By Dr. Anastasia Mirzoyants-McKnight - InterMedia
In the past decade, the international development community has been focusing a lot of efforts in promoting innovative digital financial services to rural consumers and rural communities, especially in Africa, where the high incidence of rural residency and poor infrastructure make it challenging to reach the population through traditional banking strategies.
When considering the best channels to reach farmers with financial services, including digital ones, it is important to understand how rural residents are different from other clients/consumers in terms of their financial needs and challenges. Based on the InterMedia’s Financial Inclusion Insights research, there are four key features that define rural Ugandans’ financial behaviors.
Blending of family and farm: Three-quarters of rural Ugandans are engaged in agriculture (73%) with overwhelming majority in subsistence farming, meaning they grow crop/livestock and consume most of the produce themselves. Such subsistence farms tend to employ almost exclusively household members because they cannot afford hired labor. Hence, there is little distinction between the farm and the household/family when it comes to planning incomes and budgeting expenses. The farm is the source of welfare for the household while the household is the source of the farm’s sustainability. Such blending means that most of the financial activities of rural Ugandans are focused on the family and/or the farm. For example, the top-three reasons for borrowing are to pay education fees (23% of borrowers), make routine purchases (22%) and reinvest in business (22%). The top-three reasons for savings are to protect family from poverty and crime (45% of savers), reinvest in business (41%), and make ends meet (35%).
High incidents of extreme poverty: 78% of rural Ugandans live below the poverty line (live on less than $2.50 a day). This rate is 10 percentage-points higher than the country average. Furthermore, 66% of rural Ugandans say their monthly income only covers basic expenses (i.e., food and clothes) while 21% have to borrow to pay routine bills every month. As a result, there is always a cost of missed opportunities for the little money rural Ugandans manage to accumulate, regardless what they do with the money. When they choose to place the money on a formal savings account, the cost is especially high because the money is not invested in either of the two priorities – family or farm.
Complex financial lives: While rural incomes might be small, rural adult’s financial needs are bigger than those of urban residents. In addition to the basic needs for food, cloths, shelter and security, rural residents need to cover expenses related to their farming activities and logistical expenses related to their remoteness and the lack of adequate infrastructure in rural areas. Hence, the financial lives of rural Ugandans are very complex because they are always engaged in the balancing act of borrowing, repaying, receiving, sending, saving and spending – all at the same time, which require a lot of discipline and priority-driven budgeting.
Interestingly, this complexity is transferred to the application of mobile money services. While rural registered users in Uganda are still few (24% of the group), the use cases defy the historical assumption that mobile money in rural areas serve only as a channel to deliver remittances from urban areas. In fact, only 54% of rural users even receive person-to-person transfers (Figure 1). Others use mobile money accounts to send P2P transfers, save money, receive wages, make business transactions or pay bills.
Figure 1. Percentage of rural mobile money account holders (n=549) who use their accounts for selected activities.
Source: InterMedia Uganda FII Tracker survey (N=3,001, 15+), June-July 2014.
Seeking security but taking risks with informal financial tools: Rural Ugandans understand the idea of financial shock preparedness, likely because their wellbeing is frequently and directly affected by the instability of weather conditions, market price volatility, questionable quality of agricultural inputs and so on. Hence, 36% of rural Ugandans have a plan on how to cope with emergency situations and 33% have an emergency fund at least sometimes. Yet, most rural residents continue taking risks by relying almost exclusively on informal financial tools when managing their money. For example, 35% of those who store saved funds in a hiding place where money is vulnerable to robbery, fire or flood. Similarly, 56% borrow from other people under agreements, which leave repayment terms open to lender’s interpretation/desire. While reliance on extended family or close informal networks in their financial activities provide rural Ugandans with trust-through-familiarity reassurance, it also brings high level of vulnerability because most of adversities – natural disasters, pest attacks, fires – affect everyone in such closed networks. This means that when facing an emergency, rural Ugandans might not be able to source emergency funds because their lenders or those who borrowed from them are facing the same emergency situation.
The implication of these features are many, but the most important is that successful financial product development should start with clear understanding of rural adults’ financial lives and should articulate a value proposition tailored to rural consumers’ desire to address immediate needs of their family and farm/business while also securing their future and leveraging their existing social networks.
By Dr. Anastasia Mirzoyants-McKnight - InterMedia