Posts Tagged ‘informal financial services’

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/

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

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.

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

The importance of the agent/customer relationship for successful financial inclusion

The role of agent networks in East Africa’s mobile money and mobile banking roll-outs is widely documented; as an intermediary, a kiosk exchange point – accepting deposits for e-money/ withdrawals for cash and usajili (registration).

“. . .as the first point of contact, human agents help bridge the gap between a high-tech service and low-literacy clients.” – CGAP

But, most research falls short of exploring the subject in its entirety, specifically, the relationship between customers and human agents – a recent example is the just released Agent Network Accelerator Survey – Kenya Country Report 2014 by Helix Institute of Digital Finance. To sum it up, I would say it was a numbers driven top-down approach to the subject (most likely focusing on what is best for the service provider), that failed to explore the human touch-points that make mobile money relatable.

“A lot these findings, I’m noticing, do indeed do all the research, but leave their underlying assumptions on people unquestioned [. . .] researchers go in & see behaviour – the What & How – but assume a lot on the Why” – @prepaid africa

As I see it, there is a subtly rich layer to the mobile money agent and client relationship that is readily observable in close knit communities; frequent micro-transactions lead to conversations beyond basic transactions, off-the-cuff inquiries, and thus reinforce continued trust. For people not well acquainted with the intricacies of mobile money, or tech for that matter, these human intermediaries – the agents, most of whom happen to be women – are your trusted guides to the technology and face of the service providers.

Which is why, this assumption in a post by Mondato, hit a nerve.

“In the long run, as more fully developed digital payments ecosystems develop, there will be less need for agents . . .”

When talking about Africa’s markets, in mobile financial services or whatever context, research reports which disregard the qualitative nuance of local, social and communal interaction, lead easily to such assumptions. The Helix report for example, grouped agents into 2 categories: rural and urban. On the ground however, these are polar extremes on a scale. If we go by strict definitions, this frame of reference doesn’t translate on the ground ; more common is a mix of both, or peri-urban or even rural folk who commute to their place of work in peri-urban. Perhaps a measure of cash intensity or ‘unbanked-ness’ in immediate contexts makes for a better framing?

My point is, the agent – customer relationship on Moi Avenue in Nairobi’s CBD, is markedly different from Githurai’s packed informal market place despite both located in Nairobi. In this cash intensive ecosystem, in the thick of all the chaos characteristic of informal micro-economies, human agents sit right next to mama biashara and boda boda guys. Here is where, you are likely to find the unbanked, underbanked and lower income segments.

I can’t help but think there is a larger role for mobile money agents in financial inclusion; one that resonates with commonly observed themes in this segment – social groups, local, face to face, trust. Like Monica, a cyber cafe attendant in Maai Mahiu whose role in the local community extends beyond simply offering internet browsing services. Jan Chipchase aptly describes this as symbiotic : customers, agents and service provider.

“The careful use of real world analytics combined with contextual qualitative understanding has the opportunity to reveal not only what people are doing, but also the nuances of how and why . . . this in turn will lead to the next round of service innovation insights”

Role of Chamas in informal sector entrepreneurialism in Kenya

Researcher Mary Njeri Kinyanjui shares deep insights from Kenya on how social cooperation and collaboration play an important role in the informal entrepreneur’s business financing strategy.

In East Africa, particularly in Kenya, the formation of chama—a Kiswahili word for social group—has helped to enhance group agency and solidarity entrepreneurialism. Individuals collectively and cooperatively form a chama to pool and invest savings for welfare activities, such as paying medical bills or celebrating the birth of a child, as well as for investments, such as buying property, rural land, or plots in the city. The contributions are saved and then given to members on a rotational basis as lump sum loans at low-interest rates. Such business exchanges occur in a free and open market, which discourages hoarding, unfair trading, overpricing, and undercutting.

Here are two stories of Kenyans who have successfully utilized solidarity entrepreneurialism, and chama especially, in informal economies to improve their social and economic wellbeing.

In the 1990s, John, a trader of clothing and accessories, bought his products from wholesalers across Nairobi. However, with the onset of economic liberalization, many of these wholesalers went under, and new suppliers were too expensive. He decided that the only way to sustain his business was to go to China to source his products. With a group of friends, John formed a chama, which was comprised of 10 men, and traveled to China. Together, they made monthly contributions of 10,000 Kenyan shillings (or $108 in today’s dollars). The accumulated wealth was given out as loans, with an interest rate of 10 percent, for hotels and travel expenses in China. Through this initial chama, they have created a revolving fund that facilitates Kenyan traders’ visits to China when demands arise.

In 2011, Jane was invited by a friend to rent a stall to sell clothes in ECT Mall on Taveta Road in Nairobi. She had about $2700 in savings. She spent $325 of her savings to make a down payment and to start her business. After her first earned profit of $485, she was able to renew stock from wholesalers in Kamukunji and also save some money to contribute to her chama. After saving money for five months, she obtained a loan from her chama, which enabled her to buy more stock. And after one year, the traders in her chama made a unanimous decision to use their pooled savings and earnings from loans to buy land in Kitengela. Jane thus moved her clothing business to the plot of land in Kitengela and is now able to maintain her stall with ease because rent, water, and security costs are shared among the traders.

An older article by kiwanja offers an overview of the role played by these indigenous financial cooperatives in Africa, while the chama‘s importance in Kenyan society has already captured the attention of the tech innovators looking to develop mobile solutions.