#tbt: Digital Transactions for Products the Poor Can Afford


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The promise of mobile technology infographic: how it works
Rodger Voorhies, director of financial services for the poor at the Bill & Melinda Gates Foundation in the United States, talked to Larry Reed, director of the Microcredit Summit Campaign, for the 2013 State of the Campaign Report.

Larry Reed: What opportunities do you see for digital transactions making a difference in the lives of the very poor?

Rodger Voorhies: Like most of us, poor people live their lives through a lot of different kinds of financial connections, and payments are really the connective tissue that hold those financial transactions together. Unless we can figure out ways to help poor people transact in a way that is profitable for them and profitable for providers, we’re really not going to see large-scale financial inclusion take place.

Now, one of the most exciting things that’s going on for us is the ability of mobile money to reach down into really poor households, and so right now in a country like Tanzania 47 percent of households have a mobile money user. An exciting bit of that is not so much, okay, there’s one person in the household sending money to friends, but it might open up all kinds of innovations that before were previously unavailable.

So, let’s think about savings, because we know savings have a big impact on poor people. Well, it’s really hard to save, and poor people have to take a lot of self-control and we expect a lot of self-discipline out of them if they’re going to be able to save. If I can actually begin to transact digitally and I had defaulted into commitments accounts and savings accounts for school fees or whatever the mental maps are that work for me, I think we can see large scale inclusion that actually has a big development impact. And we know that the empirical evidence around these pieces work, so we know commitment accounts work, but poor people just don’t have a way to get those commitment accounts.

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#tbt: Affordable Transactions for the Poor


Photo courtesy of Jeffrey Ashe

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We are pleased to bring you this #ThrowbackThursday blog post, which was originally published in Resilience: The State of the Microcredit Summit Campaign Report, 2014, under the chapter “Mobile Network Operators Can Build Systems that Reach the Poorest and Most Remote.” The section excerpted below describes how important mobile technology and digital financial services are for reducing the cost of doing business with the poor and hard-to-reach — both for the provider and the client. Read also Ian Radcliffe’s blog post from Tuesday in which he describes WSBI’s progress achieved so far toward a related Campaign Commitment.

Transaction costs pose a significant challenge to those seeking to provide financial services to people transacting in very small amounts or living in remote areas. The cost of providing the service often exceeds the price that the client can afford to pay. People living in poverty must manage daily transactions with incomes that are small, inconsistent, and often unpredictable.

Ian Radcliffe, of the World Savings Bank Institute (WSBI) reported its research that calculates that people living in poverty can only afford to pay about USD 0.60 a month for financial transactions, an amount far lower than the cost to employ staff to manage the transactions. Moving transactions to mobile platforms can drastically reduce many of these costs.

An interview with Ian Radcliffe, Director of World Savings Bank Institute. Download a transcript of the video [PDF].

Low-income clients have shown the ability to adopt new technology when it provides them with essential services at much lower cost or with much easier accessibility than the alternative. A study by William Jack and Tavneet Suri of the M-PESA mobile payment system in Kenya describes how their system grew from its launch in 2007 to cover 70 percent of the Kenyan population today. The study stated that “while M-PESA use was originally limited to the wealthiest groups, it is slowly being adopted by a broader share of the population,” including those in the bottom quartile of household expenditure. [1] Compared to the option of receiving money from relatives far away only on their sporadic visits home, or through a USD 5 bus ride into the city, low-income people in rural areas quickly found out how to get access to a mobile phone, receive a funds transfer on it, and travel to the nearest agent to turn the digital funds into cash.

In addition, access to mobile payments can play a key role in reducing vulnerability and building resilience. Jack and Suri studied low-income families in rural Kenya who experienced economic shocks. Those with access to M-PESA received a greater number of remittances and more money from friends and family than those who did not have access to M-PESA. Access to mobile money gave them the ability to tap into a larger network and weather the economic crisis.

[1] William Jack and Tavneet Suri, 2011, “Mobile Money: The Economics of M-PESA,” http://www9.georgetown.edu/faculty/wgj/papers/Jack_Suri-Economics-of-M-PESA.pdf.

#tbt: The Need for Pricing Transparency in Microfinance

Muhammad Yunus signs onto the MicroFinance Transparency. With Chuck Waterfield

Muhammad Yunus endorsese the MicroFinance Transparency (MFT). With Chuck Waterfield, MFT founder, at the 2008 Microcredit Summit in Bali.

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We are pleased to bring you this #ThursdayThrowback blog post, which was originally published in The State of the Microcredit Summit Campaign Report, 2009. This particular Box is especially relevant given the news about MFT closing down and the stakeholder meeting hosted by the Microfinance CEOs Working Group on April 21st.

>> Authored by Chuck Waterfield, the developer of Microfin, a business planning tool used by microfinance institutions worldwide, and MicroFinance Transparency (MFTransparency), which was launched at our 2008 Microcredit Summit in Bali, Indonesia.

Microfinance has long been a highly transparent industry, and rightly proud of it. Unfortunately however, the true price of microfinance loan products has never been accurately measured nor reported. For an industry born to displace the moneylenders by providing low-cost credit to the working poor, this is hard to imagine and even harder to explain.

Many countries require commercial lenders to state true product pricing using standards such as the APR (Annual Percentage Rate) formula mandated forty years ago in the US Truth-in-Lending Act. Such laws were enacted to help consumers make informed decisions regarding choosing loan products with different pricing. Currently, the same disparity that existed prior to Truth-in-Lending laws can be found in the microfinance industry. For example, a quoted interest rate of 3% per month can, depending on how this rate is applied, result in an APR between 36% and 96%, and beyond. Unfortunately, such misleading claims are commonplace in microfinance today. Why should the same principles of transparent pricing applied within the commercial finance industry not be applied to the microfinance industry?

The widely practiced non-transparent pricing in microfinance has evolved and perpetuated for two reasons. Firstly, there is no single market interest rate for micro-loans. The industry recognizes that interest rates on micro-loans must be higher than interest rates on larger commercial loans, but it is seldom recognized that there is no single “market rate” for micro-loans. In a market where all MFIs deal with the same cost structures, the smaller the micro-loan, the higher the interest rate necessary for that MFI to cover the costs of that loan and achieve sustainability. Due to the challenges of explaining why MFIs need to charge higher interest rates than the commercial sector, and to charge the highest interest rates to the poorest clients, the easiest alternative has been to use non-transparent pricing, where a quoted price is generally significantly lower than the actual price.

Secondly, once the industry began widely employing confusing product pricing, it became very difficult for MFIs to convert to transparent pricing. To do so, the MFI would advertise what appeared to be the highest price in the market, even though their true price could actually be the lowest. As a result, the vast majority of MFIs practice non-transparent pricing even though many would prefer to do otherwise.

In recent years the industry is shifting from the goal of “sustainable microfinance” to the goal of “high-profit microfinance.” When MFIs are operating in a very opaque pricing environment – where nobody knows how the price of one product compares to the price of another product – there exists the opportunity for MFIs to charge a price that results in very high profit levels. High profits generated off of the poor by charging non-transparent prices can create a bad public image for the microfinance industry and result in a strong backlash.

Given this reality, the industry has been in intensive dialogue and several initiatives are underway to address non-transparent pricing. One initiative is the “Campaign for Client Protection” that began after an April 2008 conference that produced the “Pocantico Declaration.” Transparent and fair pricing is one of the six core principles advocated in the campaign.

The second initiative is MicroFinance Transparency, a non-profit agency that will address pricing transparency through two joint activities. First, MFTransparency will collect product prices on all micro-loan products around the world and report those prices by a common, objective measurement system. Second, MFTransparency will undertake the equally important role of developing and disseminating straightforward educational material to enable microfinance stakeholders to better understand the concept and function of interest rates and product pricing.

It can be argued that an industry-wide effort towards transparent pricing is essential to the long-term survival of the microfinance industry. The mainstream public media is already reporting the interest rates typically charged in microfinance, but there is little explanation or understanding of why microfinance interest rates are higher than previously believed, nor why there is significant variation in interest rates among different institutions. What non-transparent pricing has kept hidden for years is no longer hidden. A forum for the industry must be built in order to report – in a clear, consistent and fair fashion – what actual interest rates are and why interest rates in competitive microfinance markets need to be higher than in commercial finance.

By practicing pricing transparency, a healthy and vibrant market for microcredit products can be built, providing a valuable component necessary in free markets and currently absent in microfinance – transparent, open communication about the true cost of products.

Over 100 microfinance industry stakeholders have endorsed MFTransparency. You may view the list and choose to sign up and endorse at the website.
Chuck Waterfield, Founder, MFTransparency, http://www.mftransparency.org/endorsements.

#tbt: There is No “Silver Bullet” by Jake Kendall

Delegates from the 2000 Microcredit Summit in Zimbabwe

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We are pleased to bring you this #ThursdayThrowback blog post, which was originally published in The State of the Microcredit Summit Campaign Report, 2011. We hope this will encourage you to reflect on the idea that all new ideas are old.

>>Authored by Jake Kendall, Research Fellow, The Bill & Melinda Gates Foundation

The poor are diverse and so are their needs for financial tools


Download the full 2011 State of the Campaign Report in our Resource Library

The past few years have seen the release of an initial round of results from randomized field trials looking into the impacts of various savings, credit and insurance services on the livelihoods of poor clients. They have been somewhat disappointing to those in the financial inclusion field who expected that they would provide clear marching orders.

Despite failure of many of these studies to find much of a poverty reduction impact on average, digging beneath the surface shows what appears to be a wide variation in both the rates of uptake of the products and in the impacts of the products on different segments of clients. This is not surprising. Financial services are primarily used to manage gaps in income or to generate lump sums for large purchases, investments or emergencies. Individuals will differ in their need to for these services. Thus, we would expect to see differences in uptake and impact. The early evidence seems to confirm that this is the case.

As examples, two recent studies of microfinance credit offerings — Banerjee, Duflo, Glennerster, and Kinnan (2009) studying Spandana in India and Karlan and Zinman (2009) studying First Macro Bank in Manila — do not show any improvement over 14-18 months in basic welfare indicators from providing credit to the general population. They do, however, show large changes in investment behavior or in other outcomes for specific subgroups — e.g. in the India study, entrepreneurs expanded their businesses and those who had similar traits to entrepreneurs launched new ones.

There have been a few studies of the impacts of savings accounts recently as well. Studying rural savings in Kenya, Dupas and Robinson (2009) found savings accounts had impacts when given to women. The study found that women who participated were investing 45 percent more, had 27 to 40 percent higher personal expenditures, and were less likely to take money out of their businesses to deal with health shocks than women who were not offered savings accounts. On the other hand, there were no impacts for the men. Studying Green Bank of Caraga in the Philippines, Ashraf, Karlan and Yin (2006, 2010), find that “commitment savings accounts” do increase average savings among women and increase feelings of empowerment relative to those with regular savings accounts. However, they also found that only 28 percent of those offered the accounts decided to accept them. Studying Opportunity International Bank of Malawi (OIBM) Brune, Gine, Goldberg, and Yang (2010) recently produced data showing that Malawian farmers with “commitment savings accounts” had significantly higher investments in farm inputs, but because the study group is only farmers, it is not at all clear how these impacts would play out in other livelihood groups offered similar accounts. Thus, in the savings studies as well there seem to be very different responses from different groups.

The conclusions we can draw from these studies are limited. It seems clear (and again, not very surprising) that demand for and impact of the different products is often correlated with differences in gender, education, wealth, livelihood segment, etc. That said, the studies to date do not give very fine-grained or particularly insightful segmentations of their study samples. It’s not always easy in academic studies to get sample sizes large enough to do this. There are fundamental limits as to what RCTs can tell us regarding how different individuals or groups respond to a single treatment. Nevertheless, it would appear that a rich direction for future research would be to frame the academic evaluations of financial products more along the lines of how marketers and practitioners would frame them, by focusing on distinct customer segments and assessing the uptake or impact among these different groups.

In a possible exception to the above trend, Jack and Suri (2010) document that, after its launch in 2007, the M-PESA money transfer and e-wallet product reached over 70 percent of all Kenyan households and over 50 percent of the poor, unbanked, and rural populations by 2009. New accounts have even grown by 40 percent since then. The researchers have preliminary results indicating that M-PESA users are better able to maintain the level of consumption expenditures, and in particular food consumption, in the face of negative income shocks. While it’s almost certainly true that, here again, different segments of clients have different uses for the product, clearly most Kenyan households have some financial need that M-PESA fulfills, and by connecting people with the ability to transfer funds, M-PESA may simply be allowing them to transact with a wider and more diverse set of counterparties who can help with whatever particular need they may have.