concept of “Financial Capability,” which strives to ensure that people have access to financial products, services and education to satisfy their needs – as they see fit. A formal bank account is but one potential component of Financial Capability, whilst it is the ultimate goal of Financial Inclusion.
One possible explanation for the continuing popularity of “Financial Inclusion’ is that it is far easier to develop programs that provide bank accounts, than it is to develop programs that address all the financial needs of low-income consumers on at the Bottom of the economic pyramid.
October 18, 2012 at 6:31 am
John Gitau
Dear Jim,
I appreciate your perspective because it helps clarify some assumptions. It is becoming increasingly clear that the whole inclusion space is divided into two- the apologists of the need to design products and services for the BOP at their terrain and as per their needs and those who advocate for inclusion to entail bringing the low income into the light, the light meaning formal financial services.
I started as pro-inclusion the latter meaning but overtime I have come to the appreciate the former. I am sure at one point, all of us will meet in the middle and craft a win win solution for the low income we so much want to improve.
Currently, the CFI as a brilliant forum, helps us exchange perspectives and it matters not who is right or wrong. Every perspective is helpful.
October 18, 2012 at 11:15 am
Jim Wells
I would have hoped that the explosive growth of m-Pesa would have negated most of the the pro-inclusion apologists. The democracy of mobile technology plus the convenience of local shops acting as agents/correspondents combined to empower long-disenfranchised consumers to conduct transactions better, smarter, faster, cheaper than they ever could with something as mundane as a bank account — if they could find a bank with a local presence that would give them a cost-effective account..
October 18, 2012 at 12:13 pm
John Gitau
Oh My! Jim, at times this debate about financial inclusions gets very complex and confusing. Mobile money has been reluctantly accepted as an inclusion vehicle. Mpesa has primarily been considered a money transfer platform. Is how money is transferred from one end to another an inclusive parameter? The poor, even before money became electronic used to have mechanisms of transporting money from one corner to another. Yet, at that time, they were still considered excluded. Does the conversion of money from hard cash to electronic form and its concomitant speed of use or transfer a qualifying parameter for inclusion?
Isn’t inclusion an access to more and versatile financial products or services irrespective of who delivers them, whether formal or informal? If a prolific pawn broker in a village gets creative and comes up with several financial products, say micro loans, insurance, a saving mechanism, a forum to discuss budgeting, an investment vehicle that taps the financial resources of the villagers with good security and returns, will that be considered financial inclusion? Or will such a pawn broker be dismissed the way a traditional healer is dismissed irrespective of his herbal healing efficacy, just because he isn’t in the mainstream medical profession?
Jim, I really like your thinking of the democracy of mobile technology. My friend Ignacio Mas indeed proposes that mobile technology should be a vehicle that would work like google- a poor or rich person can google whatever financial services they require, find out who is offering them at what prices, quality, quantity, convenience and choose at his or her private time and space. His rallying call is that we ardent proponents of financial empowerment through inclusion should be busy studying what products the poor need and want, wrought and spawn as per need specs( talk of fit to wear or custom making!). This means, according to Mas, we should be queuing well designed products soliciting the poor to pick them by virtue of their suitability. This, I thought, like you have said Jim, is democratization of inclusion through mobile telephony for the greatest benefit of the poor. Therefore, rather than urging the poor to go to towns and open bank accounts they will hardly use, banks should be busy recruiting village shopkeepers to offer the appropriate products that the villagers need and thus creating convenience. But do banks want to do that? It may not be economical, they say. But that excuse to me is pure sloth in product development just because it is easy to earn by levying deposit and withdrawal fees and clicking the mouse at the end of the month for millions to flow from ledger fees.
In Kenya, Agency banking is working very well and extending to almost every corner of the country through Equity Bank which I take exception from on that critique. Is agency banking profitable? Equity Bank derived almost quarter of its profits in 2011 from agency banking. There is so much room for branchless banking which is higher in scale that agency banking in terms of its potential outreach. That is the frontier where boys will be distinguished from men as that shall be inclusiveness at its best and if you ask me, that game will be played at the doorsteps of the poor at the BOP.
So, Jim, continue thinking that way as we get to learn from one another in this forum
September 3, 2015 at 2:03 am
Andrew
The real problem with microfinance is that it represents a meager solution to huge problem microfinance and microcredits are at best a temporary painkiller to a chronic illness. Poverty in the world at this stage is due to overpopulation. if we take a step back and look at the big picture we will find simpler and more radical solutions to poverty. Imagine if there were only a couple of billion people in the world with all this wealth in technology the abundance in production and agriculture everyone would have a job, house, car, bank account, clean water, insurance and health coverage, simply an imaginable slandered of living. All we have to do is to stop reproducing like rabbits and save ourselves from the horrors that lie in the future of mankind if we continue in this manner.