The ideal of financial inclusion is increasingly under fire (see this article and these comments to a blog post). We might be able to reasonably agree that finance is vital for poorer people in the informal economy (full argumentation here), but the next question is whether those needs are already sufficiently well-met by existing informal mechanisms that people are comfortable with and use every day. Why does finance need to be formalized?
I don’t know that we have the answer to that, but I don’t know that we need to have one either. Aren’t current choices always good enough until something better comes along? Who can confidently argue that the set of informal options that people already have represents a full basket? One might have an opinion of how difficult it will be to design formal services that ‘beat’ informal options, but only a deep pessimist can declare the effort useless.
M-PESA should be a cautionary tale to those who’d like poor people to be left alone to deal with their finances in traditional ways. Five years ago few voices argued that domestic payments were a sore need for poor people. Yet innovation unlocked it. The development of microcredit is probably in the same category of an innovation that exposed a patent gap in people’s (informal) financial portfolios.
I interpret the current financial inclusion drive as being an attempt to do for savings and insurance what Safaricom did for payments and Grameen did for credit.
Unfortunately, there is little evidence of success on this front. Sure, one can point at increasing numbers of account-holders but all the evidence that I see suggests that most of these accounts are either inactive or hold very small balances (see here, here, here). They might be useful from time to time, but it would be a stretch to describe them as effective buffers between household income and expenditures. Today’s formal savings options fall well short of the mark in terms of customer demand, never mind impact.
Why is that so? It goes back to the innovation point. We are not seeing much of it, and what little there is tends to be misdirected. If you want to displace informal savings options, you need to at least incorporate those features that people really like about informal options, and then you need to add a compelling argument to switch. Yet, I don’t know of a single formal savings account that incorporates the kinds of psychological features that people use to budget and discipline themselves: fragmentation of balances by purpose, mental labeling (thinking of something as an investment rather than as mere savings), social display and peer pressure, indivisibility, putting mental and physical distance between you and your money, etc. Banks can discipline you, and that they do by denying you access to your money for a specified period of time. People resist that: if nobody guarantees them any income, why should they guarantee the bank any money? What banks don’t do is play along with your mental discipline games.
I don’t think the main issue is that we don’t know enough about how poor people manage their money, much as the emerging quantitative research industry is pushing us to believe (who can be against collecting more data, or, as it’s now called, evidence?). The problem is that nobody has figured out what to do with all that information. (Here’s where I would start.)
The real problem is that innovation is not in the DNA of banks who know they will make more money by financing one more road than by banking millions. Innovation is also not in the DNA of mobile operators, for whom what generally passes for innovation is bundling a new ringtone and a new game coinciding with the release of the latest James Bond movie with the latest handset (the M-PESA counterexample notwithstanding). Innovation is certainly not in the DNA of banking regulators, for whom change is risk, especially if the purpose is massive change for a massive number of people. And innovation is certainly not in the DNA of the donor community which is today priming the financial inclusion industry.
So I am a in a pessimist frame of mind right now, but I’ll continue to work on it. And to the critics, I’ll say that my objective is not to see to it that everyone is included financially, but to expand the range of choices available to people – and let them decide.
--------- The author is an independent consultant working on mobile money and technology-enabled models for financial inclusion.
The next big innovation will come out of innovative financial literacy programs. When consumers understand the financial products available, they will use them and use them effectively. This is not only true in emerging markets with the poor, but also in developed countries where high school students are currently graduating with an inadequate understanding of basic banking and insurance.
Firstly, it would be easier on anyone's creative intellect and strong commitment towards helping poor people if we define Microfinance in two separate ways: (1) as a part of social welfare providing poor people with grants that stimulate them to work = micro-credits and (2) as a tool to build inclusive (formal = regulated) financial sectors.
The author defines MF in the 2nd way and then he answers his own question that poor people are not worse off with their so far informal ways in managing their money. Firstly, everyone manages a part of the money they have earned as cash money, and sometimes they do that together with family & friends; to save for life events such as weddings, funerals, anniversaries etc. But most of their money they want to have managed as safely as possible in order to be able to pay the expenses for their lives and families; food, water, housing, healthcare, electricity, waste management, old age etcetera. SAFE as possible in our society then means depositing the money with financial institutions that are effectively regulated and supervised by skilled, impartial government experts. That is what the term "Formal" means.
It is indeed so that technology can only support activities that help society, that help integrating poor people. And it is also very true that poor people suffer daily psychological frustration in managing the little money their lives and futures depend on, thus often making "relative mistakes" like buying alcohol, mobile phones or solar panels leaving them unable to buy a mosquito net, food/safe water for the week, improve their houses, prepare for coming life events (up-saving) or prepare their farming land. And finally, it is indeed sad that MF still strongly depends on foreign donors and that they now make so much efforts to call themselves "commercial" and part of the "capital market", which distorts understanding and thus hinders developing good plans.
Financial Literacy training is a good idea to make solutions centered around the people that Microfinance wants to help but it can only be effective when part of a national complete and coherent strategy. A strategy in which social welfare does not frustrate, hinder financial sector development. And that strategy needs to be established, managed and implemented by the highest national executive government. Other stakeholders, all of the above-mentioned, formal financial institutions, informal organisations, civil society, health-care providers, housing constructors and yes, in particular also foreign donors (especially today's huge "Development Finance Institutions" that also mean to include the "social/patient investors" and the "subordinated lenders") need to be part of the alliance with national government. In the end, what we need to understand well is that a country's society determines trust building and so also the stable value of the money they issue and manage with the help of financial institutions. And only stable real value money can be a key in making a country work, also against poverty.
And that can be the innovation we desperately wait for in Microfinance. Maybe we can look for leadership to AFI, the Alliance for Financial Inclusion, where governments and central banks of countries with shallow regulated economies, financial sectors, are members. But can we expect the current "Microfinance Champions" to support these authorities and wait for their requests for support before promoting and implementing the trends that they want to globally launch? Or does AFI for the next decade first need to survive the competition of these ineffective and inefficient "developmental organisations", such as World Bank, UN, national "aid agencies" and private charities? Maybe the current crisis can help make them leaner .....
I agree with your perspectives entirely. The dearth of relevant and suitable financial products and services from the formal side as represented by banks, MFIs and other formal financial services providers has led to the proliferation of informal financial services solutions spawned by the poor out of desperation and survival instincts.
What I hear you saying is that, like the proverbial rats complaining about the rapacious cat with none willing to bell it, few in the inclusion debate are ready and willing to bell the exclusion cat through innovation. Your plea is that formal financial services providers should descend from their ivory towers and snobbish ostentations and visit the humble terrains of the poor and ask them what they want or how they would want to be helped enjoy more financial products that improve their material welfare.
The famous writer Dale Carnegie wrote that if you want to catch a fish, you give it what it likes, not what you like. He said that he liked chocolate very much but he couldn't use it to catch fish. The relevance here is that if formal financial services providers want more people to enjoy more of their financial services and thus be included, they need to either informalize their services to a level or language that the poor understand or craft new products that resonate with the poor's psyche ( the psychological features that relate with how the poor think and behave as Ignacio says). Innovation around technology increase outreach and is a faster route to financial inclusion..That isn't asking too much of financial institutions. Mpesa is such an example of innovation that attracts the poor into the formal financial stream. Many more of that type should be happening. It is not the Kenya government that created Mpesa. So, Peter, if we wait for governments to innovate, we might as well wait for ever. Innovation belongs to the private sector and it is not a reserve of financial services providers either. Vodaphone isn't a financial institution and neither is Safaricom. Yes governments need to legislate and create conducive environment for innovation but governments in the world are not innovative. They thrive on status quo. It is the private sector that pushes for change by cornering governments to legislate. In Kenya, Mpesa would have been a still birth had the late Minister of Finance been allowed to have his day. He saw Mpesa as a monster that would wipe the entire financial sector and was completely opposed to Mpesa. Thanks to the Central Bank Governor Professor Njuguna Ndung'u, a visionary, for being stubbornly in support of financial innovation we now have Mpesa as a success story.
Well, we cant do without research but fascination with research is being fixated to a beacon while forgetting the territory. Research is a means to an end not an end in itself. Findings which are not followed by innovative products is a waste of research money. But it is not for researchers to create products though. There is a clear division of labor and finding researchers who double as innovative creators is a blessing. Ignacio aren't you a researcher and an innovator? What challenges do you encounter when you recommend innovations based on your research? If there is resistance in uptake, perhaps that is where the problem is and needs to be addressed.
Peter, I don’t quite see why you are singling out safety as the key attribute of formal products. Sure I’d like them to be safer than informal options, but also more flexible, more convenient, cheaper, easier to build discipline, and with more choice. Bank offerings today are inferior to informal options on many of these dimensions. I don’t think safety would necessarily be the main attribute for poor people (a cow might die of disease, but it’s still a good investment), and even if it was I don’t think they would necessarily think formal options are safer than informal ones. I’m not saying that as a result people should be content with their informal options, what I am saying is that if banks don’t offer something that is clearly superior to what people already have and use, then don’t be surprised if bank accounts remain largely unused.
Kevin, more education is obviously better than less, but I think it’s too facile to blame the lack of take-up and usage of bank products on lack of financial education. If I invent a new widget and nobody buys it, would I be entitled to run to government or NGOs and plead with them to teach everyone to like my widget? It should be up to me to design my widget in a way that addresses a specific problem people have, to make it better than the alternatives out in the market already, to build it cheap enough and make it affordable, to invest enough in marketing so that customers become aware of its existence and its advantages, etc. Why should it be any different with banks’ widget-accounts? The problem is precisely that banks build products that demand too much change in how people think about and organize their finances.
It’s just like John says: it’s easier to fish with a worm that to get them to like chocolate – nice story, I hadn't heard that one before. And I agree with John’s point that if we have to rely on governments to innovate then we might as well pray.
John, the problem with entrenching innovation is that it demands that people do something different tomorrow to what they did today; that they trade a certain margin today for only the possibility of a bigger market tomorrow; that they focus on some hard-to-measure development activities rather than fixing some operational glitch that will hit revenue today; in short, that they accept the possibility that they might end up looking like fools if they are proven wrong. Thanks John for pushing us to take the harder path...
Past events clearly suggest that next big innovation is in the DNA of the demand side and it has to come from there. Demand side means after inclusion, ‘what is happening to the included’ ? We have done enough in supply side that is for advancing inclusion or the process of inclusion and means and mode of inclusion invariably with technology intrusion. But Innovation on ‘What after inclusion’ ( be it formal, non formal informal) would be more useful for outcome mapping on the intention, intended for included in poverty segment and prove and improve the very purpose of innovation for such inclusion under MF realm.
Innovation for inclusion from supplier point is necessary but it is bound to be commercial and scalability only as priority in their business .M-Pesa, jipange Ku sav, are a typical examples serving mostly economically viable retail business people who are not necessarily MF clients ( >2 $ a day) and from its commercial perspectives it hardly reaches the bottom poor resulting inequity gulf widening even in the pyramid.
A common quote states ‘It is not from the benevolence of butcher, baker and brewer that we expect the dinner, but from their regard to their own interest”. The market oriented product and services and other selling strategies help only those who can respond (capable) to them at ‘what ever (social) cost’ and in the process vulnerable and disadvantaged sections are excluded there by widening inequity gap. In SHG/MFI system, the so called inclusion witnesses some uncared exclusion of included in the form of drop outs and group mortality and defunct a/c in ‘No frill’ innovation strategy. This phenomenon questions the validity of innovations so far made for inclusion, in achieving the ultimate goal set beyond quantitative matrix ?
It therefore points out that next big innovation is only in the DNA of demand side calling for change first in the mind set of researchers/innovators/professionals in MF from institutional dynamics to the demand side realities. Suggested area for next big innovation in MF include
a) Is mere rapid advancement of micro credit inclusion powered by technology adequate for poverty reduction if not elimination with the given infrastructure and absorbing capacity of service area ?
b) How to reduce the vulnerability and deprivation of the poor through integrated MF product and services and at the same time ensure trade off between ‘commercial gain and social goal ?
c) What are the ways and means for rejuvenating the excluded of the already included ( drop outs/push outs /defunct etc) for making inclusion a responsible and meaningful one?
d) Are CPP measures conceived sufficient to take care of all MF clients beyond micro credit borrowers and the subsequently excluded one who were included already?
e) How to harness the potential of technology for inclusion of the poorest at the bottom without discrimination for challenging the reduction of both poverty and inequality.?
f) In the context of mushroom growth of institutions and products targeting ‘common people’ using the Brand name “Micro finance” without much reflecting the concerns of the pyramid people ethically , is it a bad idea for promoting “surveillance” globally for reducing the misuse or abuse of MF concept ?
g) Last, most importantly from demand side perspectives, the innovators need to focus on the role of ‘behavior economics’ and ethical hedge in financial decision making process at client household level ( beyond financial diaries methods ) as it alone decides success or failure of ‘inclusion’ in terms of its desired outcome and impact on client’s welfare . This should be I feel, next big and prudent innovation in MF
In fine the desired outcome of the next big innovation should be in terms of sustained reduction in poverty and inequality and not necessarily in terms of number of people included and how speed with which advancement of inclusion by mobile magic ignoring the impact in poverty sector..
Ignacio, here is my comments:
1. institutions (legal entity, regulation, license, etc) is a key for development of a society/country. When in a country the institutions are poor, usually the country is less developed. That is why we need to transform as many as possible people who are using illegal or extra-legal service into a services that are provided by licensed institution/company. In Indonesia the extra-legal financial service is still massive. The case of fraud savings/investment by individual or extra-legal company or cooperative are still happening several times a year! So, convert them to use legal service actually provide them a protection for their asset.
2. What do you mean by "savings"? Is it an account where someone can put their excess money and withdraw it when they need the money? What is the difference with "current account"? Is the different only in the instrument: CA has cheque and savings has no cheque? For me savings is not a daily or weekly transaction account, especially if we want to serve the poor to help them to manage their income to increase their net-worth. What I do now is to enforce the low-income family to have several savings account based on their known/planned fixed future expenditure. They deposit their money into the savings accounts every time they have money, and they withdraw and closed a savings account when they need to money to realize their plan (pay their planned expense). I still cannot provide a savings account for their daily cash flow management (where they can deposit or withdraw their money anytime) since it service costs is very prohibitive (since the transaction amount is very tiny). I do not want to deny the fact that every where in the world, including in the US and Europe, the poor or low income people is cash society! So I just help them to manage their money to fulfill significant life cycle expenses.
Dear Ignacio, thank you for your blog. I agree wholeheartedly with you that the focus on financial inclusion, as in "getting people banked", is the wrong focus.
Recently I evaluated a large VSLA programme. This is a very effective programme getting people access to savings, loans and insurance. All three are informal financial services provided by the group to the group, but these are services that are convenient and fast and ultimately without any costs because self-managed. However, many people keep repeating that VSLA membership is not financial inclusion, this is not real financial access. So what? For many if not most of the VSLA members the three simple informal financial services satisfy most of their needs and help them manage their finances effectively.
Of course there are VSLA group members (and groups) who want more sophisticated services, who want more security for the savings, etc. These can be obtained via formal or semi-formal channels.
We should remind ourselves, being banked or being financial included is not a goal in itself, it is a means to an end.
I absolutely agree with all the writers behind the above dissertation about innovation,most clients today flock the micro finance institutions without having a proper understanding of the financial product(s) s/he is intending to buy or invest in,i therefore,challenge them to seek exhaustive consultation from the experts and financial analyst from reputable organizations.Lastly,our learning institution should also nature graduates with adequate comprehension of basic banking and insurance procedures and policies...not churning quacks at the expense of fees,and releasing them in the job market to compete.for higher job grades!