Virtual Conference Day One: Managing money, drivers of behavior and the role of MFIs, part 2

*On June 8th and 9th, 2010, MicroSave and FAI sponsored a virtual conference – Reimagining Microfinance around the World: Implementing Lessons from Portfolios of the Poor – to share findings from yearlong financial diaries kept by villagers and slum dwellers in Bangladesh, India, and South Africa.

Session Two Summary (8th June, 2010)


Mechanisms to Manage Money – continued 
•    During the course of the research, it was seen that higher dependence on informal means was seen more in urban settings than rural in spite of higher and more regular incomes due to factors like mobility of clients, lack of secure tenure etc. The challenge is to figure out how to mitigate these risks so as to ensure supply of formal financial services to these customers.
•    Informal mechanisms though used widely have a risk of monetary loss associated with them and in the past experience; the losses as a percentage of savings have been significantly high.
•    Chris Linder wondered about the non-financial methods the poor use to manage risk and queried as to whether there were ways in which MFIs could package non-financial risk mitigation services to the clients along with financial services. Peter cited the experience of construction savings banks in Europe and mentioned that formal financial intermediaries may indeed have a role in providing linkages between the financial and non- financial sector.
•    The presence of MFIs in the geographies studied varied widely. In South Africa they were absent, in India the presence was limited and in Bangladesh they were present in most of the respondent households. Even where they were present, they were seen as one among the many options available to clients rather than as ‘The’ financial service provider.
•    Some respondents mentioned Post Office savings schemes as a formal savings option available to the poor. But as evidenced by the diary households, this option was suited to relatively better off clients than the poor though the accessibility was quite good especially in rural areas. The constraint was the lack of flexibility in the product and the inability to leverage it for short-term credit requirements.

Drivers on Financial Behaviour – continued 
•    Stuart Rutherford mentioned that poor people’s financial behavior changes in accordance with the opportunities they are offered and cited the example of M-PESA in Africa wherein intermediation volumes have gone up even in informal devices like ASCAs, ROSCAs and informal borrowing.
•    Ashit Mahapatra of Dhanei KGFS mentioned that poor do have knowledge of day to day financial management but lack access to modern financial tools and are often unable to plan for the future due to the meagre nature of their incomes
•    Mukul shared his concern that given the cost considerations, most MFIs would prefer to offer long-term savings products and shorter-term loans and ignore short-term savings requirements. But the forum concurred that as exemplified in the case of Grameen II, with proper regulatory framework and good product design, the client requirements can be adequately catered to.
•    Unavailability of proper and reliable savings services increase dependence on credit, especially for shorter term needs.
•    One factor that was mentioned was that the unsuitability of formal financial product offerings to client requirements is necessitating the client to depend on informal means or to patch up informal means and formal means so as to meet their requirements.
•    Premasis raised a query on adapting financial services to varied requirements of different target segments since the needs for different segments were perceivably different. The forum felt that while this was true, there were three primary needs evident across all the diary households; need for cash flow management, for building lump sums and for a wider variety of loans.

Role of MFIs in managing poor people’s money – continued 
•    Many of the respondents wondered on the utility of MFIs as financial service providers for the poor in the current scenario. Much of the scepticism was driven by factors like single product nature of most MFIs, unsuitability of MFI product offerings / attributes to client requirements, rigid nature of features like repayment frequency and instalment amounts, lack of a wider variety of financial services (including savings, insurance, remittances etc.) in the product basket of MFIs etc. However, the forum concurred that MFIs are increasingly being responsive to client needs and many modern 3rd generation financial service models like Grameen II, BURO Bangladesh, Equity Bank, KGFS etc. are looking at catering to wider financial requirements of the clients.
•    The poor need reliability which MFIs do provide. The weak point is flexibility which is another major requirement that MFIs are not catering to the extent they need to be. Moreover the services available should be suited to help clients take advantage of quick income boosting opportunities like emigration, investment in business etc.
•    A disconnect was also perceived to be present on communication to the clients on the product offerings of MFIs and their utility.
•    A lack of focus on understanding client requirements using adequate research methods was also mentioned to be a restricting factor for MFIs in providing adequate financial services to the poor.
•    One major restrictive factor was observed to be regulatory constraints placed on MFIs. For instance, many of them are prevented from mobilising savings deposits. Peter mentioned that the integration into a formalised regulated framework is required for ensuring adequate outreach for financial service providers to the poor.
•    Multiple lending was thrown up as an issue during the course of the discussion. Many of the respondents cited clients patching together loans from different service providers. During the course of the discussion, it was mentioned that it was over indebtedness rather than multiple lending which could be a potential problem. The incidence of this was felt to be low since most MFIs were perceived to under lend necessitating the client to patch up loans from different providers.
•    The need for financial education was another aspect that was explored in the context of microfinance moving forward from the traditional realm of micro credit. It was felt that the MFIs had a responsibility in educating themselves as well as the clients on better financial management techniques.

Methodology
•    Quantitative research was mentioned to provide misleading information when it came to behaviour of poor people and product design. This could be due to many factors like cultural norms (overstating or understating income), fear of government association. A non-threatening environment in which group based methods is used or a longer-term relationship is built with the clients is ideal for eliciting relevant and accurate information.