So here’s an obvious truth: when you’re poor, you do not have enough money. You don’t have enough money to both pay off school fees and, say, connect your home to electricity. The not so obvious truth: the poor are incredibly versatile at managing the little money they do have. People save, borrow and invest using a Swiss Army knife-like array of tools and strategies to make their money work as best as possible for their needs and dreams.Still, after a year of observing every minute detail of 300 low-income families’ cash flows for an entire year in our Financial Diaries study, we see critical gaps in the effectiveness of those tools. Our findings point to four areas ripe for digital financial service innovations that could better solve the money problems of many Kenyans:
1. Easing the tradeoffs between using assets for immediate stretching and longer term investment. We found that most families save more than a month’s worth of household income – that’s a lot considering expenditures on necessities eat up to around 75% of the monthly budget. But, 90% of these savings are illiquid, meaning they are not easily accessible because they are earmarked for bigger investments critical for the long-term well-being of the family. The funds are locked up in merry-go-rounds, as shares in SACCOs, and contributions in table banking groups. Our respondents said that keeping liquid savings feels wasteful. They want their money to be busy, actively working for them. During the study, when a family suddenly needed a little bit of money for something unexpected, like an illness, in many cases they had nothing immediately on hand. Over one in three families postponed or went without medical care when needed, most often because of the lack of small sums of cash.
What if digital financial service tools could ease the tradeoffs between needing to invest in the long term and needing to cope with short term, small scale emergencies?
2. Harnessing the financial power of the social network for better insurance. When families in the study fell on hard times, friends and family often came to the rescue, providing the resources needed to get through an illness or hospitalization, to contribute funeral expenses or to pay off school fees when a family couldn’t make the payments on their own. Support from the social network was the single largest source of income for 27% of our households and the most important coping mechanism for shocks exceeding about KSh 1000 in new costs. While tremendously powerful, sometimes the social network responds too slowly to medical needs even though it’s very quick to fund funerals. Social networks seem to be more helpful to rural people and women, leaving others out of this important safety net. Also, some needs are just too large for individuals’ current networks to solve; they might need larger networks of assistance. And, the reliance on the social network places additional burdens on the slightly better off, who – as givers – often put their own welfare and goals on hold when someone they support faces a problem.
Can we imagine new solutions that increase efficiency of social networks, that help people tap larger, more reliable networks for fundraising in an emergency, and perhaps that help givers in the social network better plan for and support others?
3. Strengthening financing options at the point of service. While formal financial services do not feel particularly relevant for many low-income families, about 80% of families access finance from some unexpected providers: schools, dukas, and health facilities. These facilities often extend credit to customers, providing an extremely helpful bridge to get through the kinds of ups and downs low-income families inevitably face. This is incredibly helpful for families, but also difficult for these institutions to manage without absorbing too much risk.
Might new tools help offer credit more efficiently at the point of service while also equipping service providers with the carrots & sticks that reduce their risks and help them manage their own businesses efficiently?
4. Unlocking new earning opportunities. Low-income families are working hard to earn more money, often through combinations of multiple businesses, agricultural investments, and casual labour, nearly all of which is in the informal economy. With so few opportunities for formal employment, low-income Kenyans know they must invest their own way out of poverty. Can we make that easier?
What if new technology tools could help low-income Kenyans access new and larger client bases, benefit from new efficiencies in the supply chain, bring new kinds of goods and services to their communities, and more efficiently manage their businesses?
The Kenya Financial Diaries was an in-depth research project sponsored by Financial Sector Deepening Kenya and The Gateway Financial Innovations for Savings project, a project funded by the Bill & Melinda Gates Foundation and managed by Rockefeller Philanthropy Advisors that worked with five banks in five countries to try and accommodate new poor savers in mainstream institutions. This research was implemented in partnership between Bankable Frontier Associates and Digital Divide Data of Kenya.