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).