NOTE 7: (FINAL)

NOTE 7: ON FINANCIAL INCLUSION (FINAL)

In the two previous Notes, I commented the pros and cons of “Mobile Banking” as the main effort to promote Financial Inclusion, at least how it is sold nowadays. The issue is not whether we will have to use or not the “Mobile Banking” for that purpose: “Mobile Banking” is just another tool within a span of distant banking services such as: ATMs, Mobile Branches, Electronics Purses, Prepaid Credit cards, Teller stations in third parties facilities, walking branches, etc.,

Financial Inclusion is a more complex issue that cannot be solved simply with one paying facility, because we are working with people which implies a series of values and needs. As a simile to the “Mobile Banking”, it would be the same as to affirm that the Financial Inclusion can be solved with the International Family Remittances. So, to me the objective questions that must be raised about Financial Inclusion are: (a) How we should do it?, (b) Are we really taking in account the Financially Excluded needs, knowledge, trust and attitudes towards banking?; (c) Can a particular financial service complement to a financial product be the best and sometimes seem to be “only” option to do it better and make it more lasting?, (d) Will the Financially Excluded accept and use only Information Technology and Communications (ITC) solutions?, or will these be more used by the already banked?, (e) Do the financial excluded prefer the modern virtual systems to the traditional paper instruments?, (f) Will Financial Inclusion be effective and durable without intensive financial education?; (g) Will Financial Inclusion efforts be sustainable or will these need to be addressed as very long term profitable projects?, (h) Can the personal contact and persuasion be substituted by a payment facility?; (i) How can a new Financial Included be motivated to value and keep a continuity on the use of the banking services?; (j) Are there a series of restrains due to myths that block a more ample vision of the Financial Inclusion (For example: “The poor people cannot make savings”)? and (k) Will it be possible that the traditional financial industry unconsciously does not like to have the Financially Excluded as customers?. 

This and many other aspects produce me insomnia when addressing this important and very complex issue, for which there are no simple answers. We seem to forget that we are dealing with people, therefore the financial, technological and profitability aspects become secondary to the psychological issues behind the Financial Inclusion.

I will try to answer some of these questions, based on my experience in several cultures and for many years. Let us go, I hope not to be boring you:

There are many ways to kill a flea, so I am not convinced that there is an only way to do Financial Inclusion. The fact is that all the independent research shows that “Mobile Banking” is adopted mainly by the already banked; it has the behavioral logic of being virtual; so is easy to be accepted by the educated urban users that live the ITC in their everyday life. However in rural areas and marginal urban areas, where the Financially Excluded tends to be; this is not so clear. In a recent research done in Latin America interviewing a sample of rural people that do not use financial products it was found that: The only financial service used was bill paying: Next, about 33% would de willing to open an attractive regular saving account, in second place a little over 30% agree that security was important, surprise!; around 15% said that the rate of interest was important (85% did not care), 12% considered de debit card important and less than 4% consider the ATMs important. Maybe we are shooting at the wrong target, basing the strategy on paying facilities and interest rates, instead of addressing account attractiveness and security.

A lot of research has been done by scholars on the M-PESA® “Mobile Money” and after on the associated savings accounts: M-Kesho®, M-Shwari®, Iko Pesa®, M-Paisa®, but up to my knowledge, I have not seen any research done to validate the possible effectiveness of any “Mobile Banking” account before launching it, to match the Financial Excluded’s needs, attitudes, perceptions, expectations and motivation to save. All the research analyses that I read are focused on proving the goodness of the paying system. This seems a little weird to me, as I never developed a new financial product without a series of previous evaluations to detect what is important for the potential users for which it is designed and in that way, assure myself that the financial product will have the right balance between the customer’s and the institution’s needs. Maybe that could be the reason why I experienced few failures developing financial products and complementary services in many countries. I do not like to assume things, because financial products and complementary services failures are too expensive for the institution and very frustrating for the users.

Research points to the banked as the main stream users of the “Mobile Banking” services and, unfortunately, the results are incomplete either because the new developed “Mobile banking” products do not show precisely if the actual product’s users were banked or unbanked before opening the account and in the M-Shwari® savings account, that has an automatic loan attached to it, I never seen research on which product was the motivator to open the account; the savings or the loan.

Preferring a tangible document to a virtual solution has common sense among the Financially Excluded; printed information is much trustworthy to process any claim and to control better the money for this segment. In fact, the research mentioned before shows that more than 50% of the sample considers the savings passbook as the most important aspect in a savings account. So why are we going only virtual?, and does that fit the majority of the unbanked?.

More independent research would be necessary focused on the affectivity and acceptance of any of the actual Financial Inclusion efforts done today.

An issue that must be cleared is who the bankarized are and who is not. If we take the beneficiaries of only Microcredits as bankarized, we find that millions of people are Financially Included in the World. But, are these really bankarized?, have all benefited with an ample offer of financial products or have only gain a liability (There it has been many cases in the World like India’s Andhra Pradesh scandal that places doubts on this, not to count the thousands of MFIs that disappeared because these were not sustainable). Is this the Financial Inclusion that the World needs?. I can only talk based on my experience, I think that a healthy financial inclusion has to be clearly defined, At the time we were doing Financial Inclusion in Brazil, in the 70s, we saw absolutely clear that only a “Savings Passbook”  could be considered a healthy bankarizing product, no matter the flavors (Basic savings account, savings account with a money bank, a programmed savings account or a term deposit savings account, etc., however. today most of the financial institutions still offer only the traditional savings account and the term deposit). The reason for being so clear on the issue maybe was because in the savings and loan housing sector, where I worked at that time, home buying demanded a down payment that had to be saved and in relation to the tools, we had no doubts either; mass marketing motivation and financial education were fundamental to be successful, even more than the savings account itself and the way to access the savings. For us the two first were the main focuses on the Financial Inclusion issue. Today I have seen little or none marketing efforts, except the push the “Mobile Money” by the mobile telephone operators, and very little on financial education as solutions to the Financial Inclusion, basing everything on the payment facilities. But evidence along those 45 years of experience has shown me that products and paying facilities contribute to sell the savings, but the important issues are the motivations to open the savings products and these can only be reached trough effective mass marketing and selling strategies to satisfy the potential customers needs (That is why in 2012 Brazil reached 82,1% of Financial Inclusion, nearly the double of the rest of Latin American countries), Financial education is the aspect that brings forth to the mind of the unbanked the unconscious needs of asset building as a family protection and a better use of the money. It has no sense to ignore the fact that loans require no selling efforts because these are a natural demand product and the 2008 crises proved that if you offer a loan with easy terms and tolerant applicant qualifications the market will take them. But savings is another different animal, the decision to save will always be in the hands of the savers, who choose if they are going to save or not; how to save; where to take their money and what to do with the savings; this is an offer product, reason why there has to be in the Financially Excluded’s mind a clear understanding about the benefits of making savings and the motivations to do it, not necessarily the easy access to the money is the best or unique motivator, which points more to consumption. To save is the reason of being for the “keeping money under the mattress” or the informal savings schemes (ROSCAS, Pasanakus, Chains, etc.). So there are a few clear facts associated to the Financial Inclusion efforts: (a) The “Savings Passbook” has been proven for years that it is the best Financial Inclusion product because it creates financial saving discipline, is physical and trustworthy and is an asset to the saver and the family, therefore an attractive savings product’s menu offer is needed, (b) Not necessarily the services must be based totally on the CIT, which are only a mean not and end; the end is satisfying customer needs of control and access for the savings; (c) The personal and family needs for making savings as a way of protecting themselves from uncertainty and as income generating assets must be addressed; (d) The design and development of savings products must be based on the Financially Excluded needs and not only on the institution’s needs for a win-win situation for both parties; (e) Bettering the MFIs efficiency in order to give better service with a variety of outreach options (Correspondent branches, electronic purses, mobile banking, etc,) is needed; (f) Between the 60s and the 70s with fixed interest rates, we charged nothing for managing the accounts, and we did it by hand, today technology has proven to make massive and cheaper the account management, and the spread between savings and loans has grown higher due to the lowering costs. In Financial Inclusion efforts the fees must be revised and/or eliminated; (g) The understanding of the benefits of an adequate use of the money (Financial education and Money Management) and its use for asset’s building and the understanding of the banking operations is a must; (h) The advantage of the security of the money saved should be informed, usually guaranteed in the regulated financial institutions or on the federation’s or union’s Guaranty Funds in the case of non regulated Credit Unions or Savings and Loan Cooperatives; (i) Not necessarily the CIT are the right answer, less the unique answer. According to the International Telephone Union (ITU) (http://www.itu.int/en/ITU-D/Statistics/Pages/default.aspx) a majority of countries are in the category of “less connected countries” and the demanding attitudes of the Financially Excluded towards physical savings passbooks, points to the “hand-matic” solutions as the best answer (I call so the mix of CIT and manual operation, in fact in Spain the passbook with magnetic strip is the major system used), even this are the way for progressively changing the acceptance of “chemically pure” CIT solutions, which can take generations and (j) Having the financial institutions to assume a profit on Financial Inclusion efforts in the very long time; forgetting the short time profit, because it would be a fantasy.

We must run away from the fashions in the financial world. Today it has been shown that the Grameen model does not work well in all environments and that modern versions have been designed that do the job much better, but for many years the original model has been fashionable and the price paid was the lack of sustainability of many MFIs and the users loosing their credit sources. The World’s banking industries assumed the massive lending fashion in the 90s using the financial engineering (NASA style) statistical focus on massive lending as a token for low risk in a perfect market, the more risk the higher the interests to compensate the losses, It worked well until a critical mass of NINJAs (No job no income) loans was reached and it exploded with the credit crunch of 2008 (With some symptoms before with the Long-Term Capital Management L.P. (LTCM) in 1998, that was ignored). Financial fashions are very dangerous because these are usually a long term situation, because it can take years to reach critical mass and when these explode it have a world wide impact, so any financial innovation needs to be closely watched and studied objectively, not just becoming in “love on first sight” and assuming that it is automatically the right answer. Progressive practice and executions gives, with years of observation clues to the way to develop the best financial options, but with the “Mobile Banking” I see a significant lack of information and statistics and it is spreading too fast pushed by the mobile phone operators, similar as it happen with the mass lending in the last 15 years and the myths raised of a perfect market. True, this lending worked for several years until the loans defaulted and the financial institutions found themselves full of toxic assets: As I say in my courses and consultancies, the probability of dying in an airline accident is of 1 in 20.000, but in the falling plane is 100%; the same happened with the 2008 credit crunch. So we must avoid the fashions associated with Financial Inclusion and balance the importance of the short term profitability of the efforts, giving more weight to the significant efforts that are based on the customer’s needs, attitudes and behavior and on the ways to reach these customers with the right products, the right information, the right motivation and the right financial education, pointing to the assumption of the customer of the fact that being bankarized is the best option. The CIT have much to do with this issue, because multimedia is a good way of reaching and informing the unbanked, but finally personal contact and trust cannot be replace by webinars and premanufactured materials, marketing and personal selling strategies are also a must, in my 45 years of experience doing financial marketing, teaching and selling financial products I can guaranty you that these work and these strategies will do very well. But marketing has been demonized as the cause of the excessive or exuberant consumption, when in fact the needs for consumption are in our ADN since the Iron Age (On this I will dedicate a future Note). But when marketing is used ethically to motivate people to save, being protected and make income, the negative issues associated with the abusive marketing strategies has no sense. That is the reason why since 1965 after I graduated in psychology and started to work in a savings and loan association, I studied and applied marketing to promote savings, because I reached the conclusion that many people would benefit from the right application of this technology.  We must be careful to avoid the shot from the rifle’s butt in relation to the Financial Inclusion efforts, some more “open source” produced research on the Financial Excluded needs and financial patterns of behavior are required, and the follow up on the results of the tools used in Financial Inclusion could bring the right focus on it. Good luck!

Very best regards

Jose Linares Fontela

jlinaresf@gmail.com

NOTE 6: (CONTINUED)

NOTE 6: ON FINANCIAL INCLUSION (Continued):

In the last Note I boarded the Financial Inclusion issue, with some comments on the very interesting and innovative experience of the Commercial Bank of Africa (CBA) with Safaricom’s M-PESA®. At that time I only made some general observations, I wanted to learn more on the experience and to gather information on it. Now my comments:

1.    M-PESA® has revolutionized the “Mobile Money” but it is not a bank, it is only a mobile money transfer service.

2.    The M-PESA® (Mobile Money) banking agreements are not new, in 2010 it reached an one with the Equity Bank, this experience launched the M-Kesho® savings account. However, it seems that it was not satisfactory because it only reached 600.000 accounts. It is said that the fees charged to the account were the main drawback. The Equity Bank in 2010 also partnered with Orange to launch “Orange Money” under the brand “Iko Pesa®” (There is money), but there seem to be no statistics or information on this experience at the moment.

3.      On May 2012 M-PESA® had in Kenya: According to Miss Betty Mwangi-Thuo, who is Safaricom’s Financial Services General Manager: “The new service adds another twelve financial institutions to M-PESA’s existing network with 25 banks and over 95 SACCOS (savings and credit co-operatives) and micro-finance institutions”.(http://www.techsavvy.or.ke/magazine/2012/05/23/safaricom-signs-m-pesa-bank-transfer-deal-with-pesapoint/). To me this was a surprise to learn that so many financial institutions were using M-PESA® in Kenya, My perception is that it is growing too fast and is too big, before some observation should happen to see the possible consequences that could have the system over a reasonable span of time. Although I was surprised by M-PESA’s® outreach, it is not clear on how many of all partnered with M-PESA® are developping new account based on mobile money (As M-Shwari®) or it is just  a way give access to its customers to the service for deposits and withdrawals from their existing traditional bank accounts. Of course, in the last case this would have nothing to do with the Financial Inclusion as all the users would be already banked. Nor there is no information on how many new users have become clients of those institutions after the agreement, neither on how many of the new customers were unbanked before opening an account and why they opened.

4.   M-PESA® is being promoted globally and massively by the  Information, Communication and Technology World as “Banking for the unbanked” (http://www.itweb.co.za/?id=70826:M-Pesa-boosted-by-global-agreement) and is going global, this concept that is sold as a fact, being a fallacy, because M-PESA® is not a financial institution and therefore cannot, legally, bank anyone. M-PESA® has reached an agreement with Money Graam in 2014 (http://ir.moneygram.com/releasedetail.cfm?ReleaseID=824644) and already had agreement with Western Union® targeting Mobile Remittances, none of these are regulated by any Banking Authority, so they should not use the name “Mobile Banking”, only the term “Mobile Money” should be applied. M-PESA® clones are growing everywhere (In other African countries, Asia and not with the same speed in Latin America), so the consequences of the of the rights or wrongs in the M-PESA® model will be global as was the case of the Microcrédit Grameen Bank model. But the word “banking” is giving M-PESA® a great push towards solidness, recognition and trust which it should not be the case.      

5.      The Commercial Bank of Africa’s M-Shwari® experience has been very interesting and it is really “Mobile Banking” effort. But I still find that the automatic loan attached to the savings account is more negative than positive for the M-Shwari® customers, albeit making the savings product much more attractive. However, the consequences of default can be very damaging to the saver as it blocks the possibility of obtaining in the future a better loan that could generate assets. The short term M-Shwari® loan, due to the small amount and short 30 days term, can only solve very small needs; but defaulting in this loan seriously affects the paying reputation of the debtors and with a flat monthly rate of 7,5% that takes the Shwari® loan to an exaggerated cost with a final rate equivalent to an annual interest rate of 90%. It would be a very bad business to take it. On the other hand, the offer of the loan seems to be the main attraction of the savings account because 25% of the M-Shwari® accounts have became inoperative in 2014, probably due for being rejected on the loan approval. The problem is that loans are selective and savings massive, mixing the two is not convenient. The risk of mass lending took the World directly to the credit crunch of the 2008 that finally ended in the World’s recession. The big question is: Would the designers attached the loan to the M-Shwari® account to generate enough income to compensate the fees not charged and the reduced requirements offered with the account?, this is an important question because it arises the big question: Are the Financial Inclusion efforts sustainable? Another question could be: Does the “automatic” loan attached to the M-Shwari® account attracts loan applicants, that have no interest in making savings?. I hope that time will answer this questions.

6.   Another worry that came to my mind when I read the comment that the Shwari® account associated loan was the designed to include Islamic customers. The difference in the cost paid by the Islamic customers and the other customers, due to the conditions required by the Islamic Finances is based on the fact that no interest can be charged, so a flat fee is applied and this does matter. In 2007, according to the Kenya Central Bank (KCB) survey the lending rates on average were around 18% annual (Oscillating between 15% and 20%) (http://www.fsdkenya.org/pdf_documents/08-03-20_Survey_on_bank_charges.pdf). In a study of the Kenya’s Banking Association in 2012 the lending rates seem to be similar to those of 2007, so it would be a reasonable calculated guess to assume this rate will be similar today. That means that a 12 month loan of US$ 1.000, would have a monthly payment of US$ 91,68, so the non Islamic customers would be paying US$ 100,16 of interests. If this same customer was Islamic, the flat equivalent service fee should be 10,01% not 18%, in order to charge this customer in same conditions as the rest of the customers. Therefore I reach the conclusion that two different systems are needed and that both systems must coexist and work in parallel to be fair with all the customers.

7.      As was mentioned before, the monthly flat rate of interest of 7,5% in the M-Shwari® associated loan, it seems to be excessive (7,5% x 12 months = 90% annual rate), in the worst of the cases it should not be higher than applying the before mentioned average annual rate of 18%, that would be only a 1,5% monthly flat fee. True that any bank can apply any lending interest rate within the limits of the country’s legislation. But the Central Bank of Kenya (CBK) has formed a committee in 2014, to probe the high rates charged on lending, (http://mobile.theeastafrican.co.ke/Business/CBK-team-to-probe-high-interest-rates/-/433844/2150782/-/format/xhtml/-/hjblj7/-/index.html), maybe this happened due to the Kenya Members of Parliament pressure for a control over interest rates demanded in August 2013 (http://mobile.theeastafrican.co.ke/News/Kenyan-MPs--push-for-control-over-interest-rates/-/433842/1974560/-/format/xhtml/-/2i8xx4z/-/index.html). Under this circumstance and if the banking rates are reduced by the CBK; would the M-Shwari® modify the light requirements for the savings account and if the rate is significantly reduced will the loan be eliminated or fees charged to the account? (And the CBA can do it unilaterally according to the Terms and Condition published in the Internet (www.cbagroup.com/m-shwari/Mshwari_Terms_Conditions.pdf), if so, will the M-Shwari® account continue to be as attractive without the loan?. Time will tell.

8.      The M-PESA® research usually shows the unbanked and the bank user’s figures. However, I do not remember a study that also shows how many of the actual banked users were unbanked before the associated bank joined M-PESA® and the unbanked became banked after; in order to evaluate its positive effect on the product on Financial Inclusion. However, independent scholar’s studies have show that when a savings product is added to M-PESA® (Such as M-Kesho® with the Equity Bank and more recently M-Shwari® with the CBA), usually the main stream users are their accrual bank customers, because these already have the experience with financial products and M-PESA® is just a paying facility that make the use of the bank products easier and more accessible. So were is the clear evidence of the effectiveness of the “Mobile Money” services as a tool of Financial Inclusion?. As an example, since the 90s, the Inter-American Development Bank (IADB) has published a lot of research and detail statistics on Latin America’s remittances for many years; in which there was no clear evidence that these promoted financial inclusion, people still withdraw the total value of the remittances in the teller window. I do not see the same level of information availability in the “Mobile Money” sector where there are no detailed statistics and information published other than general numbers on “Mobile Money” and “Mobile Banking”. I hope to have this information some day in the future, as scholars and development banking institutions devote their effort to this issue and publish it.

9.      What worries me more is the condescending attitude of the Banking Authorities not to prohibit the use of the terms “bank” and “banking” to activities carried out by non supervised institutions, for sure the Bank Law of any country prohibits specifically that improper use of the name. What is happening?: can the Banking Authorities take the risk of justifying the inappropriate companies to be presented as “pseudo bank”, just for the sake of Financial Inclusion; and the risks, the trust, and the probable confusion of the citizens about where to take safely their money. Are the means more important than the ends?. A banking Authority once said on the “Mobile Money” issue: “regulation to follow innovation”, why not both simultaneously, as I understand; watch and regulation is the first obligation of any Banking Authority, according to the Bank Laws.

I am neither against M-PESA® nor against any transference or remittances service, all I considered them absolutely necessary. I studied the international family remittances services for years and developed savings products in Asia, Africa and Latin America, for MFIs, Banks, Credit Unions and Savings and loan Cooperatives; to receive the family remittances in an account and not totally in the branches, withdrawing the money from the account as needed. This in practice has always showed that an small amount is always left in the account and with time important savings are made

What I am against is in the inexact way the idea is massively sold by telecommunications operators and other parties to make it become a fashion, that it is now a days, the lack of detailed research focused on Financial Inclusion to learn more on the motivations, attitudes and the pattern of behavior of the non banked, the limited statistical information available and published by the operators, banks and regulators which reflects a lack of knowledge and leads to risky models like the lending that produced the NINJAS (No job, no income) before the 2008. This demands from the Banking Authorities detailed data from the financial Institutions that they watch and then publish it to assure the highest transparency in the financial system under their responsibility. I would like to know more about what are the detailed results of the evolution of the M-Kesho®, M-Shwari®, Iko Pesa®, M-Paisa® accounts, the M-Shwari® attached loan, etc. Not only in Kenya, Tanzania and the rest of Africa, I would also like to learn what is happening in Asia and Latin America. But, transparency is not in the typical culture of the telecommunications companies these are obscure and evasive, maybe due to the intense competition between them; at least that has been my personal perception as a user of a mobile phone for years. So, unless the banking regulators start collecting and publishing by their own the mobile banking statistics, I will have to continue picking information from a myriad of sources in the Internet to construct and understand the whole picture of what is going on with this issue.

Jose Linares Fontela

jlinaresf@gmail.com

NOTE 5

NOTE 5: ON FINANCIAL INCLUSION:

Although I thought of starting the cycle on Microcredit in this Note, some worrying and other interesting news on financial inclusion have led me to address this issue first.

Before going on I have two caveats to mention:  First, I am a fan of the information technology and communications,

my first computer was a Radio Shack Model I in 1980 and from that time to the present I have always used the latest in the market. With the operating system CP/M in the 90s before the e-mail, I had in my computer a BBS that allowed my clients to connect through a dial up modem to send and receive mails from me and from each other. I make this introduction because being 71 years old; I do not want to be look at as a reluctant and retrograde grandfather in relation to this matter. In the photo ypu

left you can appreciate my current work study which shows the opposite.

Second, in 1973 I had the opportunity to cooperate in Brazil with the Savings Promotion Center  -  Centro de Promoção  da  Poupança (CPP)that was a part of the savings and loan housing finance system. The CPP was led by my friend and mentor Col. Augusto Machado Pericles Neves, as Superintendent of the Center. This great effort in a country, that had at that time; 90 million people, with a 2000% rampant inflation: 700 Savings and Loan Associations and the CPP were able to open 20 million new savings passbook accounts (Cadernetas of Poupança) in 5 years, this should give much of a thought, working with the nails at a time when there were no PCs nor the Internet, so everything was done by hand. I think to have enough credentials to comment on what today is called "Financial Inclusion", because even when we did not call it that way, it was what we were doing and very successfully.

I think that the information technology and communications (ITC) is extremely useful and necessary, but my experience has shown me that these are not necessarily the best option, much less the only solution to all banking possibilities, which leads me to raise serious doubt on the perception that the financial industry has of “mobile banking” as the main and perhaps the only tool of financial inclusion. I think that before talking about the issue of financial inclusion, first it must be define what it is the banking of the excluded, so as to have clear what it is and what it is not, it would be very frustrating, at least to me, that the enormous and costly efforts did not achieve the expected results due to a lack of focus.

First I would like to distinguish between financial products and financial services associated with financial products: A financial product is a tool for the systematic realization of the bank intermediation, so it should have three areas: (a) The uptake of funds, (b) Provide loans with the raised funds and (c) A shareholding company, a mutual, or cooperative that manages this process, with the equity contribution of its owners. Among the financial products are demand accounts and term deposits, microcredit, leasing, etc. Each of these operate the same way regardless of how you call them, what changes is the type of beneficiary, the conditions and the requirements. The revenues generated by financial products originated in the spread or the difference between what it is charge for loans and the interest rate paid for the deposits. When the financial institutions receive deposits from the public, these are monitored by a supervisory banking authority.

Now let us talk about financial services: These have nothing to do with financial intermediation and are of three types: (a) The payments, deposits and money transfer systems, (b) The direct customer’s access to its financial information and (c) Third party collection or payment of its products or services (Electric bills, recharging phone, paying social subsidies, etc.) also called mediation, because the IMF has no direct responsibility on these products. As you can see all of the above require a financial product. For example: Bill payment to third parties require a deposit account, a credit card requires a consumer loan or a debit card a deposit account or prepayment as collateral. No financial service can exist without a financial product and that includes ATMs, banking agents, night deposits and mobile banking. The income from financial services are the fees charged when using these, this revenue is direct and the services have no associated financial costs, as it is the case of the financial products.

Now, speaking of "mobile banking" being use generically as identifying a payment means, of which M-PESA®; born in Kenya and spreading around the World has become an icon. In some subtle way, is suggested as the “only” option for financial inclusion which is wrong, because it is not a banking product. But what is it really a banking product?, does M-PESA® promotes financial discipline?, does it motivates to save or make on time payments when borrowing?. No, it does not; because M-PESA® is not a financial product and operators as Safaricom are not financial institutions, these are communications companies. The same applies to money remittance companies that are not required to be regulated or supervised by the banking authorities. In theory these service providers only receive money and deliver it elsewhere, being used for whatever purpose: Consumption, payments, family support, etc. These difference makes the name "mobile banking" as being incorrect and confusing when applied only to money transfer, as it should be really called "mobile money", as it is identified by Regulators and Scholars. It is not a simple thing, because as is happening in M-PESA® or any prepaid card or "electronic purse" when its contents remain unused through time, these become savings; therefore functioning as it does the informal savings groups, without any regulation or warranty, this is illegal and risky in virtually all countries of the World, and the wrong use of this terminology is misleading the public and this is a serious matter.

Now, I think that the "mobile money" systems are absolutely necessary and have proven in time its value, so their utility is not a matter of discussion. International remittances are an example and have been operating since the 90s, but these are not doing financial intermediation. Venture a little further and ask yourself: Do the systems of "mobile money" create financial discipline?. I will tell you in my opinion what is financial discipline; it is how to manage the money in a safe and efficient way to create state or assets to the bank’s customer, so that it should involve both sides of the coin: Deposits (Savings, checking or term deposits) and loans, the first to create wealth directly, because it is an obligation that the MFI assumes with its clients. The second is a requirement that customers acquire with the IMF, it is an asset of the institution and a liability to the customer and If the customer is not able to generate its own assets with borrowed money, his economic condition worsens (Many unfortunately are not capable to do so). Both the savings and loans create discipline on both deposits/payments, otherwise the control of the money is lost, exacerbating the condition of the estate of the customer and can lead to his(her) ruin. The money transfer does not promote this discipline.

It is clear that any financial inclusion action must necessarily involve a financial product and my experience has been that it should start with the savings account. Savings seems to be pointed in all studies as demanded at all social levels, including the poorest, as I have shown in previous Notes. However, the reality is that there are barriers to the unbanked imposed by financial institutions to the savings accounts: (a) High amounts for account opening, (b) Fees for account maintenance, (c) Fees for accounts inactivity; (d) Limitations imposed by the identification requirements; (e) high minimum balances and (f) In the case of Credit Unions, too high the amounts of the compulsory equity certificates. All this makes them inaccessible to many low-income people to formalize their way of saving, forcing them to remain in informal savings with the risk of losing their money (ROSCAs, Chains, Pasanakus , etc.).

While I never considered M-PESA® as a tool of financial inclusion, the initiative of the Commercial Bank of Africa (CBA) to launch the savings account M-Shwari® with M-PESA® is really an action of financial inclusion, not only because it leaves M-PESA® as what it is: a complementary service of a financial product, it is a savings account and it adds a method of payment and deposit to the account M-Shwari®, I think it is a new experience that requires a more in-depth analysis that I will comment in the next Note. But now I want to comment a few points on this subject before finishing this Note: The M-Shwari® account not only has the advantage of operating through M-PESA®, the requirements have also been reduced: The amount of opening and minimum balance in the account is ksh 0, the CBA has eliminated the banking fees, it has a minimal mobilization requirement of Ksh.1 (1 U.S. $ = Ksh 86.18), there are no transaction fees from M-PESA® to deposit or withdrawing in the account M-Shwari®, it allows transfers to other users of M-PESA® (With fees), produces Mini Statements, earns an interest rate from 2% to 5% depending on the balance, the account balance is displayed after each transaction and finally, introduces a new concept for a savings account operated by a bank supervised by the Central Bank of Kenya (KCB). But it also shows drawbacks, not all access points of M-PESA® are also points of  "Customer Service" for M-Shwari®, I gather that this is because the KCB enforces the CBA to have their staff attending the M-Shwari® accounts in the M-PESA® service points and CBA is not serving the M-Shwari® in their traditional “mortar” branches, which greatly reduces the account’s customer service, because an expensive infrastructure would be required to service them everywhere (There seems to be 1 M-PESA® Service Center with M-Shwari® attention for every 1.500 collaborating shops providing M-PESA® transfers). Finally there is something it does not sound too good to me: There is a loan automatically associated with the savings account that is awarded based on information from Kenya’s Credit bureaus and limit the approved loan’s amount according to volume of money of transferred through M-PESA®, wait a minute: Are we talking about savings or is it about lending.  Although the customers must wait six months after opening the M-Shawri® to access these loans, the product still is still attractive for Kenyans. The amounts of the loans are low (between Ksh 100 to Ksh 2,600, the second is equivalent to US$ 42) and the maturing period is of 30 days, with a possible extension to 60 days (This loan is not useful to make grow assets and could damage the customers in the Credit Bureaus). The Islamic customers were included by not charging interest; just a flat service fee of 7.5%, but the final rate is equivalent to an annual interest rate of 90%. While it is true that in February 2014 the CBA showed a delinquency of 3% on this loans, versus 5% in the bank industry’s loan portfolio, it represented in number 140,000 loans and the unpaid loans portfolio could reach and perhaps exceed that of the bank industry’s level if the CBA raises the loan limit from Ksh 2,600 to Ksh 3,600. The success of M-Shawri® has been undeniable, as having started in November 2012 it reached 1.2 million accounts by the end of March 2013, for that reason I am following closely this very interesting and innovative initiative.

Very best regards

Jose Linares Fontela

jlinaresf@gmail.com

NOTE 4:(FINAL)

NOTE 4: ON SAVINGS MOBILIZATION (Final):

In the first three notes I detected trends and savings needs of MFIs, as always, and based on my experience I will try to present solutions to the problems of attracting savings. First I will discuss the possibilities of MFIs to take deposits from the public. Under no circumstances you should receive deposits if the IMF is not allowed to do so, it would not only be illegal and it is also considered a felony. As discussed in Note No. 3, 80 % of MFIs are authorized to receive deposits from the public. The best way to receive savings from the public, but not necessarily the simplest or the most economical is to be supervised by the banking authority; MFIs in many countries are supervised by special laws. If we talk about Savings and Loan Cooperatives this can receive money through voluntary contributions from its members, which is another way to save. This condition allows that if a person is interested only in saving his/her money in a cooperative, it only needs to affiliate to it paying the mandatory contributions, but also making voluntary contributions that can be done according to the cooperative’s by laws. You see this type of equity allows this as it operates under the Cooperatives Law in each country. There is the figure of Credit Unions or Associations that can receive money from the public because this are supervised, but can only provide loans to its members.

NGOs are not allowed to receive money from the public, so that their funds come from equity, grants and loans. However, if they make an strategic alliance with a supervised institution their customers can make savings through the second. The mechanics are very simple: (1) An strategic alliance is made with a supervised institution, (2) The supervised institution creates a sub-account for each of the NGO clients who use a passbook or card and have access to complementary services (Debit card, access ATMs, etc.). (3) The NGO negotiates with the supervised institution on the account’s requirements, the costs, the fees, the legal reserve, etc., (4) The supervised institution agrees with the NGO on how to lend funds based on the average savings deposited by the NGO’s customers, (5) Together the NGO and the supervised institution will assess the risks and provide the means to control them and (6) Quarterly the NGO undersigned loans with the supervised institution according to the average balance of customer deposits and the amounts are disbursed to the NGO. Under this scheme, a source of scaled funds is generate, which produces a partial maturity and avoids a staggering total, so the NGOs can synchronize the payments with the recoveries of Microcredit portfolio. Borrowing costs will be higher than if the NGO received directly the deposits, which it can not do so. The NGOs have to pay higher costs for the service of the supervised institution to cover the services, the interest rates and the legal reserve. Many NGOs operate and have operated this way without problem. Finally, the other solution is to create at federation or union level a financial system, constituting or acquiring the federation a bank that would serve the member MFIs, this has been the case in Brazil of SICREDI (See link at the end of the Note), in the latter case the federation or union has to bear the full financial control of its affiliates, define credit policies and manage the risks of its members by centralizing all in one computer system, leaving the affiliates with the necessary freedom of action in the non-financial aspects, that is to say cooperative issues.

We have seen that there are different solutions for NGOs and Cooperatives to receive legally, directly or indirectly, deposits from the public, but there is something essential: If the MFIs that can receive savings or contributions do not present an strong and trustful corporate image, and does not makes an effective marketing, it will not attract savings, because in the case of savings mobilization the decision of the customers (Regulated or NGOs) or members (Cooperatives) on where to take their money is theirs and not of the institutions, unlike as it is in the case of the Microcredit. Without a proper image and a successful marketing effort, MFIs will not attract sufficient funds, since they must also attract deposits from people who do not need credit, because they are pure savers; in fact the ratio of the number of savers is always higher than of the borrowers, and the difference is what allows the MFI to obtain funds to give Microcredits.

Now let us talk about the clients or members: usually it is assumed that Microfinance’s clients only look for the Microcredit, my experience indicates that it is not so, that many customers prefer to save and turn to credit only when it is absolutely necessary. My experience is that MiF’s clients prefer to save in a supervised institution with a strong image before doing it in the IMF that gives them the Microcredit. The problem is that the regulated institutions usually impose very high minimum requirements for opening savings accounts, so many poor people do not have access to these instruments, therefore they remain in the informal savings systems, the (ROSCAS) Rotating Savings and Credit schemes, the pasanaku, the san, the tontine, consortiums and other names that are given to informal savings systems that are very popular all over the World. The important thing about these systems is that they are a mechanism of programmed savings with a loan payment when they win the pot, in which no interest is paid on the “deposits" and no interest charged for "loans". In my work I have often researched the market to identify the needs of MiF’s clients and have developed savings products for many of these based on their user needs, some of my observations point to the following main reasons for making savings: (1) To attend emergencies, (2) To meet monthly obligations and reach month’s end, (3) provide more security for the money than having it in cash (Theft ), (4) to address unforeseen expenses, (5) To avoid spending easily money if it is in cash, (6) To engage in productive activities, (7) To have better control over expenditures and (8) To serve as collateral for Microcredit. The main barriers to saving include: (1) Do not have much money to save, due to the high opening amounts and minimum balances required, (3) The service fees, (4) Having to go somewhere to deposit and withdraw money (Low rural presence), (5) To receive low interests (On term deposits) and (6) It depends on the image of the savings institution. The reality is that not being able to save money by not having much money is due to the lack of savings products tailored to the needs and realities of the customers and not on the convenience of the financial institutions. I want to share some thoughts with you on the issue of the requirements and fees: I remember in the 70s financial institutions in Latin America did not charge any fees to the savings accounts and everything had to be done manually; I am of the generation of the machine with cardboard legers, the NCR 80, which had a crank if electricity failed. Transactions were kept in ledgers files and at simultaneously printed on the passbook and the ledger, interest were calculated manually: Account by account!. The cost of the operation was high and institutions lived with the differential between the interest rate between loans and deposits. The information technology came in the 90s. At that time I worked with La Vivienda EAP, in Venezuela, which was perhaps one of the first institutions in the World to mount an online processing: We were connected to a computer that was in the IBM’s® offices, we had 100,000 savings accounts that could be opened with $ 2.30 and we were still able to give a free Life and Accidents Insurance to all our savers (U.S. $ 697 for life and the same for accidents). Suddenly other financial institutions claimed that the spread between lending and deposit was not enough and had losses and to have many savings accounts with low balance was also a loss. One moment!, if you are using a computer to manage accounts; we are talking about fixed costs; because the investment in computing equipment, like industrial machinery, grows by leaps; That is, when the limit is reached in a computer, it is replaced with a cheaper and possibly 3 or 4 times bigger and faster hardware, the staff in financial Institutions has not grown to infinity, by contrast it has been reduced thanks to computer processing and distant banking. Today the processing costs are falling; abiding with Moore's Law, and the capabilities have multiplied by thousands. The variable costs of managing savings accounts are limited to the legal reserve, the interests, the cost of passbooks or cards, these last having reach great advances and become even cheaper, the stationery, etc, that represent a fraction of the investment in technology, staff, depreciation of premises, electricity, communications and all the other fixed costs. But the number of customers, accounts and loans has not stopped growing. So the big question is: If in the 70s doing everything by hand, blood, sweat and tears, we managed many accounts with low opening amounts and balances, no fees and even gave away a Collective Life and Accident Insurance to the savers and La Vivienda EAP was still profitable; How come today the financial institutions are not profitable, with larger volumes of customers, operations, using technology, and charging for everything, I think the answer is well reflected in the credit crisis of 2008: Because they were wrong, ignoring the risks attracted by high profitability and fell in the moral hazard by counting on governments as sources of last resort, to take over their mistakes, as in fact it happened. Nobody can convince me that operating many accounts with an small opening amount and with low balances is not profitable, given the use of technology, remote banking and reduced staff, if this expenditures are divided by the growing number of accounts, it is clear that the cost of managing each account should fall rather than rise. Moreover the evidence of the growth of a significant number of governments paying subsidies with rechargeable cards and using ATMs as a means of payment, show that governments are not fools to continue to pay directly by hand, as before, because this would demand a huge and growing bureaucracy. I think the problem is that many MFIs are on a traditional financial institution’s point of view which assumes that it is a bad business to open accounts with small amounts and to manage accounts with low balances, and that the poor need more Microloans and cannot save; this is to ignore the reality of the needs of lower-income customers and put up barriers to financial inclusion. There is evidence in a study conducted in 2011 by TECNOCOM and I quote:" In Mexico, Oportunidades beneficiaries are offered a standard savings account in public bank, Bansefi. Approximately 30 % of the beneficiaries decide to accept the account (1.5 million out of 5 million beneficiaries) and end up saving on average 12% of their transfer", I would like to know: How many inclusion programs have reach 1,5 millions of new people included with savings accounts in any country?. I think that it has been generated the idea of financial inclusion programs can only be based on better means of payment, that will eventually be more used in consumption, when only a savings account can ensure effective financial inclusion which involves: Designing savings products with easy opening amounts, low balances and no fees. Because these products would motivate a voluntary act of separating and accumulating money, create financial discipline and financial assets and reinforce the regular payment habit, fundamental in the Microloans; that would never be given by any means of payment only.

Jose Linares Fontela

jlinaresf@gmail.com

Comment: Visit SICREDI in this link and chose English or Portuguese http://www.sicredi.com.br/conheca.html

Report: TECNOCOM at link: http://www.afi.es/afi/libre/pdfs/remex/Informe_Tecnocom_ING12.pdf  (Te link is for a short English version. The Spanish version has 40 pages the English version only 10 pages) the link of the Spanish version is: http://www.afi.es/afi/libre/PDFS/Grupo/Documentos/Informe_Tecnocom12.pdf  this is the link for the Spanish version in case you want to download it.