It’s been interesting to watch the microcredit sector struggle with the concept of what it means to put the client at the center of their work. Perhaps, we should start the conversation with family finances, how the poor generate their income, and the big expenses they incur along the way. A 2007 Oliver Wyman study tried to do just that. Commissioned by the Bill & Melinda Gates Foundation with the purpose of describing the potential demand for financial services from 2.6 billion people who live on less than US$2 a day, the study divided the poor up into livelihood segments according to how families generate most of their income. The thinking was, if we knew how families generate their incomes, we could better understand: which financial products would best fit their cash flows, how they can take advantage of major investment opportunities, and how to address their primary vulnerabilities.
The results of the study are interesting.
Source: Oliver Wyman (2007), “Sizing and Segmenting Financial Needs of the World’s Poor,” unpublished paper commissioned by the Bill & Melinda Gates Foundation.
Of the 2.6 billion people living on less than US$2 a day, one billion are technically classified as being either too young or too old to participate in the labor force. This leaves about 1.6 billion, of which just over one billion earn a primary income from farming, casual labor, fishing, and pastoral activities. A little under 500 million depend on salaries or microenterprises. If you think about it, that means that two-thirds of the poor have incomes that are highly irregular, in addition to being low, and only one-third earns regularly from an enterprise or a low paying job.
We have built an entire sector around the notion that the poor need a highly standardized product, one that is best suited to those with regular incomes. While at times we have worried about the ‘self-exclusion’ of poorer segments, rarely have we questioned our core assumptions around the importance of sticking with rigid repayment schedules, regular meetings, and programmed credit renewals at the expiration of the present loans.
This high degree of standardization has had its benefits. For many clients, it provides a self-disciplining mechanism that allows them to reach certain specific financial goals. It has allowed leading microcredit organizations to drive their operating expenses down from more than a dollar for each dollar lent (during the 1970s) to less than 10 cents on a dollar today. And it has facilitated ancillary activities that address other social goals.
But, how well can microcredit serve the one billion poor whose incomes are both low and highly irregular? Families in rural areas have particularly volatile income flows from farming, work as day laborers, and periodic migration to urban areas.
And, is microcredit the best product for families whose incomes are not constant, who may face periods of the year in which they are food deficit, and who have few assets to fall back on in times of special need?
Actually, a tiny loan might be a perfectly useful instrument for a farmer who needs to get a crop in and is lacking money for fertilizer. But the loan that’s just right for that farmer doesn’t look like the products offered by microfinance organizations. That fertilizer loan might be best designed to be repaid when the farmer receives his proceeds, or around the cash flow from other activities in the household meanwhile. More interesting is the potential to offer savings. When farmers in Malawi were offered an opportunity to set aside part of their harvest in a commitment savings’ account, 21% took advantage of the opportunity. Committed farmers spent 26% more on inputs, and increased the value of crop output by 22% and household expenditures in the months immediately after harvest (17 % increase) compared to the control group.
By increasing the repayment frequency to a weekly basis, taking into account that market vendors had high points each week when they were flush with cash, microcredit made huge strides in the 1970s and 1980s. But all this progress was largely concentrated on one segment of poor people excluded from formal financial services.
If we truly care about providing the maximum benefits through financial services to the worlds’ poor, should we not be thinking carefully about the majority of the poor households whose cash flows may not fit very well with our current product offerings? Should we not be thinking about products that can be tailored to those flows, or marketed against major financial goals? Will the advent of agent banking, with its potential to dramatically reduce transaction costs for clients, allow us to offer savings and loan products that are more flexible, allowing clients to save all the time, borrow when they need, and repay when they can?
A recent Financial Times article entitled, “Innovators don’t ignore customers” argued that the rapidly dropping share price of Netflix, a DVD rental and online film service could be explained by the fact that the company lost touch with what its customers wanted. Keeping a sharp eye on client demand is thus not only the responsible or developmental thing to do–it simply makes good business sense.
I have to say that I completely agree with Robert. So much so that this was one of the ideas that spurred the creation of our company, InVenture. We knew that the high interest rates and rigid repayment schedules required by MFIs could actually hinder their clients’ growth. With this in mind we created a revenue sharing repayment model that allows our clients to grow in spite of their fluctuating cash flows. So far we’ve seen some great success with some of our clients expanding to the point of hiring locals to handle their increased demand.
I agree the poor man’s cash flow and current product offerings do not coalesce in the process of ensuring maximum benefit through financial services to the world poor. In this regard I would like to share my views
1. In MF arena with the ultimate goal of poverty reduction, ‘focusing the client’ means a provision of comprehensive protection to their livelihood for upliftment sustainably thro various ways and means suggested below
a) location of priority segment in the bottom of poverty pyramid first and identification of their needs followed by sequencing the provision of both financial and non financial product and services for their graduation (CGAP-Pilot projects) accompanied with improved cash flow in their household
b) Care for designing diversified Micro finance products holistically including micro savings, micro insurance etc., and not necessarily confining to micro credit alone depending on the multiple needs of poor client for their sustainable livelihood
c) Pro poor product designing calls for cash flow analysis, but it alone may not be adequate for this art. The factors such as clients’capability and physical infrastructure in the given area which influence the productivity of the product in the process of income generation in the given area, also need to be reckoned with.
d) Even in the particular segment (small business/vendors) with regular cash flow, how to protect and sustain the cash flow from the particular activity financed from the wrath of co-variant and idiosyncratic risks? Similarly for the clients with farm based activities including livestock are prone to such vulnerabilities how to ensure protection from such risk? In this context, isn’t necessary to integrate micro credit product with micro insurance product as mandatory ( in practice in Indian banking ) for the benefit of both the client and provider as well? Will it not facilitate for smooth cash flow without strain for the client? Advocacy for designing such integrated product and awareness campaign are lacking in this industry
2. Observations on the study findings
a) In the graphical illustration for size and segmenting financial needs of world poor (Oliver Wyman), the technical classification misses gender type as it would facilitate to identify their specific needs and design matching products and services towards women empowerment . This fact assumes importance in the context of greater role of women in poverty reduction at house hold level and women SHGs acting as vital conduit for MF activities in Asia
b) Repayment coinciding crop harvest in the case of tiny loan for farmers is very appropriate instead of attaching with any other means of income in the cash flow of the respective client’s household income. Here innovative products like Paddy pledging scheme which provides storing facility of the farm produce during the harvest period and issue of Go Down/warehousing receipt (Thailand –BAAC) for the stored grain with the facility for pledging the same for better return and for avoiding too much of supply of produce at particular period in the market and Kisan card (Indian Banks) for multi purposes including micro insurance coverage and automatic eligibility for availing second loan , may be useful for farm clients
In fine the greatest challenge for the institution which focuses the attention of clients first or positions the client at the centre, is the reduction of intra poor client’s inequity gap with proper sequencing the provision of diversified and integrated MF products ( not confining to micro credit alone) matching to their respective needs as an a’ priori ‘condition . Once this challenged is effectively faced, it endorses justifiably the finance as ‘responsible finance’ and inclusion as ‘responsible inclusion’ for the supplier and ensures sustainable poverty cure meaningfully in the client’s side.
Thank you for sharing my views
An excellent post Mr. Christen, but I think that many Micro-Credit supporters don’t care much about these kind of arguments and THAT lack of concern is in fact what needs to be changed, and drastically and fast.
Allowing oneself to think five minutes about the realities of a poor person that is unemployed, one understands the absence of security and predictability at many levels, as well as the absence or lack of basic goods and services (of an acceptable quality). In such daily environment it might be better to create a framework that supports improving the situation of the poor in many ways and in which Micro-Finance definitely has a role to play.
That role (of MF) can only be effective and sustainable when the support is adequately institutionalised and when the owner and managers of the institutions are legally and financially liable for the institution’s activities. The strategy that Micro-Credit supporters and practitioners have so far successfully followed to avoid such responsibility is by always stating that they help the poor and that they dislike bankers. In doing so they make sure to follow the latest trends with the best banking terms in the most fluent language.
Consequently, Focusing on the Clients Really is not about what credit services they want and how, but it is on WHO can be held responsible for providing poor, so far unbanked people, with professional financial services for which safety and quality the providers can be effectively and efficiently be held accountable and liable.
Remaining in the vicious circle of discussing improving channeling money to the poor by way of “micro-credit” has already proven to not be a circle but a one-way street of channeling funds for socio-political objectives. That is social welfare where a financial services debate does not make much sense.