Financial services for next billion? [Part 6] Concluding thoughts – What’s next?

Similar to my last 5 posts in my series on “financial services for next billion?”, in this one I have covered chapter 6 and 7 of the book – Portfolios of the poor in Q&A format, covering pieces around next phase of micro-finance and concluding thoughts of the book as opportunities for financial services ventures trying to cater to low income population in countries like India. This is the last piece of “financial services for next billion” series from this book.

What is the Grameen II – next version of Grameen Bank?
“Grameen II, however would contribute to a different set of messages, based around the provision of broad banking services, including savings, increasingly tailored to individuals and their multiple needs.”
“Grameen II made two sets of changes. The first tackled the rigidity and inflexibility in the lending system….It recognised that a single loan term (of one year) and a single repayment schedule (of equal invariable weekly instalments that can’t be prepaid but have to be paid each and every week for the full year) simply didn’t match the cash flows of many poor households……Grameen II accordingly brought in a wide range of loan terms from three months to three years.”
“To help if and when cash flow starts to dry up part way through a loan, or if some new investment opportunity arises, loans could be topped up to their fill value before they were fully repaid. In cases of serious repayment difficulties, borrowers could reschedule their loans by extending the term, thus reducing the instalment value. This is done within a system that contains incentives to “get back on the track” in the form of promise of renewed borrowing rights once the problem has mended.”
“Grameen II also stepped back from group solidarity, outlawing any arrangements that makes borrowers responsible for repaying each other’s loans.”
“In effect, Grameen turned itself from a micro-enterprise lender into a true retail bank, but one that continued to focus on poor households.”

What are the next kinds of saving products introduced in Grameen II?
“Under Grameen II, this compulsory saving was abandoned, and two new savings products were introduced in its place. A personal passbook savings account allowed individuals to deposit and withdraw savings at any time in any value. ”
“A commitment savings plan, known as the Grameen Pension Savings, or GPS, was also introduced that offered a good rate of interest in return for regular monthly deposits over a five or 10 year term.”
” GPS, offers a good rate of interest to members who agree to save a regular sum of at least one dollar per month for a term of five or 10 years. It is a pension in name only. Use is not restricted for retirement needs; indeed, many younger families see the pensions as ways to build resources for expenses that loom in the medium term – like the eventual need to pay for children’s schooling or weddings.”
“Grameen II demonstrates that introducing better products can dramatically change an equation: with the introduction of the easy to use passbook savings account, savings activity rose dramatically.”

Is Grameen II successful ?
“These changes hold out the promise of making it easier for cash-strapped poor households to manage cash day to day and to accumulate large sums in a secure savings device, two of the core financial service needs we identified.”
” With Grameen II, not only was Grameen able to raise more savings from its poor borrowers, but the bank intensified its’ mobilisation of deposits from the ordinary public”
“This was dramatically successful: by the end of 2004 the bank’s deposit portfolio exceeded its loan portfolio for the first time ever, and savings have continued to grow since at a faster rate than the loan portfolio.”
” By the end of 2007 Grameen clients collectively owned $1.4 of savings in the bank for each $1 they that had in loans.”

What are loan-top ups?
“the loan top-up facility, under which loans can be refreshed to the amount that had originally been disbursed. This could happen part way through the repayment cycle, so that if you started with a $200 loan and had already paid off $100, you could borrow that $100 again to get back up to $200 and continue with weekly repayments for an extended term.”
“subsequent top-ups didn’t mean that Ramna was falling into deeper and deeper debt: the top-up merely allowed her to refresh her loan to its original disbursed value, not more. ”

Consumer or cash flow management lending left out?
“the focus on micro-credit for micro-enterprise has contributed enormously to the attraction, success, and spread of micro-finance, but has had the unfortunate side effect of diverting attention from a much wider set of households who seek, value and reliably repay loans for many other purposes.”
“it is clear that an early hope of micro-finance lending – that virtually every loan would be invested in a micro-enterprise- has not come about. On the other hand, businesses and asset-investment uses are responsible for more than half the value of loans disbursed, through concentrated among the minority of borrowers well places to used them in this way.”

What are the short-comings of micro-finance institutions?
“meetings consume too much precious time, there is no privacy, individual needs go unrecognized, the male workers tend to patronize the women members, and more and more members skip the meeting if they can, preferring just to show up and pay their dues as quickly as possible.”
“Working almost exclusively with women may well have started as a commendable attempt to right a gender imbalance, but, as times goes by, more and more critics point to the failure to find ways to serve men.”
“Many micro-finance institutions say that they have abandoned joint liability, but field staff fearful of loan arrears, continue to impose some forms of it.”
“despite attempts to make repayment terms and schedules more flexible, most loans are still for one year with equal invariable weekly top-up system and competitors short-term emergency loans remains an exception rather than a rule in the industry.”
“Most clients are still routinely pressured into taking out a fresh loan as they have repaid an early one. Higher rates of account closures suggest that many members find these conditions difficult.”

What are the opportunities for financial service providers if they want to cater to this audience?
” 1. Helping poor households manage money on a day to day basis.
2. Helping poor households build savings over the long term.
3. Helping poor households borrow for all uses.

In some places, providing insurance will also provide a big opportunity, but the diaries remind us that from a household’s perspective what matters is being able to manage risk, not being insured per se.”

What does cash flow management means?
“By cash-flow management we mean day to day money management: manipulating small and irregular or unreliable incomes to ensure that cash is available when needed, so that there is food on the table every day, small but unpredictable needs like a visit to the doctor are met, and low-value but recurrent outlays, say for school fees or books, can be provided for.”

Do poor people want to save and how?
” The diaries show that poor households have room in their budgets for savings and understand the need to savings and understand the need to save.”
“offer long-term contractual savings products. These mimic savings clubs by making it possible to save small sums on a regular basis, but add the opportunity of doing so safely over the long term.”
“But this revolution in long term “microsaving” is only just starting, and is yet to begin in countries where legislation to allow reliable microbankers to mobilise savings is not yet in place.”

Does this segment need a micro-insurance product or general purpose insurance product?
“If there were such a thing as “general purpose insurance”-an insurance policy that paid out for a wide range of events – poor households would be more likely to embrace it. In it’s absence, the next best way of dealing with risk is through savings, backed up by access to loans…”

Does this segment look for “general purpose” loan?
“Even if poor households are provided with ways to build savings over the long term, they will still need to finance a wide range of larger expenditures through borrowing. There are so many demands for large sums that they cannot be met by saving alone. But the diaries show that poor households lack dependable access to credit, especially for larger sums that are needed to deal with major life-cycle events, big purchases, and emergencies.”
“But many micro-finance providers still prefer their borrowers to use their loans for just one purpose – micro-enterprise. Where this is enforced, clients can’t borrow for other vital uses even when they have the cash flow to service the loans”
“many loans ostensibly taken for micro-enterprises are used for other purposes. It is time for micro-finance not merely to face up to this reality, but to embrace the opportunity it presents. By offering general-purpose loans, matched in value and structure to the cash flows of poor households, micro-finance would open to the biggest single market it is likely to find among the poor (especially the urban poor who tend to be waged rather than self-employed), and one that would be greatly appreciated by most of our diary households.”

What are the four core principles to be kept in mind while designing the products for poor people?
“reliability, convenience, flexibility, and structure”
“Reliability – the delivery of products and services at the promised time, in the promised amount, and at the promised price”
“Convenience. By convenience we mean the chance to take and repay loans, and make and withdraw deposits, frequently, close to home or work, quickly, privately, and unobtrusively. ”
“Flexibility refers to the ease with which transactions can reconciled with cash flows.”
“Structure. Regularities- such as scheduled visits by bank workers, or planned savings or loan repayment schedules0 that promote self-discipline are what we mean by structure. Structure becomes important as values rise and term lengths grow, above all in commitment savings plans and longer-term or higher-value loans.”

I would like to hear more from you if you are using (or planning to use) these insights to build financial services for the next billion. Please do write to me at


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