Friday, 11 September 2009

Dispelling the myths surrounding poor consumers

Developing World consumers are often better savers, more conscientious spenders and highly reliable at making repayments. CI’s Robin Simpson looks at why the West could learn a lesson or two from Micro-finance initiatives in Africa:

The poor are not interested in financial services, right? Wrong. Maybe they are not served by banks with brass nameplates, but micro-credit is a world wide phenomenon, and many people who earn less than $2 a day will spend to save. In India the current rate is in excess of 30%. And in sub-Saharan Africa it is far from absent despite the stereotypes, at around 15%. Also, savings ratios are higher in middle income countries (26%) than in high income countries (23%)[1].

The poor are riskier clients than the better off, right? Wrong. Micro-credit loan repayment rates in excess of 95% in Africa and South Asia are the norm, and have remained so for at least a decade[2]. Anyway, where did the financial crisis begin?

But micro finance must have taken a hit as a result of the crisis surely? Yes. New IFC (the World Bank’s International Finance Corporation) data from the top 150 micro-finance institutions shows that the proportion of borrowers that are 30 days behind on loans has doubled. That is the bad news. But the good news is that it has doubled from 1.2% before the crisis to 2-3% in 2009. In other words, the arrears rate is still very low[3].

But there is something wrong here. If the poor are such a good prospect, then how come the banks are not queuing up to serve them? There are three answers to that.

Firstly, the UN has reported that risks in lending to the poor have been consistently overrated[4].

Secondly, the banks are waking up to this market. The IFC gave 55% more year-on-year to micro-finance lenders between 2004 and 2007. Micro-finance portfolios of private investment funds grew from $600m in 2004 to $2billion in 2006[5].

In South Africa, micro-lending tripled between 1995 and 1997 and the country’s banks now dominate the sector. By 2005 South African banks accounted for 50% of outstanding micro-loans[6].

Thirdly, micro-finance is mutating. In Africa mobile phone companies are becoming micro lenders. In France and the US there are micro-finance schemes serving the indigent such as homeless people.

Should we not worry about this expansion? Will these new consumers go on a credit binge? Generally in Africa, micro-credit is for production not consumption. When it is for ‘consumption’ it is for ‘one off’ life events, eg marriages or funerals. In South Africa savings are mainly for funerals (69%) and care for families in event of death (12%)[7].

In any case, credit is not the only financial service. At a World Bank conference in 2000, it was reported: There is a larger market for savings products than for credit products as has been demonstrated repeatedly by micro- finance organisations which consistently report loan/deposit ratios of less than 50% [8]. With ratios like that we would not have a financial crisis in Wall St and London!

So the financial services market is hugely underdeveloped because of the myths.

A recent survey reported by the World Bank found that in Uganda only 2-3% of households with someone in the workforce were part of the formal banking sector, yet 70% reported that they could make regular savings[9]. In South Africa, 2004 saw the introduction of Mzansi basic banking for low income consumers, providing deposit services and ATM usage (but not credit) for reduced charges. There was no government subsidy. Within six weeks there were 180,000 users, which far outstripped expectations[10]. We all need a mattress to hide our savings under.

How do the emerging economies make sure they do not make the same mistakes as the rich countries? Of course, basic consumer protection mechanisms are needed as the financial services sector evolves. During the International Year of Microcredit (2005) The UN distanced itself from the traditional caveat emptor principle of ’let the buyer beware’. (It is also known sometimes as ‘read the small print’) The UN reported that “This minimalist option is often considered anti-consumer”. It suggested that policy makers can opt to:

Increase consumer information; eg truth in lending;

  • Invest in financial literacy initiatives; eg consumer education;
  • Insist that the retail financial industry take steps to protect consumers; eg self regulatory codes;
  • Encourage development of independent regulatory oversight body; monitoring reviewing and taking complaints.[11]

A UNDP/DFID sponsored study [12] found that the informal sector appeals to the poor because poorer consumers welcome the combination of self-discipline and informality. Doorstep services, much maligned in richer countries, may be valued in poorer environments using a personal approach. Also small deposits are possible. (By the same token small frequent payments to public utilities result in low arrears levels for essential services too). In other words, to secure poor consumers’ money it needs to be made easy for them to pay it in.

At its simplest, micro-credit can operate as loans to families for individual activities eg rainwater harvesting, or initial connection charges to networks. It can evolve to more collective provision as in Kenya through the K-Rep bank[13]. In due course there may be scope for scaling up of families contributions to the selling of municipal bonds. These would have the huge advantage for service providers of avoiding currency risk and the householders would see that they are investing in their own communities.

This blog draws on extracts from CI President, Samuel Ochieng’s recent address to a finance summit convened by the World Bank and development agencies DfID, GTZ and USAID, Held in Ghana, the event looked specifically at the financial challenges facing Africa. Mr Ochieng was speaking on the effect the financial crisis has had on African consumers.


[1] Ian McAuley Globalisation for all-reviving the spirit of Bretton Woods, an examination of developments in global financial markets. CI 2003; unpublished data on India 2008

[2] L Chen, The protection of small savers in the Ugandan micro-finance industry, World Bank 2000 plus note 3

[3] Economist, 21 March 2009

[4] UN 2005 International Year of Microcredit, Building inclusive financial sectors for development, exec summary UN 2006

[5] Economist, 21 March 2009

[6] Mark Napier Finnmark Trust SA. Provision of Financial services in SA.in OECD, 2006 Liberalisation & universal access to Basic services.

[7] Finnmark Trust The savings market for the poor: assessing the barriers costs and potential; Jan 2007

[8] L Chen, The protection of small savers in the Ugandan micro-finance industry, World Bank 2000 plus

[9] L. Chen op cit

[10] Mark Napier op cit

[11] UN op cit

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