Archive for the ‘Loans’ Category

How the African movable assets bill can unleash innovation opportunities for the rural economy

Somewhere in Kenya, 4th June 2012 (Photo: Niti Bhan)

As Kenya joins Zambia and Zimbabwe in ratifying a Movable Property Security Rights Act, there’s a sense that the floodgates to innovation in access to finance might be taking place in rural Africa, south of the Sahara and north of South Africa.

Kenya’s law also goes beyond the cows and goats and allows a borrower to collateralise future receivables arising from contractual relationships.

How it ends up being implemented will set the stage for the next big disruption in financial inclusion. In the meantime, let’s take a closer look at the opportunity space for innovation in the informal and rural economy that dominates these operating environments.

 

1. A whole new bank, designed to meet the needs of rural Africa

Last night, a tweet by Charles Onyango-Obbo struck me forcibly, and reminded me of our Banking the Unbanked proposal crafted for ICICI back in January of 2007.

The very fact that contemporary thoughtleaders in the Kenyan banking industry are unable to take the concept of livestock as collateral for loans seriously, taken together with the deeply embedded assumptions of the formal economy’s financial structure leaves the door wide open to disruption.

It would not be too difficult to conceptualize a rural, co-operative bank custom designed for the local operating environment. In Kenya, where the mobile platform provides clear evidence of the viability, feasibility, and desirability of innovative financial tools and services that work for irregular income streams and provide the flexibility, reciprocity, and negotiability inherent in the cooperative local economies, such a bank could change the social and economic development landscape overnight.

In fact, one could conceivably foresee this “bank for rural Africa” scaling far beyond Kenya’s borders.

 

2. Insurance sector must respond to banking disruption

The domino effect of disruption in the banking sector should kickstart the stagnant insurance industry that has been ineffectually attempting to scale outside of the formal economy’s neatly defined boundaries. Bankers willing to take livestock as collateral for loans will therefore require insurance on their movable asset as a surety against the risk of disease, or drought.

Current products tend to emerge from the international aid industry, seeking to insure smallholder farmers against the shock of losing their livestock to climate related disasters such as prolonged drought, or an epidemic of illness. There is a dearth of relevant and appropriately designed insurance products from the private sector targeting the needs of the rural economy. For all the talk of African urbanization, even the most optimistic projections show that East Africa’s rural population will continue to dominate.

Thus, this an opportunity ripe for the plucking, given the right mix of product, pricing, and promotional messaging.

 

3. Disrupting assumptions of Poverty and Purchasing Power

Whether it is Kenya’s significant non profit sector or the nascent consumer oriented markets, the redrawn lines defining assets, collateral, and the floodgates of access to finance will require a complete overhaul in the way the population is segmented and measured.

Once these hundreds of movable assets have been valued, insured, and registered officially, even the most reluctant banker must now count the pastoralist among his wealthiest local clientele, able to draw a line of credit against his true wealth to the tune of thousands of dollars without feeling the pinch.

 

4. Triggering a rural investment and consumption boom

From mabati for a new roof and simti for the backyard wall, to the latest model smartphone or pickup truck, the concurrent boom in investments and consumption provides an ample playing ground for new products and services tailored for the contextual needs upcountry. Finally, Farmer Joe can install that solar powered irrigation pump for his orange groves in time to reap the next big harvest. And Mama Mercy can think of building up a nest egg of investments faster from the income provided by her farmyard animals.

Kagio Produce Market, Kenya, April 2013 (photo: Niti Bhan)

This might turn out to mean upgrading to a breed of high yield milch cows or being able to provide them with better quality feeds and medicines, but the financial bridge that a well designed strategy leveraging this movable assets bill and it’s timely implementation could mean the difference between the brass ring or treading water.

 

5. Trade and Commerce will open new markets

Given that the Kenyan Movable Property Security Rights Act 2017 goes beyond livestock to include other stores of wealth and value creation, there will be an undeniable impact on regional and cross border trade. No trader will give up the opportunity to leverage their existing inventory if it qualifies for additional credit that can be plowed back into the business.

On the road to Bungoma, Western Kenya, February 2016 (Photo: Niti Bhan)

Trader’s mindset and the documented biashara growth strategies already in evidence point clearly to the productive economic use of this access to finance rather than passive consumption alone. As their business grows, they will require a whole slew of tools and services tailored to their needs. This could be as simple as a basic book keeping app or as complex as customized commodity (assets, livestock, non perishable foodstuffs, grains and cereals) exchange platforms that integrate the disruptive new services percolating through the entire ecosystem.

 

In conclusion

These few steps outlined above are only the beginning of laying the foundation for disrupting the current social and economic development trajectory of small town and rural Kenya. I see immense potential for both direct to consumer as well as business to business segments for forward looking organizations seeking a foothold in the burgeoning East African markets.

We, at Emerging Futures Lab, would be pleased to offer you customized white papers on the opportunities for new products, services, and even business models, based on this emerging financial environment recently signed into law by President Kenyatta. Contact us for an exploratory conversation on the scope and scale of your particular industry’s needs. Our experienced team can help you maximize these opportunities from concept design and prototyping all the way through to path to market strategies.

Bridging East Africa’ formal – informal financial services divide

Kenya’s formal inclusion looks pretty, the financial inclusion industry has been has been great at talking up its achievements over the past 10 years. Here, 75.3% of Kenyans are now formally included, a 50.3% increase from 19 years ago. Official statistics on mobile phone penetration is up to 80.5% of the population and there is general consensus, the mobile phone has been central to expanding formal financial services to the – unbanked and under banked. The numbers are pretty awesome.

In February, FSD Kenya’s chart of the week featured an interesting pattern.

 

source: http://fsdkenya.org/data-visualization/chart-of-the-week-credit-in-kenya-how-big-are-loans-on-average/

source: http://fsdkenya.org/data-visualization/chart-of-the-week-credit-in-kenya-how-big-are-loans-on-average/

 

The red line marks the axis between the formal (prudential) and informal financial services alternatives. The largest source of credit for the bottom 40% populate the informal segment – SACCOs ,MFIs, Peer to peer, community groups. Dotting the top in blue are the banks and mobile banking lending products Mshwari.

So, there is more going on besides what the numbers say about formal financial inclusion.

 

Appreciating the informal sector’s financing alternatives

I got a sense of this gap between what the reports say and what was on the ground in 2015/2016 as part of 2 immersive fieldwork projects – Nyeri Mama’s Financial Diaries and later same year as part of Borderland Biashara: Mapping the cross border, national and regional trade in the East African informal economy project. I got to meet and spend time with biashara people, mama biashara, informal traders at the borderlands, boda boda guys, brokers and 65 year old Wangari – all in their natural setting – the mostly rural and cash intensive informal economies at the borderlands.

I found out that 90% of them had a basket of alternative credit, investment, insurance and savings informal financial products at their disposal – up to 8 different volatility management groups. The flavor of these alternatives ranged from extreme formal prudential to extreme informal.

Wangari, from Nyeri, for example, did not have a bank account but, was part of

  • 1 Micro-finance bank,
  • 2 Cooperatives
  • 1 ROSCA (Rotating Savings and Credit Association
  • 1 Chama (savings group)
  • a Catholic church group and
  • a modest Nokia mobile phone with Mobile wallet (Mpesa) and mobile wallet bank (Mshwari)

At the borderlands of Busia and Malaba between Kenya and Uganda, close to 96% of 100 biashara interviewees were part of at least 3 savings groups, besides their mobile phone. There was almost always one savings group that was part of their trade or craft networks.

 

Bridging the Gap

system-monster

When we look at the under banked strictly through the lenses of a bank, we miss out on the rich diversity of community bank-like products at their disposal. When their options are labelled informal, the tone becomes one of expanding the larger banking formal system, at the expense of our dear Chamas.

My suggestion for the present day efforts to push towards financial formalization, is to instead transform into a pull towards formality. Is there a middle ground? Where we can have the rich of the Chamas and savings group together with the formal financial system? Or where we can have a blend of the rich of the savings groups with technology?

Yes, we can, and there are examples from East Africa’s Kenya and West Africa’s Chad

  • Equity bank directly engages registered savings groups at the Busia Malaba border, a trader’s Chama.  A credit officer from a local branch attends weekly meetings with the group, and liaises between Equity Bank and the Chama. The bank facilitates loans guaranteed by the group as a unit. 

“Muranga county seeks to ease unemployment with cow loans”Daily Nation

  • Ng’ombe loan, by Muramati and Unaitas SACCO, was an unconventional loan product much closer to the realities of a rural Muranga. Youth in this county received high-yielding, pregnant dairy cows on credit, and were to repay the loan through milk deliveries to processors. An expectant cow as the loan principal, with repayments priced in daily milk deliveries. How cool!

“TigoPaare – People’s Banks for Communities across Africa”Balancing Act Africa

  • In Chad, Paare are the equivalent of Chama group savings plans in East Africa. TigoPaare is a group wallet that adds a ‘group layer’ on top of standard mobile money, to deal with common funds, trust and other group initiatives. The wallet helps informal cattle trades look after their income from cattle sales, with the functionality to make loans to members. The pilot attracted 19,000 users, including community mutual funds, cotton producers cooperatives, churches, market sellers and women’s groups.

 

 

Finally, the silver bullet of micro-finance can be buried in peace

Six years ago, in March 2009, after my return from The Philippines where I’d first conducted fieldwork using design ethnography methods to understand household financial management at the erstwhile Base of the Pyramid in a rural region, I had written:

Another eye opener was hearing the story about a micro-finance loan for enabling local women to start their own small businesses. The woman in question runs a sari sari store as seen in the photograph above in a small cluster of houses. She participated in the program about 4 years ago and took out a loan of 5000 pesos to start the shop. It was based on the Bangladesh model according to her memory of the introductory seminar by the loan officers and they would be required to pay it back over a period of 25 weeks (6 months). The experience made her so unhappy that she will never take out such a loan again, poor woman entrepreneur or no.

The first payment was due exactly one week after the loan was disbursed – she’d barely set up her shop, bought inventory of stocks, figured out pricing and what to do, already she was under pressure to start repaying. She used the capital to pay the interest and wished that there had been a grace period to get the business up and running. After all, it was not a cow or a mobile phone, something that could conceivably start earning money in the first week after purchase. A shop needed time to start generating cash flow as people in the neighbourhood discovered the location and spread her prices (the lowest in the walkable distance) by word of mouth. The pressure was intense and created tremendous ongoing tension every week. It just wasn’t worth it and she was glad to have gotten out from under the cloud.

Others, she says, are still trapped in the ongoing cycle of taking out constant loans for working capital and repaying back, never quite earning enough to buy a decent amount of inventory and thus earn enough to get their heads above water.

Was this bridge between “poverty and progress” meant to drown the BoP in consumer debt? The whole experience sounded like a vicious downward spiral for the new business owner/entrepreneurs.

Now, finally, after years of suicides and scandals, such as in India, and debt burdened poor, as in South Africa, there’s a spate of articles digging the grave for this usurious practice of “loans for the poor”.  I could see this train wreck coming but when silver bullets capture the imagination of the powers that be, small voices barely heard can rarely make a difference. It takes years of failure, and so many lives ruined, before donors, funders and institutions wake up to the problem.

The question still remains, however, whether anyone cares enough to design a more viable solution/s, and to put an end to this nonsense, or, whether under the new name of financial inclusion, market forces will continue to drive the implementation of cheap and easy money dangled in front of the poor?

 

Creative ways to financial inclusion, inspired by observing practice

Needless to say, mobile money has been a wild success in scaling an expansive agent network for converting cash to e-money and enabling person to person money transfer. Speaking at a recent conference, John Staley, Chief Officer – Finance, Innovation and Technology at Equity Bank had this to say:

“We should move the conversation from mobile money to mobile financial services.”

Absolutely! My takeaway from his comment was ”how do we get there?”

You see, with a mobile phone in (almost) everyone’s pocket, coupled with ubiquitous mobile money, conventional wisdom quips “to each his own bank.” Building on this assumption, focus quickly shifts to tweaking mobile money functions and pushing mobile based financial products to market. While this strategy may work for affluent, educated urban consumers, already familiar with banking functions of a modern economy, is it a fit for others who do not meet these criteria?

 

Banking Outside the Box

Often cited as the ‘unbanked’, lower income segment groups found amongst rural and informal sector demographic, aren’t as helpless as we imagine them to be. In fact, they have devised creative ways to exercise parallel banking functions: group savings, insurance, social reputation based credit scoring and loan systems; mechanisms oblivious to outsiders and at times, even subject to misinterpretation.

One instance, from Kenya’s Kiambu County, in part rural part urban Ruiru, a young goat grazes idly, unmanned and tethered to a pivot stone. For the family that owns it, this is their way of saving; it costs little in terms of management and input, with a future expected value that can be reasonably estimated. This practice is not unique to East Africa, evident from similar field observations in rural parts of India and the Philippines.

“The comparative affordability of a calf is such that the value of the mature animal is considered a worthwhile return on investment. In an emergency, livestock is a walking fixed deposit, to be sold for ready cash.” – Niti Bhan

The way I see it, in order to succeed, financial inclusion efforts need to draw insights from the people it seeks to enable, be considerate of their culture, observe their behaviour and get a better sense of their environment. Like the domestication of animals common in rural, for example.

Which is why I was rather pleased when I came across this headline on an unconventional approach to credit, Ng’ombe loan; much closer to the realities of a rural operating environment in my opinion.

“[Murang’a] Youth will receive high-yielding, pregnant dairy cows on credit [from Muramati and Unaitas SACCO] and repay the loan through milk deliveries to processors.” – Business Daily

An expectant cow as the loan principal, with repayments priced in daily milk deliveries.

 

Putting People first

So how do mobile financial services fit into this picture? What will mobile financial services for the ‘unbanked’ look like in the future? Is mobile even a consideration for servicing the ‘unbanked’?  I won’t pretend to know.

One thing seems certain though, if the plan is to expand these services to our target audience, then just tweaking won’t cut it. It could be because the people involved are far removed from our daily experiences, interactions, notions and concepts of money or banks. Whatever the reason, when the customers are people, it behooves us to better understand their POV, even if seemingly unorthodox, so as to inform design of financial products – mobile or not.

Published! Pathways Out of Poverty by iBoPAsia Project

Innovating with the BoP in Southeast Asia.

The iBoP Asia Project has published the complete set of small grants funding innovation projects for those at the Bottom of the Pyramid in the ASEAN region. One of the first projects to win the Small Grants competition in 2008 was The Prepaid Economy Project: Understanding BoP household financial management.

Core values: business models meant to serve the BoP

(Republished from old Perspective 2.0 blog March 10th 2009)

Single meal portions of vegetables, Cabatuan market, Iloilo February 2009

The biggest shock for me in the Phillippines was learning that airtime minutes purchased on a prepaid plan came with an expiry date. The smaller the amount the faster the expiration. For example, the lowest amounts of “load” that can be purchased are 10 or 20 pesos (about 25 USD cents) and they are valid for either text or voice or a combination of both for just 24 hours.

As usual, nobody in the rural area had heard about GCash or used it, much less transferred airtime to pay for anything, although anecdotal reports seem to imply that this was the case. While my observations are naturally based on the interactions in one barangay in one province on one of over 7000 islands, it does make me wonder if by creating a perishable product, the local telco’s might inadvertently be hampering the uptick of a host of grassroots workarounds and innovative uses? It also makes me wonder if the observed and documented phenomena of Filipinos having the highest usage of SMS might have something to do with the fact that you have to consume the 20 peso worth (100) sms in 24 hours or lose your money?

“But people are in the habit of only buying what they consume daily” said someone in the city when I brought up this fact out of curiosity. True, to a degree. On the other side of the coin was a small business owner who is forced to load 30 peso worth every three days simply to keep his phone operational since it is a critical part of his business operations and allows him to stay in touch with customers. Do high volumes/small margins at the BoP necessarily imply forced consumption?

Rural sari sari store, Iloilo, The Philippines February 2009

Another eye opener was hearing the story about a microfinance loan for enabling local women to start their own small businesses. The woman in question runs a sari sari store as seen in the photograph above in a small cluster of houses. She participated in the program about 4 years ago and took out a loan of 5000 pesos to start the shop. It was based on the Bangladesh model according to her memory of the introductory seminar by the loan officers and they would be required to pay it back over a period of 25 weeks (6 months). The experience made her so unhappy that she will never take out such a loan again, poor woman entreprenuer or no.

The first payment was due exactly one week after the loan was disbursed – she’d barely set up her shop, bought inventory of stocks, figured out pricing and what to do, already she was under pressure to start repaying. She used the capital to pay the interest and wished that there had been a grace period to get the business up and running. After all, it was not a cow or a mobile phone, something that could conceivably start earning money in the first week after purchase. A shop needed time to start generating cash flow as people in the neighbourhood discovered the location and spread her prices (the lowest in the walkable distance) by word of mouth. The pressure was intense and created tremendous ongoing tension every week. It just wasn’t worth it and she was glad to have gotten out from under the cloud.

Others, she says, are still trapped in the ongoing cycle of taking out constant loans for working capital and repaying back, never quite earning enough to buy a decent amount of inventory and thus earn enough to get their heads above water. Was this bridge between “poverty and progress” meant to drown the BoP in consumer debt? The whole experience sounded like a vicious downward spiral for the new business owner/entreprenuers.

There’s much much more to this story of course and after spending a significant amount of time in the shop, doing inventory shopping, checking the prices at the outlet store in the nearest town 5 km away, the affordable markup on the products back in the village and the subsequent analysis, it makes me wonder if it were possible for business models meant to the serve the BoP could be designed to be as flexible and adaptable as the informal economy itself?

For example, the most popular ‘sausage’ seller in the area is a woman who sells them door to door. Her prices are naturally a tad higher than what you’d get at the markets in town but her USP or unique selling proposition for the majority of her customers – she has about 50 households on her regular weekly walking route – is that she extends them a week’s credit to pay her for the ‘frozen foods’ as they are called locally. Hotdogs, chorizos, longganisa and other preserved meats. Naturally, given the choice between needing to have cash upfront when shopping for the same  or being able to account for it over the period of a week, they prefer buying from her. Besides, she’s a cousin and they don’t have any remittence coming in at home.

All of this makes me wonder what is it about the set up that workarounds are inevitably required by those who live on irregular and unpredictable incomes in order to navigate their way through these systems and processes? In some cases, ironically, even those meant to improve their lives.

Whether its the chap who would rather sell his much loved motorcycle to start his own business than to risk taking out a microfinance loan meant just for people like him (because his income flow is so different from the payment schedules) or the woman who sends her about to expire airtime to her son and he sends it back to her again ( passaload costing just 2 pesos) so that the clock ticking on expiry turns back to zero, these are all jugaad ways or workarounds to cope with the inability of the systems to meet the unmet needs of the customers for whom they are meant.

How and where do we begin to meet the basic needs, if we are indeed to do business sustainably with the poor, not just profitably?

Women Together: Incentivising Savings

Prema Salgaonkar has been working with Mahila Milan for over 20 years and now heads a group of local facilitators of a daily savings scheme for Dharavi residents. Mahila Milan means “women together” and provides a decentralised vehicle for the empowerment of women via leadership roles and advocacy alongside its pivotal daily savings collection. Prema visits around 450 households each day, of which a third will deposit anything between Rs 5 to 200, with almost all households banking something each week. Such a savings mechanism is ideally suited to the irregular nature of earnings at the base of the pyramid which we have been widely discussing here.

The deposits from a number of collectives are formally banked but rather than paying interest Mahila Milan provides community and emergency support in a transparent manner. For many, without this daily visit which both incentivises and protects savings, surplus cash would not even be conceived of – let alone put aside. Savings are readily accessible and members of the scheme can apply for credit if required. If loans are requested the local Mahila Milan leaders will assess the need and ability to repay, possibly consulting with neighbours as to the borrower’s situation. Repayment terms are negotiated on a case-by-case basis around the borrower’s earning patterns, with consideration given to the maintenance of some savings alongside repayments. Loans – usually for up to Rs 500 at 2% interest – have helped with school fees, medical bills and entrepreneurial start-ups from tailoring services to coconut vending.

Beginning in Mumbai in the eighties, initially Mahila Milan had many more illiterate members and developed a system whereby coloured squares of paper would be exchanged for deposits and kept by the saving member in a plastic bag: red for one rupee, yellow for two, green for three and so on. This way members could always check how much money they had access to and plan accordingly. Now this system has been largely disbanded and replaced with passbooks which members were proud to show us and explain the context of various peaks in savings and withdrawal. Currently Mahila Milan constitutes a networked federation of nationwide woman’s collectives encompassing 60,000 women

The system is not just about collecting money but also about daily contact which deepens the understanding of various issues facing Dharavi residents. Contributing to a consensus of community priorities, this information is often passed on to other support groups in the area such as the local community council (panchayat) plus used to inform a number of Mahila Milan initiatives. One of our informants (above) who used the scheme conveyed that even on the days when she has nothing to deposit that its was reassuring to be visited by a trusted outsider with sound financial knowledge and that she sometimes used the opportunity to discuss issues such as how rising food prices were affecting those beyond her own neighbourhood. She notes that watching her savings grow has allowed her to start imagining and planning a better future for her family – with her mother and sister also active members in the scheme.

We were told of numerous success stories like the woman who saved towards buying a second-hand sewing machine which allowed her daughter to leave a gruelling job at a local garment factory to start her own now-flourishing dressmaking business. Another woman with six children and an alcoholic husband saved Rs 5-10 a day till she had Rs 5000 with which she bought a machine to process heavy duty plastic for recycling and now boasts a much higher standard of living for herself and her family. Others access their savings on a more short term basis to counter income fluctuations – still signalling a heightened life standard. And significantly most continue with their savings schemes while servicing their loans.

Micro-credit has been commanding a fair amount of attention surrounding poverty alleviation of late – including voices of caution as have featured on blog posts below. Mahila Milan seeks to strengthen financial assets primarily through savings-led services with micro-loans being offered as a secondary and complimentary service. Last year’s brief article Putting the Microsavings in Microfinance from the New York Times makes the highly relevant point that “only some poor people will benefit from the chance to borrow, but almost all will benefit from the chance to save.”

[Check out more photos from fieldwork at Dharavi.]

Traditional moneylending – informal, flexible, trust based and changing fast

As Microfinance Grows in India, So Do Its Rivals is the title of a recent WSJ article by Ketaki Gokhale which begins so,

The practice of making tiny loans to poor people, or microfinance, was supposed to help drive traditional village moneylenders from rural India.

Instead, traditional moneylenders, who typically charge high interest rates, are thriving, even in areas most heavily targeted by microfinance, [..]
Even as the government and nonprofit organizations came together to create the Indian microfinance market in the 1990s, traditional moneylenders’ share of total rural Indian household debt grew to 29.6% from 17.5%, according to a government survey.
[…]
One potential reason for their growth: Some microfinance borrowers say they need village moneylenders to help them pay their debts on time. Some academic researchers believe the moneylenders are keeping afloat many microfinance groups.

Peer pressure to pay back microfinance loans is intense, because microlenders almost always require borrowers to join small, tightknit groups. If one member defaults, none can get another loan. Microloans have a stellar repayment rate — close to 100% — and some analysts believe a hidden reason is the stopgap provided by moneylenders.

Drive out the village bania, a caricatured movie villain whose like has not graced the silver screen for quite some time. Before we continue to look at the anecdotes in the WSJ article, it behooves us to take a fair and balanced view of the village moneylender in India

There are 34,000 money lenders – and they have lent money to more than 2,00,00,000 farmers. They account for nearly 30% of the rural credit flows – and more credit than all the nationalized banks put together.

They charge between 18% to 36% p.a. interest generally. Lesser than what most ‘educated’ credit card users pay – and what ‘modern’ banks charge their English speaking customers.

So much about ‘usury’ by money lenders.

even while the WSJ’s own Indian arm loses all rights to call itself an objective observer of society.

The article seems to imply that traditional moneylenders charge far more interest than MFIs quoting the CGAP on this “fact”,

But the rates are still lower than those offered by the traditional
Indian moneylending industry, a chaotic jumble of pawn brokers, gold merchants and other private moneylenders — some licensed, most not. For centuries they have monopolized rural Indian credit markets but have been accused of fleecing people who don’t have access to formal banking by charging exorbitant rates and seizing all their belongings as collateral. They typically charge between 24% and 120% annually, according to CGAP.

I’m sure that no one had access to “formal banking” during those very centuries an extensive, sophisticated yet simple system of indigenous banking that extended credit and enabled trade to flourish across India.

I found it fascinating that this article set out to show why the informal economy had to be wiped out by the formal MFI one, in order to better serve the poor, only to support the exact opposite argument anecdotally. Perhaps its MFIs which need to be driven out of rural India’s villages?

One lender, who wished to remain anonymous because his business is unregistered, gives borrowers short-term, collateral-free loans “as quickly as an ATM gives money,” he boasts. Interest sometimes has to be paid on a daily basis and works out to an annual rate of 48%.

The poor use his loans as a stopgap when they can’t make their weekly microfinance repayments because their income was less than expected, he says.
[…]
The difference, however, is that the moneylenders give loans faster, without asking the women to form groups and serve as each other’s guarantors, as microfinance lenders do in order to ensure a higher repayment rate. They also charge significantly more than the four microlenders serving the neighborhood.

“Group pressure makes us go to moneylenders” to cover their microfinance loans, says Baleshwari, who goes by only one name, as does her sister. “We get small loans for 15 days to fill the gaps when we can’t pay. If you lag behind, the rest of the group members can’t get new loans.”

This dynamic is why some analysts believe the village moneylenders are actually floating the microfinance lenders.

The inherent conflict between the schedule of payments and the irregular income stream of income is the crux of this research. Rural MFI consultant and CGAP consultant  Brett Matthews had pointed out over many emails that MFIs prefer not deal with seasonality yet it was an overwhelming aspect of rural life,

But here in Mahabubnagar, few women have started their own businesses. Some of those in business have to rely on moneylenders. Microloan repayments begin the week after the loan is disbursed and continue with weekly payments. Most businesses don’t produce instant profits, and many are seasonal, so moneylenders can help when funds are tight.

This challenge was observed in The Philippines during fieldwork and discussed here  – specifically pointing out that MFIs expect repayment to start the week following the loan, an additional burden if the business for which the loan was secured needed some lead time to get going. One wishes the author had shared her source for this insight as it would have been interesting to follow up and explore other findings in this subject area in greater depth, if available.

Where microlenders, relative newcomers to rural India, rely on peer pressure for repayment, private moneylenders have historically been conservative in their practices: extending loans based on an intimate knowledge of people’s finances, and building their client bases over many years,

 

Trust.

The most critical element of doing business within rural communities everywhere as well observed among the urban BoP. What are the odds that your neighbourhood moneylender would be open to negotiation on smaller payments made as and when cash was in hand since he knew how and where you made your money?

But since microfinance took off in Mahabubnagar, he has seen moneylenders start to “adopt the methods of microfinance” — small loans, large volumes and regular repayments — “to scale up their business.”

In summary, it seems that traditional ways and means which offer speed, flexibility and trust are definitely in danger from their rivals, the
microfinance organizations but not that of being pushed out. Instead we
find they too are taking on the practices of high volume micro loans to
scale and compete with these newcomers.

Banking on Trust

Following up on the Reserve Bank of India announcement mentioned below to allow small shops and phone kiosks, etc to handle basic services on behalf of banks – I directed questions around potential receptivity today.

I spoke to a woman who runs a terracotta pot making business. It is unusual in this area for a women to do so but her husband is an alcoholic so she manages the operation herself. She currently uses a local community savings scheme on which she receives interest if she makes regular payments for 5 years. She can also take a loan from the scheme to cope with seasonal fluctuation in earning – at slightly lower rates than banks. I carefully described the upcoming developments and her response was that she wouldn’t use shops, etc for banking as a few years back many people in her area got burnt after using outside middlemen for banking services for 6 years and lost all their money. One imagines that perhaps over time she would use such a scheme but she certainly wouldn’t be an early adopter.

This raises the issue of trust in new banking ventures… and indeed any new services.
I noted in the
white paper from the CGAP blog about their initiatives in Malawi that they have: “found that catering to local opinion leaders, developing a road show to build brand awareness, and utilizing radio as a key medium of communication are important components of their strategy that have evolved through their experiences.”

These communities are very close knit and trust is not won easily but is essential to adoption of new services. A further concern was access to her money anytime – which she has with her savings scheme if an emergency arises and is another reason she cited to not wanting to use a formal bank in its current capacity.

My informant also mentioned that she preferred her private savings scheme as she fears a bank account could be accessed by her husband (Indian banks probably need to a better job of countering this assumption if indeed it is not the case). She seems quite successful in keeping her family’s money safe from him but he does menial work at a local liquor store in exchange for alcohol.

Although she doesn’t own a mobile phone… many men and women in the area do. One notes that Indian mobile banking does not include as inclusive initiatives as M-Pesa. It seems that this is partly because the RBI approved banks over mobile network operators to conduct services. The resulting offerings haven’t effectively reduced barriers for the unbanked at the bottom of the pyramid.

Seasonality and its influence on rural BoP household financial management

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Fallow field, Sawai Madhopur, Rajasthan India  January 2009

I first noticed the influence of seasonality on income halfway during the Indian fieldwork. On one hand, its but natural that the seasons are linked to a farmer's cash flow, dependent as it is on the harvest. But it was when I met the silversmith that I realized that even his income was influenced by the harvest season simply because so many of his customers were farmers. This led me to start asking everyone else that I met whether they noticed any pattern of change in their income over the course of the natural year. Just about everyone could identify the high points and the lows, regardless of whether they themselves owned land or were farmers themselves. We could stop at this point with the assumption that rural economies are linked to the seasons and impact the majority of the closely knit community.

However, I found that in The Philippines, Jesse the furniture maker, could also identify seasonal ups and downs in his income over the year, but his pattern of months was very different from the rest of the community. Instead of being linked to the "dry" and "wet" seasons (this was a rice farming region) his peak times were dependent on the holiday seasons of the balik bayan or migrant workers. They would use their home leaves to improve their houses, tending to order new furniture in conjunction with the renovation or building work done during this time.

This leads me to say that while one could define seasonality as solely the influence of nature on the land, in the context of learning about irregular incomes, I'd prefer to expand the definition to include any reasonably predictable patterns in cash flow based on the earner's prior experience. This would then differentiate known changes in cash flow from the truly unpredictable – natural disaster say or the random – how many bottles of wine might be sold today.

Thus, in rural communities, such as those studied, one might hazard a guess that the various mitigating behaviours, such as maintaining multiple streams of income or managing a portfolio of "deposits" that could be converted into cash at different durations of time, emerged from the experience and knowledge of the known, natural rhythm of the larger cycle of seasons but is also used to smoothen the volatility of the random and unpredictable in the shorter time spans. Nature would teach that there are things beyond the control of the human being, but experience would permit the control of that which could be managed.