> Posted by John Gitau, CEO, Kenya Financial Education Centre
Embed from Getty ImagesWhat are the sources of income for the poor surviving on two dollars a day? While every financial inclusion advocate wants to recommend savings, credit, and insurance products to the poor, offered by the formal financial institutions, there is a loud silence on the earning component of financial capability.
Could the silence be judged as complacent satisfaction that the earnings currently available are good enough? Suffice it to say that even though the current financial products do not produce income for the users, if they are well designed, they should facilitate the earning of income and certainly the use of income in money management. However, we do realize that if we want to talk of increasing income, we are onto a whole different development agenda: livelihood.
The latest Financial Diaries research in Kenya conducted by Bankable Frontier Associates in collaboration with Digital Divide Data Kenya reveal how poor Kenyans, both in rural and urban areas create and manage multiple sources of income. Each household in the research sample was found to have at least five revenue streams. This finding resulted from tracking 300 households both in urban and rural areas, studying their sources of money and all its uses over a period of one year. The ingenious income generation strategies and mechanisms revealed are quite intriguing if not to spite us intellectuals in the financial capability field.
It is easy to assume that rural households derive their income from agriculture and therefore agriculture is considered as the only income source of interest. But the Financial Diaries reveal something different. An excerpt in the reports says “Many rural households supplement their farming income with income from casual work, doing things like construction, washing, running small businesses or picking up work at clinics, schools and shops. Also, many earn their agricultural income from products that are sold in small quantities frequently like tea, milk, eggs, vegetables.”
Looking at this narrative, one wonders: who teaches the poor how to come up with multiple sources of income? How can experts help? Are we to help in creating more schools, clinics, or shops to enhance labor-based revenue streams?
As if to demonstrate how irrelevant we intellectuals are in this game of income generation for the poor, the diaries continue “The median Kenyan household mediates 128 percent of its income through financial devices. This means they are constantly shuffling money into and out of financial devices such as high frequency ROSCAs or savings in the house. Some take goods on credit and pay after just a day. The day-to-day struggle is all about juggling obligations and keeping some open space to cater for needs that might arise. The result is that income is flowing into the household more regularly than we might expect and in many different kinds of potentially complimentary patterns.”
The way the revenue streams closely interface and mediate with financial devices to match day-to-day needs can only be seen as a preserve of the poor and this dimension a no-go zone for the intellectuals. As if to permanently exonerate us from lethargy and inertia in helping the poor expand income streams, the following excerpt is indeed the saving grace. It says “It is not income that determines what needs to be done rather what must be done around meeting household basics such as food, shelter and health care determines what source of income will be.” This means that need dictates the income source in a demand-driven model. Therefore, unless we live in poverty, it will be difficult to understand, leave alone help the poor in the design of income-generating opportunities.
The Kenya Financial Diaries and Ignacio Mas’ work “Money Resolutions” reveals a paradigm of income earning and money management that appears to exist only in the minds of the poor. It seems difficult to decipher unless one lives in poverty. Woe unto us poor intellectuals left with the lazy job of advising the real poor to seek financial services from financial institutions and also asking financial institutions to design suitable products for the poor.
John Gitau is an independent financial education consultant and trainer and is the CEO of Kenya Financial Education Centre, an independent centre that supports and promotes financial inclusion efforts among the Kenya poor living in low-income neighborhoods. He does that using his home grown financial literacy curriculum, Practical Financial Literacy Counseling (P-FLC) adopted from the Global Financial Education Program (GFEP) developed by Microfinance Opportunities, Citi Foundation, and Freedom from Hunger.
Have you read?
300 Households for One Year – Results of the Kenya Financial Diaries
Honesty: The New Frontier in Formal Financial Services
Beyond Giving Hope – Religion’s Contribution to Financial Capability
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December 11, 2014 at 2:38 pm
Anne Hastings
Many of us who have tried to learn from and/or replicate in our own country BRAC’s ultra-poor graduation program are very aware of this. For instance, in Haiti, in order to graduate into a lending program, the member must have at least three sources of income. Often these will include managing goats (or pigs or chickens), engaging in small trading in the local marketplace and off-and-on day labor. In addition, if there is even a small area around the home, the member will be encouraged to start a kitchen garden or plant a fruit tree or two so that there is always a little food growing nearby. In the Haiti program, the 18 months of accompaniment before the member gets her first loan is all about building up these sources of income and learning to manage the cash flow needed to keep 5 or 6 children fed, clothed and in school. A daunting task indeed!
December 11, 2014 at 5:01 pm
Monique Cohen
John, I agree it is time to get a better handle on poor people’s perspective on how they mange money. Let me suggest issues that are often ignored but warrant consideration. Poor people rarely make decisions in isolation. Rather, given their limited discretionary cash, most choices of financial services as well as consumer goods are trade offs between a range of alternatives. At the same time financial service providers willingly try to generate customer interest in not just one financial product but rather a combination of products e.g. adding a microinsurance premium to supplement a loan or commitment savings account. While attempts at cross selling financial products abound, what is often ignored is that each product requires a commitment of a regular payment that only a few can afford. Moreover, succumbing to such extra expenses and using loans to cover the transactions, is also just another step along the path to over indebtedness.
The Malawi Financial diaries also showed that income flows into the rural household are more regular than we might expect and come in many different kinds of potentially complimentary patterns. This finding led to OBM expanding the membership eligible to contribute to a Christmas Savings club. They added informal sector workers to the existing customer base of formal sector employees. The Bank staff had previously assumed that the poor did not earn money during the hungry season which starts before Christmas and therefore would not be able to deposit money regularly during that time. The transactions data changed that perspective.
December 12, 2014 at 6:25 am
John Gitau
Reading Anne and Monique’s comments triggers a barrage of thoughts, questions and concerns.
I guess serving the ultra-poor is not the same as serving the regular poor as each segment needs unique tools and products( just like a patient in ICU needs different sets of equipments and attention than one in a normal ward). That is why BRAC’s model should be applauded for its current efforts and need not be judged alongside other poverty alleviation models.
I have two concerns though, and Anne you could help me.
1.BRAC’s approach sounds funnel-like, with the ultimate achievement prize being delivery of the extreme poverty victims to microfinance. Is that a great end game while microfinance is being accused of facilitating over-indebtedness, ironically as a result of its effectiveness in delivering loans to the poor? Shouldn’t self sustenance be the ultimate goal by increasing income sources and sizes while keeping off debt?.
2. The BRAC process has some semblance of “domestication” of poverty alleviation patterns. What will happen to survival instincts as Monique decribes” poor people rarely make decisions in isolation”? Aren’t the “tradeoffs between a range of alternatives” important instincts that are developed out of confrontation with income/expenditure challenges? As Jeffrey Riecke describes in his post on Financial Diaries- 300 Households for one year-Results of the Kenya Financial Diaries, there is something admirable around some struggle that strengthens than weaken the poor. He quotes the Diaries ” Kenyans prefer to not leave money idle but instead to set it to work, providing some immediate benefits for themselves or their social networks. For example, savings often go toward a rotating savings and credit association (ROSCA) allowing another member to withdraw funds, a savings and credit cooperative organization(SACCO) enabling borrowing or buying a physical asset that is productive and has potential to function as a loan collateral”. These creative multiple pronged manoeuvers are survival instinctively developed.
The ROSCAs and SACCOS, much as they have a borrowing component, ensure members enjoy the full benefits of interest as income(dividends) at one point. On the other hand, commercial external microfinance institutions that lend the poor take the creme in interest charges leaving borrowers to struggle with the profit margin balance( if the loans funded microenterprises).
One is tempted to discourage the poor from borrowing, for the reason of over-indebtedness that Monique points out, as well as for the principle that earning more to cover all expenses while leaving a surplus for investment should be the focus of any program. The Kenya Financial Diaries say ” The lack of liquid savings has tradeoffs. On one hand, allowing savings into illiquid forms helps individuals invest, however modestly” This is important because, in the sequence of development, the continuum should be earning, saving and investing – not earning, saving and borrowing. That makes the Kenyan case interesting when it is stated that ” The median household has 129 per cent of its monthly income equivalent in financial assets versus 53 per cent in liabilities”. This seems a better idea than increase in income followed by increase in debt.
Monique has a bone to pick with financial services providers whose version of helping the poor earn more is by increasing product ranges that require fixed payment. I suppose such models of products development and delivery, much as they appear faster solutions are beaten by the home grown multiple sources of incomes for the poor and investment styles that resonate with their fluid requirements and circumstances.
December 12, 2014 at 4:16 pm
Anne Hastings
John, you make some excellent points. But let me clarify one thing: in the way that the BRAC program has been implemented in countries around the world, the term “graduation” does not necessarily mean graduation into microcredit. In fact, graduation can perhaps better be defined as graduation into sustainability. Not all graduates move into microfinance nor are they encouraged to. In fact, some specifically offer savings groups. Others even have the members participate in ROSCAs while they are in the program — and they continue after graduation. What they do have when they graduate from the program is multiple sources of income, a savings account or ROSCA they have learned to use, no malnutrition in the household, a home that protects them from the elements, children in school and the understanding of how to access health care when they need it. What they choose to do following graduation is entirely up to them. If they feel they need credit, it can be made available. If they just want savings or microinsurance, they know what these products are and know how to decide if they need them. They have a good understanding of how to access government benefits if their government offers any. Hopefully they understand both the risks and the potential benefits of taking credit.
December 12, 2014 at 6:03 pm
John Gitau
I appreciate your clarification Anne. I am now wondering whether ROSCAs and SACCOs, given their importance in supporting livelihood should be considered as financial inclusion vehicles. As it is now, it appears financial inclusion starts at microfinance stage.
I suppose BRAC’s model can be graduated to serve the normal poor and its internalization can help in designing support products even if they are around the financial systems they use (Saccos and Roscas). I am already wondering if there could be Groups Roscas to raise capital for groups projects. If the system works for individuals in a group for purposes of getting lumpsums for household needs, it could also work with groups as a way of raising lumpy capital.
In another development, BRAC could facilitate the intermediation with Microfinance institutions opening lines of credits for saccos to operate like overdrafts so that sacco members or groups can tap capital on a need basis (eg during planting season) and only get charged for what they borrow and for the respective days. Saccos know their members needs, capabilities and capacities. That may control cost of credit compared to the regular terms loans that have to be paid in lumpsums at defined times irrespective of possibility.
Also, Microfinace institutions funding saccos could accelerate financial inclusion. Saccos can be good safety valves hedging their members from indebtedness. In any case, saccos would be able to negotiate low interest rates for wholesale money as well as secure longer durations for loans complete with grace periods. In the event that BRAC wants to try new products for the poor, trials would be cost effective as they would already have the sacco membership catchment and would quickly know what can and can’t work.
The good thing about this approach is that saccos can buy relevant insurance packages for all their members, underwriting the premiums with respective deductions. Group based insurance covers are not only easier to administer but given the demographic homogeneity of sacco members risk assessment is easier. And what can be done for saccos can also apply for ROSCAs with slight variations.
In short, if BRAC’s model is working under such tough circumstances with those almost dismissed by larger society as gone cases, then a similar model may work in a bigger way for the regular poor. The lessons learned can be used to do things better at the higher level. And, if the model can be replicated as is happening, perhaps it can also be franchised to speed up support for the poor across the world.