I am personally spending a lot of time understanding financial services landscape in emerging economies like India and how can they play an important role to help poor people come out of poverty by creating solutions designed and catered to them, by leveraging data/technology and understanding their behaviour.
On the recommendation of multiple people, I decided to give a shot to the book- Portfolios of the Poor. The first chapter gave me answers to a lot of my questions, doubts, and comments. So, I decided to use excerpts from this chapter to answer them.
This is the first in series of articles on “Financial services for next billion?” that I will be basing on this book.
India-2 and India-3 deserve better?
“Money stored at home can be lost, stolen or wasted on trivial expenditure. The poor deserve something better. ”
Three needs that drive financial activity of the poor households:
- Managing basics: cash-flow management to transform irregular income flows into a dependable resource to meet daily needs.
“Short-term cash flow management is vital to ensure that the family doesn’t go hungry”
- Coping with risks: dealing with the emergencies that can derail families with little in reserve.
- Raising lump sums: seizing opportunities and paying for big ticket expenses by accumulating usefully large sums of money.
Do annualised rates even matter?
“Annualised rates may not be the most appropriate way to compare a large, yearlong microcredit loan with a small, short-term loan from a moneylender, and poor households may not be behaving irrationally if they sometimes choose the money lender over the microcredit provider.”
“For example, a 25 cent fee charged for a moneylender loan of $10 for a week may sound quite reasonable even to Hamid the motor rickshaw driver, who earns just $2.33 per day and for whom a $10 loan may mean the difference being able to buy his sone new clothes for the Eid festival and having him go the mosque in last year’s rags. But on an annualised basis (assuming compounding of the interest) such a loan costs 261 percent per year. That doesn’t sound at all reasonable. One of the lessons for the diaries is that interest paid on very short-duration loans is more sensibly understood as a fee than as annualised interest.”
What matters most is matching household’s cash flow?
“The fact that the loan could be repaid in a series of small weekly payments made it manageable: it allowed her to use a year’s worth of small weekly savings to achieve a single big lump of savings. Price was only aspect of the loan, less important than the repayment schedule that matched instalments to the household’s cash flow. “
Security over convenience
“Security is important, but so is convenience. Reward (in the form of interest receivable) is of less importance: thus they may hide savings at home or entrust cash to their next-door neighbour. “
Combination of financial instruments over just relying on one financial instrument?
“Dealing with emergencies is so crucial that even where insurance is available to them, poor households often have to draw down savings and seek loans to make up the losses in full. Similarly, both saving and borrowing need to be deployed, often simultaneously for the same purpose, to manage cash flow on a day to day basis and to create usefully large lump sums.”
Why physical infrastructure is not everything?
“The Indian experience shows that developing the physical (branch) infrastructure of banks, and even pushing accounts and subsidized loans towards the poor, will not address issues of access unless products are priced to allow banks a good return, and designed to suit the lifestyle, income levels, and cash flows of the poor. “
Uses cases beyond micro-credit for micro-enterprise purposes
“The idea of microcredit has long been associated with the promotion of enterprise: to enable people to purchase productive assets and working stock to setup in business. Micro-credit has thus come to be a closely associated with the customers “microenterprises”. “
“… the demand for microcredit extends well beyond the need for just microenterprise credit. The poor….. seek loans for a multitude for a multitude of uses besides business investment: to cope with emergencies, acquire household assets, pay schooling and health fees, and in general, to better manage complicated lives.”
Moving from micro-credit to micro-finance
“When Yunus started Grameen, his focus was not on microfinance but on microcredit. Moving to microfinance from the narrower goal of microcredit begins with the recognition that poor households want to save and insure as well as borrow.”
What these poor customers are looking for?
“Poor households show that they are impatient for better quality services, inventive in bending such services to suit their own purposes, willing to pay for them, and longing for more reliable financial partners.”
“No household used fewer than four types of the financial instrument during the year. ”
“Even the very poorest, held both savings and debt of some sort.”
“They found informal transactions unpleasant but unavoidable.”
“Lenders, for example, tend to be much more willing to advance loans against a regular flow of income. “
I would like to hear more from you if you are using these insights to build financial services for the next billion. Please do write to me at email@example.com.