Financial Behaviour Patterns Observed Among Households in Rural Informal Economy in Asia

This is the original working paper of the research conducted on rural household financial management, in developing country conditions, pioneering the use of methods from human centered design for discovery, during Nov 2008 to March 2009, aka the Prepaid Economy Project. It was peer reviewed by Brett Hudson Matthews, and I have incorporated his comments into the PDF.

This research study was carried out with the aid of a grant from the iBoP Asia Project (http://www.ibop-asia.net), a partnership between the Ateneo School of Government and Canada’s International Development Research Centre (www.idrc.ca)

The abstract:

The challenge faced by Bottom of the Pyramid (BoP) ventures has been the lack of knowledge about their intended target audience from the point of view of business development whereas decades of consumer research and insights are available for conventional markets. What little is known about the BoP’s consumer behaviour, purchasing patterns and decision making tends to assume that there are no primary differences between mainstream consumers and the BoP except for the amount of their income – pegged most often between $2 to $5 a day.

In practice, the great majority at the BoP manage on incomes earned from a variety of sources rather than a predictable salary from a regular job and have little or no access to conventional financial tools such as credit cards, bank accounts, loans, mortgages. This is one of the biggest differentiators in the challenge of value creation faced by BoP ventures, particularly among rural populations (over 60% of the global BoP population lives in rural areas).

Exploratory research was conducted in the field among rural Indian and rural Filipino populations in order to understand how those on irregular incomes managed their household expenses. Empirical data collected by observations, interviews and extended immersion led us to identify patterns of behaviour among the rural BoP in their management of income and expenditure, ‘cash flow’ and ‘working capital’ and the significance of social capital and community networks as financial tools. Practices documented include ‘conversion to goods’, ‘stored wealth’, ‘cashless transactions’, and reliance on multiple sources of income that mature over different times.

This paper will share our observations from the field; identify some challenges these behaviours create for business and also explore some opportunities for value creation by seeking to articulate the elements that BoP ventures must address if they are to do business profitably with the rural ‘poor’ based on their own existing patterns of financial habits and norms.

The Conclusion:

In sum, it can be concluded that the challenges for value creation can be quite different for BoP ventures interested in addressing the rural markets. From the observations made in the field, we can highlight three key implications for business development. These are:

Seasonality – with the exception of the salaried, everyone else in the sample pool was able to identify times of abundance and scarcity over the course of natural year in their earnings. Identification of a particular region or market’s local pattern of seasonality would benefit the design of payment schedules, timing of entry or new product and service launch, for example.

Relative lack of liquidity – The majority of the rural households observed tended to ‘store wealth’ in the form of goods, livestock or natural resources, relying on a variety of cashless transactions within the community for a number of needs. Conventional business development strategies need to be reformulated to take this into account as these patterns of behaviour may reflect the household’s purchasing power or income level inaccurately.

Increasing the customer’s span of control over the timing, frequency and amount of cash required – Since the availability and amount of cash cannot be predicted on calendar time, this implication is best reflected by the success of the prepaid mobile phone subscriptions in these same markets. When some cash is available, it can be used to purchase airtime minutes for text or voice calls, when there is no money, the phone can still receive incoming calls. Models which impose an external schedule of periodicity, frequency and amount of cash required may not always be successful in matching the volatile cash flow particular to each household’s sources of income.

It’s way past the time to consider the Informal Economy as a distinct commercial environment

Brand stickers on avocados displayed for sale on a highway, Kenya. April 2013

Regardless of continent, it is now high time we accepted the informal economy (unformal or unrecognised or unorganized sectors) as a commercial operating environment in its own right.

The continued oversight is rapidly coalescing into a gaping void of hiccups and failures, by large companies, non profit institutions, and startups, alike. This issue goes far beyond “understanding the informal” or recognizing the fulltime professional status of the service providers that I’ve written about before.

It’s about the problems created by continuing to assume every individual is poverty stricken and struggling to make a livelihood simply because a significant portion of their commercial activity operates outside what is rarely defined but is assumed to be the formal, structured economy held up as the pinnacle of economic development.

It’s why academics can barely conceal their flabbergasted surprise that a person has a better quality of life, and a reasonably viable revenue stream in [gasp] informal market trading, or even agricultural work.

It’s why @pesa_africa questions the continued transplantation of e-commerce business models directly from Seattle to subSahara given that they’ve tended to wither on the vines.

It’s why market women and traders pay the price of daily harassment and abuse by those given authority over their peace of mind.

And, it’s also why the freshest produce gets to you first thing in the morning in Nairobi or Cotonou or Kinshasa.

This is not meant to be a paean to the hardworking women and men who keep the engines of commerce and trade humming in the harshest of environments with scarce resources and inadequate infrastructure.

It’s the first step in acknowledging yet another holdover from a colonial past that decades later still hampers and hinders the social and economic development that should have happened by now, by all rights.

It’s also the necessary counterpart to the recognition of agency required for design interventions to succeed once donor funding ends.

This theme is consistently covered in this blog in the category Biashara Economics and hashtag #biasharaeconomics

Launching Our Digital Documentation Project: Ibadan’s Tailors, Traders, and Textiles by Nigerian/British artist Folake Shoga

After months of hard work, I am very honoured and proud to announced our new digital documentation project by my friend Folake Shoga, a Nigerian/British multidisciplinary artist with more than three decades of experience.

She went on a journey of discovery through the twists and turns of the informal value web that holds together West Africa’s famed textiles and fashionably styled culture.

Her window to this world is centered around Ibadan, Nigeria, and she takes us through an illustrated, personally narrated documentary that spans the experience of getting a new dress, from choosing the right fabric, all the way through building a fashion brand.

Come and join us for this fascinating peek behind the scenes! You can also find this unique photo-documentary again on my portfolio page.

As global firms (MNC) pull back from emerging markets, what does this mean for Africa?

Last week’s issue of The Economist drilled down deeper to cover the retreat of globalization – at least in the most visible form, that of the multinational brands dotting cityscapes around the world. The retreat of the global company, they trumpet, the end of Theodore Levitt’s vision.

Credit Suisse takes a concise yet comprehensive look at these weak signals in their well-written report that frames the situation as a transitional tug of war between globalization and multipolarity – an inflection point, rather than a retreat. They make it sound like missing the turn at an intersection and having to come back to the traffic lights to figure out which way to go.

Duncan Green of Oxfam captured the essence well:

But the deeper explanation is that both the advantages of scale and those of arbitrage have worn away. Global firms have big overheads; complex supply chains tie up inventory; sprawling organisations are hard to run. Some arbitrage opportunities have been exhausted; wages have risen in China; and most firms have massaged their tax bills as low as they can go. The free flow of information means that competitors can catch up with leads in technology and know-how more easily than they used to. As a result firms with a domestic focus are winning market share.

In the “headquarters countries”, the mood changed after the financial crisis. Multinational firms started to be seen as agents of inequality. They created jobs abroad, but not at home. The profits from their hoards of intellectual property were pocketed by a wealthy shareholder elite. Political willingness to help multinationals duly lapsed.

Of all those involved in the spread of global businesses, the “host countries” that receive investment by multinationals remain the most enthusiastic.

The first thing to note is that the global MNCs being considered by The Economist are primarily the legacy ones – fast food chains like McDonalds and KFC (Yum Brands) – whose shiny logos used to represent the liberalization of the closed markets of India and China.

Even at powerhouses such as Unilever, General Electric (GE), PepsiCo and Procter & Gamble, foreign profits are down by a quarter or more from their peak.

or the few examples of emerging market brands that have gone global such as China’s Lenovo which purchased IBM’s Thinkpad and India’s Airtel which bought into the African market.

What’s being touted as their competition are regional brands, who aren’t as stretch out globally in terms of their supply chains, and less vulnerable to currency volatility. Further, the majority of these global brands are heavily dependent on their B2C marketing and sales – the question of whether they ever managed to understand their new markets is a topic for another post.

And so, we ask, what will this mean for the emerging economies of Africa, who are only now seeing the first fruits of FDI? Who will come and develop their consumer markets?

India and China apparently. And strategically – through unbranded affordable commodities and the acquisition of successful regional consumer brands – rather than the legacy MNC approach influenced by Levitt. Even Japan recognizes this, as they seek to piggyback on the Indian experience.The economics of scale that propelled the first rounds of growth for the manufacturers of washing machines and the automobiles never did make sense infrastructurally for the majority of the African consumer markets.

Instead, the patterns pointed out by The Economist and Credit Suisse imply that opportunities will lie among regional stars – Equity Bank of Kenya, for instance, whose regional footprint is surely but steadily creeping outwards across the East African Community and trading partners – or, the telcom brands such as Tigo (Millicom) who innovate for each of their local markets.

The jobs and exports that can be attributed to multinationals are already a diminishing part of the story. In 2000 every billion dollars of the stock of worldwide foreign investment represented 7,000 jobs and $600m of annual exports. Today $1bn supports 3,000 jobs and $300m of exports.

Godrej, for instance would be considered a regional Indian giant rather than a multinational in the conventional sense of a Unilever or P&G.

Where [MNCs] get constrained is, they are driven by lot of processes that are global. For a smaller organisation like us, we are completely empowered; decision-making is quick and we can initiate changes very fast. We are more agile and have an advantage over them.

Yet their expansion outside India shows a “pick and choose” strategy of markets they’re comfortable entering.

The group’s acquisition strategy hinges on identifying unlisted companies built by entrepreneurs looking for capital, picking up stakes and working with them to scale up their businesses.

At least two homegrown Kenyan FMCG brands – skincare by a global giant and cosmetics by private equity – have been acquired. As have snack foods, spices, dairy products, and other products that cater to local tastes. The best known being Fan Milk of West Africa. Private equity such as Abraaj make no bones about going after consumer driven opportunities.

Given these choices, sustainable African businesses who understand their consumer markets have an opportunity to establish their brands and grow – with the financial help that’s strategically becoming available.While Chinese imports make the market highly competitive and price conscious, fish and tyres are substitutable goods in a way skincare and cosmetics are not.

African consumer companies – formal, informal, or semi-almost there-formal – need to hustle right now.

The retreat of the MNCs offers a chance to exhale, and expand, and grow, but the advent of the East implies waking up to the need for serious strategic thinking about domestic comparative and competitive advantage – one of which is incomparable knowledge of local consumers, culture, and needs, and critically, experience of their vast informal sectors and cash intensive economies.

The dangerous assumption that there’s no competition from the informal sector

In addition, the informal economy of open street markets still dominates 90% of retail in large countries like Nigeria and Kenya, meaning it’s a near safe bet there’s plenty of room to grow. ~ Quartz Africa, Jan 2017

Failure is a risk, and an inescapable function of the amount of resources invested, not just money. Time, effort, and managerial ambitions are also losses that destroy value for companies. Danger, then, lies in leaping to assumptions that turn out to be wrong. This is one of them.

First, a bit of history. Just over a decade ago, the Indian market was opening up to world’s investment flows in the retail sector, and estimates of the potential were as rosy and glowing as Africa’s today. From The Economist in April 2006:

Most Indian shops belong to what is known, quite accurately, as the “unorganised” sector—small, family-owned shops surviving on unpaid labour and, often, free land for a small stall. “Organised” retailing accounts for only 2-3% of the total, and of that, 96% is in the ten biggest cities, and 86% in the biggest six. However, organised retailing is growing at 18-20% a year and inspiring a rush of property development. Shopping malls are springing up in every big town: some 450 are at various stages of development.

By 2015, it was clear that these ambitious potentials were never going to materialize, though many malls did spring up in cities across the country. Last year, I covered this topic looking back at the growth projections and the subsequent real numbers achieved from the perspective of the resilience shown by the informal retail sector. I noted, in August 2016:

Yet if you look at the data from 2015, you’ll see that the forecasts were far too ambitious – formal retail has only reached 8% penetration in the past 10 years. Nowhere close to the 25% expected by 2010. Mind you, these were all the management consultancy reports bandying the numbers around.

I bring this up because I’m seeing the same kinds of projections happening right now for the African consumer market by the very same firms.

Second, this time it’s not just a management consultancy report with all the research and analysis efforts they pour into making their case. It’s not been distilled into one single yet dangerous sentence:

meaning it’s a near safe bet there’s plenty of room

“Plenty of room” (Photo Credit: Yepeka Yeebo in Accra, Ghana)

There’s an inherent assumption within the assumption that the myriads of little stands, market ladies and their longstanding relationships with customers and suppliers, and the entire ecosystem which exists, such as in the photograph above, can simply be bulldozed over with a granite and marble mall development covered in shiny unreflective glass.
It didn’t happen in India, and it’s not happening in Africa. From Ghana, this news article on mall development says:

Ghana’s economic woes have translated into a variety of challenges for formal retailers who are competing for sales alongside the dominant and deep-rooted informal shopping sector. According to a recent report by African commercial property services group Broll overall sales in most modern shopping malls are well below historic averages, despite garnering sufficient foot traffic.

Further, and more dangerously, this blithe assumption of a cakewalk where an informal sector so tangibly exists, overlooks the innate ingenuity of those who seek a dignified life even while hustling for a living. And that there’s no competition or customer service.

Snapshot of the Dynamics of the Urban Informal Retail Trade in Nairobi, Kenya

Made by Latiff Cherono – click for larger image

Latiff Cherono quickly made up this diagram during a brainstorming session with Francis Hook and myself on the ways and means to further disaggregate the general category of “Informal wholesale and retail trade” that the Kenya National Statistics Board uses to lump together the second largest sector providing employment in Kenya after agriculture.

In urban conditions, vending and hawking of this sort is the largest source of income for the formally unemployed.

As you can see in the map visualizing Latiff’s analysis of a well known location for street vendors and hawkers to operate breaks down traffic flows not only by speed but also takes in account both static and dynamic forms of informal trade.

It may look chaotic but there are principles underlying the decisions made by both pavement vendors and mobile vendors (streethawkers in traffic) for their location of choice. These relate to the speed of passersby and potential customers – both wheeled and heeled, as Francis is wont to say – and closer analysis will most likely provide evidence of attempt to drive more footfalls to the shopfront, so to speak.

An example is the way pavement vendors locate themselves on either side of the busy bus stops, while mobile vendors who vend their way through traffic focus on the bottlenecks created by the roundabout and the traffic police.

We’re still in early days yet but time and money seem to be two of the factors that describe the attributes to segment and categorize the informal retail sector in urban Africa.

Signs of Interdependency between the Formal and the Informal Economy

There is a lot to be unpacked here – I made a mindmap of the urban African entrepreneur who is the backbone of the visible emergence of a consumer class. I’m drawing from my experience of the Kenyan context. I started this in response to Michael Kimani’s Storify recently on the mythical “middle class” and the African consumer market.

We know that this demographic, regardless of the efforts to label it “middle class”, is quite unlike the traditional bourgeoisie that built the developed world a century ago. We can call them the informal bourgeoisie – solid members of society who nonetheless break stereotypes of the white collar, university educated, salaryman.

More often than not, they are entrepreneurs and businesswomen, traders and makers, and workshop owners, who bootstrap their lines of business through the traditional means available amongst what is still called the informal economy. If they’re lucky they might have finished high school, or even graduated from university, but a degree is not a prerequisite as it might be in a private sector job.

In this post, I’m only going to write about something that struck me last night when I was staring at the mindmap. The line that links business to entrepreneur can also be considered a bridge between the informal economy and it’s business practices, and the upcoming formal markets of urban population centers.

The successful workshop owner or regional trader rapidly acquires the signals of his or her business success in the form of consumer goods and increased expenditure on staples and necessities, including upgrades to choice of schools and church. I believe that formal financial services and products such as bank accounts, credit cards, and various apps on a smartphone are part and parcel of this.

In effect, the entrepreneur is the link between the informal economy which provides employment and income to the vast majority, and the burgeoning formal sector in consumer facing services and products.

The formal economy is more likely to be dependent upon the health of the informal sectors than the reverse.

This interdependency, and relationship, is important. I will be coming back to this diagram again to unpack more of what I’m seeing here. For now, it’s enough to have figured out that initiatives meant to eradicate the “pesky” informal trade might have greater implications than initially assumed.

An Africa Expert on Beneficiaries maybe the wrong Expert on Customers and Consumers

LifeStraw, kept hidden in case donor comes to check. Rural western Kenya, June 2012 (Photo Credit: Niti Bhan)

As the African markets increase in opportunity and visibility, the corresponding increase in need for experienced personnel is also felt. Many consumer facing companies hire “old Africa hands”, often former employees of various nonprofits and their projects. The assumption is that knowledge and experience among “poor” Africans implies knowledge and experience of African consumers and markets. This is most visible among social enterprises who struggle with the tension between social benefits and sustainable revenues.

Why is this assumption of expertise a problem?

Beneficiaries are likely to be perceived differently, and are also likely to behave differently than if they were customers in the market for the same product or service. An analysis of attitudes and assumptions had been conducted with a client organization facing this challenge with their top management team back in 2012.

What are the biases and barriers facing both the company and their customer base when a for profit company in a high growth, stable consumer market is managed like a humanitarian NGO experienced in high conflict contexts of extreme adversity?

Here are the findings:

From the company side:

Guilt over making profits or revenue
Anything goes because anything free has always been gratefully accepted by singing and dancing – impact on product and service design, as well as quality
Poor, dumb, savages who don’t understand the good we’re doing
Need help, training, aid to buy our product or service
Little or no accountability traditional in donor supported charitable initiatives as compared to corporate reports on sales performance and customer retention to give one example.
Thus, patronization embedded in the experienced “knowledge” of the population

On the customer base or target audience:

Will accept anything gratefully, no marketing required
Will say or do anything for freebies – higher mistrust of customer’s ability to choose or decide
Will seek to game the system or the market research
Thus, treating demanding customers like passive beneficiaries without agency, even while attempting to sell them something.

Type of companies who have already failed due to this problem include social enterprises, social impact organizations, Bottom of the Pyramid marketing, public private partnerships. That is, any organization that relies on third party experts for the voice of the customer or to identify end user needs and aspirations.

Top 3 Assumptions About the African Consumer Market

Treichville Market, Abidjan, Cote D’Ivoire (Photo Credit: Niti Bhan)

Claims have been made about the Great African Market Opportunity – in retail, in real estate, in banking, and packaged consumer goods – that drive investment decisions and marketing strategies. Yet, reality has been less opportunistic than imagined – Nestle’s struggles in Kenya back in 2015 are one such example.

Here are the top 3 assumptions, if left unpacked or unquestioned, that can make or break a new market entry strategy in the African Consumer Market. For most of the continent, it’s safe to say that the majority of the mass market are primarily employed in the informal economy.

1. Price is the problem
Affordability is not a matter of price but access to payment means or method. Upfront lumpsum cash transactions will narrow potential customer base down, depending on the season, or the income source.

What this means is that there are whole categories of products that would have had a larger audience but do not due to barriers set up by their own transaction model.

Accessibility and Affordability are thus not a function of the Price itself but the lack of flexibility in the business model. Flexibility drives consumer segmentation in the African Consumer Market, as product purchase decisions get made based on cash in hand and cash flow patterns.

2. Consumer Segmentation Metrics are the Same
The factors that influence the segments of the population who have the potential to be consumers are the following:
– Urban or Rural
– Sources of Income

Factors that do not influence “poverty” (ref: textbook market segmentation)
– Education
– Location
– Employer

Example: Schoolteachers are considered part of the rural elite in Kenya, accruing community status and respect. Yet, they may be on a fixed salary within a lower pay grade, albeit teaching with a Master’s degree, with less purchasing power than a school dropout with a successful trading business.

Assumption: Demographic attributes traditionally used such as Education level or stability of Employer correlate to consumer purchasing power or disposable income.

3. Brand Loyalty is absolute and unconditional
Consumer insight reports on the African market opportunity tend to highlight the high degree of brand loyalty prevalent among customers, and leave it at that. Recommendations then emphasize first mover advantage or capturing customer loyalty, with the assumption that once locked in, this will create a committed customer for life. Why brands matter so much is rarely, if ever, asked.

The assumption is that this brand loyalty implies pricing blind consumption and status seeking behaviours. While this may certainly occur at the upper end of the income spectrum, these drivers are not likely to be as common for decision making among the mass majority audience. Demand drivers for brand loyalty more commonly noted are:

– the need to minimize risk (of loss)
– maximizing the return on the investment (in the purchase) including status signalling and reputation factors, which have a role in accrual of social capital leveraged for business activities in the informal sector.

Trade-offs are constantly being made in purchasing decisions, influenced by a variety of factors. Yes, compromises may be made on groceries in order to pay for a branded product, but simplistic interpretations of this behaviour lead to egregious errors in the design of customer experiences.

Implicit Assumptions commonly held about Informal Markets

Woman owned and managed informal retail in Mozambique via Twitter

“Informal Economy” always means illegal, shadowy, gray.
High volume of low value cash transactions imply poverty, ignorance, lack of sophisticated money management.
Operating with a lack of infrastructure and institutions implies ignorance, lack of ambitions and aspirations, and motivation.
Lack of cash implies lack of purchasing power – particularly in rural settings.
Lack of formal retail markets and packaged consumer goods implies lack of knowledge, information, and choices.
Lack of competition, due to all of the above.
Entering markets where informal retail dominates will be a cakewalk.