Just what role is finance playing—or should it be playing—in shaping the economic futures of low income Kenyans?
Is finance really helping families manage risk and take advantage of opportunities? In 2015, we went back to the 298 households that participated in the 2012-13 Financial Diaries study to seek deeper answers to these questions. We measured how welfare outcomes were unfolding and tried to understand how financial services were shaping those outcomes. In the first report of this series – Trickling down & climbing up, we analyzed changes in objective and subjective measures of well-being and looked at the causes of those changes. In the second report – Small “b” biashara, we examined one important cause of income gains – business expansion – and looked at how finance helped make those investments possible.
In this final report (also available to download as a pdf) we take advantage of the richness of the qualitative data to explore the how financial services are serving eight households and what the industry would need to do to have a more meaningful impact on their lives.
In selecting households for this analysis, we clustered households into two main groups: those who subjectively felt their economic lives were improving and those who felt they were deteriorating. Within these two clusters, we selected one household who attributed their trajectory to each of the top three reasons reported for economic improvement or decline, allowing us to dig a little deeper into what self-reported drivers of economic change look like in respondents’ real, complicated lives. Additionally, to contextualize the range of experiences of our respondents we include two stories that reflect the extremes of high and low economic welfare across the sample.
Statistically, these eight stories do not represent a wider whole. Instead, our hope is to illuminate the role of finance in respondents’ lives and spark some creative thinking about how financial service providers just might matter a little more.
Renting and brewing on the road to growth: Stella & Duncan
[My ROSCAs] help me save money that I would otherwise use carelessly
Paul Gubbins, Research lead, on the role of savings, investing and poverty reduction
After 2 years, Stella and Duncan feel better off and report growth in their business activities as the primary reason. During this time their per capita income increased by 93 percent, from Ksh 4,000 to Ksh 7,881. Read more
Seeing opportunities for finance in unexpected places
Obviously, non-financial factors have a big role to play in welfare trajectories. But even in these situations, one can see how the right kinds of well-delivered financial tools might have been more helpful. Let’s take education. When we look across our sample of adults, it’s hard to find a case of an adult who finished secondary school and potentially even some college and is not doing relatively well today. Even for those who have based their livelihoods around self-employment, like Ernest, where there are no education barriers to entry, we find a correlation between education and earnings.
And finance features prominently in the stories around what makes education possible. Many are turning to loans to spread the burden of school fee payments over time. They are calling on remittances, delivered through banks and M-PESA, to make fee payments, and even to make it possible to spread loan obligations over the social network, as we see in the story of Henry. Even bursaries rely on the financial sector for delivery. This appears to be mostly in cheques, which are not necessarily the most efficient payment mechanism available.
Subsidy in education appears to be a powerful tool, one to which the finance and fintech sectors might devote more attention by making application and payment more efficient, by making it more likely that the most deserving students are covered, by mobilizing larger social networks to assist in these investments, and by making existing social networks better at keeping children in school and giving them the headspace to learn, unlike Matthew who only managed to finish his studies by working round the clock to pay for them.
Student loans for tertiary education are not available for all the students who need them. And when young people stay at home for long periods before beginning their tertiary training, we see the course of their lives can take a different turn. They can get in with the wrong crowd or start a family at a young age, missing out on the opportunity for a transformative future.
At last, independence: Lucy
I do not have to struggle much to provide for other members like I did last year when [Nancy] and her children were living with me.
Amrik Heyer, head of knowledge, on social safety nets and the challenges facing women
Social relationships and family bonds are critical safety nets for the poor in Kenya, but they also can prove challenging for those who shoulder the support. Lucy's story also sheds light on the common challenges facing women in Kenya, including raising and caring for children when you are on your own. Read more
Similarly, finance can’t fix the kind of poverty that Janet and Joseph are facing in their old age. What is particularly heartbreaking about their story is that there are two government cash transfer programmes—one providing grants to the elderly and the other for caregivers of orphans and vulnerable children—that could make their lives much easier. But, somehow, they have not been enrolled in either. Financial service providers have been instrumental in developing new, more efficient delivery channels for these transfers. Perhaps financial service providers’ infrastructure could be better utilized to help manage applications for such programmes as well.
We also see how family size can strain a household, and not just in the choice to have a large family but in providing a home when bad things happen, like when a woman’s marriage falls apart or when children’s parents die or abandon them. Financial tools couldn’t have fixed Lucy’s daughter’s marriage. But perhaps, it could have done more to help her more quickly recover. Uber and Little Cab, for example, are offering many drivers—mostly men—a flexible labour market to move in and out of, all made possible by digital payments that move between clients, service providers, and workers. Might there be other industries where there is an opportunity to coordinate such a distributed workforce, potentially opportunities with lower capital barriers to entry where women like Nancy might be able to turn?
A good number of households experienced a downturn in economic welfare due to a drop in remittances, sometime caused by remitters losing their jobs and sometimes when fathers stopped sending support for the upkeep of their children. What if those with regular jobs—even temporary contracts—could opt in to a personal savings scheme that automatically deducted a very small part of their earnings each month that would be issued in a lump sum whenever the job ended for any reason? Even if the total amassed was just the equivalent of a month or two’s worth of earnings, it would provide a valuable cushion, helping them take the time to find the right new job or using the money to buy stock to start a trading business. When it comes to child support payments, new e-government initiatives could do a better job of holding parents to account by issuing monthly mobile bills to those deemed by the courts to be responsible for regular payments. Those payments could then be tracked and defaulters reported to the credit bureau.
The point is that the infrastructure that Kenya now has makes so many new kinds of services possible and potentially very helpful in the lives of low income people.
Hustle pays off: Matthew
Straining has not been much as it used to be earlier on and no begging or depending on handouts from family and friends
Kuria Wanjau, project manager, reflects on the value of informal, community-based finance
With a new job at Nairobi's Java house that earns him KShs 23,000 per month, Mathew feels better off now compared to 2013. He has gone from "begging or depending" on handouts from family and friends to having his social network call on him for help, especially school fees for his younger siblings. Read more
Financial tools already play important roles
These stories also offer reason to celebrate the progress Kenya has already made on financial inclusion. It is clearly making a difference in the lives of many, both in terms of stretching budgets and growing incomes and assets.
Take bank accounts, for example. Many of our respondent households—52% in the Diaries Update—were using a bank account. These accounts proved particularly helpful in safely holding onto large lump sums, like accumulated savings and salary receipts. Some saved regularly in these accounts as well, with agency banking reducing the costs of these kinds of frequent transactions. For many Kenyans, like Ernest, this is now beginning to create at least a partial digital trail for his otherwise informal business, making him eligible for loans to continue to grow and invest.
Bank and microfinance loans are playing an important role in helping many get ahead, especially given the high concentration of low income people in self-employment. Small loans are paving the way to bigger ones, and much of this borrowing is going to really important investments in assets, business, and education. Henry, for example, was initially intimidated by the prospect of a loan. His first microfinance loan for a motorbike gave him confidence to borrow again, first to help his brother start a business, then again to buy his own tuk tuk. Henry is worried about his income today, but he feels like it would be much worse if he hadn’t been able to take these loans and make these key investments.
It’s impossible to ignore the powerful role that savings chamas and welfare groups are playing in people’s lives. In these eight stories, the critical role of ROSCAs stands out. Stella and Duncan have nearly doubled their income over the past two years due to investments enabled by their ROSCA savings. By using groups with a variety of payment sizes and frequencies and of different sizes (and maturities), they have very little idle cash and don’t see a particular need for a bank, though living without their groups would be incredibly difficult. ROSCAs are powerful tools at nearly every income level. A payout of just KSh 4000 helped Lucy start her porridge business after the post-election violence. But, they’re just as meaningful for Ernest & Greta who earn about eight times as much. Certainly groups do not work perfectly, and people also lose money. But, for most, the losses haven’t been sufficient to drown out their value. As a powerful tool for accumulating lump sums, the banks can hardly compete.
New income & new burdens: Henry & Naomi
At home, he has a nailed-shut wooden box where he deposits his coins at the end of the day. He’s written on the box “Brian’s Bank” ... this is money he’s saving for clothes and treats for his son.
Gitau Mburu, Policy Specialist, on how credit might be improved for borrowers like Henry and Naomi.
Despite a notable improvement in their household incomes, Henry and Naomi feel that they are worse off now than when we last saw them in 2013 and blame a drop in business. New expenditure and loan repayment obligations may also explain the negative assessment of their current economic situation. Read more
But, financial service providers need to get better on service quality
It is clear that even though usage of many formal services is sizeable, and that many are finding these services useful, they are not satisfied with the quality of all of these offerings. Banks are still struggling to provide consistent services, as Annette pointed out with the challenge around her local bank agent having enough cash to offer withdrawals. Many feel misled by opaque product features and terms, like Ernest’s experience with a restricted savings device. We heard similar complaints about the fees charged when processing loans. Like Matthew, many still do not fully trust that banks are operating in depositors’ best interest. Experiences like that of Henry, who was put through a maze of unnecessary procedures and made to travel to another branch to do his banking, do not help that image. He felt like his bank did not respect him or his time, like they were doing him a favor to process a loan that would earn them a surplus. A customer service orientation in the sector still seems to be missing, and one wonders what that will mean for services that are purely digital and lacking in any kind of “personal touch.” Will customers consider the consistency of a digital experience more fair than their experience with retail banks, whose “personal touch” was so often condescending and frustrating?
Insurance providers also need to do better in building customer confidence and maintaining regular communication with their customers. Ernest was so worried about being duped by his life insurance and education policy providers that he ended up dropping their services, never benefitting from the premiums he did pay. Since his provider didn’t keep him informed about a missed premium on his vehicle insurance, when he was in an accident, they refused to help. That situation could have been avoided with a simple, cheap text message update about his outstanding bill.
Mounting responsibilities in old age: Janet & Joseph
[The savings group] really helped me develop myself.
Janet, age 68, and Joseph, age 73, felt like their situation had gotten worse. With a series of health conditions, Janet could no longer do casual work and their son - who used to send money regularly - lost his job and could no longer send money. Read more
Financial services don’t yet cover all the bases
Of course, there are still areas of unmet financial need where the right kind of financial service could potentially be quite beneficial. Health risks, for example, continue to be managed mostly through savings in the house for relatively small needs and through informal social network gifts for large things. While a large, active, reliable welfare group came to Henry’s brother’s rescue, such groups today only benefit a relatively small number of people. Some health insurance is expanding in exciting ways: on the revisits we found some tea cooperatives beginning to cover their members, and some poor households who receive government cash transfers were also receiving government health insurance. This meant that 18 new households had active health cover in 2015. But the expansion was nearly matched by the contraction with 17 households losing their cover. About seven explicitly cited price as the reason for ending their cover, while the others’ policies ended when they lost their formal jobs, where employers make deductions on workers’ behalf. Health financing may be complicated and some forms of coverage for the poor will require subsidy. But this is one area of persistent need that requires more attention.
Struggling for School Fees: Magdalene
With a monthly income of less than KSh 8,000, Magdalene has to come up with KSh 100,000 per year for education fees and expenses just for one child.
As a widow, Magdalene has to fully shoulder the financial responsibility of raising and educating four children. With a drop in her business income and the pressure of paying for university tuition for two of her children, she feels her economic situation has worsened and has to put one of her children's nursing training hopes on hold. Read more
It also seems that there are very few formal services catering to the particularly low incomes and irregular earning patterns that are particularly common among women. Services that accommodate even smaller transactions and still add value are very tough for formal providers to offer, but new kinds of mobile-only solutions—like M-Shwari, which can disburse loans under KSh 500—prove that it can be possible and challenge the rest of the industry to work harder at accommodating very small needs. This is key to closing the gender gap in access to truly helpful financial services.
And once those low income users have developed a history of using small scale services, the services need to grow with them and be available for larger loans even in remote, rural areas. It’s not yet clear if nano-sized, short term loans on M-Shwari will serve as an on ramp to other, more diverse, investment-oriented loans in the formal credit market. Magdalene’s entry point was a microfinance group in a remote, rural area. This microfinance institution was the only provider in the area. Even though she had established herself as a reliable borrower, when her group collapsed, she didn’t feel like she could access a similar facility elsewhere. There were no other similar groups in her community. Financial institutions would do well to make sure that worthy borrowers like her know their options and know that their credit histories can now move with them.
From the ghetto to the good Life: Ernest & Greta
In a typical month, they were making more than KSh 100,000 in profits and felt they only really need KSh 20,000 to get by.
Anne Gachoka, Associate at BFA, on the gender dynamics of money management in the household.
Ernest and Greta's economic welfare is extremely high compared to the majority of households in the Diaries sample. Their growing chain of salons in Nairobi earns them much more than they need, enabling them to build up solid reserves for their future. Read more
Low income Kenyans are eager for transformation and focus attention on the services that offer that promise
These eight stories all show how hard low income Kenyans are working to reach a higher standard of living for themselves and their families. They are motivated by the opportunities to access large lump sums to help them make big investments, big bets on the future.
Sometimes, that eagerness got them into trouble. Lucy was so allured by the prospect of accessing an Uwezo fund loan that she managed to rather quickly pull together a large amount of savings—KSh 10,000 in her group. But because this group was the only one she knew about that was pursuing this opportunity, she didn’t feel like she could be picky about the leadership and governance issues. And it cost her, losing KSh 3,000 to corruption within the group. For her, that was a really big loss. And, she never got that transformational opportunity that motivated her participation in the first place. We also see Annette making a big gamble, putting nearly all of her eggs in one basket, and losing. She is certainly sad that her situation has since become quite dire, but she doesn’t regret her efforts to buy the entire lorry of molasses. For her, that was a huge opportunity. She had to try.
Reality requires that Kenyans use a wide range of different kinds of financial tools to do all kinds of financial jobs. Undoubtedly, ones that give access to quick, small amounts of liquidity—like credit from the shop—are incredibly useful, and respondents even tell us so. But the tools that seem to enable transformation tend to be in the growth space, where larger sums can be invested to unlock new kinds of opportunities. This is big money (relative to average incomes), but not huge money, in the KSh 10,000-KSh 100,000 range. ROSCAs are powerful in providing these kinds of sums in incremental ways for those with some active business and capacity to save regularly. Only for those who are already earning more than they need are the larger sums available, even for things like secondary and tertiary education, where the long term returns are clear. Making financial services in Kenya a more powerful force for upward mobility is going to require getting more ‘big’ money to poorer households. Luckily, there is already a lot of progress to celebrate and—with the digital revolution—an increasing number of new and unconventional ways to do that.
Losing a big bet: Annette
When I want to withdraw KSh 10,000 and the agents says that only KSh 2,000 is available, I have to go to the nearest town, Kakamega, to use the ATM machine.
Catherine Wanjala, Research consultant, on the challenges of bouncing back from major shocks.
Annette's economic welfare is extremely low and deteriorated significantly since 2013. Her household income dropped from just over KShs 4,000 to under KShs 300 per month over the course of two years. Her story underscores the risk and return tradeoff households face when they make major investments that might just help them climb out of poverty if outcomes are good, but sink them further into it if outcomes are bad. Read more