> Posted by Jeffrey Riecke, Communications Associate, CFI

Understanding the cash flows and money management practices of the poor is a requirement for effectively designing financial services. Complex income scenarios and impossibly-thin budgets make finances for many poor people complex. It takes time and resources to capture such information in a meaningful way. Insight into these practices was sought in the ambitious Kenya Financial Diaries project, which included biweekly interviews with 300 lower-income households in Kenya over the course of one year. Results from the project were released earlier this week.

The Kenya Financial Diaries, a joint research project by Bankable Frontier Associates and Digital Divide Data, comprehensively tracked the transactions of households across Kenya using a customized, “intelligent” questionnaire. The questionnaire was tailored to each household’s composition, income sources, and financial devices used. As new information became available, the questionnaire adapted accordingly. Along with the quantitative records on their financial lives, researchers interviewed household members on their perceptions, stories, and life events affecting their finances.

The results?

Not surprisingly, lower-income Kenyan households face high volatility in income and consumption, they typically have many income sources, and family and friends make crucial contributions.

The income of the median household in the study fluctuated by 55 percent month-to-month and consumption by 43 percent. The median household had a total of 10 income sources throughout the course of the studied year. Some of these were individually counted sources from family and friends. If these “resources received” were excluded, the medium household number of income sources was five. These figures reflect how households piece together multiple income generating activities to form a whole, moving between projects and picking up extra work as available.

Support from family and friends comprised a significant portion of total income. This held especially true for rural populations and women. Money from family and friends made up 25 percent of the median rural household’s income, compared to 6 percent in urban households. Eighty-five percent of the women surveyed received this kind of funding, accounting for 33 percent of income at the median. Men were much less likely to receive money this way, and it accounted for only 4 percent of income at the median.

In terms of money management, a key priority among the studied households was maintaining ample liquidity for unexpected expenses. This takes the form of maintaining open lines of credit, social relations that could offer financial support, and, to a lesser extent, liquid savings. However, ensuring this short-term liquidity was found by the study to be one of the core challenges facing the sector. This is due in part to Kenyans being very “active” savers. Kenyans prefer to not leave money idle, but instead to set it to work, providing some immediate benefit for themselves or their social network. For example, savings often go towards a rotating savings and credit association (ROSCA) allowing another member to withdraw funds, a savings and credit cooperative organization (SACCO) enabling borrowing, or to buying a physical asset that is productive and has the potential to function as loan collateral. This leaves most savings unavailable in the very short run. The study calculated that the median household only had 10 percent of its financial assets in liquid form.

The lack of liquid savings has tradeoffs. On the one hand, allocating savings into illiquid forms helps individuals invest, however modestly. On the other, a lack of available capital can be detrimental and deadly. During the study there were instances of critical delays in accessing emergency health finance. Many cases involved treatment of malaria or other infections where the cost of care was below KSh 500 (about US$6)

Investing in the longer-term was another challenge identified by the study. ROSCAs are the most widely and successfully used investment instrument, but their payout average is low, only KSh 1,500.

Between savings and loans, Kenyans emphasize saving more than borrowing. At the end of the study, the median household had 129 percent of its monthly income equivalent in financial assets versus 53 percent in liabilities. Only an average of 9 percent of household savings are held in formal financial institutions.

The research identified aspects of existing services that can be improved to encourage usage. “Idle” savings services could offer interest on small balance savings giving clients the feel that their money is “working” and productive. Additionally, savings providers can instill prominent indications that even very small value transactions are welcome. This might take the form of incorporating the option of a low value deposit (e.g. KSh 20) on a mobile service interface. Other aspects cited were improving pricing transparency, increasing loan payment flexibility, and strengthening recourse systems. (The Smart Campaign offers tools and resources in these and other areas, here.)

For more on the findings of the Kenya Financial Diaries, read the report, here. Additional project reports will be released in the future offering closer looks at areas including payments, savings groups, and risk.

Image credit: Gates Foundation

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