> Posted by Ignacio Mas, Independent Consultant
Too much of post-microcredit financial inclusion still operates as a numbers game. We declare victors and write up successes based on headline customer acquisition rates, without looking much at underlying usage patterns. We continue to quote customer uptake or account registration numbers when providers give us nothing else to go by. We declare customers active and ourselves satisfied when customers use the service once every 1-3 months – can you imagine the education, electricity, water and sanitation people doing that? We judge customer relevance by scrutinizing average per-customer transaction volumes and sizes, even though those are usually driven entirely by the top ten percent of the distribution. If we looked deeper, we would find that many of those who are deemed to be underbanked are actually irrelevantly banked.
Glossing over usage data is a symptom that we are an industry which thrives on hype, an almost inevitable consequence when you mix a commendable spirit of do-goodism, deep donor pockets, and insatiable social media platforms. But it also has a lot to do with the fact that we actually know very little about what drives customer usage and value of formal financial services, beyond the occasional loan and remote payment.
Especially in the savings space, we are lacking an overall perspective on how to tackle the problem of relevance. We feel we need data, so we engage researchers to run excruciatingly detailed financial diaries, quantitative surveys, and randomized control trials. We feel we need product ideas, so we hire consultants to tell us what is successful elsewhere, though alas that is generally based on those awkward headline customer acquisition numbers. We feel we need processes, so we engage branded designers to run innovative rapid prototyping exercises. But it feels difficult to make all this come together purposefully.
A more structured approach would be based on formulating some key questions which can help sharpen our focus and narrow the solution search space. Let me propose three such questions, again focused on savings:
1. Changing savings behaviors versus changing savings mechanisms. A classic evaluation framework which VCs use to evaluate projects is the Ansoff matrix: is the proposed project targeting an existing or a new product, and is it doing so in an existing or a new market? They will typically shun heroic projects which propose new products in new markets. The analogy in financial inclusion would be: are we trying to get people to save more (changing behavior), or are we trying to create new ways for them to channel their existing savings behavior (new mechanism)? Put differently: are we trying to find new savings triggers (through behavioral insights or financial education) or are we trying to productize existing informal practices? My guess is that the latter will be an easier path than the former, though both are in principle valid. Unfortunately, much current savings product innovation is aiming for a muddled middle: new ways for people to do new things.
2. Primacy of savings goals versus savings vessels. It´s quite clear that separation of money into distinct lumps is core to people´s savings practices, as this helps them budget and maintain discipline in how money is used. But in staging this separation through a formal savings service, is it better to reinforce the savings goals or the savings vehicles themselves? A plethora of new web-based banking services, mostly in developed countries, now require that the customer start by articulating a goal (e.g. SmartyPig, Goalmine, Simple, Coinc). Being goal-oriented is meant to enhance motivation to save and build discipline. These services in fact have a financial education agenda. And yet my own observation is that most poor people do not have very concrete goals beyond some immediate concerns like paying the next round of bills or some inevitable lifecycle ones like marrying a daughter. They don’t lack other goals (like buying home appliances), they just keep them purposely fuzzy. If you have precarious finances, this is advantageous because your objectives must adapt to your evolving circumstances, and you can´t afford to set your heart on any one thing because there is a good chance you won´t get it due to circumstances beyond your control. Instead of fixing on concrete goals, they come to see their savings vehicles (cows, jewels, a ROSCA, etc.) as a proxy for a bunch of things they might buy with them if they achieve their savings goals. Forcing them to pick a goal may not feel natural to them, and that´s not for lack of financial savvy or determination.
3. Help me save versus help me keep it saved. Will formal savings services be more useful to people by helping them fall into a pattern of setting money aside regularly (providing discipline in), or by helping them avoid temptations to raid the money they´ve previously set aside when it is not so justified (providing discipline out)? In other words, should they emphasize rules about when and how much to save, or frictions which lay out conditions for liquidity? This is of course a question of balance. In informal finance, participating in ROSCAs and taking on loans are the main discipline-in mechanisms, while longer-term informal savings mechanism such as cows and jewels offer no rules but have many liquidity frictions built into them (indivisibility, waiting period, social peer pressure, financial penalty,…) which could be usefully emulated by formal financial products.
There may be better questions or better ways of articulating these particular questions. But it seems to me that if we don´t frame the discussion at this level it will be difficult to have a constructive global debate on how to promote formal financial services.
Image credit: IPA
Ignacio Mas is an independent consultant. You can learn more about his work here.
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April 10, 2014 at 8:58 am
John Gitau
The microfinance industry players tell their customers” we can give you loans type a, b, c d, e f—you do WHATEVER with it to earn, then we shall provide you savings type 1, 2, 3 4″. There is silence on WHATEVER. Or do the players dread the challenge of being called upon to show the poor how to earn because they have no clue? They don’t understand how the poor earn except knowing that they are traders. The borrowers might as well be performing magic with the loans. And as long as they can pull rabbit savings from their hats, it is enough evidence that they know how to earn, right?. Who is teaching the poor the different types of earnings, the i, ii, iii iv ways of increasing income?
Also, don’t we find it funny that we encourage the poor to save the little they have while we are aggressively looking for extra incomes? Why don’t we invigorate in them the culture of getting more income like us rather than more loans? Surely, we don’t wake up every morning reminding ourselves how much we shall save, but how much more we plan to earn. Do we assume that savings is for the poor as earning is for the well to do? So, the poor are better given loans and reminded how to save. Too little income can only result to too little savings no matter how many savings products we create or savings mechanisms we spawn.
April 10, 2014 at 12:25 pm
Monique Cohen
Ignacio, I welcome your attempt to refocus the discussion on savings. As you note the poor save and it helps them budget. While that is desirable behavior it implies that they manage their money ex ante, they plan ahead. In fact, most money management is ex post, as needed rather than as anticipated. In fact, for many poor people budgeting is not a forward looking tool but rather a way to assess when their money after it has run out. Financial education gives people a framework to do this.I would argue that people will only save when their income is sufficient and stable and they feel they can manage risk without depleting assets. Only then will they have the confidence to move from ex post to ex ante money management behaviors.
April 10, 2014 at 1:23 pm
Ignacio
Hi Monique, I very much subscribe to your statement that ¨most money management is ex post, as needed rather than as anticipated.¨ People seem to have only a fuzzy sense of future goals, but seem so focused on extracting liquidity out of whatever and whoever when there is a current pressing need. That´s why in my mind savings products that emphasize the formulation of specific future goals are a difficult fit, while credit-based solutions that help address specific current shortfalls seem so much more directly helpful.
But I do think that trying to change how people think about money through financial education is such a hard job. That´s why I was positing in my point #1 the alternative that perhaps we should offer them products that work with this ex ante fuzziness. These products would have to be intuitive things that play along with the fuzzy, changing stories that they tell themselves in their own minds at any point in time. Not that I have an exact recipe for how to do that…
And I totally agree with your and John´s point that without stable income there´s very little you can expect in terms of savings. If there´s not much to be saved, savings is not going to get you out of the hole. Short of a savings product that makes everyone rich, to me that reinforces the point that the objective shouldn´t necessarily be to get them to save more (through financial education or whatever other means) but to save in a better way. Modest as that sounds, that´s already proving to be a tough challenge!
April 10, 2014 at 1:26 pm
John Gitau
That people will only save when their income is sufficient and stable brings in the question of how they will enhance their income to sufficiency and stability. The current hypothesis is that the poor need to save in order to invest in income generating assets. But scanty savings will not help achieve that objective unless new ways of setting multiple sources of income are introduced to them. Who will do that?
Monique you introduce a delicate perspective that savings will only be possible with better incomes. I would have thought savings is a mindset not contingent upon income size. There are those even among us with good incomes but have no savings because they just have a consumption mindset. That perspective will also bring in the question of how much is comfortable and stable. Does stability mean guaranteed income like in employment? Sufficient is very subjective. Again, what asset quantities are sufficient to mitigate which risk? It is hard to visualize a critical mass of assets sufficient to cover unspecified risks in unpredictable environments-a fire in a low income residential areas can gut income generating assets in one night.
How about helping the low income people leverage their mindsets in savings and earnings while leaving allocation of incomes to them as they know their circumstances better. Ignacio is opposed to lumpsums as the low income have ways of segregating their monies physically for their own reasons. We recommend bank savings while the poor may prefer saving their money in pawnable assets such as jewelry. So, sometimes, savings double as investment in a subtle way only understood in the mind of the poor.
April 12, 2014 at 8:09 am
John Gitau
Ignacio, in my mother tongue, there is saying that goes “too much intelligence removes wisdom( not sure if that direct translation is accurate). If the poor in their juggling have developed wise ways of handling savings that serves them well, why are we intent on introducing our ways to them? They have devised ways of keeping their savings safe from their own attacks and others. They know how to make savings play double duty as investment. Rather than the hard work of trying to understand how they think and designing products to fit their thought patterns, can’t we support them do what they do better? So, just like mortgage and hire purchase companies buy their customers houses and assets, financial services providers can buy their customers what they consider investments and charge them a fee as they hold the investments as security. For sure, since they will have defined what they want, they will have the ownership and care and because they wouldn’t want to lose, they would work hard to service the repayment. So, a cow financing will mean that the bank will insure the cow, and the farmer customer will enjoy consuming and selling the milk, use its manure for crops and still be able to sell calves as bonuses, not forgetting that cow dung is a resource for bio-gas. If on savings the poor like segregating their accounts according to their goals, create savings pigeon holes in line with their saving labels and just like in the post office where people have keys to their letter boxes, let them enter the bank’s savings room and post their savings in their self selected savings pigeon holes. They can put the money in envelops and post. No time consuming queues in intimidating bank halls. And if such concept can work, banks can then make village shopkeepers as collection agents with mini strong security boxes. Likewise, in urban areas, banks can recruit merchants as savings agents in exchange for trading overdrafts. That is a basic example and the underlying is supporting the poor along their thinking and practices, like flowing with the current than against it. We have mortgage loans. Could we have savings loans eg cow saving loan?
It doesn’t make sense to demolish the poor’s savings wisdom just because we think and believe our financial inclusion wisdom is what is good for them. Could our intelligence be consuming our wisdom and like a virus a threat to the wisdom of the poor?
April 13, 2014 at 9:19 pm
Monique Cohen
There seems to be an inherent contradiction between the notion that the poor are good money managers and the advocacy for financial education, that the poor need to learn to save, budget and manage debt. We also tend to focus on products, trying to design what we think they need. Working on mobile banking has suggested to me that the poor know what they need, but they lack behaviors for using these new delivery channels.
The GSMA figure of 70% inactive accounts suggests that this is more than a product issue but also a delivery channels issue. E-banking requires the poor to leapfrog the digital divide into unfamiliar territory, banking and technology. Maybe we should focus in the short term on building confidence in using virtual money and trust with these new types of institution. The poor are inherently conservative. E-money is perceived as risky and what they hear from the providers is clearly not convincing. There is a role for financial education but it may not be what we traditionally think of. Rather we might have more success with education that addressees first trust and confidence and make sure that clients understand their rights.Once they achieve this they will in all likelihood figure out how to use e-banking services effectively and efficiently to save and for their purposes..
April 14, 2014 at 4:12 am
John Gitau
Monique you are right that the poor know what they need. But, that they lack behaviors for using these new delivery channels needs further inquiry. I am of the opinion that they know when and how to use these new channels but prefer their existing cash handling mechanisms. Their lack of uptake may not be a reflection of their conservativeness, dearth in confidence, financial illiteracy or risk aversion. In addition, digital financial services providers are not short in the aggressiveness needed to reach the poor with their value propositions. The mismatch is evidence of an underlying truth that needs to be discovered.
Perhaps the analogy of a river can help explain the digital products uptake apathy. In rural areas, people draw water from a river and take it to their homesteads to do the many things done with water. They warm it and bathe, cook with it, feed animals, wash utensils and preserve some in their water pots for drinking. Some of it is mixed with cow dung to “cement” the house floor. Dusty compounds also get sprinkled with it. Likewise, digital money is cashed out to be engaged in the various ways only the poor understand. Ignacio in one of his papers fondly talks of the money that is “dished” out to relatives, yet to the giver, it is important social capital premium. It is difficult to to imagine its equivalent in digital form, yet it can be delivered digitally. Such money appearing as “careless” giving, according to Ignacio, may become more important than some digital savings retained in the channel. The “you helped me” feeling by the recipient may one day translate to more benefit to the giver than the finite saving holed up in a digital account. That is the drama that can easily be missed when talking about digital financial products.
There is all evidence that the poor don’t just want to preserve money in digital form because they like it physical to do the so many duties they assign to it. I don’t think they are ignorant of the value propositions being presented to them. No, it’s only that they don’t match what they have at hand, which is known and tested.
There is one point among many that Ignacio brings out which is worth more attention. He suggests that rather than us looking at the benefits proffered by digital money, we should perhaps get interested in why the poor cash out the money and what they do with it. Our suggested options may not be as strong as their current money engagement ways. Ignacio has detailed inquiry results and useful insights on the options the poor have and use and his papers is perhaps the best place to start for those not familiar with what he writes on as a digital money expert. I personally find his thoughts and observations practical as that is exactly what I see when I relate with the poor in the course of my work.
April 16, 2014 at 2:31 pm
Ignacio
Hi Monique. I agree that we tend to overemphasize products. I look at the main opportunity from using mobiles as giving people tools, not products: ways for them to flexibly separate money into various pots or categories (however fuzzy or concrete they want them to be); letting them set various kinds of rules to create routine; and letting them define various kinds of frictions to keep the money in there as and for however long they choose. With a small number of such tools we can accommodate a large number of use cases. But more importantly, by giving people the ability of concocting the money management system that works for them, they will make it their own and it will enhance their sense of empowerment and control. That is the sense that John is portraying through his colorful metaphor of the river.
I also agree with John that the underlying reason why so many digital accounts are empty is not because people don´t trust them, but rather because they don´t find them useful. (It´s hard to trust what you don´t use, of course; but it´s easier to crack that by demonstrating usefulness rather than by demonstrating trustworthiness.) People don´t put all their money into one big glass jar sitting on the kitchen table; so why would they feel comfortable putting all their money into one liquid electronic account?
April 17, 2014 at 5:03 am
John Gitau
Thank you Ignacio for your further clarification and emphasis. It is good that you have introduced the concept of tools. It took me long to understand the tools concept; the difference between a product and a tool in the financial inclusion context. My understanding is not complete yet and I have more to learn.
Correct me if I am wrong in my example here: To Safaricom in Kenya, M-pesa is a product (among its many products). To its consumers, M-pesa is a tool. The possibilities that the consumers engage the M-pesa tool in, are the products.
So, to an M-pesa consumer, one of the products within the M-pesa tool is money transfer. And within the money transfer product are clusters of mini-products configured by the consumers. So, If I, as an M-pesa account holder, transfer some money to my auntie to keep for me until I ask for it, that to me is a savings mini-product. If I send some money to my nephew to pay the veterinary to come and inseminate my cow, that is an investment input. If I send some to my ROSCA treasurer as my contribution to the capital to buy the piece of land our group is buying, that is an investment mini-product. Note, we have only dealt with money transfer product. I can also, through the M-pesa tool, buy airtime. Airtime is a product available to me. I can pay a bill.That is a product.
I can save in M-shwari. To Safaricom, M-shwari is a product but to me it is a tool that I can use to store values for my mini-products. So, I can allocate in my mind some savings in M-shwari for payment of insurance premium when due. Part of the saving can be allocated for buying a gift for my sister’s upcoming wedding as part of my social capital insurance premium. Again, some savings in the same M-shwari account can be allocated to pay school fees or cater for emergency, buy a motorcycle, pay dowry and others, all mini-products configured by me and stored in the M-shwari tool.
But here is the reason why M-shwari may not be an effective tool to a poor consumer. He finds it cumbersome to think of the single lumpsum in M-shwari in line with so many mini-products he has configured. It confuses him because that is not how his mind allocates saved money. Here is where the difficulty is: each time he withdraws from the M-shwari lumpsum to acquire one of the mini-products, he has to recalculate in his head what is left and run through the remaining allocated mini-products to fit the remaining savings balance in lumpsum. That mathematical computation is confusing and not worth the trouble, need to change behavior nothwithstanding.
What is the option? Well, much as M-shwari is a good tool that is helpful in products storage(as lumpsum) the consumer will prefer to withdraw the money and allocate it physically to the many mini-products. So, for the dowry savings that will be needed two years later, he decides to buy a milk goat. That option becomes important because the goat will give birth to a kid with value, provide milk as well as manure. Yes, he is aware it can die, just like M-shwari product mother, Safaricom can collapse. He is not naive. But his calculations are based on multiplier thinking-savings doubling as investment and utility. The school fee lot is also withdrawn and since school fees is four months away, he buys a few chicken with an awareness that by the time the fees is due, he will take them to the market but in case some windfall comes, he may not even need to sell the chicken rather keep them as investment for eggs, manure and finally meat. For the cash needed for emergency, he may decide to split it; keeping some in a tin and burying it under a mango tree and stash some in some box within the house. The burying under the mango tree should not be construed as backwardness. No, it is a clever way of allowing ease of access( it is just a stone throw away) and the difficulty in access( Do I have to dig this out yet this is not an emergency, why am I deceiving myself?). Ignacio describes this as the friction-accessibility and inaccessibility, not dichotomised but interfaced in an intriguing mental model.
Note, the lumpsum in an M-shwari tool can deceptively distort the consumer’s mind as a lot of money thus blurring the already set savings mindset. So, M-shwari easily becomes the demolisher of good savings behavior patterns.
The physical separation of money in line with the separate needs is perhaps the secret tool the poor have used from time immemorial (even Jesus in the bible was amazed by the poor widow who donated the only dime she had saved. To her, the dime saving was quietly allocated for that purpose and we shall never know if in addition to being a savings to give, it had a further objective of bringing abundant blessings and the fact that she became famous as to be a biblical example of giving with full heart, is evidence of success ( isn’t she a legend?). This means, the tools the poor use for their myriad products is a science that needs to be studied, a paradigm that needs reinforcement rather than change.
We in the financial inclusion are interesting people. We are in digital era. We believe everybody, including the poor, should join the digital bandwagon. Yet, experts in digital money are warning that digital paradigm is intriguing in its slow uptake in spite of its declared benefits. In my country, two digital money companies are a disaster. One has lost over US$530 million and is indebted to the tune of $290 million and struggling to get a buyer. Another one that partnered with the government has sucked over US$60 million and hasn’t made money. It is in the market looking for a buyer as well. A runners up that has always had difficulties in penetrating the market and has changed ownership frequently is asking the regulator to compel the market leader to open its infrastructure for sharing.. So, Kenya as the success story of mobile money is not convincing, yeah? And we want the poor to go digital while digital money revolution is having a false start?. By the way, have you heard the comedy of MNO lazy bones pleading with the regulator to compel the market leader to allow them use its network? And the leader saying under its dead body, as it went fishing in the sea risking death through sharks while the pretenders to competition chose to fish in the village shallow streams. Yet, we in Financial inclusion space are still urging the poor to drop their ways and join the digital world of money for all their savings, borrowing investment and insurance needs, yet their ways have not failed only that they need a leg up to improve.
The idea of tools fascinates me a lot and as I walk in slums, I see men and women baking from the narrow streets pavements. Looking at the dough balls, you wouldn’t guess what will come form them. If you see five microentrepreneurs with dough in front of them and pass by later, you will be surprised by the variety of food products that were wrought from the dough. There will be chapati, doughnuts, samosa, kaimati, mandazi (local names). To me it a perfect example of tools followed by choice of products designs.
If only the poor are given tools such as Mpesa, Mshwari and allowed to create their own products, that would be the biggest achievement to financial inclusion. For financial services providers, the best products they should design for the poor are tools and not the final products which they are incapable of understanding, not least how the poor understand them. So, for M-shwari to succeed as a savings tool, it cant advocate lumpsum savings. That’s not how the poor thinking around savings as Ignacio has abundantly demonstrated. But having digital pockets within M-shwari that modeled the poors’ savings can work. So, it it not the digital system that is wrong rather the incompetence around the designing of digital financial products that resonate with the poor thoughts and practices. This is how I have understood Ignacio’s suggestions.
Will financial services providers site behavioral economics as a solution to their understanding the poor so that they can design relevant products for them?. Let them delude themselves.The products the poor have are holed up in their subconscious minds as mental programs or systems not easily revealed or accurately picked by behavioral researchers. I get amused when behavioral economist lay claim to understanding the poors’ mindset just after a few observations. Woe unto financial products designers if you shall use such observations to design products for the poor. Such products will meet uptake challenges. Of course you will not buy in from the hyped evidence of PR based successes. Those are fund raiser findings and not introspective insights. This is a layman’s observation and I am one.
Finally, do you know why Safaricom in Kenya is successful? It designs products as tools to be used flexibly. And it is so observant and innovative in ways that resonate with what the customers want. At lease I have the confidence to say that because the other services providers have not succeeded in the same market, same people because they have a product approach as opposed to a tools approach.
Let insurance companies go to the poors’ terrains, observe how they handle their protection and design tools that will help them create clusters of protection, the protection products as the poor see fit for them. Let banks go to the poors’ neighborhoods and study savings mechanisms and design tools that will help in savings. If they can’t do that because it is expensive or cumbersome, let them forget the poor. The worse thing we in financial inclusion can do is to try to change behavior of the poor to adopt to digital money systems while we are not even sure of the benefits or survival rate.
On another note, we keep talking of behavior changes. We know how long it takes to form a habit and how difficult it is to change behavior especially towards new things. The best is to design tools that deliver adaptive products that do not require direct behavior change. I was joking with a colleague that it is difficult to have a lazy person change to become hardworking. Such an attempt is hard work. Instead, we should design economic activities that suite laziness. Eg fish in a pond need feeding twice a day. It involves throwing feed bought from a shop into the pond in known quantities twice a day. Fine, have the laziest member of the family do the feeding. Since they are too lazy, let them sleep and only wake up twice a day to feed the fish. The fish know how to multiply themselves. To another lazy member, have him do bee keeping. Bees don’t need to be fed. If he is sent to buy a hive a few kilometers away and he takes the whole day due to his lazy walking but finally brings the hive in the evening, once it is positioned at location, he might as well sleep each and every day because his project only requires him once every six months-during honey harvesting and you hire a professional. Honey doesn’t require aggressive marketing. After selling, give him part of the proceed which he might be too lazy to spend anyway. Well, said in jest but it demonstrates that behavior change isn’t easy.. But I would rather tools which make people change behavior. For sure, the M-pesa tool in Kenya has changed people’s behavior especially the appreciation of efficiency. People slowly become efficient as the system pulls them up. So, a relative who would have waited for days to receive money to buy seeds will get the same money in a few minutes and is able to plant seeds promptly and when yields are good, the appreciation makes him do more and before he realizes, he has changed.
April 17, 2014 at 6:49 pm
Monique Cohen
Hello Ignacio and John. This is an interesting conversation and as I see it we are largely in agreement. Ignacio, I agree that if you have never used a product/tool or institution, you cannot trust it (yes, Ignacio I do like that concept of tools) but if you are new to virtual money and have never used technology or banks where do you start? Becoming comfortable with what is new is the first step and then you figure out how to best use it. We should not forget that people have long adapted vanilla microcredit to their needs. These were less that ideal matches. This observation led providers to scramble for a more diversified range of credit products, often no more than minor tweaks to basic working capital loans. Is this the best solution?
Changing behavior is a challenge and I agree we need to be a little less ambitious in what we want to achieve in this area. The evidence to date about the effect of teaching financial education has been less than encouraging. This has prompted me to wonder if we are going about this the wrong way. We know that adults are most responsive to word of mouth recommendations and learning by doing, so maybe we need to rethink our approach and our content. I have argued that building trust and confidence to use new tools so people feel comfortable figuring out their use is desirable. Given poor people’s limited discretionary cash, the new tools will be welcomed if they lead to better cash management and reduced levels of vulnerability.
The discussion so far has not dwelt on what I see as an important weakness of microfinance. It has tended to be static, focusing on getting people to access new financial services. Retention has long been a problem in microcredit so why are we surprised that this is recurring in the case of savings, microinsurance and mobile banking? To me there needs to be more attention given to making sure that the tools we offer respond to the users aging and changing financial needs over their life cycle. If that is one of the benefits of mobile banking it will be an important one.
April 19, 2014 at 7:18 am
John Gitau
With the big questions Monique is directing at Ignacio, I am lucky to be younger in the field, thus exempted from ability to respond. Big brother Ignacio, over to you. But that doesn’t mean I can’t guess and be excused when I sound naive.
Simplicity in understanding and use determines uptake of anything new, technology and virtual money included. Indeed, uptake and the extent of use is the only evidence of such simplicity. Comfort, intensity and flexibility of use depends on how the new oferring corresponds with the existing thinking patterns, practices and evident efficacy in solving existing problems. The new has to mirror the existing patterns to create comfort- a fish in water parallel.
I wish we stuck at the Vanilla microcredit level. At least we would still be having something to look forward to. Now the baby is gone with the bath water. Looking at the microcredit tweaks into working capital’s only shortfall as inadequacy in solving the problem at hand is equivalent to a judge charging a driver who has just crashed a pedestrian to death with careless driving instead of dangerous driving. We wouldn’t be fumbling with consumption smoothing justification to cover up the impotent tweaks’ imbroglio. The day we accepted income smoothing as an official explanation to why microcredit has not created enterprise geniuses among the poor, is the day we accepted microcredits as income streams. We lost the plot. Since then, damage control has been our biggest preoccupation. I call this the obscene incomization of microcredits. To the poor today, microcredits are income streams. And because they can officially and morally consume them within the income smoothing regime, they can as well service them with new microcredits. A moral tweak? ( if I am allowed to consume the money I borrowed, where then am I expected to repay from? I bought food and ate, paid rent and school fees, paid the doctor and repaired my leaking roof).
So, the problem is not that microcredit tweaking has not done enough. The problem is that it has brought disaster to the poor. They are now heavily indebted because they took loans to consume. They are indebted to several financial institutions. These institutions are chasing them for repayment. They cannot borrow anymore and the small businesses they initially put a little money into are too small to even feed their families. Monique, you are talking of an abdication of responsibility. That is being too lenient. I am talking of a crime being committed. I wish it was only an abdication of duty since another system can be introduced to clean up the mess. The poor have even lost the foraging instincts as they were introduced to easy to get money coming as loans which they took as income.
Dr. Cohen, you are the mother of financial education. You sound subdued and frustrated, wondering what went wrong with the intended benefits of financial education. There is is nothing wrong with financial education as it is today. In fact GFEP curriculum is elaborate on the principles of adult learning and teaches the nine principles of adults learning. One principle states that adults learn better by word of recommendation, watching others who have done and succeeded and by doing it themselves. So, to me as a financial education practitioner, the problem is not in content or methodology. The problem is expecting a casino owner to teach gamblers how to win. That is crazy, right? How do you entrust financial education delivery to the same people who sell products that thrive on financial illiteracy? Do you expect a microfinance institution to warn its customers against high interest rates? Or expect them to teach them how to invest and earn more money? Do you sincerely expect them to teach them budgeting or how commissions translate to earnings yield for the institutions? Most microfinance institutions are deceptively clever. Yes, they teach the poor the importance of saving so that they can save the money that becomes collateral for the loans they give. It is self preservation based financial literacy pedagogy. They never tell them ” now you have saved enough, don’t borrow, use it as working capital. Or “you are now cured of the need for loans, take your bed and walk”. You can wait for that to happen until the messiah comes. But, give credit where it is due; they do mention to them about insurance but only when telling them to take policies that cover the loans they have taken or cover household items they have proclaimed as collateral for loans taken.
I always get nervous when the phrase better money management among the poor is used. Who said they have poor money management practices and what is the basis for that declaration?. Would you call a person who stretch the $2 you would spend on a cup of coffee without thinking twice, across rent, food, fees, clothes and still do all what we with bigger money do poor money management? We should be humble enough to learn from the poor how they are able to survive on the so little unassured income. But I agree that they remain very vulnerable and it is not because they need to be taught how to reduce their vulnerability. They know the need, only that their stomachs needs can’t allow any more provision. So, we need to help them improve earning. And that brings in the theme that has always been ignored-EARNING.
As I conclude my ranting, let me say that it is important that we are talking about Financial inclusion as an umbrella under which falls microfinance, financial services and microinsurance. But we need to do one more thing urgently. That is removing the savings component from the microfinance ambit. Microfinance can’t promote selfless savings as it is anathema to itself. Savings should be driven separately and as a competitor to microfinance. That is why initiatives such as Savings Revoution championed by Paul Rippey should be supported. I see solutions for the poor coming from that direction. Microfinance is injured and limping and the more clutches it seeks, the more it demonstrates the fatality of the injury as opposed to hope of recovery.
October 16, 2014 at 3:16 am
Getaneh Gobezie
Thank you for the very good discussion….
Some quick points on the need to ‘’ teach’’ or ‘’not to teach’’. The findings from our on going research reveals — YES and NO. 1) For the poor, particularly those with ‘’low’’, ‘irregular’’ and ‘’unreliable’’ income, saving part of ”whatever” amount of income they earn is a MUST, and they have already been doing this. In this case, the decision to save is not an income-surplus function, but rather a reserve planned prior to consumption, i.e. poor people tend to save fixed amounts of money regardless of income, but they vary their consumptive expenses according to the income situation. I.E, poor people do not save according to the equation Savings = Income – Fixed Consumption but according to the equation Consumption = Income – Fixed Savings. 2) However, that doesn’t mean that they are doing it in efficient, risk free manner. In fact mechanisms (e.g financial education, suitable savings products, etc) that can help them do it more effectively can help them enhance their savings and earnings. … This relates to the issue of NEEDS and WANTS. …. Not everyone makes a wise use of money, people’s immediate ‘demand’ does not prove their benefit, people may ‘want’ cigarettes, but they may not ‘need’ them (instead they may want ‘milk).. scientifically true.. So we may feel the need to teach on avoiding expenditure on this, and plan for a better future, etc. Thanks and Regards, Getaneh (getanehg2002@yahoo.com)