Archive for the ‘rural’ Category

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.

Samsung took its commitment to the African market very seriously

This article in the Financial Times caught my attention first for it’s mention of Samsung’s seemingly innovative adaptation to the harsh operating environment prevalent across the African continent. It reminded me of the very first exploratory user research programme I had been part of, for Samsung, back in early 2008. That was a seminal trip for me, 3 weeks by Landy through the bleakest parts of rural South Africa, in search of how people lived, worked, and played with their mobile phones.

Mobile phone repairman, Elizabeth, Eastern Cape, South Africa, January 2008 (Photo: Niti Bhan)

We discovered what I would now look back and recognize as a whole new world. This fieldtrip was the turning point in my career, and the prepaid economy project was the outcome of questioning many of the assumptions around what were then called “Bottom of the Pyramid” markets, which had been shattered, in my eyes, by this journey’s end.

Life is hard” became my mantra for the next couple of years, as I illustrated the vast chasm between the mainstream consumer market’s mindset of credit driven consumerism, and the cash intensive hitherto ignored reality of the townships and informal settlements. The article I wrote on the mindset and values of Africans in their guise as customers for consumer goods – who had not been conditioned by generations of advertising messaging since the poor (the BoP, the bottom of the pyramid)- went on to be cited by the late CK Prahalad himself in the revised 2010 Introduction to his seminal The Fortune at the Bottom of the Pyramid.

Next came the development of a holistic strategy to reach these untapped opportunities, with a semblance of a value system rather than be driven by the pure profit motive alone.

The core values, then and now, for a consumer appliance, device, or hardware, any durable really, was the following:

Simple
Easy
Endurance
Survivor/al
Commitment

If Samsung is established in its foothold in Africa today, and their appliances are designed to survive the environment and meet the needs of their African customers, then I am very pleased to read it.

That first photograph is of the slider that Samsung models being sold at that time had. And in Africa, as the repair guru holding the part was showing us – and two of Samsung’s own mobile design team members – was the weakest point of failure in their phones. Grit would get in and jam the part, and most such phones came in for repair within a few months of their purchase date.

Later, in London, where the Samsung Design Europe office was located, we walked into one of their phone shops – somewhere near Harrods, if I recall correctly, and asked about the longevity of their slider phones. The salesman gave us a long song and dance about how these parts had been tested to “slide” a thousand times before each model went on sale. Yes, I mused to myself, it had. In the dustfree laboratory conditions of their engineering unit, or the less harsh environment of London or Seoul. What about upcountry South Africa? Or Senegal or Kenya or even, India?

The 2009 models introduced for emerging market opportunities, such as those on the African continent almost a decade ago, were all candybars.

As for me, I’ve never stopped using a good oldfashioned “dumb” Nokia that stolid Finnish engineering and product development ensured would survive and endure anything – even being run over by a truck.

Livestock as movable assets and financial collateral: Collected insights

Mama Mercy’s farm, Nyeri, Kenya (Photo: Niti Bhan, April 2013)

Following in the footsteps of Zimbabwe, Kenya has just passed a law on the use of movable assets as collateral for loans.

President Uhuru Kenyatta has signed into law a Bill allowing borrowers to use household goods, crops, live animals and even intellectual property to secure commercial loans in a move aimed at boosting access to credit.

This is an important move, because unlike Zimbabwe, the “Kenyan Movable Property Security Rights Act 2017 paves the way for the formation of a centralised electronic registry for mobile assets that financial institutions can use to verify the security offered.”

The implications for the rural economy, entrepreneurial smallscale farmers, and the informal trade sector are enormous, and I will take a deeper look and analyze the implications in subsequent posts. First, I will begin by collating the past decade’s writing on the role of livestock in household financial management, clustered broadly by theme:

 

 

On The Role of Livestock
The multifunctionality of livestock in rural Kenya ~ literature review
“households will treat livestock similarly to a savings account or stock portfolio and typically (and perhaps reluctantly) only sell livestock to cover cash shortfalls when certain necessary expenditures arise”
The Role of Livestock Data in Rural Africa: The Tanzanian Case Study
Only provides evidence of the importance of investing in same
The role of the cow as an investment vehicle in India: Insights on Return on Investment

 

 

Emerging Futures Lab Original Primary Research
The Prepaid Economy project 2009: Original research on rural economic behaviour (IDRC & iBoP Asia) – Part 1
Observations & analysis of rural household financial behaviour – Part 2
Synthesis & Insights on rural economic behaviour – Part 3
Visual documentation from Philippines, India, and Malawi – Part 4
Rural Bottom/Base of the Pyramid and their cash economy

 

 

Application of insights for innovation in Kenya
Component parts of the rural, social economy
Seasonality as a factor in livestock export trade finance
Rural Kenya’s livestock and produce markets are a complex, economic ecosystem
Affordability, pricing strategy, and business models
Livestock’s role in path to upward mobility
From the individual to the community: the rural economic ecosystem (Dec 2013)
Importance and value of the informal food market
Creative ways to financial inclusion, by Michael Kimani

 

 

To Read More: Use this tag “movable assets” for all forthcoming analyses, and you can find a decade’s worth of my original research on informal economy, prepaid business models, literature reviews and ethnography here. The entire subject can be found under the category “Biashara Economics“.

A matter of timing: seasonal opportunities

IMG_7354

Temporary stall for festive goods (Photo: Niti Bhan, March 2017)

These stalls full of water pistols and balloons sprouted overnight a couple of days before the spring festival of Holi (March 13th 2017) – these vendors are neither local nor regulars in the market complex. They’re here to offer seasonal products and might even have been invited by the local shopkeepers to provide attractive temporary displays not unlike festival shopping at the mall.

IMG_7356Seasonal opportunities for special offers and custom products are not to be missed chances for a boost in sales. India’s FMCG majors can’t afford to ignore the seasons that guide the cash flow for the majority in the informal and rural economies over the course of the natural year.

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.

 

 

Lowering the barriers to effective communication is the key to sustainable development

KnowledgeOne of the challenges that we discovered during our multistakeholder workshop in The Hague a few years ago was that people tended to fall back on their expertise when faced with the discomfort of empathizing with farmer’s needs. Particularly so when the farmers in question were from Africa, and not from their own regions.

Our design visualization team – Jam visualdenken – captured one element of how this barrier manifested. Experts talked a lot about “Knowledge” being the key to effective agriculture value chain development, and how it was critical to transfer as much of it as possible. It became this big thing shoved at the ‘global South’, with little thought given to how it would be transferred, much less how relevant and appropriate the “knowledge” would be. A silver bullet, or a panacea.

Today I came across this article from Zimbabwe – “Limitations of using documents & reports to share knowledge in Africa” and I could immediately perceive the author’s deep understanding and empathy of their own local context and needs. Here’s a snippet:

While African communities have learnt from each other for generations, the conventional way of trying to spread knowledge through case studies is not yielding sustainable results.

There is an assumption that technical people can get into a community, work with local people, document their successes and share success stories with other communities, leading to adoption of best practices.

This notion misses a thorough understanding of how communities learn from each other. Almost all rural African communities rely on collective sense-making through very patient conversations, observations and learning by doing.

This led me down the rabbit hole of the authoring organization‘s website, where I came across a blog worth following for their deep understanding of the African agricultural landscape and the information needs of the farmers. Here are two selected blogposts from their site:

From farmers and traders to knowledge artisans

[… ]motor mechanics and metal fabrication are now part of the informal sector.  Previously locked in formal systems, these skills are now being unpacked and applied in informal markets.  This is leading to the integration of indigenous knowledge systems into formal knowledge sharing pathways. 

Since indigenous knowledge is more customer-oriented, it results in the production of needs-based products, tailor-made to meet the needs of diverse customers.  For example, ploughs and hoes are made as per customer requirements unlike the previous mass production ethos in the formal sector which had little consideration for existing draught power dynamics in different farming communities.
[…]
Technology and digital tools do not know empathy and why it is important.

Why some approaches and technologies are not moving beyond early adopters

A lot can be learnt from remarkable ways through which African socio-cultural systems generated and shared knowledge. There were reliable conduits for sharing knowledge from one age group to another, one gender to another and one society to another.  Besides respected knowledge brokers, each community had sense making tools linking different communities of practice. Some of these methods and tools included rituals, idioms, metaphors, stories and various forms of apprenticeship.
[…]
This is exactly what our modern knowledge systems lack. We have not cultivated proper ways of sharing the rich information/knowledge from schools, colleges and university curricular into diverse African communities.  There is an expectation that this knowledge can be shared by students after graduating. However, a lot of what can be useful in communities is either forgotten or misapplied.  More than 70% of ordinary Africans who function through their own languages, values and norms have no way of meshing what they know with the formal education system.  In most cases, their cultural values are still considered barriers to academic knowledge which is being confused with modernization.

Unless we develop verifiable ways through which knowledge is questioned, shared, rejected and value-added, it remains stuck within various communities of practice.  Such knowledge will have less developmental impact than anticipated. Academics continue to be locked in their systems, speaking to each other while farmers and rural communities continue holding onto what they know works. As if that is not enough, the language used for crafting policies in most African countries is not suitable for use by the majority but for lawyers and judiciary systems who can interpret it.

Reframing the informal sector in the African consumer market: The real African middle class

malishopThis is Ruth’s shop, on the side of the highway, approximately 5km on the road to Kisumu, from Busia in western Kenya. Not quite directly part of the borderland’s economy, that trades incessantly with each other, these businesses still manage to feed off the energy of the hustle and bustle of biashara, as it flows through the complex webs, as seen by Walther in W/Africa.

Her home, abutting her husband’s wholesale business in soft drinks (they’re registered with Coca Cola) is next door to her shop, hidden in this photograph. She buys a minimum of 10,000 shillings of goods each Thursday, just from Bungoma, and that’s only one of her many source markets. The malimali shop is the village general store or variety store. The 5 and 10 mashed with a mini department store. We bought two of her sandals. I would have paid $7 in Singapore for them and it only cost $1.80. They were made in Kenya, I think.

This is the sign of the emerging middle class that the bean counters can’t find in their datasets. This class of business abounds in the small market towns dotting the countryside and the economically stronger parts in the interior. They are wholesalers and retailers, sometimes both, as nobody wants to turn away a customer, no matter how small their wallet might be. Its an inclusive market and one that we might learn something from. It sometimes has a feeling of a socially responsible capimercantilist society.

Bright Simons was the first to point this fact out, in HBR a few years ago. He was right, as I’ve just validated through a recently completed study on the rural/urban economic linkage in western Kenya.

Infrastructure has a direct relationship to how much your rural business can scale

trader

Busia market, Kenya Feb 2016 (Photo: Niti Bhan)

This is a micro-wholesaler and retailer in a staple commodity. Infrastructural constraints limit the stock she can manage at one go – seen as the sack with her name on it. This indicates that it was sourced from some distance away, as this is the matatu’s informal package tracking service. It could have come from rural Uganda – some of the most productive agricultural land is in Eastern Uganda within 60km of the Kenyan border. Food is ridiculously cheap in Uganda and the fish in Busia was swimming a few hours before it landed on your plate with dhania sprinkled over it.

Similarly, that poor fish can only go so far, though the traders have built their own jua kali cold chain and can assure you of 24 hours freshness. Its the tomatos and the cabbages that wilt miserably in the searing sunshine and thus limit Mama’s daily income to the purchasing power in her neighbourhood market. She can’t wait for two days to sell her produce.

Its a natural cap on her ability to scale. Both volumes traded and distance supplied are a function of the quality of the cold chain at the very last mile of the farm to fork sustainable agricultural value chain. They need good logistics and reliable infrastructure. We can’t have the fish spoil during a power outage.

Therefore, you can see the economic importance of good infrastructure and also how such minor easy to implement tweaks can boost and trigger all sorts of emerging opportunities for entrepreneurs.

The hidden cost of doing business #informaleconomy

household shop

Kenya, 2nd Feb 2016. Photo Credit: Emerging Futures Lab

This looks like its a low cost business operation with low barriers to entry. All you need to do is find a decent tree under which to display your wares.

The reality is that these entrepreneurs have numerous fees and costs that they must pay in order to do business, regardless of how informal it all looks. They pay rent for that space on market day, they pay the council in order to transport their wares, they need to pay for transportation, and any assistance they might need for loading and unloading, they even need to pay the various formal and informal “tax” collectors on the road to this market town.

There is a cost to doing business, and there’s uncertainty of income and cash flow. Some of these fees might be fixed or known, but some, like the amounts asked for, along the way, might be dependent on the mood of the officer, or even, the weather.

On the other hand, these fees and taxes and payments ensure that the retailer has a decent location in the market, that they won’t be harassed or chased away during working hours, and that the “system” – chaotic though it might seem to our eyes – will serve their needs.

If you were ask them what they think of this, they would shrug their shoulders and tell you its just the cost of doing business.