How do we stop financial inclusion from becoming financial slavery

Financial inclusion has become one of the buzzwords in many African countries including Zimbabwe.  It is as if financial institutions, development agents and policy makers have suddenly discovered the need to bring marginal communities into formal financial systems.  However, financial inclusion that does not fully take into account socio-economic circumstances of those to be financially included will miss the mark. In most cases, financial inclusion is being confused with opening bank accounts and mobile money where people are expected to put their money into mobile wallets.

One of the spotlights is now on trying to formalize rural savings clubs which have been part of African economies for decades. The clubs are known by various names in many African countries ranging from Stokvel in South Africa and Mukando in Zimbabwe. Mobile service providers such  Econet Wireless Zimbabwe have started working with NGOs in trying to link mobile money transfer mechanisms with Village Savings and Lending Associations (VSLAs). While this move may seem noble for mobile service providers and policy makers keen to harvest all the money circulating outside formal financial systems, farmers and rural groups do not see the value of formalizing their age-old nests.

The importance of understanding what motivates savings clubs

To make matters worse, those pushing for formalisation have not done their home-work.  The foundation of all savings clubs has strong social and economic dimensions.  The clubs were (and still are) a self-driven initiative as revealed through self-group formation among community members with the same social status. In addition to having specific objectives, traditionally, members had the same and consistent source of income. That would enable them to contribute to the club. The savings clubs  revolved mainly around income-generating projects like beer brewing.

The rush to formalize savings clubs does not seem to be taking this indigenous framework into full account.  The main question is: should formalizing savings clubs start with requesting club members to save or start by supporting income generating projects which will enable member to save?  All savings clubs need a support base and sustainability framework.  Institutions like banks that come into these clubs should come as partners bringing value added services beyond just mobile platforms.  They should realize that they are coming into existing socio-economic networks.

The main selling proposition for a mobile platform like eco-cash has remained the distance factor.  However, for most savings clubs, proximity is key. Members live in the same village and beyond just existing as a club, they conduct regular physical meetings to discuss various issues.  Institutions coming into the community should try to fully understand what drives group formation – Is it a project or self-driven initiatives like local burial societies?

Addressing the real needs

Bringing together savings club members onto a mobile money platform does not translate into addressing softer social issues.  A major gap may be financial literacy in terms of identifying and making sense of investment opportunities.  How can members re-invest their savings?  If a member borrows from the club and repays with interest, there should be a viable business from which s/he will earn enough to be able to repay a loan with interest. Otherwise borrowing for consumption makes members worse off when they fail to pay back with interest.  What is the trade-off between saving in eco-save or investing in an income generating project?  If club members use $500 to buy 100 chickens  and earn $100 profit at the end of eight weeks, to what extent are they able to earn the same profit by saving the same $500 in eco-save during the same period?  This is an opportunity cost factor that most savings clubs consider.

The mobile money platform model across African countries is designed in such a way that users are charged for moving money not for creating business.  If a club member decides to send money to the club through eco-cash s/he is charged while the club is also charged for withdrawing that money. In dynamic businesses like agriculture markets where members can make daily contributions, it means they will lose a lot of money through charges.  Cumulative charges associated with depositing, transferring and withdrawing minimize any interest that could have accrued to the club or individual members.


Time factor and opportunity cost

Saving for three month as a condition for one to get a loan from formal financial institutions attracts prohibitive opportunity costs, especially in the fast-paced agricultural trading business.  An alternative would be riding on the numbers where a substantial amount stays in the club fund.  Members can get loans and repay quickly.  Someone may just need a loan to facilitate a transaction, for example, order financing.  A reserve of, for example, 10% per given amount can act as a reserve fund.  As the number of people increase, so does the reserve fund.  For every $100, a reserve can be $10.  Another option is to inject a loan fund within the savings club at a much lower cost to boost it.  This is more like a backing account for the club’s investment opportunities.

Technological limitations

At the moment mobile technology has no way of tracking and providing comprehensive reports compared to what happens in banks.  Users of eco-save or eco-cash can only see their balance and deposits on their mobile phones.  The whole record -keeping process is not embedded in the system so that savings’ club members can monitor their trends. Another challenge is access to technology.  Some members may not have up to date phones for tracking transactions.  Another critical issue is security.  The conventional banking model requires two or three signatories. On the other hand, when using technology, each person gets an individual pin number. How can two or three club members use their individual pin numbers to electronically sign for the whole club in order to do business?

Building on existing economic drivers

The mobile money model should be built around other value chain actors. If a club is interested in inputs, it makes sense for the institutional funder to bring in a seed company or an input provider. Members can get inputs to produce agricultural commodities and payment for inputs in deducted from the club fund.  This is smart financial inclusion riding on production as a motivation for saving. The rural banking model has collapsed in many African countries because of failure to ride on existing economic drivers and other value chain actors. Most Africans based in rural areas do not have potential to save cash due to fewer cash-based economic activities.  Instead, they save in the form of assets such as chickens, goats and cattle which constitute meaningful wealth.  When their cash gets to a certain level, they buy livestock and other valuable assets such as utensils.  They are fully aware that saving should be linked to valuable commodities.  This is a much broader and meaningful notion of multiplying value and creating wealth.

Options in agriculture markets

The rate at which money changes hands in informal agriculture markets presents a unique scenario for crafting appropriate financial saving models. The facility can be designed to attract very low charges on transactions and very small reserve requirements that ride on the velocity of transactions.  In a market with 5000 traders, each trader can easily save $1 a day, translating to $5000 available for loaning out to other traders. Transactions can also show which commodities perform better than others. Traders in the market tend to have speculative tendencies such that sometimes they may not buy commodities every day as they watch market performance.  This balancing act in line with market activities and performance is an opportunity for smart saving.

However, to be functional, this initiative requires a broker who also monitors agricultural commodities in the market.  An additional key role for the broker is verifying and authenticating transactions in line with commodities on transit.  This is one way in which the savings clubs model can be linked to commodities in agriculture markets without impoverishing savings clubs.  Ordinary consumers and club members who want to have agricultural commodities delivered to their door-steps can also use such a trusted facility with an institution taking care of the needs of various actors.  / /

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