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.

A theoretical approach to Value for Money in aid & development: Optimizing research and design for ‘best fit’ iterative programming

Last year, I briefly touched upon this concept as an approach to cost effective programme design that was still flexible enough to provide room for iteration for best fit.

Today, I want to explore the concept further to evaluate its potential as a framework for incorporating the concurrent shift in development thinking towards Value for Money (DFID) principles, in addition to designing for best fit.

Value for Money as a Process Driver

Value for Money (VfM) is not the same as traditional monitoring and evaluation which seeks to measure impact of a project, and occurs usually after the fact. In many large scale projects, this may not happen until years after inception.

Instead, VfM is defined by the UK’s National Audit Office as ‘the optimal use of resources to achieve intended outcomes’, which in turn, the DFID document contextualizes for their aid programming investments as “We maximise the impact of each pound spent to improve poor people’s lives.”

If this applies to all investments in aid related programme development, then it follows that it must also apply to earliest stage of discovery and exploration that leads to problem framing i.e. the necessary groundwork to write a comprehensive and inclusive design brief for future programming.

Thus, the conceptual approach that I introduced at the beginning of this post, which is taken from the discipline of Operations Research, and seeks to solve the challenge framed so – what is the optimal solution that minimizes resources (inputs) for maximum outputs (value creation) – fits as a potential framework that can theoretically apply from the earliest stages of implementing development strategy, even before inception of any related projects, including early stage research and feasibility studies. After all, the function of Linear Programming is optimization.

Note: Here I will only consider the theoretical aspects from the point of view of programme design research and development, and not the mathematics. That will have to wait until I have gathered enough data for validation.

Design Research for Programme Design Purposes

In this context, the primary function of such an exploratory project is to identify the opportunity spaces for interventions that would together form an integrated programme designed to effect some sort of positive change in the ecosystem within which it would be implemented, and offer a wider (more inclusive) range of cross-cutting benefits.

In the language of product development, we are attempting to build a working prototype. We cannot build and test first prototypes to see if they work, directly, because our room for failure is much less spacious for experimenting with aid related programming, ethically speaking. This is not a laboratory environment but the real world with enough challenges and adversity already existent.

Programmes are not the same as consumer products, nor are they meant to be designed and tested in isolation before being launched for pilot testing in the market. Their very nature is such that innocent people are involved from the start, often with a history of skepticism regarding any number of well meant donor funded projects aimed at improving their lives. This changes the stringency of the early stage requirements for design planning.

At the same time, the nature of the task is such that no first prototype can be expected to be the final design. So, from the very beginning, what we must do is set the objective of the outcome as a Minimal Working Prototype (MWP) that meets all the criteria for an optimal solution, and NOT a Minimal Viable Product (which may or may not work wholly as intended until tested in the field for iteration.)

That is, the first implementation of the iterative programme design must fall within the bounds of the solution space – that which is represented by the shaded area in the diagram above.

The Optimal Solution is the Iterative Programme Design

Thus, what we must be able to do at the end of the discovery phase of research necessary to write the design brief, is tightly constrain the boundary conditions for the solution space within which the MWP can then be iterated. This minimizes the risk of utter failure, and maximizes the chances of discovering the best fit, and all of this within the definitions of Value for Money and it’s guidelines.

There are numerous ways to set the goals for optimization – one can minimize resources and maximize constraints, or minimize risk and maximize return on resources invested. These will guide our testing of this framework in field conditions to validate the robustness of this theoretical approach.

In this way, we can constrain our efforts to discover best fit within predefined limits of tolerance, while retaining the flexibility to adapt to changing real world circumstances and progressive transformation of operating conditions.

Best fit, then, becomes less a matter of experimentation without boundary conditions and more a discovery of which of the many right answers – if we take the entire shaded area as containing “right answers” to the problem at hand – help us meet the goals of intervention in the complex adaptive system in an optimal manner.

The point to note from this conceptual framework is that there is never any ONE right answer, so much as the answer will be that which we discover to the question “What is needed right now for us to meet our goals, given these changes since we last looked at the system?”

It is this aspect that loads the burden of a successful outcome on the front end of the entire research and development process, given that framing the problem correctly at the outset is what drives the research planning and steers the discovery process in the direction of relevant criteria, conditions, constraints, and user needs that will not only form the bounds of our solution space, but also act as waymarkers for monitoring change and evaluating its progression.

The importance of user agency for good design in the humanitarian and development context

This is a topic that has come up so often on Twitter that I thought to write it out once and for all. A link would be ever so much easier to argue with than to make the case for recognizing the agency of the end user – whether an intended customer or beneficiary – of an innovation.

At some point, I’ll get around to writing a much longer version with citations and links to contemporary research in iterative programming for complex, adaptive systems i.e. the ecosystem intended as the target recipient for the implementation of a socio-economic development program or project. For now, this short version will do.

The late John Heskett, professor in Design Planning and Market Forces at the Institute of Design, IIT, Chicago, once said in the classroom (notes, Spring 2003) that an invention could not be considered to be an innovation until it had been embraced by the end user. Witness the difference in adoption between Apple’s iPod and the Segway human transporter.

This metric of success for the novel – be it a product or a service, or even a business model such as the prepaid/pay as you go means of using mobile phones – requires that the customer (the end user or the beneficiary, as the case may be) be given the opportunity to choose, that is, to make a decision on whether to adopt, adapt, or reject the innovation in question.

In order to choose, and to decide, the user for whom such systems are designed must then be imbued with agency, rather than be considered passive recipients of the innovation.

This respect and recognition of the recipient’s agency forms the core of our work in innovation planning and concept design inspired by primary research in the informal markets of rural and urban sub Saharan Africa, South Asia, and the ASEAN. It has been informed by more than a decade of practical knowledge from experience in the field.

And it is this recognition of agency, which is that which empowers, that provides the foundation for our processes and systems, our methods and tools, and thus, our learning and teaching of how to think differently across the bridge of disparity, and inspires conceptual design of holistic solutions.

Without explicit acknowledgement of the individual’s agency or recognition of the diversity of circumstances, abilities, and aspirations in a community, any designs meant to effect positive change will remain lifeless attempts to intervene from the outside. Witness the number of pilots that fail to scale, or programmes that remain unsustained once external funding ends.

India: Dragging the reluctant elephant into a digital, cashless future

Final processing for India’s digital identity platform Aadhaar, New Delhi on 3 March 2017 (Photo Credit: Niti Bhan)

My recent immersion in Delhi a mere four months after demonetization (or, notebandi as it’s locally known) was a bit of a letdown. Oh sure, there were numerous, visible changes in the 2 years since my last trip – mostly very clear indicators of India’s socio-economic development – but none of the sense of chaos that I was expecting, having relied primarily on third party news sources, that too, in English, in the weeks leading up to my departure.

The headlines would have it that people were dropping like flies on the streets. A grand total of 187* people died visibly due to notebandi, or so I heard. The two most common responses were either sympathy – people should not have had to die for something like this and it was a sad thing to happen; or pragmatism – “people die everyday, who knows why, maybe his time had come and he was standing in line.”

The overall atmosphere was one of energy – there’s less of a sense of lackadaisical chaos that used to characterise the neighbourhood market and it’s sleepy vendors waiting for the evening strollers. There’s a sense of purpose in the hustle, as though there was money to be made. Digital money.

The combination of a digital identity platform and the disruption of demonetization could indeed be said to describe ideal conditions for triggering cashless India. Cards are accepted far more easily than before. “Paytm” – a local payments app – is visible everywhere, from on demand cars (Ola, Uber, Meru, etc), small kiosks, through to shiny upmarket shops. As a taxi driver told me with a smirk, everyone’s using Paytm now, even the beggars.

Rural India is said to have suffered far more, according to the reports I’d read prior to my trip. This might be unevenly distributed according to geography and growing season – a factoryworker returning from his home village in Bihar said he’d attended a wedding with hundreds of people and surely someone would have had a sob story to share.

Instead, he’d heard it was the intermediaries in the farm to fork supply chain who purchase from myriads of small farms in order to aggregate in bulk prior to selling onwards towards the cities who’d been hit harder by the sudden lack of liquidity. They were caught in the middle of the cash based chain of transactions and had to carry the burden of wastage if they weren’t able to move produce fast enough. Anecdotes included them distributing potatoes freely to farmers to use as seed for the next harvest, and tomato prices crashing.

Articles in the news state that the economy was hit harder than people would admit to but none, as yet, have complimented the common man for his endurance under conditions of scarcity and hardship, nor praised the hardworking women who kept their families fed through their social networks of give and take.

All the papers – domestic and foreign – only go on about India’s GDP, the economy, the vast business sectors, and the politics. If at all the average Indian is mentioned it is through the lens of pity – “oh, the poor farmer is suffering” or some such heartrending sob story from the “informal sector” – there’s never any mention of their ingenuity in keeping things going without cash; or the way it was all held together under conditions of adversity and scarcity.

That, perhaps was my biggest takeaway from my open ended conversations with a wide range of people from different socio-economic strata, professions, backgrounds, and age groups.

Their palpable pride in themselves in having come through upheaval relatively unscathed, or having the wherewithal to manage. All the rest of it, the Aadhaar digital ID, the use of technology for transparency and accountability, the mobile platform and its ubiquity, all of these and more, I believe, will sort themselves out in time.

I’m minded to end this with a quote from Rositta J. Valiyamattam writing, ironically, on the topic of Indian fiction (page xii):

“Their novels testify to the amazing resilience of the masses in a nation wherein the commoner is rendered helpless by an often corrupt mighty polity. What stands out is the assertion of the individual will over uncontrolled powers and unfavourable circumstances. They salute the heroic struggles of ordinary Indians in times of extraordinary transformation.”

*Word of mouth number, every report has a different total, so whatever. All photographs not captioned were taken in Delhi by Niti Bhan during March 2017.

Unforeseen outcomes of India’s demonetization shine light on the value of our design philosophy

Latest news on India’s demonetization informs us how the rural economy is bearing the brunt of this initiative.

The action was intended to target wealthy tax evaders and end India’s “shadow economy”, but it has also exposed the dependency of poor farmers and small businesses on informal credit systems in a country where half the population has no access to formal banking.

The details shed light on the consequences of implementing interventions without a holistic understanding of the landscape of the operating environment. In this case, it is the rural, informal cash intensive economy.

…the breakdown in the informal credit sector points to a government that has failed to grasp how the cash economy impacts ordinary Indians.

“It is this lack of understanding and not appreciating the importance of the cash economy in India on the part of the government that has landed the country in such an unwarranted situation today,” said Sunil Kumar Sinha, an economist and director of public finance at India Ratings.

This lack of understanding the dynamics of the cash economy (I don’t mind calling it the prepaid economy, in this context) and it’s role in the rural Indian value web has led to unforeseen challenges at a time when farmers are planting seeds for the next harvest, hampering the flow of farm inputs as traditional lines of credit face the obstacle of an artificial shortage of liquidity.

I want to use this clear example of systems design failure to explain my philosophy and approach to our work in the informal economies of the developing world. I’ve written often enough about what we do, now I have an opportunity to explain why we do it, and why it’s important.

Read On…

Systems design and the Monster who squats between the formal and the informal

This framing of the real challenge to development and poverty alleviation comes from Ken Wong writing on his experience in Malawi:

We can only win the war on poverty and hunger in Malawi by targeting the real enemy – and that enemy is the system of how the world tries to help. Specifically:

— The system that demands foreign aid be funneled through the government or large NGOs

— The system that creates a hierarchy of aid and government workers whose job security and quality of life depends not on their wanting what is good on the ground, but pleasing whoever is above them in rank

— The system that discriminates against on-the-ground, local initiatives because of a lack academic credentials, English-speaking skills, and the ability to complete unwieldy applications and fulfill misguided metric targets

If we are to win the war against poverty, we need to face the truth and admit that the system has not only not worked in Malawi, it has made the situation worse.

The system itself is the barrier to progress. The System Monster, as I dubbed it, is quite a nice fellow really, rather well meaning and all that, but he doesn’t see how he’s just stuck there inbetween, unable to adapt to the context on the ground.

Here’s is a 5 minute video where I introduce the concept, from the BankInter Foundation’s Future Trends Forum on Inequality and Technology held in Madrid in early June 2016.

Part 2: Enabling development’s paradigm shift from ‘best practice’ to ‘best fit’

Programming in International Development jumps directly into the Design phase of the projects. This is the root of the challenge they face now as they seek to change the paradigm away from ‘best practice’ to putting the end users at the center of their strategies, with ‘best fit’. I identified this problem in the Autumn of 2012 whilst delving into the internal project development processes with civil servants at the Netherlands Ministries of Foreign Affairs and Economy during a customized internal workshop.

It should be mentioned at this point that while Robert Chambers has extensively promoted the participatory approach, there were issues in the process that were explored during our work, and can be covered in a separate article. Participatory design is not synonymous with user centered design, and neither approach includes a robust methodology for assessing the landscape of the operating environment in conjuction with solution development for ‘best fit’, particularly in the developing world context.

Before we can jump into the design of a project or programme – whether with or without the participation of the end users/beneficiaries, we need a structured approach to grasping the context of the challenge. Without a map of the landscape of the ‘wicked problem’, one cannot navigate the complexity (1). This so called landscape map of the ecosystem in which the development project will be introduced, should not only include understanding the people and their operating environment, but identify and frame the touchpoints for the design of ‘best fit’ interventions.

That is, there’s a need for framing the problem in a manner such that the outcome narrows down the solution space i.e. delineating the boundaries for ‘best fit’ prior to the inception of the design process. In the field of design, these boundary conditions can be known as design criteria and constraints, along with filters for assessing optimal solutions at the conceptual stage from the plurality available.

These first three steps in the process BEFORE jumping into design are collectively known as Design Planning, and their outcome minimizes the wasteful experimentation of ‘suits to try’ for ‘best fit’ as the design phase begins with the ‘measurements’ necessary for a ‘bespoke suit’ tailored to fit, to stretch the analogy. Bespoke tailors do not expect their carefully measured suit to fit their client on the first try, and usually one returns two or three times for the final fitting. Similarly, customized programming may require tweaks and can be considered a working prototype (a pilot program, for instance, prior to scaling) where the kinks are worked out together with the participants.

This will require work upfront at the start of the multi-year programmes. There are no silver bullets to addressing complexity.

(1) Part 1: An Interdisciplinary Approach to “Best Fit” for International Development: Process and Tools

Borderland Biashara: Mapping the Cross Border, National and Regional Trade in the East African Informal Economy

Rinku Gajera & Michael Kimani, Malaba Border, Kenya, January 2016. Photo: Niti Bhan

And, we’re back! With apologies for the long delay in posting on the blog, we’d been busy wrapping up our groundbreaking design research for development programming project for Trade Mark East Africa this past month or so. As you can imagine, the last few weeks of any project suck all the bandwidth out and leave little for blogging or writing.

Let me be the first to say that this project could not have been executed or completed without a rockstar research team – Rinku Gajera, Research Lead, and Michael Kimani, Research Associate, together put in gruelling hours in the sun, and on Skype, to help increase our understanding of the informal economy in East Africa, particularly the informal trade sector – cross border, national, and regional. Emerging Futures Lab has been immersed in design and development of pioneering methodology for mapping the informal trade ecosystem – henceforward known as biashara, at the borderlands of the East African Community, since November 2015.

For this opportunity, I must thank the CEO of Trade Mark East Africa, Frank Matsaert, who saw our passion and our belief in the worth and value of the informal sector, and recognized the need to understand the traders, their business practices, and their aspirations, as the first step necessary for the design of interventions that are not only people-centered, but cost effective and impactful. We were granted creative license to colour outside the box of the terms of reference with our designer’s empathy and exploratory mindset, and frame this project as an exercise in developing the understanding necessary for the design of human centered methods, tools and frameworks for development programming. You can be sure that there will be more on this topic published soon on this blog, so grab the RSS feed now, or sign up for inboxed posts.

Download the Borderland Biashara Ecosystem Mapping project at the Kenya/Uganda border at Busia and Malaba.

Nov 2015 – Inception report Informal Economy, Kenya/East Africa/Uganda
Jan 2016 – Literature Review on Informal Cross Border Trade in the East African Community (EAC), the DRC and South Sudan
May 2016 – Final Report, General Public – Borderland Biashara, by Emerging Futures Lab

The formal sector and economic development: A lesson from marketing

Pursuing the thoughts introduced in the previous post further, I looked up the original reference on “formalization of the informal sector”1.

Alan Gelb, et al. 2009. “To Formalize or Not to Formalize? Comparisons of Microenterprise Data from Southern and East Africa.” CGD Working Paper 175

“…in East Africa, weak enforcement of tax payment and no significant difference in access to services between formal and informal firms means that these variables do not explain the allocation of firms across the informal-formal divide.

We conclude that in countries with weak business environments, informal firms are just as likely as formal firms to increase their productivity as they grow.

Thus, interventions to increase productivity and lower the cost of formality may be helpful.”

The question comes back to what is the benefit of formalizing when the costs associated with it do not offer any additional services, such as reliable electricity, for instance, that offset the investment.

Formality only becomes a barrier when new market opportunities require paperwork – a formal sector customer, or a chance to export.

“…improvements in the business environment in East Africa are potentially more valuable in changing the balance of benefits and costs from formalization, and so encouraging small firms to formalize and grow.”

Really, what seems to be the case is that instead of pushing individual entrepreneurs to formalize, it is their operating environment that must be tweaked in order to attract them towards formalization. As long as there’s little difference between the formal and informal sectors of the economy, there is no incentive to invest in the relatively expensive and cumbersome process.

The key insight here is that the current day efforts to push towards formalization, must instead transform into a pull towards formality.

If indeed we’re now seeing the end-users as customers of our services, then we must market the benefits in order to attract them. This has implications for the durability, and thus, sustainability of programs and initiatives, beyond the life of the project.

With the nuanced shift in perspective offered by Gelb et al, we can also see the role that human centered design can play in this journey. Who better to identify what customers’ need and want?

1

I first used phrase formalization of the informal in 1974 paper. Was it ever used before? https://t.co/G7FcRTXcQU https://t.co/gzF3dD9obq

— John Conroy (@informaleconomy) January 4, 2016

Design research as a method for discovering & understanding the world around us

Variously known as User Centered Design (UCD) or Human Centered Design (HCD), the fundamental philosophy underlying the designer’s approach to problem solving is that of discovery – “figuring out how to make something that will work in this context”.

Innovation, invention and novelty rarely have pre-scripted processes due to the as yet unknown, and often, uncertain nature of the outcome. The design process acknowledges this by embedding various techniques for discovery of the problem space as well as the possible solutions.

These include:

Exploration – 1. the action of exploring an unfamiliar area. 2. the thorough examination of a subject.;
Prototyping – an early sample, model, or release built to test a concept or process or to act as a thing to be replicated or learned from;
Iteration – the act of repeating a process with the aim of approaching a desired goal, target or result (2);
Experimentation – a procedure carried out to verify, refute, or establish the validity of a hypothesis. May vary greatly in goal and scale, but always rely on repeatable procedure and logical analysis of the results.

This post was inspired by a twitter conversation with Dr Dan Lockton. It is the first of a series of explorations on our adaptation and evolution of the methods available for design research as tools for discovery and understanding where data may be inadequate or non-existent such as the informal economy in emerging African economies.

Please use the category UCSD to discover more on this subject.