From Responsible Finance to Suitable Finance: Financial Engineering for Low-Income Households

This post is written by Bindu Ananth and Amit Shah. Bindu Ananth is President of the IFMR Trust and Amit Shah is Head of  Business Intelligence at IFMR Rural Finance. They co-edited the recently published book “Financial Engineering for Low-Income Households.”

Five years ago when we set up the KGFS model of financial institutions in remote-rural India, we wanted to make a fundamental shift in the way financial services were offered to households. We wanted the organising principle to be suitability, i.e., how do we make sure that every single customer receives the portfolio of financial services that is most suitable given her needs and preferences? This is essentially what wealth managers are supposed to do for ultra-rich individuals but we wanted to do it for clients with a mean income of USD 1000 per year through staff with twelve years of formal education.   

We quickly realised that in order to be scaleable, we needed to build a set of rules that would govern the sale of financial services by our front-line staff rather than train each of them to be financial engineers. To our surprise, we found that there was not very clear guidance on questions such as how much life insurance must a 28 year old wage labourer buy? What health risks should be financed by savings and what should be insured? How to account for human capital while doing asset allocation for low-income households? We had to embark on this book project to arrive at precise answers to questions like these and build the rules that govern product sales in a KGFS environment. 

Financial Engineering for Low-Income Households is an edited volume of chapters that provides an overview of theoretical concepts and design principles to equip institutions engaged in the design and delivery of retail financial services, particularly to low-income households. It also includes exercises and cases that can be used as training material for providers.

As retail finance institutions increasingly go from distributing a single product to multiple products and regulation starts holding providers accountable for suitability (a new Committee Report on Customer Protection in India recommends that the right to suitable financial advice for all individuals be enshrined in law), understanding these concepts and issues is likely to become a business necessity for retail financial institutions in India. But this book is not just for Indian MFIs. For providers serving low-income clients anywhere in the world, we believe that this is the future of responsible finance.