Financial services for next billion? [Part 2] – Triple Whammy

This is the second in a series of articles on “Financial services for next billion?” that will be based on the book – Portfolios of the poor. Similar to my last post, in this one I have covered chapter 2 of this book in Q&A format, covering pieces around triple whammy, informal financial instruments, designing financial products for the poor, etc.

What is “triple whammy”?
“multiple occupations leading to low incomes – often patched together from uncertain parts – results in a “triple whammy” of incomes that are not just small but also irregular, and that have to be managed with financial instruments that do not always fit the household’s cash-flow patterns.”
“The first element of the triple whammy that poor households face, then is low incomes. The second element, the uncertain timing of cash flows..”
“The third part of the triple whammy is that existing financial instruments are not well suited to address each of these problems.”

Why poor households prefer short term financial instruments?
“Borrowing and saving for the long term are indeed important to poor households….but long-term goals were not the primary financial concern of most of households….Instead households…borrowed and saved mostly to meet pressing short-term needs: their main objective was cashflow management. Being able to manage immediate needs is a precondition for considering long-term ambitions – but the way that poor people achieve it has received scant attention from policymakers and others arguing for financial access for the poor.”

Why lower incomes require more rather than less active financial management?
“..flows moving through financial instruments are large relative to income even in households with low incomes and small balances. In Bangladesh, where rural incomes are lower than urban ones, median turnover in the countryside is nevertheless higher than in the town.”
“The high level of financial cash flow is particularly surprising when considered in relation to income…. “cash flow intensity of income”: the sum of funds borrowed, paid out, recovered, deposited and withdrawn, divided by income of all sorts. In India, households shifted, on average, between 0.75 and 1.75 times their incomes, with high velocity money movers like rural small traders shifting more than three times their earnings in an average month.”

Poor households <–> Small startup?
“Like a small startup business, a poor household may indicate financial health by carrying a certain level of debt. A start-up business needs to take on debt in order to invest and grow. Likewise, poor households need to access debt so they can weather interruptions that may threaten their investments in the long term.”

Does debt happens because of reckless consumption?
“many instances debt didn’t arise from reckless consumption, but from stretching too small an income over too many mouths to feed, a matter of meeting basic needs between payments.”

What are the advantages of informal savings and borrowing?
“The tools used for informal saving and borrowing are generally close at hand(savings hidden in the hut, loans from nearby neighbours) and flexible (that is, without strictly fixed terms or payment schedules), two hallmarks of desirable cash management tools.”

What are the weaknesses of informal devices?
“Informal arrangements offer flexibility and convenience but may lack reliability, privacy, and transparency, and rely too heavily on kindness, goodwill, and norms of mutual obligation.”

  • Unreliability
    • “Many of the shortcomings of informal finance are aspects of its general unreliability. Its lack of capacity – its financial shallowness..”
    • “Insecurity is another aspect of unreliability: savings stored at home can be lost, stolen, washed away in storms, captured by relatives, or eroded by trivial expenditure; savings stored with money-guards or clubs can be poorly recorded and stored, or even misappropriated.”
  • Lack of privacy
    • “approaching several people for loans before getting one is not merely an inconvenient outcome of the financial shallowness of the informal sector, but a source of stress and shame.”
    • “they would go to several informal sources (colleagues, neighbours, the grocer, one’s employer) before they would resort to relatives.”
    • “avoided recourse to relatives at all costs, because he was ashamed and anxious that, if he couldn’t repay on time, he would strain the relationship.”

What formal sector need to learn from informal sector?
“required tools that were flexible and easy to access. The informal sector has proved to be the best provider of those tools so far, and the challenge for the formal sector is whether it can do better, with services that are just as flexible and convenient, but also more reliable and more liquid.”

Better off people vs poor people in terms of use of financial instrument
“Better-off people might manage money on an everyday basis with a credit card. For the poor households…. the main strategy was to turn to each other, using one on one lending and borrowing between friends, family and neighbours.”

Does it always starts with lending?
“Subir and Mumtaz told us that they had decided not join a micro-finance institution because their main need was to save, not borrow. If they borrowed, they might not be able to make the regular weekly repayments.”

What is reciprocal and obligatory lending and borrowing?
“Often there is an understanding that the borrower will return the favor and lend when the need arises: we call this “reciprocal lending” and borrowing. In other cases, the borrowing flows one way and the creditor in one deal is unlikely to become the debtor in the next: thigh might be called “obligatory” lending since it depends on the lender’s sense that he or she is obliged to help out the borrower with a loan.”

What features are needed for a mass market in tools for cash-flow management for the poor?
“Loans that are disbursed on the date promised, in the amount agreed upon, and a standard price. Savings accounts that allow ready access and convenient withdrawals, with deposits and withdrawals made in any value. Insurance contracts that pay out quickly and with little haggling when needs arise.”

How to make loans more flexible?
“One idea common in informal lending is allowing penalty free-grace periods when cash-flow problems hit. Another idea… is to allow borrowers to “top up” their loans (by borrowing again what they have repaid) part way through the repayment schedule, to increase liquidity….Another important path is the development of loans with a range of terms, including short-term “emergency loan”.”
“embracing the notion that households seek loans for general purposes will open up possibilities for innovation and expansion for microfinance providers.”
“Yet another innovation is to offer loans secured against liquid assets commonly held by the poor.”

General insights
“there is no doubt that irregularity, and above all unpredictability, of income causes even more serious challenges in cash flow management, resulting in ever more innovation in trying to address them.”
“A formal sector job, then doesn’t necessarily translate to more reliable income in South Asia.”
“She once opened a bank account to save money, but it is now inactive: the time and cost to visit the bank aren’t worth the bother.”
“Being poor does not disqualify you from being inventive in your finances.”
“the product’s flexibility is highly appreciated although further creative ingenuity and informal contacts are still required for a farmer to overcome seasonal and low income.”
“poor-household incomes are not merely low but awkwardly timed, and the financial services used to address this irregularity in incomes are imperfect.”
“cash-flow analysis, rather than balance-sheet analysis, is the way to begin understanding their financial lives.”
“because poor households strive to enlarge their access to both savings and loan services, they are often happy to take loans secured against their own savings: indeed this is regarded by some of them as an ideal situation in which they enjoy liquidity even while they preserve their precious savings.”

I would like to hear more from you if you are using (or planning to use) these insights to build financial services for the next billion. Please do write to me at sagar@humane.network.

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