Series 2: Role of MFIs in Managing Poor Peoples’ Money: Interactions with PoP Authors

Microfinance Focus, June 10, 2010: MicroSave and Financial Access Initiative (FAI) organized a two day virtual conference on ‘Reimagining Microfinance around the World: Implementing lessons from Portfolio of the Poor’ on June 8-9, 2010. Based on the groundbreaking book, ‘Portfolio of the Poor: How the world’s poor live on $2 a day’, the conference was moderated by its co-authors Stuart Rutherford, Daryl Collins, Jonathan Morduch, and Orlanda Ruthven, and MicroSave’s Graham Wright.

The conference attracted hundreds of industry experts who raised pertinent questions based on the findings of the book. On the first day of the conference, its authors discussed the topic: Role of MFIs in Managing Poor Peoples’ Money – Lessons from “Portfolios of the Poor” and the excerpts from the discussion are presented below.

Participant’s Question: During the last years financial capability building has become a very important subject in the international field as well as in microfinance. I have not had the opportunity, yet, to read your book on the Portfolios of the Poor, but reading all your comments on the questions you received today I am wondering what the book reveals us about the financial cababilities of the poor and which capabilities we should try to develop more, whereas others may be quite “well developed” and would need “less attention”. I was also wondering what the book reveals us on the common idea that the poor have a very low savings culture and we need to develop it for them to be able to realize savings and purchase adequate savings products? Wouldn’t your book reveal a different perspective on this?

Stuart: Thanks for the questions. Let me take your second one first, about the savings culture of poor households. You may have seen some remarks I made in answer to earlier contributors, about how we found a variety of personality types and a variety of abilities in managing money.

But every single one of all our 250+ households saved in some way, if only at home (often for lack of other reliable partners to do it with). We were led to conclude that such is the pressing need to manage money that every household grabbed at some means of doing it. Although the research behind the book couldn’t test the hypothesis in full, we were led to believe that better, more accessible and reliable savings services would be popular with poor households. There was evidence for that when we did the second set of Bangladesh diaries which looked at households who were using Grameen new and more user-friendly savings services.

Back to your first point. In the book we didn’t enter the discussion about financial education, financial literacy and financial capabilities. We did note that exposure over time to the semi-formal sector in Bangladesh had made Bangladeshi village women much more aware of money management matters than they had been before the MFIs came along.

Speaking for myself rather than as one of the book’s authors, I’m trying to develop a sensible view on financial education. On the one hand I see that in practice most poor households will probably go on ‘learning by doing’ as there probably won’t be the resources to get good education to 2 or 3 billion people. But on the other hand I’d love to see financial education firmly established in primary and secondary schools. And some experiences make me believe that even for adults some strategically-placed education might have a good pay-off, if you can use the learners to influence others in their peer group, for example. What do you think? – your Foundation must have thought about all this a lot.

Participant’s Question: Many of the MFI/Microfinance banks, which are permitted to collect savings by their respective regulators, have one constant product product offering which is called compulsory savings. The key feature of this product is that all the loan members are forced to save an amount determined by the bank/MFI on regular basis, irrespective of their willignness or capacity. The justification given by the institutions is that they are trying to build the habit of their clients to do regular savings and this is all the more important as the clients they serve are poor. My question is: is savings a habit which needs to be built, especially in case of poor? This question has implications for the kind of products which the institutions may offer to the clients. The approach that has been described somehow limits the flexibility of the client in deciding about their own savings plan.

Stuart: The book looks at this interesting issue in the following way. It notes that you may need both flexibility AND structure to make the most of your savings potential. So the two are complementary, not opposed. So to manage things on a day-to-day basis you need access to a savings facility that is near-at-hand and lets you save-as-you-like and withdraw-as-you-like. That way you can make sure you get food on the table every day and not just on days you get income.

But in such a facility you’re not likely to build up a big balance! So you need something more disciplined. In the book we say how much we like Grameen II’s commitment savings plan (‘recurrent’ savings) – where you save the same amount each month (conveniently, in your own village or slum) and get it all back with a good interest return after ten years. If you look at facilities like Grameen’s passbook savings you’ll see high velocity of transactions and low balances, and if you look at the ccommitment savings you’ll see the opposite -  less churning but the steady build-up of big balances. So I like to look at compulsory savings in this light. They are not altogether bad. They offer some structure which many clients quite like. They are, if you like, a kind of ‘primitive’ version of a full-scale service that would include both instant-access savings and commitment devices.

Participant’s Question: Do you think MFIs can take on additional social responsibilities and yet be financially solvent?

Orlanda: I think there are two distinct levels of involvement for MFIs beyond pushing financial products, (i) they respond to other critical needs of their client base because these needs are there (health, education, access to government schemes and services, other business services), and (ii) they undertake research and build linkages to ensure their core business (finance) plays a role in building the local economy and does not simply encourage competition in self-employments which serve only immediate local markets.

I think (ii) has to be a core function, while (i) is best kept discrete from financial programmes (although the network of MF branches and field staff can of course be usefully employed to roll out social programmes through parallel resources).

Participant’s Question: I’ve been pondering over the question of limited innovation in the MFI space (I’m trying to incubate a home-improvement product & service)- it seems as if there is no dearth of innovation at the client end (portfolios of the poor shows the flexibility on the ground- a MFI borrower, using credit for investment or further on lending $ to a neighbour as a way to save even if for a few days)

Speaking for the Indian landscape- could it be that 80% of micro finance activity is done by NBFC( for profit)-MFIs that have raised commercial capital, where competition is cut-throat and with such a unserved micro-credit market, the risk and opportunity cost to try new products is higher and greater. And possibly the returns lower.

While the other kind- NGO-MFIs although operating on a smaller scale- can incubate innovative products through access to grant support, show operational viability and once tried/tested and if successful are commercialized by the NBFC-MFIs. I’m wondering if this is not how ‘micro-credit’ actually started-up in the 80′s and found its wings, and developed a model that can be scaled, that we see today. Maybe our expectations(including mine) on innovations from 80% of the MFIs are
unreasonable?

Graham: This is a really good point but … I believe that the relative lack of innovation in the Indian NBFCs is largely driven by:

1. The largely uncompetitive market in India and

2. The short-term nature of the private equity that underpins their balance sheets.

Existing large players in India today by and large the share the same broad characteristics:

1. Growth is by geographical expansion
2. Product suite is dominated by a single product
3. Distribution is carried out via one channel
4. Their operating focus is “efficiency”
5. Operations are strongly standardised
6. They are very flat organisations
7. Over 95% of the labour is devoted to operations
8. Product feature trade-offs are in favour of the MFI…all copied from an existing successful model.

Capital participants in MFIs in India are generally short term participants looking to grow the size of single product players and exit within 2 to 3 years – they are generally much less tolerant of time and effort spend on long term change, because it diverts resources and distracts management. And they do not need to care about medium/long-term client satisfaction, loyalty or perhaps even well-being!

Participant’s Question: If these people are using 4 financial devices on average, and some using up to 10, (I understand what sort of devices are these) but how comfortable are they with the basic technology? Meaning are they willing to give up their fears with technology for buying in more convenience/speed/safety/saving? What would be your view on the ‘adoption by these people’ of a technology based solution for their benefit? And what would be the evolution in your view?

Stuart: This is exciting, it has introduced the whole area of technology. I’d love to hear what other people would say. I put up a posting yesterday in which I mentioned my own optimism. I’m just back from a visit to East Africa. I saw and was impressed by M-PESA (who wouldn’t be?). But the thing that really interested me was the way that poor people are already incorporating M-PESA’s technology into their informal financial lives. So: clubs make ROSCA pay-outs or ASCA loans by M-PESA, take and repay private loans by M-PESA, and so on. It looked to me as if without any prompting from outsiders poor people were seeing and exploiting the value of the M-PESA technology. There’s good work being done by Olga Morawczynski on this topic of the interface between technology and financial lives.

Participant’s Question: My questions/observations are rather philosophical and possibly outrageous. They are:

1. Do you think the poor need MFIs at all?

2. Are there MFIs that address financial literacy of the poor? In an era where
individuals and financial institutions are hoarding money through several means
- what with the free Trading of stocks, indices, forex, etc. – where do the poor
stand in terms of their financial management? We need a Robert Kiyosaki for
microfinance I guess.

3. Are there MFIs that help the poor with increasing their incomes even before
they can think of savings/credit?

Orlanda: Your questions are excellent since they put back the focus on the basic point of low incomes and inequalities in a capitalist system. This has to remain our focus and we should not wash over it or disguise it in the detail of financial services provision! In response to your questions:-

1.       The poor need reliability desperately: they are used to having unreliability in most other aspects of their lives and they benefit hugely from one set of services which can at least assure this. MFIs have played this role if they can do this and be flexible too (which has been their weak point), then they make a valuable contribution.

2.       The poor also encounter opportunities to make a quick buck and they need services which enable them to take advantage of these. The majority of uses which larger sums were put by our respondents were for opportunities in all three countries, i.e. buying land and livestock, investing in business, on-lending, emigration and investment in savings products.

3.       MF services cannot increase incomes, without wider interventions in the local economy. But they can certainly help stabilize them and ensure that crisis and shortfalls don€™t lead households into major crises.

Participant’s Question: In your research have you compared if a savings-led model works better than a credit-led model of microfinance delivery? And does this have an implication on client retention, loyalty, etc?

Orlanda: Our research in India encompassed only a single MFI, in our rural site (this reminds us how far there is still to go on coverage in India, though this is happening extremely rapidly now). Other than this MFI, the only credit-led players were moneylenders! The MFI in question struggled to make the model work for those depending on wage labour and/or very small scale farming, but was very successful among local traders with high demands for working capital. The model used at the time made it impossible for the MFI to retain a presence in villages/ centres where borrowing was only intermittent and in small amounts.

I think the wider experience of Grameen II and the larger Indian MFIs is amply demonstrating the value of savings in (i) attracting and retaining clients and (ii) deepening outreach to poorer groups. The challenge is of course in the business model, it is hard to break even with a programme offering flexible savings on a small scale.

Catch the Session-wise summary on the discussions, Visit the Link

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