European Microfinance Week 2015

PRESENTATIONS

Michel HANOUCH opened by mentioning that the session would start with a presentation on the Kenyan financial diaries, and then focus on innovations made within digital finance services (DFS), including how insights from demand side research can be used to drive innovation and experimentation. Hanouch introduced the speakers, who would be showcasing three innovative cases of DFS. 

Julie ZOLLMANN presented her work on behalf of Kenya Financial Diaries. Zollmann’s team visited 300 Kenyan families every two weeks, trying to record cash flow, transaction of money and savings. The financial diaries provided several insights. Firstly, households often do not have enough money, not just for assets and education, but also to fund financial services which would be beneficial to them. Households have to make trade-offs. Secondly, households often have volatile incomes, going up and down by 54 percent per month. Thirdly, the financial management challenge is complicated. Households have several financial tools for different financial tasks, such as savings in the house, ASCAs or ROSCAs, pensions or shop credit. This also relates to the fourth point, as households have to make trade-offs between the tools, which can either be helpful for stretching (‘liquid­ity’) and growing (‘investing’) money. Fifthly, Zollmann mentioned that people face a large number of moderately severe risks. Households cannot insure for all of these risks and need to make trade-offs. Finally, Zollmann stressed the importance of social networks in mitigating impact of shocks.

Zollmann then explained why M-Shwari, a digital savings and credit product, works in this context. Before the introduction of M-Shwari, liquidity management was largely limited to savings in the house, which is a serious challenge considering the small amounts of liquidity available for households. M-Shwari allows users to have quick access to liquidity and provides infrastructure to reach nearly everywhere, including the very poor, filling low income households’ critical need for liquidity. She concluded by sharing some opportunities for DFS to help low income Kenyans. Firstly, Zollmann emphasized that DFS gives the poor access to existing social networks with greater speed and efficiency. Secondly, DFS caters to their flexible payment needs by delivering services when needed. Thirdly, DFS can help to ease trade-offs between investments and liquidity by keeping savings locked for investment while enabling borrowing for cash flow liquidity. Lastly, DFS can focus on more than credit, for example connecting people to new employment opportunities.

Richard LEFTLEY presented the development path of MicroEnsure’s microinsurance products over time. MicroEnsure started working with MFIs in 2002 to test whether there was a business case for microinsurance. This resulted in simple products linked to credit, but clients soon wanted more. It became clear that MicroEnsure needed to scale up but would then need a bigger revenue stream from a wider client base. Leftley had realised at the time that the best results would likely come from embedding their products into a loan, savings account, airtime purchase or mobile wallet.

As a result, MicroEnsure worked with telephone companies to develop the next version of their product. Several key attributes made telephone companies such a distribution channel: their trusted brand, the accessible points-of-sale and their clear payments channel. MicroEnsure, together with Airtel and various insurance companies, has rolled out a structure which offers free insurance for the customer based on their airtime purchases, which is in fact paid for by the telephone company. The next step in the structure is a small upsell to cover family members in the insurance and finally moves into a fully paid service with extra products and benefits. As a result of the insurance products, telephone companies saw an increase in overall revenue and average revenue per user. Leftley is now preparing for the next step: bringing insurance directly to the client.

Wolfgang BÜCKER presented the case of develoPPP – a program to enhance transparency, efficiency and traceability of business operations in the coffee value chain in Uganda. The goal of the program, together with SAP, was to develop a smartphone-based application, capturing buying and payment transactions digitally on all levels of the Uganda Coffee Farmers Alliance (UCFA) – from farmer to exporter. They then trained smartphone-users and farmers in order to improve central monitoring and evaluation of transaction data. This has led to an increased production of approximately 10 percent, a reduction in transaction costs of 11 percent and an increase in trust and transparency in the organizational structure of UCFA. The main challenges revolved around the power supply and internet network, security, and time constraints because of double record keeping. 

The next step, according to Bücker, is to integrate DFS in the system, including mobile payments and designing agricultural loan and savings products for farmers to overcome the financing gap between coffee seasons. Bücker emphasized that the production and sales data from the current smartphone application will serve as a track record for the loan and savings product. The DFS should be easily accessible via mobile phone, suitable for smallholder farmers and adapted to the value chain actors. The new services will be combined with financial literacy training in the field.

DISCUSSION

The first question from the audience revolved around the effects of DFS. Zollmann answered that DFS is really helpful to give the poor low-stakes experience using financial services, allowing them to learn how things work. Credit is not easy to get in Kenya, and where before you would need a complicated system which was difficult to understand for people, DFS allows social experiential learning to happen more quickly. And if for some reason a customer gets blocked by the Kenyan credit bureau, because of non-repayment, M-Shwari helps that customer to clear their record. She, furthermore, stressed that the fine of the credit bureau is relatively small (USD 20), making it easier for customers to make and learn from mistakes. Leftley added that MicroEnsure aims to keep life insurance products simple by blocking exclusions, so that people will understand and use the product.

Another question from the audience revolved around the future of MFIs in the era of DFS. Leftley mentioned that there will always be a group that benefit from MFIs and group lending. However, mobile money will compete with microfinance and he stressed that MFIs should embrace technical innovations. Bücker emphasized that the client relation that MFIs have will remain important. The final question from the audience related to the future of index-based insurance for farmers. Leftley mentioned that because of issues related to distribution and high premiums, he is not very optimistic about weather-related insurances.

Hanouch concluded by noting that: 1) poor customers have broad financial needs; 2) DFS is not only a risk for MFIs but also an opportunity; and 3) there are multiple models to provide financial services to low income customers. Providers need to balance between offering sufficient value to customers, while providing the services in a sustainable and scalable way.