September 23rd – 24th, 2013Sarova Stanley, Nairobi

Dr. Tonny K. OmwansaProf. Timothy M. Waema

School of Computing and InformaticsUniversity of Nairobi

September 23rd – 24th, 2013Sarova Stanley, Nairobi

Dr. Tonny K. OmwansaProf. Timothy M. Waema

School of Computing and InformaticsUniversity of Nairobi

Deepening Financial Inclusion through collaboration to create innovative and appropriate financial products for the

poor

2nd Annual Kenya Bankers Association Banking Research Conference

OutlineOutline

1. Introduction2. Review of related literature3. Description of data4. Lessons and conclusions

BackgroundBackground

• World– Almost 1/2 live on less than $2 a day– About 1/2 don’t have a bank account

• Kenya– 2009, about 59% adult population completely excluded/informal methods.– financial inclusion is at the core of vision 2030– numerous achievements make Kenya a world example– we must stay ahead: innovate further

• Financial access– increase in formal financial services has effect on poverty traps. – Conventional: reduce costs, mobilize savings & encourage investments – to the poor: make appropriate & affordable

BackgroundBackground

• ‘Innovative modes of financial services delivery can have a transformative effect on poor households’

• Innovation– ability to identify good ideas – thought leadership skills to

• enhance• drive the relevant change • Facilitate collaboration and

– ability to drive to tangible economic, academic, social or political results

• Financial Inclusion: – Ability of an individual, household, or group to access appropriate financial

services or products.

ObjectivesObjectives

Demonstrate that one promising strategy to deepen financial inclusion at BoP is through collaboration between strategic partners who would develop and execute innovative and appropriate financial solutions to this segment.

Discuss some challenges to achieving appropriate financial products

Financial sector transformationFinancial sector transformation

• Transformation from 2005

– Within 3 years, deposit accounts grew by152%

– Branch network expanded by 60%,

– ATM network grew from 323 units to 1,325

– 2006-2009, access to formal financial services rose from 26.3% to 40.3%

– Agency banking commissioned April 2010 rapidly grew to 17,000 by March 2013

FinAccess

Innovation for Financial InclusionInnovation for Financial Inclusion

– Reaching BoP using mobile technology generates enthusiasm– Financial services outside conventional branches now common– 10% growth is undoubtedly attributed to M-Pesa

Choice of remittance channel between 2006 and 2009, FinAccess 2011

Use of money transfer options in 2006 and 2009, FinAccess 2011

Journey to Cash-LiteJourney to Cash-Lite

Better than Cash AllianceOur opportunity

Cash-Lite BarriersCash-Lite Barriers

Our opportunity

Low adoption at rural and BoPLow adoption at rural and BoP

• Characteristics: Lower literacy levels & Lower access to information• Income is low, irregular & unpredictable• Late and slower adopters of technological innovations

Access strands by Finaccess

The poor and their financial livesThe poor and their financial lives

• They live sophisticated financial lives– save, borrow, lend & prepare for rainy days

• USD 2 per day is an average– some days they earn USD 5, other days no income

• Their level of uncertainty is high

• Live less healthy lives, stay in less secure places & face income volatility

Poor are not stupid, they are just poor.

Lack appropriate financial toolsLack appropriate financial tools

• Money management could be more crucial at BoP than elsewhere– Save low irregular income into dependable source for

daily living– Cope with risk particularly emergencies – raise lump sums by reliably accumulating meaningful bits

• They use informal tools are expensive, unreliable and at times unsafe because of poor quality

• MFIs have attempted, but fail in several ways

• Mobile money is a reliable channel, but not a sophisticated and appropriate financial tool

Appropriate financial tools for BoPAppropriate financial tools for BoP

• reliable – Delivery of services – at promised time – in the promised amount – at the promised price

• convenient – ability to access – quickly, – nearby, – privately – unobtrusively

• flexible – ease with which– transactions are reconcilable with cash flows

• structure – regularities – to promote self-discipline

How close are we to appropriateness?How close are we to appropriateness?

•Agent banking improves convenience of banks

•Costs must come down for all channels

•How to improve the combination of structure and flexibility?

Johnson et al. (2012)

Innovate!!!

Emerging business modelsEmerging business models

• ‘Pay-as-you-use’: – Consumers pay lower costs for every single use of a

facility, product, or service;

• ‘No Frills’:– Services/products that meet basic needs of the poor

at very low price but still profitable to supplier

• ‘Shared Channels’:– Enables piggybacking products and services on

existing customer supply chains, to enable poor people to access and afford goods and services valuable to them.

OTHER TERMS

‘Pay-as-you-go’,

‘Lease-to-own’,

‘Layaway programs’

OTHER TERMS

‘Pay-as-you-go’,

‘Lease-to-own’,

‘Layaway programs’

Data setsData sets

• Impact of M-Pesa– 89 in-depth qualitative interviews from a

variety of respondents – New developments of using MM as a channel– Between January 2011 and August 2011.

• Adoption of mobile money at the base of the pyramid – 283 respondents in Nairobi’s poor areas– Several constructs were investigated

• In-depth study of BoP financial product (pure mobile-based micro-financing) – 245 respondents participated

Adoption FrameworkAdoption Framework

Constructs:

• Performance expectancy• Social Influence• Perceived Trust• Facilitating Conditions• Transaction Cost

Adoption Drivers

Adoption drivers to design principlesAdoption drivers to design principlesPerformance

Expectancy

Reliability

Social Influence Convenience

Perceived Trust Missing

Transaction Cost Cost

Facilitating

Conditions

Flexibility & StructureOmwansa, T. (2012)

Johnson et al. (2012)

Provider willingnessDesign of the solutions by third party enterprises

Design/adoption features are barriers?Design/adoption features are barriers?

Flexibility Structure Cost

Performance

Expectancy

Social

Influence

Facilitating

Conditions

Facilitating

Conditions

Cost

Partnerships/Business models for BoPPartnerships/Business models for BoP

financial Institution

(custodian)

Mobile Money Provider(channel)

Social Entrepreneurs

(solutions for BoP)Appropriate

financial product

BoP Consumer

Interacts with consumers

through agentsNo one partner is

Going to do it all well alone

Research organizations,

Universities etc.

Findings and Discussions

Flexibility and StructureFlexibility and Structure

Incubation of business ideas

Collaboration with research & academic institutions

Platforms facilitating collaboration between start-ups, MNOs, Financial Institutions etc

Taskforces on financial inclusion for BoP.

Transaction CostTransaction Cost

• Ability to pay: Costs are high for low value transactions• Willingness to pay: For ‘lack’ of options, they will pay• Every transfer, however small attracts fees

Amount (KSHs) To subscriber &

withdraw

% of total amount To non subscriber

& withdraw

% of total

amount

50 15 30 NA NA

100 15 15 NA NA

200 54 27 93 46.5

500 54 10.8 93 18.6

700 60 8.6 93 13.2

1000 60 6 93 9.3

• 150,000 new businesses

• 740,000 people moved out of poverty

• Over 200,000 pumps sold

• M-Pesa mobile layaway program reduces payment period (12 to 3 months)

• Uses sales agents, SMS reminders and SMS updates to keep customers close

M-Shwari, KickStart Mobile Layaway, M-Kesho, Mbao Pension,Angaza Design, M-Bima, Indigo pay-as-you-go solar, M-Kopa, Bridge International Academies, Grundfos Lifelink, Musoni...

Mobile layaway program to purchase a water pump

Provides high quality primary education at low cost•KShs. 320 per month per child

•20,000+ school children

•Fees paid by MM, service providers paid by MM

•Largest single M-Pesa client

Cash-less micro finance

(‘M’ for Mobile and ‘Usoni’ for future)

Uses 100% mobile money (M-Pesa) for loan disbursement and repayments•Enables cash-less microfinance operations•1st loan in May 2010, 160M+ lent with 100M+ outstanding loan balance, 500,000+ borrowers, over 10,000 loans •To clients: Faster turn around, zero paper work, more convenience•To Musoni: Lower risk, less paper work, better customer service, easier and more accurate transaction tracking

We are focused on innovating, incubating and creating new

opportunities for its membership.

Prepaid (MM) off-grid energy

Make life-changing energy solutions affordable to low income customers•Embedded micro-payments to the solar technology•Piloted from October 2010. •Commercial sales started 8th June 2012•Roll out considered a success

Lessons from the synergiesLessons from the synergies

• BoP are accumulating savings• Meaningful sums to acquire assets/services• Technology is an enabler• Innovation is 1% inspiration, 99% perspiration – execution is key

• Structure: • targets are clear• regular progress updates by SMS• Reminders not to default by SMS• Phone call & face to face follow ups

• Flexibility: • Ability to pay whatever amount at whatever time• Negotiations allowed when customer likely to default

• Transaction cost: • Absorbed by 3rd party &/or consumer

Lessons from the synergiesLessons from the synergies

• Current partnerships• Mostly between MNOs and 3rd parties• Each party focuses on their strengths• 3rd party is the face of the product• Savings translate to specific service/product that BoP need

• Consumers• Appreciate the value of MM more when bundled with other

relevant product• Appreciate convenience more than security• Trust plays a key role, especially in the 3rd party who is the face• Face to face interactions, personalized reminders were greatly

appreciated• Challenges of water, energy, education, agriculture, housing,

transport, healthcare etc form a basis for collaborations

ConclusionConclusion• Partnership key for reaching BoP

• Providing appropriate and innovative financial products • Not likely to be achieved by one player• Partnerships challenges:

• technology • competition • trust• interoperability etc

• BoP financial solution must be appropriate• Design features must be incorporated• Trust must be developed and sustained• Transaction costs need to come down• Innovating is hard work and the price has to be paid

• BoP users need MM• More importantly as a means not an end• MM then becomes a platform• Likely to increase savings & change behaviour towards cash-lite

Thank you!

Dr. Tonny K. OmwansaSchool of computing and informatics

University of Nairobi@tomwansa