Posts Tagged ‘cash based’

Lessons for Formal Finance from Informal financial services

 

On one of my many field explorations on rural financial services,  I found out, that for one mama biashara, as soon as payment checks in, she withdraws all her funds from her local coffee SACCO account, and spreads it out via micro-deposits across her more than 5 local informal savings groups (from right to left on diagram).

 

Choice of Informal Formal financial services – continuum

 

A report conducted across East Africa using data from [Finaccess, Fin survey – ’09,’12,’13] Kenya, Uganda, Tanzania, Burundi and Rwanda, found that on average, 60% of survey participants saved with informal groups and places – ASCAs, ROSCA, SECRET place

 

“Determinants of Household Savings Mobilization across EAC Countries: An Exploratory Analysis.”

 

Even M-Shwari – “a new [mobile] banking platform that enables customers to save, earn interest, and access small amounts of credit instantly via their mobile phones”, on paper an ideal tool for banking the unbanked, faces the same challenge as per CGAP’s How M-Shwari Works: The Story So Far Report (pdf).

“The main competition to M-Shwari as a place to deposit and store money temporarily comes from informal savings groups and banks”

There is mounting evidence of widespread use of informal and semi-formal financial services, despite efforts to shift to digital financial services (DFS). While in formal circles they may be perceived as ‘a risky place to borrow/put your money’, based on evidence, there is an allure that does not readily lend itself to be seen. Often, what is lost in countless narratives, is the fact that before banks (B.B.), people weren’t necessarily unbanked per se. As creative social beings, they devised ways to meet typical banking functions  eg credit, saving, credit rating etc Not devoid of shortcomings, but filled a role all the same.

How, do they [informal financial services] compete so well with formal finance with nil marketing budgets?

 

Consider Financial Historical Data

In the formal world of finance, any unrecorded financial history before Banks or Telcos proprietary mobile phone spending history is non-existent. Mobile phone history instead, is preferred as a surrogate for credit history. In turn, the bank provider

“partners with Safaricom (telcos) to use one’s mobile phone usage data and Mpesa transaction data as a credit score for how much in instant loans you qualify for”

Here, there is a rather obvious disconnect. For starters, majority of transactions in rural and informal economies (where the poor, unbanked and underbanked likely found) occur in cash – forms of savings, micro-loans and micro-transactions! Secondly, rich peer to peer (P2P), business to consumer (B2C) and business to business (B2B) credit exchanges, occur frequently in this domain, based on social ties, trust and familiarity in rural and informal economy transactions. Both inherently valuable credit histories.

Yet, all these financial exchanges that take place in these groups and the informal cash intensive economy are not considered as valid credit history.  If we consider mama biashara’s alternatives (as per my formal -informal continuum diagram above), for emergencies, she is likely to turn to her informal devices for plugging her short term credit needs – P2P credit, B2B credit, Business Self Help group etc than say a bank. As a function of trust therefore, these informal devices, rank favorably in her implicit trust continuum scale seen here.

 

Trust Continuum – informal and formal financial services

 

Takeaways from Informal

If by their own admission, telcos and banks admit informal savings groups are their biggest competitors, shouldn’t the first step be to understand the competition ?

by Damien Newman https://revisionlab.wordpress.com/that-squiggle-of-the-design-process/

Cash intensive rural and informal domains are a rich data mine semblance of spaghetti balls, unlike digital data that lends itself to direct measurement. The nature of this data is more qualitative – the kind collected from exploratory research, people, immersion, observing behavior, cues picked up from dialogues, and time spent interacting in environments. While we focus on readily measurable metrics, we are missing out on an even bigger source.

 

 

Glossary:
ASCA –        Accumulating Savings and Credit Associations
ROSCA –     Rotating Savings and Credit Association
SHG –          Self-help group of mamas with common business interest
Chama –      Informal cooperative society used to pool and invest savings
P2P credit –     peer to peer credit eg mama to mama
B2C credit –     business to consumer credit eg mama to her customers
B2B credit –     business to business credit eg a supplier to mama
MFI –          Micro Finance institution
SACCO –     Savings and Credit Cooperative

Can digital currency earn trust in hyper-local rural economies?

One characteristic of rural and informal type micro-economies, is irregular patterns in cash flows and money supply.

Mama biashara for instance, finds it hard to replenish stock if business is generally slow within her domain. Even if she could, there is still Mr. boda boda who has to be paid. When he doesn’t get paid, the local bicycle repairman loses out as well; ultimately, a long chain of intra-local value exchange is not originated.

It seems, when there is little or no fiat cash to go round, the aggregate action of actors to yield economic activity within a locale is stifled – business cycles, household and individual consumption patterns.

But, what if they could bypass using cash? And make use of say, an alternative medium to settle biashara, boost short term liquidity and add sorely needed economic value ?

From my most recent immersion in rural Nyeri, I made a couple of notable observations on how slow moving fiat cash inhibits economic exchange where it is needed most:

Cooperative IOUs as trust currency

As a member of a coffee SACCo, my aunt is entitled to periodic lump sum payments for her share of the crop; IOUs that she can literally take to the bank. Every now and then, she settles transactions amongst her peers, by promising her soon-to-mature IOUs.  Since SACCo disbursements are a well known event, her creditors know when to come knocking.

Milk Co-op, Nyeri County, Kenya (Photo Credit: Niti Bhan)

Mutethi, a subsistence farmer, is a member of a dairy cooperative. He carries with him a blue milk card issued by KCC Kiandu milk cooling plant. All of his milk drop offs are weighed and a matching entry appended to his card. He redeems his IOUs during the next scheduled payment in cash, bank or mobile money. Until that time, all he has is this money form, that he cannot exchange for goods and services. Or just maybe, like my aunt, he does.

Valuable insights from the field! Two separate instances of alternative currencies, built around trust and a backdrop social setting – one virtual , the other physical.

Concept to prototype – Bangla Pesa, Kenya’s slum currency

Will Ruddick took this concept to prototype in Kenya’s Bangladesh Slum with Bangla Pesa – a coupon currency. Its multiplier effect, backed up by data, increased small business activity by 22% – that otherwise would not have transpired.

Senior Fellow Mwangi S. Kimenyi and Policy Analyst David Muthaka wrote on Brookings blog:

“Around 83 % of participants […] reported that their total sales were increasing as a result of the vouchers with only 0.05 % reporting a decline in sales. Average daily sales through Bangla-Pesa represent 22 % of the total daily sales […] ”

Take Away thoughts: Trust currency is virtual and so is digital money

In this post, I highlighted the perception of mobile money in informal and rural cash based micro-economies and posited:

“Are attempts at replacing cash with digital money, deep down, really about taking on ecosystems?”

Right now, I am especially interested in the implications of alternative social currencies on mobile money for development in SSA. Can such an approach aid transitions from cash to virtual money in cash intensive rural and informal domains? After all, it is here where the unbanked are likely to be found.

 

This post is a guest blog by Michael Kimani (@pesa_africa) founder of the African Digital Currency Association

Related post of interest: Systems thinking and the mobile platform for economic impact and wealth creation

Spotting an opportunity in Kinshasa’s informal markets

After writing yesterday’s post on the proliferation of superficial analysis being used to exemplify emerging consumer market opportunities in Sub Saharan Africa, I was pleased to find this  Afribiz article demonstrating clearly how on the ground observations can help identify spaces for innovation and new business in the informal markets:

At first glance, Kinshasa might seem intimidating to a perspective investor because they generally conduct business in an informal way there and have a relatively high poverty rate.  But with a little market research, innovation, and follow through doing business in Kinshasa can prove to be very lucrative. 

The people in the markets of Kinshasa generally conduct business with cash, avoiding banks.  “A single note can touch maybe one million hands before it reaches a bank,” says Claude Ibalanky, Chief Executive Officer for Bantu Investments.  “To do business in such a market, you first need to understand this dynamic.  Without (understanding) this dynamic, business would not succeed in Congo (consumer markets).”  As in other major African cities, you need to modify the way that you do business there and adapt to the local environment.
[…]
Claude Ibalanky found success in Kinshasa’s informal market with Nando’s, a popular restaurant based in South Africa. “When we looked at Nando’s,” says Ibalanky, “we saw an opportunity in Congo where most people did not.”

“You go into the streets of Kinshasa at night (and) you find (many) people selling chicken. They’re selling it – cooking it with charcoal and wood in the streets with dust, with rain water, with flies and all those kinds of things. We went to speak to them (the vendors) and we realized behind that was a very, very, very big and huge market. So, we thought a little bit of innovation, a little bit of formal set up could certainly capture a segment of the market which we targeted,” shares Ibalanky.

Bantu’s initial goal was to generate $10 for every person that ate in their Nando’s restaurants and, “after two years of operation we are sitting at about $24 per head,” says Ibalanky. So in an economy where they were expected to fail, they are instead making 2.5 times more than their goal.