Banking Low-Income Populations:
Perspectives from South Africa
Daryl Collins Jonathan Morduch
New York University
Outline
1.
A new approach to understanding household
financial management
2.
3 lessons learned from South Africa
3.
-Cash flow management is a first tier objective
-Savings requires not incentives, but the right mechanism
-Useful credit is not just for small businesses
Implications for serving low income communities
Typical ways of understanding
financial needs in low income
households
• Institutional approaches: What microfinance products
are popular?
• Household surveys: Usually large cross-sections.
Helpful, but hard to:
– See full range of activities, especially informal
– Tease out logic of financial strategies
– Gauge changes over time and differences
between intentions and outcomes
The Financial Diaries
approach
• Understand the financial lives of poor households by
following all daily transactions over a year for 180
households in South Africa (and others in India and
Bangladesh).
• Not a one-time survey
• Not self-reports of needs
• Reconciled household “cash flow statements” capture
informal and formal activities, even “unusual”ones
Reconciling cash flows to
obtain a margin of error
Matching sources of funds to uses of funds every interview
Sources of funds
Regular wages
Withdrawal from bank account
$ 308
$ 154
$ 154
Uses of funds
Deposit wages in bank account
Buy food
Buy electricity
Pay burial society
Pay off moneylender loan
Keep money in the house
$ 294
$ 154
$ 46
$
5
$ 12
$ 62
$ 15
Cash on hand
$
8
Balance
$
6
(Margin of error)
(2% of sources of funds)
Declining margin of error
over time
Financial Diaries: Margin of error
(% of Sources of Funds)
100%
50%
0%
-50%
-100%
After about 6 interviews, the margin of
error of data collection decreases to
an average of 6%.
-150%
-200%
-250%
-300%
-350%
-400%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
The sample
(% of households)
Langa
(urban)
Lugangeni
(rural)
Diepsloot
(urban)
Above $10 per
day
40%
19%
39%
$5-$10 per day
33%
22%
29%
$3-$5 per day
18%
17%
12%
$2-$3 per day
9%
19%
16%
$1-$2 per day
0%
17%
14%
Less than $1 per
day
0%
5%
0%
Lessons from South Africa
1. Cash flow management is a first tier objective
•
Small asset balances, large transaction flows.
•
Income arising from several different sources each
requires an instrument to capture and store it, and
also requires instruments to patch times of cash
scarcity .
•
The result: active financial management with
numerous financial instruments, both formal and
informal.
Example of a household balance sheet
(US$, converted at market rate)
End of
year value
Turnover
over year
Assets
Formal
Bank account
2 086
10 353
369
182
-
68
Saved at home
483
4 875
Savings clubs
246
1 206
Money guard
153
153
Burial society
-
68
Lending (for interest)
0
2 404
Savings annuity
Funeral plan
Informal
Liabilities
Formal
Credit card
0
248
Informal
Shop credit
0
1
Net Worth
3 338
19 564
Mixture of informal and formal
in the same portfolio
Formality of instruments used in the average household portfolio
(Number of instruments)
Informal
South Africa
Microfinance
Formal
Bangladesh
0
5
10
15
20
Lessons from South Africa
2. Saving requires not incentives, but the right
mechanism
•
Poor households have a significant capacity to
save.
•
Large assets are accumulated incrementally.
•
Problem: Savings instruments tend to be designed
around a designated event or time (e.g.,
Christmas), leaving long term accumulation or
emergencies.
•
When emergencies happen, they require patching
from numerous sources.
Finding the budget to save
Uses of funds
Sources of funds
Total
Regular wages
Business profits
$ 509
$ 185
$ 324
Total
$ 488
Cell phone
Cigarettes
Electricity
Food
Home building
Transport to shopping
Transport to work
$
$
$
$
$
$
$
6
3
16
49
31
1
13
Savings clubs
Net savings in bank
$ 367
$ 23
Financial breakdown of an
urban funeral
Sources of funds
$ 1410
Payout from burial society
$
Remittance from relative
$
Remittance from relative
$
Remittance from relative
$
Rental of tent by relative
$
Rental of pots by relative
$
Purchase of sheep by relatives $
Borrow from aunt’s burial society
(no interest)
$
Borrow from cousin’s ASCA
(30% per month)
$
Borrow from cousin (no interest) $
Money from grant
$
Brother’s money
$
154
231
154
154
90
34
100
154
92
108
91
48
Uses of funds
$ 1413
Undertaker
Tent
Pots
Food
Sheep
$ 538
$ 91
$ 35
$ 649
$ 100
Lessons from South Africa
3. Useful credit is not just for small businesses
•
Both formal and informal consumer finance can
lead to indebtedness, but many households can
manage debt responsibly.
•
Most credit is taken not for micro-businesses, but
for household consumption and emergencies.
•
Small businesses struggle to manage the credit
they give than to service the credit they take.
Implications for serving lowincome households
• Most households seek general financial services, not
micro-loans for micro-enterprise
• Poor households actively seek ways to borrow and
save (and insure)
• Informal instruments are not crowded out and often
provide services that formal instruments do not.
Implications for serving lowincome households
Poor households are willing to pay for quality
services.
• Quality dimensions most desired:
– Reliability
– Convenience
– Flexibility
– Continuity (in part: option value)
– Discipline
Implications for US (?)
• There is a powerful demand for “consumer finance” –
and it can improve welfare and support income
generation and job stability
• Long-term asset accumulation is only possible when
built on a platform of basic financial management:
– Cash flow management
– Finance for emergencies
– Use of easily implemented accumulation devices
that can transfer lump sums into longer-term
instruments
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