We know that the path out of poverty is rarely a smooth one. The poor are buffeted by a wide range of shocks, pushing them backwards along the way. Exploring the world of risk in the Kenya Financial Diaries, we learned that for many of the poor, navigating a world of risk is actually not only about how you manage your money. It’s also about how you manage relationships with friends and family who can come to your aid when things go wrong. Consider Greta’s story:
Greta and her husband had saved money for a caesarian section she would need to deliver her baby. But public health facility workers went on strike just she was due, and the cost of care at a private facility was five times higher, much more than Greta could finance without hard and dangerous sacrifices. Through friends and family Greta was able to raise roughly 75% of the additional funds needed.
For low-income Kenyans, social network financing of risk is incredibly powerful:
Social network money is flexible. While transfers within a social network may include expectations to reciprocate, rarely are those expectations dollar-for-dollar or even monetary. Also, funds tend to be redistributive, flowing from the better-off members of the network to the relatively worse-off ones.
Social network money can be big. Social networks, like Greta’s, can help families generate funds that are much larger than they could finance alone. Networks in the study could help a family generate upwards of five months’ worth of income in a matter of days. The median household—in contrast—was able to hold only about one month’s worth of income in savings at any given moment, and those savings needs to do more than just finance risk.
Social network money is multi-purpose. The poor may be able to insure themselves against some of these risks. But, they face a very large number of moderate probability, moderate impact types of risks. They simply cannot afford to insure against them all.
Still, we observed that this incredible source of coverage was often not enough to manage risks. Some needs were simply out of reach, even for the network. Some needs fell between the gaps of the values people could access from their savings and values that warranted turning to the network. Networks didn’t always respond in time to address urgent needs. One family in the study tried to raise funds for emergency care from their network, but could not. When a household member subsequently died, they received more via condolences than they needed to pay for the care that would have saved the woman. And, not everyone was covered equally by their social networks, leaving some more vulnerable than others. Women were more covered than men; rural families more than urban ones.
So what are the lessons for service providers?
Risk is about more than insurance. New kinds of solutions may look very different, leveraging technology platforms to make social network financing more efficient. For example, they may enable healthcare patients to electronically share bills from hospitals with their networks and enable direct payment against urgent needs. Others might connect individuals or groups with limited networks to new, broader social networks for financing, not unlike crowdfunding platforms we see in the United States. Successful solutions are likely to complement rather than compete with social network financing. M-Shwari offers a quicker, more private solution for a set of small needs that sometimes are too low to warrant a request to the social network. And viable insurance options will focus on the types and scales of risk where networks typically fail. Recognizing social network dynamics, insurers might even change their marketing approach, covering the poor via sales to their children and siblings. Rather than targeting those facing the risk, they might sell to the ones asked to come to the rescue when disaster strikes.
This deeper understanding of how people actually manage risk helps us all think more creatively about how we can protect poor households and give them the confidence to go after what really matters: building a better tomorrow.