Poor centricity and financial inclusion: The poor live complex financial lives

 Nahid Akhter | Published:  July 24, 2019 21:24:22 


Access to financial services has emerged as a legitimate tool for development in countries like Bangladesh. The provision of financial services refers to adequate access to prudent financial services including savings, credit, payments, insurance and other risk management services for individuals to employ for personal or business purposes.

There is a growing body of knowledge that shows that the poor live complex financial lives. Research based on yearlong data on daily financial  transactions  (financial  diaries)  of  villagers  and  slum  dwellers  in  Bangladesh  show  that  most  of  these  poor  families  do  not  live  hand  to mouth, rather they employ financial  tools–many linked to informal networks and family ties. They push money into savings for reserves, squeeze money out of creditors whenever possible, run savings clubs, and use micro-financing wherever available. This means the poor do actually save, borrow, lend and prepare for rainy days. But the  poor  households are  frustrated  by  the  lack  of  appropriate  financial  instruments  that  could  help  them  manage  their  resources  better  as  a  way  to  accelerate their lives out of poverty.

One  of  the  characteristics  of  the  financial  lives  of  the  poor is that they have low income, which is irregular and unpredictable. In some days, they can earn reasonable amounts, while in other days, they may go without any income. For individuals who are engaged in activities like farming, which are seasonal, their income could vary even more.  Given  the  nature  and  flow  of  income  to  the  poor  members  in  society,  their  level  of  uncertainty is high. This  translates  to  them  living  less  healthy  lives,  staying  in  less  secure places and facing income volatility associated with market supply and demand dynamics.

The poor lack appropriate financial tools. The need for appropriate financial tools becomes even more critical for this segment of the population, since money management is more crucial for them than those in the higher economic pyramid. Given the low, irregular and unreliable income, tools that facilitate savings, streamline cash flows and accumulate bigger ticket items (lump sums) are of greater value for the poor groups.

WHAT DRIVE FINANCIAL  ACTIVITIES  OF  THE  POOR: Three  needs are identified  that  drive  the  financial  activities  of  the  poor: (i)  management  of  basics, which entails managing cash flows so as to transform the low irregular income into a dependable source for daily living; (ii) coping with risks particularly emergencies; and (iii) raising lump sums whereby they can reliably accumulate meaningful sums of money to invest or meet working capital needs.

Given that the poor live complex financial lives and yet lacks appropriate formal tools, their only choice is the informal tools. These tools work and meet their needs. However, they are expensive, unreliable and at times unsafe because of poor quality.

As new, innovative digital and other techniques are being developed in the financial sector focusing on the poor, recent evidence shows that the poor’s financial and economic lives have improved in Bangladesh. Access to a range of appropriate and affordable financial tools helps the poor reduce their vulnerability to shocks. In addition, these tools  improve  their  welfare  and  in  a  number  of  cases, raises their income. There is evidence of impact of other forms including the benefit of a safer place to save, increased savings, improved credit worthiness, access to microfinance as well as other indirect benefits like better financial patterns, increased agricultural productivity and reduced child labour.

There are certain characteristics that the poor value in financial services. Given the size of income, safety is certainly high in the list. The nature of the needs also necessitates that the funds should easily be accessible if they truly need to utilise them.  Research in these areas shows that for short-term savings, rewards in the form of interest is not highly valued, rather safety and convenience are important considerations.

A GENERAL CONSENSUS: There  is a general consensus  that  conventional  financial  institutions  are  expensive  for  the  poor,  which  keeps  them  away  from  the  banks.  The  result  is  that  they  cannot  build  dependable  credit  history,  to  enable  them  further  participate in the formal economy.  Newer  and  innovative  models  of  providing  financial  services  such  as  mobile financial services  and agency banking are rapidly outpacing the conventional financial  sector  both in subscriber  base and geographical reach. Banks are designed to handle high value transactions, and  as  much  as  they  are  keen  on  the  high  frequency low value transactions, by design they move slowly in meeting the needs of the poor.

There  are  general  deficiencies  in the  financial  sector,  such  that  despite the improvements in the last several years, the system still  struggles  with  market  inefficiencies  that  affect  the  business environment. There are cases of fragility and incompleteness. Microfinance  institutions (MFIs)  have  made  inroads  into  serving  the  poor,  but  have  not  been  flexible,  inexpensive  enough  and  entirely  effective  in  meeting  the  needs  of   this   segment   of   society. There are differing arguments about the impacts of MFIs in helping the poor escape poverty, partly because of the complexity of evaluating impact at the macro levels.  It is  possible  that the poor’s lives  are  improved  and  the financial  lives  are more  organised,  but  whether  the  poor  actually  get  out  of  poverty  is  sometimes  subject  to  debate,  particularly at larger scales. Despite the varying views, it is obvious that the structure of services offered by MFIs is rigid and in some cases expensive.  Despite the closeness of MFIs to the poor, achieving the last mile still remains expensive. 

There are  a  number  of  factors  that make  mobile  financial  services  succeed  so  rapidly  in Bangladesh. The factors include an existing demand for reliable services and low transaction costs. Emerging innovative financial inclusion models are characterised by synergy. Mobile  financial  services  are  now  common  place  in  Bangladesh  and  are  filling  the  much  needed  gap  of  offering appropriate financial tools.

The G20 financial inclusion experts group describes ‘innovative financial inclusion’  as  the  ‘delivery  of  financial  services  outside  conventional   branches  of   financial   institutions   by  using  information  and  communications  technologies  and non-bank retail agents and other new institutional arrangements to reach those who are financially excluded’.  This description extends to include all forms of  delivery  and  cash-in-cash-out,  including  mobile  phone  payments  and  point of sale (POS)  services. There are examples in Bangladesh  of  use  of  mobile  phones  for  financial  access,  agents  for  cash-in-cash-out  and  collaboration  between   mobile   network   operators (MNOs) and financial  institutions to  accelerate  access  to  formal  financial services.

IDENTIFYING SPECIFIC BUSINESS MODELS: The important issue for Bangladesh is to identify specific business models, tailored for each group of low-income earners. For example, ‘pay-as-you-use’ may be a category where consumers pay lower costs for every single use of a facility, product, or service; ‘no frills’ may be a category of services or products which are supposed to  meet  basic  needs  of  the  poor  at  a  very  low  price  but still generates positive cash flow for the suppliers; and there can be ‘shared  channels’,  which  would enable piggybacking  products  and  services  on  existing  customer  supply  chains,  so  as  to  enable  poor  people  to  access  and  afford  goods  and  services  valuable  to  them. Similarly, there can be categories such as ‘pay-as-you-go’, ‘lease-to-own’, and ‘layaway programmes’, among others. There are examples of many successful models being applied by start-ups  to  extend  financial  inclusion  by  providing  goods  and  services  for  which  customers can  pay  through  mobile money.

The fact is that, despite progress, a vast majority of the population are still financially excluded in Bangladesh. There are special groups who are financially excluded for various reasons. They include: young people lacking employment, education and training;  lone parents; disabled people; people living in isolated and disadvantaged areas; members of ethnic minorities; recent migrants; refugees; homeless people; older people; women; and poor and extreme poor people. Detailed information on the profiles of these groups of people is necessary to understand their degree of financial inclusion and nature of barriers to inclusion.

For extending financial inclusion, a key issue is to acquire knowledge from different stakeholders to help innovate new pathways to promote financial inclusion through cross learning across diverse audience covering policy makers, financial experts, practitioners, academicians, and the excluded people at large over the complex issues and challenges facing the ‘financial inclusion for all’ agenda.

POSTCRIPT: The International FIN-B Financial Inclusion Conference scheduled   to be organised on July 30-31 by the Financial Inclusion Network-Bangladesh (FIN-B), an initiative of the Institute for Inclusive Finance and Development (InM), will discuss financial inclusion challenges, identify innovative solutions, and share experiences among the representatives across all stakeholders covering both demand and supply side issues.

Nahid Akhter is Senior Research Associate. Institute for Inclusive Finance and Development (InM).